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REPAYE Capitalization
May 12, 2016
7:41 pm
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May 12, 2016
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Hello! I’m a recent grad of an llm (tax) program looking for someone to help me confirm a few things about the REPAYE plan.

A bit about my debt:
1) 235k in grad plus loans. Weighted average interest 7.17%. earliest borrow date 8/2012 (Law School / LLM) All unsubsidized
2) 102k stafford, weighted average interest 5.22%. Earliest borrow date 8/2012 (Law School / LLM) All unsubsidized
3) Consolidation Loan, 12.1k. Subsidized 1k, Unsubbed 11.1k. Rate is 3.0%, Borrow date somewhere around 2004.

I have applied for and received REPAYE from my Law School/LLM servicer. (Great Lakes). Navient services my consolidation from undergrad. I have not applied with them for REPAYE. Everything is currently on in school deferment, Law School LLM will then hit grace period, navient will go back to pulling $100 a month.

1) It seems the only way capitalization happens on REPAYE is a) you leave the plan, or 2) you fail to re-certify annually. (This annual recertification thing seems like total crap to me when there is no longer a requirement for partial financial hardship… but whatever… moving on.)

2) Since my loans are all unsubsidized the gov’t “will pay” 50% of my unpaid interest in a month. As I was a student my AGI for 2015 was stupid low. The job I have accepted starts in July, and due to moving expenses and only 1/2 year of salary, I’ll have another stupid low year in 2016. Starting comp for job is 98k, and I don’t think the repayment calculator on studentloans.gov accurate for my career path.

3) If I understand things correctly, my law school/llm loans are roughly 337,000. I have not consolidated. Taking just my “starting base” salary and the poverty limit for a family size of 1, my estimated monthly payment is 677, which annually is 8124 annually. Interest at 6.8% is $22,916. This leaves unpaid interest of $14,792. The gov’t pays half of this (which boggles my mind, why not just reduce the rate) as a feature of the REPAYE plan. So $7,396 “accrues” and I’m responsible for it?

4) Does this amount capitalize every year? Or does it just hang out as accrued interest. If this just hangs around, it builds a “cost of leaving REPAYE” through capitalization by failing to re-certify or voluntarily leaving the plan. But if this ISN’T capitalized, then it shouldn’t be used to calculate annual interest amounts for the next year. If it is capitalized then why don’t they just say that? Further, if payments made above my required payment amount are applied first to unpaid accrued interest, then effectively, capitalization is irrelevant because you still end up paying the unpaid accrued interest?

Any comments/help would be very appreciated.

May 17, 2016
11:15 pm
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1) Your point one is correct, but I would note that the annual recertification is for a reason… your income can change from year to year. If you make less money, you will be glad it is time to recertify because it will result in lower payments.

2) The long term calculators for the income driven plans are a total guess. You will be much better served by doing the math yourself to figure out what plan is best for you long term.

3) Correct. You will be responsible for that extra interest. The good news is that as long as you stay on the REPAYE plan, it does not get added to your principal balance… meaning you don’t pay interest on that interest. Once you leave the plan it capitalizes and you start paying interest on the interest.

4) As you put it, it just kind of hangs around as accrued interest until something happens with your plan. As for the exact accounting procedure, we are getting so far into the nitty gritty of the subject that it is probably something you want to discuss with your loan servicer.

Generally speaking, I find there are two common plans of attack for huge amounts of federal debt such as yours. Option one is to pay the minimum over the life of the loan an bank on forgiveness. Option two is to attack. For either route, signing up for REPAYE can be the best option because of the flexibility offered (it helps you work towards forgiveness, but if you decide to attack the debt you can focus your extra payments on the highest interest loans).

Good Luck!

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