Traditional Repayment Plans
Before IDR plans, we only had the following "traditional" repayment plans:
- Standard repayment plan
- Graduated repayment plan
- Extended repayment plan
These plans base your monthly payment on your loan balance, interest rate, and loan term (10-30 years). Your income is not taken into consideration when determining your payment.
These plans were fine when students finished school with just a few thousand dollars of debt. However, as the cost of college and medical school skyrocketed, students were forced to take on vast amounts of debt to pay for school. The resulting monthly payments were unmanageable under traditional repayment plans (especially on a resident physician's meager salary). This led residents to spend years in loan forbearance or deferment, meaning they made no payments but their debt kept growing due to interest charges.
Although the traditional plans still exist, they have largely been replaced by IDR plans. IDR plans offer more flexibility and borrower-friendly features like interest subsidies and loan forgiveness.
Income-Driven Repayment
IDR plans were designed to help borrowers who could not afford traditional payments due to low incomes or high debt. Instead of tying payments to the size of your loan, IDR payments are based on your income and family size. This makes IDR plans great for medical residents, who often have high student loan balances but earn low salaries.
Although income-driven repayment is great for you, it does not make financial sense for lenders, since they cannot predict how much they will be repaid. This is why you can only use IDR to pay for federal loans, which are owned by the US Government. Private student loans, which are owned by banks and other non-government lenders, do not offer IDR payments.
To qualify for most income-driven repayment plans, your loans need to be a specific type of federal loan called a Direct Loan. Fortunately, nearly all federal loans are now Direct Loans. If you have older varieties of federal loans such as Perkins or FFEL loans, you can perform a Direct Loan Consolidation to turn them into Direct Loans.
You can learn more about Loan Consolidation here.
Interest Subsidies
IDR payments are often so small that they do not even cover the interest on your loans. Because of this, several IDR plans reduce or cap the total amount of interest that accrues while you are in repayment.
Interest subsidies are great for you because they give you the ability to make minimal payments without having your interest spiral out of control.
Interest subsidies offered by IDR plans have also made voluntary deferment and forbearance virtually obsolete. In the past, people who couldn't afford their monthly payments had to go into loan forbearance or deferment. However, these are periods where interest is not subsidized, so it is much better to get into an IDR plan.
Loan Forgiveness
Another great feature of income-driven repayment is loan forgiveness. There are two types of loan forgiveness:
1. Public Service Loan Forgiveness (PSLF). PSLF is popular with physicians. To qualify for PSLF, you must be enrolled in an IDR plan, make 120 monthly payments, and work for a non-profit or government employer. After making 120 payments, your student loan balance is forgiven, tax-free.
2. Taxable loan forgiveness. If you do not qualify for PSLF, you can still receive loan forgiveness by making IDR payments for 20 to 25 years, depending on the plan. However, few physicians will benefit from this because most will pay off their entire loan balance in fewer than 20 years. In contrast to PSLF, this type of loan forgiveness is treated as taxable income.
The IDR Plans
There are four IDR plans, each with unique features and eligibility requirements:
1. Revised Pay As You Earn Repayment Plan (REPAYE)/Saving on a Valuable Education (SAVE) Plan
2. Pay As You Earn Repayment Plan (PAYE)
3. Income-Based Repayment Plan (IBR)
3. Income-Contingent Repayment Plan (ICR)
REPAYE/SAVE.
Note: REPAYE was updated in July 2023 and renamed SAVE. To avoid confusion due to the two names, I will refer to the plan as REPAYE/SAVE.
When your income is low, REPAYE/SAVE is almost always the best option. Virtually all residents should be in REPAYE/SAVE.
Payments: Monthly payments are 10% of your discretionary income for graduate loans and 5% for undergraduate loans. If you have a mix of undergraduate and graduate loans, your payment will be the weighted average of the original amount of the loans you took out (between 5 and 10%).
Under REPAYE/SAVE, discretionary income is calculated by subtracting 225% of the federal poverty line from your adjusted gross income. This is the most generous plan, as all others subtract only 100-150% of the federal poverty line from your AGI.
Previously, you could not shield your spouse's income from REPAYE, even if you filed tax separately. SAVE changed this, so you can now ignore your spouse's income by filing separate tax returns.
There is no payment cap in REPAYE, so those with high incomes may pay more in REPAYE than in PAYE or IBR (which do have payment caps). This is the biggest downside of REAPYE/SAVE.
Interest Subsidy: Previously, 50% of your unpaid interest was waived under REPAYE. In 2023, the SAVE update included a 100% subsidy on unpaid interest. This means unpaid interest will never accrue, regardless of how little you pay per month. This is a tremendous benefit, particularly for low earners.
Forgiveness: Payments made while in REPAYE qualify for PSLF. If you are not eligible for PSLF, taxable forgiveness is granted after 20 years for people who only have undergraduate loans. If you have any graduate loans, taxable forgiveness is provided after 25 years.
Eligibility: REPAYE/SAVE can only be used to pay Direct Loans. There are no other eligibility requirements.
Bottom Line: When your income is low, REPAYE/SAVE is the best plan due to low monthly payments and the 100% subsidy on unpaid interest. If you experience a significant income jump, you may be able to save money by switching to a plan with a payment cap.
Pay As You Earn Repayment Plan (PAYE)
PAYE is the best plan for physicians with high incomes and those with high-earning spouses.
NOTE: The Department of Education will sunset PAYE on July 1st, 2024. This means that you must apply to PAYE before then to enroll in the plan. Only those already in PAYE will be allowed to remain in PAYE after that date.
Payments: Monthly payments are 10% of your discretionary income. Discretionary income is calculated by subtracting 150% of the federal poverty line from your adjusted gross income. If married, you can file your taxes separately to exclude your spouse’s income from the payment calculation.
PAYE has a payment cap, so you will never pay more in PAYE than you would in the 10-year Standard Repayment Plan.
Interest Subsidy: PAYE does not have an unpaid interest subsidy, but there is 10% cap on interest capitalization. This means if you experience an event that triggers interest capitalization, your principal balance will grow by no more than 10% of the original balance. However, you will still be responsible for repaying all interest you have accrued. The interest subsidy in REPAYE/SAVE is much better than the interest capitalization cap in PAYE.
Forgiveness: Payments made in PAYE qualify for PSLF. If you are not working for a PSLF-eligible employer, taxable forgiveness is granted after 20 years for undergraduate and graduate loans.
Eligibility: PAYE can only be used to pay Direct Loans. The date that your loans were disbursed also matters.* Fortunately, this is not a problem for most current medical students and residents.
To enroll in PAYE, you must demonstrate "partial financial hardship." This means your initial monthly payment in PAYE must be less than you would pay in the 10-year standard plan.
Most resident physicians have no problem qualifying for partial financial hardship. However, if your income increases and you want to switch from REPAYE to PAYE, you must enroll in PAYE before your taxes reflect the increased income.
Bottom Line: If you or your spouse earn a high income, PAYE may be better than REPAYE. However, PAYE has income-based eligibility requirements, so if you switch from REPAYE to PAYE you must apply before your tax returns reflect the higher income.
*You must have had no outstanding balance on federal loans as of Oct 1, 2007, and you must have received at least one Direct Loan on or after Oct 1, 2011.
Income-Based Repayment Plan (IBR)
IBR is useful for physicians who do not want to be in REPAYE but are not eligible for PAYE due to their loan origination dates.
Payments: Monthly payments are set to either 10% or 15% of your discretionary income (using 150% of the federal poverty line), depending on the dates your loans were dispersed:
- If you have any federal loans that were made before July 1, 2014, your payment will be 15% of your discretionary income.
- If your federal loans are all from July 1, 2014 or later, your payment is 10% of your discretionary income (note: in this case, you would also qualify for PAYE).
If married, you can exclude your spouse’s income from your payment calculation by filing separate tax returns.
IBR also includes a payment cap, so you will never pay more in IBR than you would in the 10-year Standard Repayment Plan.
Interest Subsidy: Unlike PAYE, there is no cap on unpaid interest in IBR.
Forgiveness: Payments made in IBR qualify for PSLF. If you are not eligible for PSLF, forgiveness is granted after 20 or 25 years depending on the disbursement date of your loans.
Eligibility: You can enroll in IBR with either Direct or FFEL loans, but we recommend consolidating FFEL loans into Direct Loans to make them eligible for PSLF.
As with PAYE, you must demonstrate partial financial hardship to enroll in the IBR plan.
Bottom Line: If you do not want to be in REPAYE and do not qualify for PAYE, IBR is the next best option.
Income-Contingent Repayment Plan (ICR)
ICR is the oldest plan and has the worst repayment terms. There are virtually no situations in which a physician should be enrolled in ICR. The Department of Education will sunset ICR to most new borrowers in July 2024.
Payments: Monthly payments in ICR are 20% of your discretionary income (using 100% of the federal poverty line).
If married, you can exclude your spouse’s income from your payment calculation by filing separate tax returns.
Interest Subsidy: Unpaid interest is capitalized annually in ICR, but the total amount that can be capitalized is capped at 10% of your initial loan balance.
Forgiveness: Payments made while in ICR qualify for PSLF. If you are not working for a PSLF-eligible employer, any remaining balance is forgiven after 25 years of making payments.
Eligibility: ICR can only be used to pay Direct Loans or Parent Plus loans. There are no other eligibility requirements for ICR.
Bottom Line: ICR payments are higher than those in the other IDR plans.
How do I enroll in an IDR Plan?
You can enroll in an IDR Plan through the Federal Student Aid (FSA) website or by contacting your student loan servicer.
When you complete the IDR application, you’ll be asked to provide information about your family size, income, and spouse's income if you're married.
The easiest way to provide income documentation is through your most recent tax return, which can be obtained by linking directly to the IRS website.
Annual Income Recertification
Once enrolled in an IDR plan, you’ll need to recertify your income and family size each year.
Recertification is similar to IDR enrollment and can be done on the FSA website or through your loan servicer.
WARNING: If you forget to recertify on time, you will automatically be enrolled in the 10-year standard plan and any unpaid interest on your loan will be capitalized. This is a costly mistake, so make sure to submit your documentation on time.
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