I’ve been on IBR for about 2 years and I am about to switch to REPAYE.
– I made about 125k last year and hope to clear about 180k this year (though i work on commission so yearly income can fluctuate off a base of 100k). I’m still certified under my 2014 returns with an AGI of 96k
– I have2 loans: ~27k in subsidized direct consolidated loans and ~268k in subsidized from law school with about ~28k in unpaid interest from the IBR plans (my income has steadily risen from 54k to present the last 3 years). All these loans are consolidated at 7.875% with the 0.25% direct debit cut.
I’m spoke with my loan provider, FedLoan, and they seem to not fully understand what level of payment they give for the subsidized and subsidized. The last support staff told me that the subsidized interest is fully paid for the first 3 years (which includes the 2 years i was on IBR). After that I will need to pay the interest. This makes sense.
However, the unsubsidized portion they differ in their remarks. Sometimes they say they will pay 50% of the unpaid interest per month (capped at 3 years), other times 50% of the unpaid interest at the end of the year (capped at 3 years) and other times 50% of the unpaid interest for the remainder of the loan (they may pay it monthly or . Do you know the final details since I can’t seem to find the information online? It would make sense that they cap after 3 years but given the high loans for grad students, negative amortization is a big deal that prevents people like me from actually paying down their loans.
Also, these are the numbers i’m coming up with for the different plans. If i stayed under IBR, i accumulated 10k if i don’t increase my payments (at this level, it seems more advantageous to save my bonuses and wait until i find a more stable income or change careers to take advantage of PSLF). Under REPAYE, even with capitalization, my interest is only is a $8100 accumulation and a lower monthly payment (extra $3400 yearly). 3 years would be great to figure things out but if they were able to do this for the life of the loan, it would be fantastic. I hope there is a loophole that allows me to do this!
-Current monthly interest under IBR for ~268k – ~1753
-Current monthly payment under IBR – $884
– Yearly Accumulating interest – ~10k
-Estimated monthly interest under REPAYE for ~296k (268k plus 28 capitalized interest from switching plans) – ~1949
-Estimated monthly payment – $600
– 50% payment of interest per year – ~8100 ($674 per month)
May 3, 2014
These are excellent questions. Unfortunately, not information that I have off the top of my head. This is a subject I am currently researching and I will stop back once I learn more.
Update: I spoke to Fed Loan again and they should be sending me documentation of the following:
They said subsidized loans are fully covered on interest (minus your payment) for 3 years. Afterwards, its covered (minus payment, at the end of the month) for the remainder of the loan.
Unsubsidized loans are covered at 50% of the interest (minus your REPAYE payment) by the DOE at the end of the month for the remainder of the loan. No cap on years or amount paid by the DOE.
This leads to some interesting ways to save month and determine the best times to pay down the principal and accrued interest. Also, with depending on how well you use your AGI to cap payments, when making less than 300k per year, it doesn’t seem worth actually trying to pay down your loans if you have a balance as high as mine.
Any additional information will be welcome! Thank you for an amazing website!
May 3, 2014
Thanks for sharing your findings and for your kind words.
I’d add one thing. My understanding is that they way REPAYE and IBR/PAYE treat the additional interest is different. I believe what you said about REPAYE is correct. The key thing to note is that the interest coverage applies ONLY to the interest that is not paid by your monthly payments. Example, your monthly payment is $200 per month. However, your monthly interest is $300 per month. That means each month your balance is essentially growing by $100. On REPAYE, DOE cuts the extra interest in half, meaning your balance grows by $50 per month instead of $100.
There are two important questions that I have not yet gotten confirmed answers on:
1) How do PAYE, IBR, and REPAYE treat the extra interest? Does the example just given only apply to REPAYE, or does it apply to all three?
2) How is the additional interest capitalized? Currently on IBR and PAYE, if your account balance grows each month, the interest is not added to the principal balance. This means your interest is not compounded. However, if you fail to recertify on time or you leave the program, that extra interest is added to your principal balance and you start paying interest on it all.
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