IBR/REPAYE next year...file seperately or jointly in this situation?

[adamanteus]

I'm a 4th year med student who will graduate in May with $330,000 in student loans.

My wife is a nurse who's 2015 AGI was 58k. She will be returning to school full time this coming fall for Family NP school. She currently has 55k in school loans from previous degrees. Of which, 35k is private (Sallie Mae) and is currently paying ~600/month total now.

With next years IBR during my intern year in mind, we are looking to file our taxes soon and don't know if we should do this separately or jointly. If we file jointly this year, we will get back $3000 in refunds with my education credits. Filing separately, she will owe $600. I am worried that by filing jointly, we may do some harm for next year when I try to set up the IBR. We won't mind making payments during my intern year, but want to keep them low - say less than $400/month. Also keep in mind our roles next year will essentially be reversed, as I will be working while she will be in school full time and her loans back into forbearance (however she does plan to work PRN here and there to make a little extra dough).

Could anyone shed some light on what we could expect if we do go ahead and file jointly? And in this situation, might REPAYE be a better option than IBR? Thank you!

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[deleted480308]

this may or may not appeal to you but one of the EM organizations just sent me an ad for a compaany that advises on this type of thing "doctors without quarters"

(I have no affiliation or experience with them)

 

[RangerBob]

I would go with whatever plan you think you'll be on long term, because if you change plans your interest will capitalize. I'm switching to REPAYE despite almost $30k being capitalized because I'm switching repayment plans. The extra interest due to the capitalization of interest I accumulate each year will be on the order of ~$2k, but with the 50% interest subsidy, I will save something on the order of $8-14k/year (more if we have a baby and my wife stops working) for the rest of residency/fellowship.

I think for most people, REPAYE makes more sense long-term as you'll pay 10% of your AGI (vs 15%) and you get that really nice interest subsidy, which is quite generous if you owe a lot like I do but aren't making very much. Some people do get a lower monthly payment with the 15% plan, but these are generally people with spouses who also work but have no debt. If I recall our monthly payments were still pretty close whether we filed jointly or separately--but that's because we both have substantial loans. If my wife had a really high paying job and no debt and I was a resident with $400k in debt, we would definitely save money each month by filing separately. But then, if she had a high paying job we'd just pay as much as possible to get rid of those loans ASAP.

Remember, between the two of you your payments would total to 10% of your AGI (minus the poverty level correction). You're not each paying 10% of your family AGI. My REPAYE payments are going to be $250/month, whereas my wife's will be closer to $150. She doesn't make very much, but I feel those payments are quite manageable. I'm also paying $100/month on my DRB private consolidation loan.

Also, consider that if your wife is in school and you don't file jointly, you can't claim her education deductions/credits.

One of my biggest rules is not not give up "free money." There's usually not much free money floating around, but the government will give you money to go to school (education credits). That doesn't mean go to school so you can get the money, but it does mean if you're going to go to school anyway, take advantage of what the government will pay for. They will also pay your unpaid subsidized interest for IBR/PAYE/REPAYE for three years--that's saving me quite a bit. Some people want to put their loans in forbearance in residency, but I thin with the very management 10-15% AGI payments, it's very much worth it so you get the interest subsidy (not to mention your savings from interest not capitalizing as long as you're in the program). Like I said, the gov't will also pay 50% of your unpaid unsubsidized interest with REPAYE. Even if your monthly payments are slightly higher, it may be far better off to make those payments so that you will be eligible for those subsidies. There's no guarantee PSLF will stick around or not be capped/limited in some capacity, so think long-term what's going to help you get rid of your loans. Personally, I'm hoping for PSLF, but I'm planning on it not being around.

Keep in mind if you file jointly, you don't have to use your taxes for IBR/REPAYE calculations--you can send your current pay-stubs.

Take all of this into consideration--then put all the numbers together in an excel spreadsheet and do the math. You can get advice from financial advisers, but ultimately you should know your loans and finances the best and it helps to learn how to do your own financial plan. I really, really wish I'd started doing that earlier--I would've saved a lot of money in medical school by borrowing less. Lessons learned...

 

[SigmaFS]

Duplicate

 

[SigmaFS]

I think RangerBob analyzed the IBR vs REPAYE comparison quite well. I'll emphasize the REPAYE 50% interest subsidy on any interest accrual, which is of particular importance during your residency. The REPAYE 50% interest subsidy might be the critical factor in deciding to file MFJ vs MFS.

Before presenting some excel screenshots, I do have a few a questions for you:

1. Do you have any federal student loans issued on or before Oct. 1, 2007? (I ask to determine whether you qualify for PAYE)
2. Does your $330k include accrued interest?

Having asked that, below are couple of spreadsheet screenshots analyzing REPAYE & IBR given some information you provided. Some of my assumptions are as follows:

• IBR assumed MFS, REPAYE both incomes are considered, so MFJ
• 4 year residency
• Attending salary of $244,000 in year 6
• $350k federal student loan balance = $330k for you + $20k for spouse

I've highlighted Repayment Years 1-6 because it may be in your financial interest to consider another repayment strategy assuming a high income as an attending.

REPAYE:

During the Repayment Years 1-6:

• Interest accrual = $37,763
• Principal and interest balance = $387,763
• Payment made = $67,744

IBR:

During the Repayment Years 1-6:

• Interest accrual = $97,000
• Principal and interest balance = $447,000
• Payment made = $49,999

I would recommend MFJ, resulting in a $3,000 refund (per your calculations), selecting REPAYE. Also, I've developed a YouTube video discussing IBR, PAYE & REPAYE that might be of interest to you -



Best of luck!

 

[adamanteus]

Thank you both so much for such informative replies, and for taking the time to write them out. Wow, that was helpful!

Sigma, I do believe I have taken out federal loans prior to Oct 2007, and the 330,000 does not include interest accrued to date. Also, that video was incredibly informative. I'm going to share it with my classmates on our class's facebook page.

One question I would like to ask is about the differences in the REPAYE "Total Cost of Loan" in the example you set up for me vs the example in the video. I will be going into family medicine with a residency income of $50,000, and expecting a salary of $200,000 fresh out of residency 06/2019, with my wife making ~85,000 upon graduation 06/2018. It looks like in the video the total cost of the loan was significantly lower than in my example. Is there anything I can do to make the video's scenario closer to my own?

Edit: also, is that excel sheet a creation of your own, or is it something I could buy online and use for future reference?

 

[SigmaFS]

Thank you both so much for such informative replies, and for taking the time to write them out. Wow, that was helpful!

Sigma, I do believe I have taken out federal loans prior to Oct 2007, and the 330,000 does not include interest accrued to date. Also, that video was incredibly informative. I'm going to share it with my classmates on our class's facebook page.

One question I would like to ask is about the differences in the REPAYE "Total Cost of Loan" in the example you set up for me vs the example in the video. I will be going into family medicine with a residency income of $50,000, and expecting a salary of $200,000 fresh out of residency 06/2019, with my wife making ~85,000 upon graduation 06/2018. It looks like in the video the total cost of the loan was significantly lower than in my example. Is there anything I can do to make the video's scenario closer to my own?

Edit: also, is that excel sheet a creation of your own, or is it something I could buy online and use for future reference?

Good to hear you found the video informative. And, thank you for sharing it on your class FB page.

The spreadsheet is proprietary document I developed and sometimes share with my clients. I am considering selling it online, but haven't quite convinced myself.

I have revised the spreadsheet based on your parameters. I also increased the loan balance to $400,000 to reflect the in-school interest accrual.

 

[adamanteus]

Thank you for posting that updated file. So very much appreciated.

Is there anything I can do to make the total cost of the loan lower than the theoretical $765,000 in the spreadsheet you posted with my information? I noticed in the Youtube video your REPAYE spreadsheet showed the total cost of a 500,000 loan actually being ~$510,000 and having a very low Effective Interest Rate. What adjustments can I make to head in that direction?

 

[SigmaFS]

Thank you for posting that updated file. So very much appreciated.

Is there anything I can do to make the total cost of the loan lower than the theoretical $765,000 in the spreadsheet you posted with my information? I noticed in the Youtube video your REPAYE spreadsheet showed the total cost of a 500,000 loan actually being ~$510,000 and having a very low Effective Interest Rate. What adjustments can I make to head in that direction?

Cost of the loan in an income driven repayment program is a function of your AGI (Adjusted Gross Income). Managing your AGI is key to this process (please don't confuse AGI with taxable income. Simplified equation for AGI = taxable income + (standard or itemized deductions) +allowances). AGI management is more readily accomplished when paid as independent contractor (IC) than a W-2 employee. But, in either compensation arrangement, there are strategies to reduce your AGI. For example, there are higher contributions limit for an SEP-IRA or Solo 401K if paid as IC. As a W-2, maximize your employer sponsored retirement plan and other employer benefits. Just a few ideas.

 

[adamanteus]

Cost of the loan in an income driven repayment program is a function of your AGI (Adjusted Gross Income). Managing your AGI is key to this process (please don't confuse AGI with taxable income. Simplified equation for AGI = taxable income + (standard or itemized deductions) +allowances). AGI management is more readily accomplished when paid as independent contractor (IC) than a W-2 employee. But, in either compensation arrangement, there are strategies to reduce your AGI. For example, there are higher contributions limit for an SEP-IRA or Solo 401K if paid as IC. As a W-2, maximize your employer sponsored retirement plan and other employer benefits. Just a few ideas.

Great, thanks so much for your help. This has been invaluable.

 

[ophthapp1]

Thanks for the great discussion everyone. I think I may be misunderstanding the eligibility requirements for IBR; please correct me where I'm wrong. I searched the forums and the interwebz and can't get it straight.

According to the studentaid.ed.gov website, IBR is "Generally 15 percent of your discretionary income... but never more than the 10-year Standard Repayment Plan amount" (for people like me who borrowed prior to July 2014). Also, one must demonstrate a Partial Financial Hardship to be eligible for IBR defined as "a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 15 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live" (same source).

Let's say I have 180k direct unsubsidized loan at 6.1%, starting residency this July. According to my calculations my 10 year standard repayment plan monthly payment would be ~$2000. If I entered IBR, married filing separately (my spouse has a solid income), my monthly IBR payments would be <$500 month based on my resident salary, depending on family size. My IBR payments would jump after residency to let's say $2500-$3500/month depending on family size.

So:
During residency: $500/month on ~$55k salary
Post residency: $2500-3500/month on ~$250k salary

My confusion lies herein: At that time (year 6 of IBR) my monthly payments are greater than my original 10-year standard repayment plan amount of $2000. At this time am I disqualified from IBR altogether and forced to choose another repayment plan, or are my payments then capped at $2000? (note: I realize private consolidation or switching to PAYE/REPAYE might be more beneficial at that point, but for the sake of argument let's say I wanted to stay on IBR). SigmaFS's awesome spreadsheets seem to imply disqualification. Charts on studentaid.gov point to a cap. Please enlighten me.

Also, if I file separately is my family size just 1 (even though I have a wife and child) when using the poverty level to calculate IBR payments? I'm still thinking through all of these variables before tax time. I will likely use REPAYE over IBR based on my number crunching on excel, but I want to get a clear view of each before settling on one.