REPAYE vs PAYE/MFS for Married Residents – The White Coat Investor – Investing & Personal Finance for Doctors

[Editor’s Note: Today’s guest post was submitted by Dr. Thomas Bomberger, a PGY2 Diagnostic Radiologist at Case Western Reserve University School of Medicine. As a 4th-year medical student, Dr. Bomberger took a deep dive into the question of REPAYE vs PAYE/MFS for residents married to a working, debt-free spouse. We have no financial relationship.]

For the majority of graduating medical students, the decision of which student loan repayment plan to enter will be simple: REPAYE.  It’s the most generous because:

• it offers the 50% unpaid interest subsidy
• qualifies for PSLF
• and almost all loans are eligible.

However, the IDR payment calculation for REPAYE will include spousal income, which can cause higher payments for residents married to a working spouse without educational debt.

Some residents in this situation opt for a strategy of minimizing payments on their loans by filing their taxes separately from their spouse and enrolling in the PAYE program (“PAYE/MFS”).  This will decrease your payments but will lead interest accrual because

1. you are making smaller payments, and
2. you’re missing out on the REPAYE interest subsidy.

The end goal with the PAYE/MFS strategy is to minimize payments and get the loans forgiven eventually.

Below is an outline of my approach to the PAYE/MFS vs. REPAYE decision for residents with a working spouse, as well as my general thoughts on where the different inflection points may be.  I’ve broken down my algorithm by the different variables you’ll need to consider.

For the purpose of simplifying things, we’ll assume all residents have an interest rate of 6% and resident AGI of $55k for all PGY years, however, in reality, most people will have much lower AGIs the first couple years and slightly higher ones in the later years.

Recommended Reading:

The Ultimate Guide to Student Loan Debt Management

REPAYE Case Studies

I Switched to REPAYE and I Liked It

How to Enroll in REPAYE Early

3 Variables to Consider

#1 Your Loan Balance

The first variable is the size of your loans at graduation/consolidation.  The higher your loan balance, the more you benefit from the REPAYE unpaid interest subsidy (for now, we won’t consider PSLF).  To quantify how valuable this is, let’s pretend you’re a single resident choosing between PAYE and REPAYE (a scenario in which you should generally choose REPAYE).  The more debt you have, the more interest you aren’t paying, and the larger the subsidy.

For example, our ideal resident making $55k would have payments $300/mo. or $3600/year.  If you have $200k in loans, then your loans are accruing $12k in interest each year.  You’re paying $3600 into the loans, and the government covers 50% of the unpaid interest, which means your interest benefit is $4,200.  If you have $400k in loans, they’re accruing $24k per year, and you qualify for the same payment, giving you an interest subsidy benefit of $10,200 per year for every year you’re in training.  Keep in mind that you’ll have a bigger subsidy benefit the first couple years of training before you file taxes with your prior year salary in the spring of your PGY2 year, so the benefit is greater in those first 2 years.

I hope I’ve convinced any single resident to choose REPAYE over PAYE by now!  However, the take-home point for married residents with working spouses is that the higher your loan balance, the more valuable the REPAYE interest rate subsidy is, and the more strongly you should consider it.

#2 Length of Training

The second variable is the length of your training.  The longer you’re in training, the more valuable the REPAYE interest subsidy.  Here is the difference in interest accrual for PAYE vs. REPAYE with our ideal single resident.

As you can see, if you have $400k in loans, you will accrue $30k of additional interest in PAYE vs. REPAYE by the end of PGY3, and $61k by the end of PGY6 based on the interest subsidy alone.  If you have a particularly high loan burden and a long training period, you could end up accruing over $100k of additional interest just by missing out on the REPAYE subsidy.  If you end up not being a candidate for PSLF, that $100k will have to be paid back, but will also be subject to capitalization when you refinance, and you’ll have to pay interest on your interest for the life of the loan.

Likewise, if you have a low student loan burden (congrats) and a short training period, the REPAYE benefit is not quite as profound (although the above tables likely understate it since your payments will be significantly less than $300 if you don’t have earnings).  It is hard to make a big mistake with a low loan balance and short training period, so it may be reasonable to pursue PAYE/MFS without risk of it costing you a lot of money at the end of training.  Just keep in mind that the larger the loan and the longer you’re in training, the more interest accrues.

#3 Spousal AGI

The third variable is how much money your spouse makes and thus what payments are within your monthly budget.

The first step is to calculate out the IDR payments for PAYE/MFS and REPAYE (PAYE/MFS is just your AGI, and REPAYE is your household AGI).  Then, look at your monthly budget, and see whether the increased REPAYE payments will be affordable.  For example, if you are in a higher COL area and have children, you may have less financial flexibility and the increased REPAYE payments may be more difficult to afford.  If you can afford the increased monthly payments, consider REPAYE or PAYE/MFS depending on your spousal income levels, and how much they will affect your monthly IDR total.

If your spouse makes around $10k/year, you should go with REPAYE.  Their additional salary will not drastically affect the IDR calculation ($300 for PAYE/MFS vs. $390 for REPAYE), and you get the benefit of the interest subsidy. This amounts to paying a $90 monthly premium for an interest benefit of 50% of all interest accruing above $390.  A large benefit for REPAYE, even at lower loan balances.

If your spouse makes around the same order of magnitude of a resident (for example, spousal AGI $50k), then REPAYE or PAYE/MFS could be considered.  Generally, REPAYE is preferential if (1) it fits into the budget, and (2) you have a high loan burden.  IDR is again $300 for PAYE/MFS, but increases to $725 for REPAYE in this example.  Essentially, you’re paying a $425 monthly premium in order to eliminate half of the interest accruing above $725 per month.  Whether this premium is worth it will depend on the interest benefit you stand to gain.

If your spouse makes an order of magnitude above you ($150k for example), then it is usually more beneficial to opt for PAYE/MFS.  IDR payments for this plan would be $300 for PAYE vs. $1,560 for REPAYE.  Now, you’re paying a $1,260 monthly premium for a 50% subsidy on interest over $1,560.  This amounts to a higher monthly premium for diminishing gain.

To take a more extreme example, once your spousal income hits $200k, you have to pay in almost $24,000 yearly for relatively small interest benefit, even at very high loan balances.  At this point, with any possibility of PSLF (and maybe even without that possibility), I think you’re better off going with PAYE/MFS and using the money saved on payments to max out your tax-advantaged retirement plans (401(k)/403(b), backdoor Roth, and HSA for example).  Of course, that requires that you actually invest the money saved on payments, but with a spouse earning that high of a salary, this isn’t unreasonable.

To be perfectly honest, before I wrote this post up I always imagined the inflection point for most residents where PAYE/MFS made sense over REPAYE would be those with very high-earning spouses somewhere in the $150k-$200k range.  However, after running the numbers above I think it may be a decent bit less for a lot of borrowers, maybe even as low as the $50k range.  Just note that the numbers above are yearly, so multiply the payments and interest benefit by the number of years in training to see the total premium paid and the total interest benefit during training.

If you’re like me, you went through the above iterations and realized you COULD choose either plan.  Basically, the increased payments fit into your budget and you stand to benefit a reasonable amount from the additional payments via the REPAYE interest subsidy.  The final variable will more directly address the question of which plan most residents SHOULD choose.

Public Service Loan Forgiveness (PSLF)

The reason PSLF is critical to the overall PAYE/MFS vs. REPAYE strategy is that the only way you end up significantly ahead by minimizing payments with PSLF/MFS is if you stick with the strategy all the way through to PSLF.

PSLF is a windfall benefit because it forgives the balance of your loan in a relatively short time (10 years of payments), and the forgiven amount is tax-free.  If you have a very high loan balance, for example, $500k of tax-free loan forgiveness is roughly equivalent to a bit less than a $1M bonus.  So, if there’s any possibility you end up working at a 501(c)(3), you should keep the PSLF door open, especially when there are very low costs associated with doing so.

With that said, I’m also not sure it makes sense to fully commit to PSLF by minimizing payments you could otherwise afford and foregoing the REPAYE interest subsidy, because (1) there is uncertainty around the program, and (2) there is individual career uncertainty.

First, with respect to the global uncertainty around the PSLF program, politicians of both parties have made efforts to cap forgiveness, and I can’t imagine it was ever really meant for doctors to have hundreds of thousands of dollars in loans forgiven.  So, I anticipate that there will be changes to the program in the coming years, especially once the first physicians’ loans start coming up for forgiveness in 2021.  With that said, if you’re in a qualifying repayment program right now, you have your signed MPNs, and are making payments, you’ll probably be grandfathered in.  Either way, we don’t really have any control over this, so probably not worth losing sleep over.  If you’re graduating this year, it may be prudent (and also a generally good financial decision) to enter a qualifying program right after graduation via federal direct consolidation as a hedge against potential changes that may come during your 6-month grace period.

The more relevant risk you should consider is individual career path uncertainty.  No resident knows for sure exactly where or how they’re going to be practicing 5 or 10 years from now.  Maybe your spouse has a strong preference for a geography with a predominance of private practice jobs.  Maybe you get academic offers that are $100k less than private practice offers.  Maybe $150k less.  Maybe you start a family and want to prioritize the most vacation time.  Maybe your research projects never take off and you can’t secure an appealing academic post.

This isn’t to say I don’t want an academic career, but rather it’s an acknowledgment that uncertainty exists, and that where there is uncertainty, we should aim to keep options open.  This is especially true regarding PSLF, however, we should also be aware of the interest accrual just in case PSLF isn’t in the cards.  For me, REPAY split the difference between these two goals nicely, but as I noted above, it isn’t without associated costs that may not be worth it for everyone.

Whichever route you decide on, you should try to stick with it through residency or at least until you have a life-changing event like having children and/or getting married/divorced/remarried rather than switching back and forth between the two options, although it is technically an option to switch.

Finally, astute readers will note that I only talked about PSLF here and not the inherent 20-year forgiveness in PAYE.  If you’re wondering about that 20-year forgiveness option, then sure you could make an argument that some low-earning, part-time physicians with high loan burdens married to a high-earning spouse may gain some advantage from doing PAYE/MFS, stringing out payments as low as they can, investing the difference, sticking with it for 20(!!!!!) years, and then paying the ~50%(!!!!!) tax bomb at the end.  However, this is a complex plan based on a lot of moving parts (including governmental support for the program), stringing out loans for longer periods means that you pay more interest to them, and the tax bomb can diminish the benefit significantly.  I’ll admit, there is probably an inflection point at which this makes technical financial sense too, but I really don’t see this as a reasonable primary strategy for managing a physicians’ student loans, and especially not in residency.

Recommended Reading

Why You Should Not Give Up on Public Service Loan Forgiveness

PSLF Side Fund

Refinance and Payoff or Go For PSLF?

Why I Chose REPAYE

I have a high loan balance and long training period, my spouse works and makes around the same as most residents, we live in a low COL city with no kids, and there is uncertainty about whether I’ll qualify PSLF.  So how did I decide on REPAYE?

It honestly wasn’t quite as complicated as what I just went through.  Basically, I first calculated whether we would be able to afford the REPAYE IDR in our monthly budget.

Next, I calculated out what my loans would grow to by the end of training under the REPAYE and PAYE/MFS strategies.  There was nearly a $100,000 difference between the two after PGY6 (suffice to say I was not very comfortable with the top number).

After that, I totaled the amount extra I was paying in and the benefit I would get back.  I will end up paying about $20k extra into the loans because of the higher IDR payments with REPAYE, but I end up getting about $80k of benefit in the form of non-accrued interest from the subsidy, so about 4:1 ROI, and that’s before capitalization is considered.

If I do end up qualifying for PSLF, I won’t get any benefit from the $20k premium I paid over the course of residency.  However, if I end up not qualifying for PSLF, I will have $100k+ less to pay back.  I am more comfortable with the risk of losing the $20k for the peace of mind I get by knowing I won’t under any circumstances have to pay that extra $100k+ back, and that’s why I ultimately decided on REPAYE.

Did you choose REPAYE or PAYE/MFS as a married resident? Comment below!

And, if you’re still sitting on loans that can be refinanced, what are you waiting for? Hurry up and get cashback by clicking on the links below.