Paying off subsidized loan before repayment period?

[koikisi]

Hi,

I needed some advice. I am planning on graduating medical school (DO) this next week. I have $8,500 in subsidized loans (max we were allowed), and some $190K+ in unsubsidized federal loans.

I will qualify for PAYE, but I was wondering if I should take care of the $8,500 subsidized amount, now?

The way I understand it, PAYE will only work as 10% of my income, until I start making in excess of $190K? At that point my responsibility would be the standard repayment plan based on my original debt, or is it the debt that is left after the payments I make during residency?

I don't foresee this happening as I am more than likely going to be in a lower paying specialty (Psychiatry) where I will be seeing $150-170K based on my practice model.

Thanks for any advice.

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[RangerBob]

Why would you pay off your subsidized loan? If you go into PAYE then the gov't pays your unpaid interest for three years. There's no reason to pay that loan off first that I can think of.

Also, while your income may be low enough that your PAYE amount is not as high as the standard repayment (though eventually as you pay your loan down, you should be bumped over to the 10-year plan) that doesn't mean you can't pay more and get rid of your loans sooner.

 

[koikisi]

Why would you pay off your subsidized loan? If you go into PAYE then the gov't pays your unpaid interest for three years. There's no reason to pay that loan off first that I can think of.

Also, while your income may be low enough that your PAYE amount is not as high as the standard repayment (though eventually as you pay your loan down, you should be bumped over to the 10-year plan) that doesn't mean you can't pay more and get rid of your loans sooner.

Actually since I'm doing a 4 year residency, it would be 4 years. It was my understanding that interest wouldn't capitalize during the financial hardship period (so it doesn't accrue while I'm doing residency--correct?)

I thought paying the $8,500 off now (my only subsidized portion of loan) would at least spare me some interest later on, but according to you, I wouldn't accrue interest for the next 4 years either?

Thanks

 

[RangerBob]

Actually since I'm doing a 4 year residency, it would be 4 years. It was my understanding that interest wouldn't capitalize during the financial hardship period (so it doesn't accrue while I'm doing residency--correct?)

I thought paying the $8,500 off now (my only subsidized portion of loan) would at least spare me some interest later on, but according to you, I wouldn't accrue interest for the next 4 years either?

Thanks

I'm in IBR (I don't qualify for PAYE), so things may be slightly different, but for IBR the gov't pays your unpaid interest (your payment will cover some of the accruing interest) on your subsidized loans for up to three years. That basically means 3.5yrs post graduation since the loan is still subsidized while in your six-month grace period.

I'm pretty sure 3yrs is the max, but maybe PAYE is slightly better than IBR in that respect (it's equal or better in every other respect...). But even if they're the same, that means you only have 6 months of interest accruing during residency, vs 4 years of all your unsubsidized loans accruing interest. Unless the subsidized loan is at a ridiculous rate (it should be the same as any unsubsidized loans taken out the same year) then you'll save more by paying off the unsubsidized loans first.

If you have $8500 in cash, I'd recommend paying off a loan/part of a loan that will accrue interest (all the others in your case). The government is basically giving you money for free on that subsidized loan--so hold onto it! Instead put that extra cash towards a rainy day fund (if you don't already have one) or take your pick of paying $8500 off your highest interest rate loan (that will save you the most) or towards your smallest loan that isn't the subsidized loan--technically that's been shown to get your loans paid off quicker (it's the "snowball effect") though generally that's for people actively paying off their loans. Instead your goal over the next 4 years sounds like it's trying to minimize the damage of that interest accumulating (though if you have the means, then you can certainly start paying those loans down!)

 

[koikisi]

I'm in IBR (I don't qualify for PAYE), so things may be slightly different, but for IBR the gov't pays your unpaid interest (your payment will cover some of the accruing interest) on your subsidized loans for up to three years. That basically means 3.5yrs post graduation since the loan is still subsidized while in your six-month grace period.

I'm pretty sure 3yrs is the max, but maybe PAYE is slightly better than IBR in that respect (it's equal or better in every other respect...). But even if they're the same, that means you only have 6 months of interest accruing during residency, vs 4 years of all your unsubsidized loans accruing interest. Unless the subsidized loan is at a ridiculous rate (it should be the same as any unsubsidized loans taken out the same year) then you'll save more by paying off the unsubsidized loans first.

If you have $8500 in cash, I'd recommend paying off a loan/part of a loan that will accrue interest (all the others in your case). The government is basically giving you money for free on that subsidized loan--so hold onto it! Instead put that extra cash towards a rainy day fund (if you don't already have one) or take your pick of paying $8500 off your highest interest rate loan (that will save you the most) or towards your smallest loan that isn't the subsidized loan--technically that's been shown to get your loans paid off quicker (it's the "snowball effect") though generally that's for people actively paying off their loans. Instead your goal over the next 4 years sounds like it's trying to minimize the damage of that interest accumulating (though if you have the means, then you can certainly start paying those loans down!)

Thanks I guess that's what I'll end up doing. Is to go after the loan with the smallest amount due.

A glance on iOnTuition,My federal unsubsizied stafford loans for he first 3 year were offered to me at a rate of 6.8%, this last year, it was 5.4%.