Pursuing PSLF and planning to switch from RePAYE to PAYE after residency does not work. You are better off choosing the best plan up front or switching to PAYE while still in residency.
You will not be able to change to IBR once your income increases, nor will you be able to switch to the 10-Year Standard Repayment plan.
“Choose the correct repayment plan for PSLF up front and stick with it for the 120 payments.”
Let’s assume you are an average medical student and have just started residency. You are making an average $52,200 residency salary, and you have $200,000 in outstanding medical student loans at 7%. You are single and are planning on a total of 4 years of residency/fellowship. As an attending, your income will go to $300,000. To make things simple, you do not have any undergraduate loans. You intend to seek PSLF.
Looking at the above table, you choose RePAYE as your payment plan because the debt increases the least of the three income-driven plans due to RePAYE’s interest rate subsidy. Even though your total payments will be higher after ten years in RePAYE, you figure you can switch to a new, lower payment later. You are also pretty savvy and consolidated your loans at graduation and started with $0/month payments your first year.
Four years later you are receiving your attending salary, and it’s time to report your increased income to Fedloan Servicing. Your loan balance has only grown to $222,501, but your RePAYE payment is going to jump to around $2353. That’s more than the 10-Year Standard Repayment Plan payment of $2322 that you calculated when you started your repayment, and you realize it is only going to increase from there. What can you do?
Nothing if you are still planning on PSLF. There is nothing you can do at this point to reduce your payments and stay eligible for PSLF.
You will not be able to change from RePAYE to IBR once your income increases.
Some people are thinking of changing from RePAYE to IBR to get the payment cap. To be eligible for IBR, your IBR payment (calculated as 15% of AGI minus 150% of the poverty level) must be lower than the 10-Year Standard Repayment.
If your loans are less than your income, unfortunately, your income is too high. You are therefore ineligible to change to a new IBR repayment plan.
If you loans are equal to or greater than your income, you can switch to IBR. Problem is your payments will go up substantially. If you stick with RePAYE, and your loan balances are high, you will never hit the 10-year payment cap and in many cases never even increase to the IBR payment.
You will not be able to change from RePAYE to the 10-Year Standard Repayment plan and continue to pursue PSLF.
If you are thinking of changing from RePAYE to the 10-Year Standard Repayment plan, you can’t do that either.
I think a lot of the confusion with this one comes from the way the government websites lump together the 10-Year Standard Repayment Plan and the 30-Year Consolidated Repayment Plan in their discussions. They are both regularly referred to as the “Standard Repayment Plan.”
Here is why you can’t do it.
“If a borrower changes plans, the repayment period is the period provided under the borrower’s new repayment plan, calculated from the date the loan initially entered repayment.” – U. S. Government Publishing Office, Reg 34 CFR 685.210 – CHOICE OF REPAYMENT PLAN.
This rule means that if you want to change to the 10-Year Repayment Plan, the amortization clock started back when you began the RePAYE payments. Your new “Standard Repayment Plan” will require you to completely pay off the loans by the end of the original ten year period. You could opt for a “Standard Repayment Plan” that is longer than ten years, but those payments will not be eligible for PSLF.
I have to give Heather Jarvis credit for the documentation reference. After looking for supporting documentation for months, I couldn’t find the proof I’m sure many people are going to need. It finally dawned on me to ask Heather Jarvis. She kindly provided the link to the correct reg. I don’t believe her site was meant to be public so here is the link directly to Reg 34 CFR 685.210 – CHOICE OF REPAYMENT PLAN. The text I quoted above is located in (b) Changing Repayment Plans. (2)(ii).
What if I made the Wrong Choice Initially?
If you made the wrong choice when you first signed up for PSLF, you might be able to do something about it before your income increases. The second half of (b) Changing Repayment Plans (2)(ii) talks about moving to an Income contingent or income-based plan. You can do that but, it doesn’t make sense after your income goes up.
You can switch from PAYE to RePAYE, but that is almost certainly not a good idea. The big decision to be made between PAYE and RePAYE is when you start your payments. You compare the benefit of the interest subsidy of RePAYE versus the cap on payments of PAYE and of course marriage status, total student loan debt, etc.
You can switch from IBR to RePAYE or PAYE. There is a good chance this is a good idea as IBR is based on 15% of your salary and RePAYE and PAYE are based on 10%. If you wait until after your income goes up, PAYE will no longer be an option as you have to qualify same as the IBR discussion above. RePAYE will not be a good option because you lose the payment cap available while in IBR.
Get in the Correct Plan the Day you Graduate
As we have been telling people all along; make the right choice up front. In this case, you need to choose between the reduced amount of accrued debt with the RePAYE plan or the lower total payments with the PAYE plan.
“Choose wisely my friend” – Most interesting man in the world
Don’t count on being able to fix it later. Either learn the rules and do the math to determine the best option for you or hire a competent advisor to do it for you.
We have posted additional information on this subject. Take a look at Switching from RePAYE to another Repayment Plan, Part 2 if you are interested in some of the specific calculations involved.