In my time since finishing training and my financial enlightenment, I’ve had several residents ask me about their student loans. I am often surprised to find out how little they know about the ways in which they can save money utilizing the income driven repayment programs and – in particular – Revised Pay As You Earn (REPAYE). Today, I want to discuss how REPAYE works and mention some hacks that I’ve come across to get the most bang for you buck in this program. Many of these student loan hacks will work for all of the IDR programs.
If you are a medical student or resident, this should prove to be a really high-yield post. If you are an academic attending, you should read this so that you can better educate your residents on their student loan debt burden.
We will cover the basics of REPAYE first before discussing the loop hole and hacks. Let’s dig in.
Before we dive into the hacks, let’s make sure we cover the basics. REPAYE is one of the income driven repayment programs. Therefore, payments in REPAYE qualify for PSLF. It is often the best program for residents regardless of whether they plan to refinance or pursue PSLF after training.
Advantages of REPAYE
REPAYE gets a lot of good press. The reason is that is has one really unique advantage that other income driven repayment programs lack.
The most noteworthy advantage is that the government pays for half of whatever interest is not covered by your monthly payment each month regardless of whether you have subsidized or unsubsidized loans.
For example, if you were accruing $1,200 in monthly interest and your monthly payment was $200, ecah month $1,000 in interest should be accruing. Ouch. Enter REPAYE and the government will help you out as the U.S. department of education would pay for half ($500) of that interest. The other $500 would continue to accrue.
This is called an “effective interest rate reduction” because the government paid for half of your outstanding interest. Effectively, this cuts your interest rate by about half.
This is an impressive advantage and often makes REPAYE a better deal than privately refinancing your loans during training.
The REPAYE Payment
In the REPAYE program this is how your payment works:
Annual REPAYE Payment = 10% of your Discretionary Income
In other words,
Annual REPAYE Payment = 10% (Adjusted Gross Income – 150% of Poverty Line)
That might seem like Greek. Let’s break it down.
Your AGI can be found in last year’s tax forms. In 2018, you can find this on line 4 (Form 1040 EZ), line 21 (Form 1040A), or line 37 (Form 1040). Find your taxes, and which form you filled out, to locate your AGI.
Great, we know our AGI. Now, we need to figure out what 150% of the poverty line is for us. Well, this depends on where you live and how many are in your family. If you live in the continental U.S. (not Alaska or Hawaii), this is how it shakes out:
Poverty Line Table
REPAYE Payment Example
Now that we know how all of the variables work, we can calculate an annual payment. For example, let’s say that we have a couple with an AGI of $60,000 (one resident physician spouse, one stay at home parent) with two children.
We know their AGI. From the poverty line table above, we know that for a family of 4 the 150% poverty line is $37,650. So, let’s subtract this from their AGI ($60,000-$37,650). We are left with $22,350. If we multiple this by 10%, we will know their annual REPAYE payment, which is $2,235.
Annual REPAYE Payment = 10% ($60,000-$37,650) = $2,235
Take note that this is an annual payment. For a monthly payment, we would divide this by 12 – which would result in a monthly payment of $186.25… not too bad.
Three Things to Note:
First, notice that the REPAYE payment has nothing to do with the size of the student loan debt burden. This was all calculated by the couple’s AGI and 150% of the poverty line.
Second, note that the REPAYE payment (unlike PAYE) takes the partner’s AGI into consideration regardless of whether you file married jointly or married filing separately. So, if the stay at home parent had a full-time job instead (or was also a resident physician) – their income would be included in the calculation above. This is not true for PAYE where if you file separately, the spouse’s income is not included (and neither are the tax breaks for filing jointly).
Third, my medical student friends should note, you need an AGI to apply for REPAYE. This is why it is important to file your taxes even as a fourth year medical student with no income.
“What happens if I overpay in REPAYE?“
The REPAYE Loophole
Now that we know how the payment works, it will be easier to discuss the giant loop hole in this system and the hacks for making the most of REPAYE.
Finding the giant loop hole came about when I had a resident ask me the following question, “What happens if I overpay in REPAYE?”
Being a logical person, I looked at the equation that I listed above and explained that for every additional dollar that is put towards a REPAYE payment 50 cents will go towards the remaining interest. The other 50 cents will get sucked up into the governmental subsidy you would have been given.
That’s what makes sense based on the equation above, right? Well, life isn’t always so straightforward (fortunately)!
Apparently, the answer to the question depends on who the servicer is for your loan. The servicers break into two groups:
Group 1: Math
This group views the math the same way that I explained above. 50% of any additional money over the required monthly payment will go towards the remaining interest and 50% will decrease the money the government pays for you.
As far as I understand, these servicers typically list your subsidy on your monthly payment information.
Group 2: The Loop Hole
This group of servicers determines your monthly subsidy based on your annual payment and the interest that should be accruing. So, if you are supposed to accrue $10,000 in annual interest. The subsidy will cover $5,000 regardless of whether you are paying more than the required payment or not.
The key takeaway for this loop hole is to call your servicer and ask them how your subsidy is calculated and what would happen if you pay more than the required minimum payment.
If your servicer is in group 2, you may be able to prevent even more interest from accruing while you are in training.
Other REPAYE Hacks
The loophole above is a big deal. If you can maximize the subsidy from the government while you keep even more interest at bay with higher monthly payments, that is a win.
Time to be greedy. The following hacks are meant to decrease your required monthly payment (which will increase your monthly subsidy from the government). If you combine these hacks with the loophole above, you might make out like a bandit in REPAYE.
The following might feel a bit like manipulating physiologic equations to produce a desired outcome. For my anesthesia residents, MAP = CO x SVR… right? Just like we can manipulate this equation to improve a patient’s mean arterial pressure (MAP), we can use the REPAYE equation to manipulate our financial situation.
As a reminder, here is the equation. REPAYE = 10% (AGI – 150% Poverty Line)
Student Loan Hack # 1 Tax-Protected Retirement Space
Anything that decreases your adjusted gross income (AGI) is going to decrease your required REPAYE payment and increase the amount of your governmental subsidy because your unpaid interest would be higher.
One great way to do this is to participate in pre-tax contributions in retirement accounts. This includes any 401K, 403B, or Individual Retirement Account (IRA).
Let’s use the example from the couple given above (one resident physician; one stay at home parent).
Their gross income was originally $60,000. Let’s say that they contribute $6,000 to a traditional IRA in 2019. This would reduce their AGI to $54,000, which would result in a monthly payment of $136.25. This is $50 lower than their monthly payment ($600 for the year) if they didn’t contribute and their REPAYE payment was based on their full $60,000 income.
If this couple had $200,000 in student loans accruing at 6.8% interest (~$13,600 in annual interest), this would also increase the subsidy that the government is paying for them by almost $450 annually. In turn, that $6,000 contribution has now saved them over $1,000 that year ($600 lower payment + $450 increase in subsidy).
If the couple contributes the same amount as their annual interest ($13,600) to the 401K or 403B offered by their employer, this would reduce their REPAYE payment to zero dollars.
Student Loan Hack #2: Participate in your HSA
If you have a high deductible health care plan, you likely qualify to participate in a health savings account (HSA). Arguably, this is the first tax-advantaged space you should fill up as it has a triple tax benefit.
What this means is that you place pre-tax money into the account (lowering your AGI), it grows tax-free, and as long as you use it on health care expenses it remains untaxed.
This is a great way to help pay for medical care in training because it will lower your REPAYE payment, and you can use this money (which is worth more since it is pre-tax) on any upcoming health care expenses, including having a kid.
That said, these plans usually have a higher deductible and out of pocket max than other plans offered by employers. So, do the math.
Student Loan Hack #3: Moonlight and open a solo-401K
For those in training who moonlight, you will often earn a 1099 income. This income will increase your AGI and, therefore, increase your REPAYE payment and decrease your subsidy.
There are a few ways around this. One way is to simply increase your contributions in your main employer’s 401K/403B to the same amount of money you earn from moonlighting. This will offset the income.
Another way is to open up a solo-401K and place money from your moonlighting gig into this account. It will effectively do the same thing as any pre-tax contribution decreases your AGI.
While a solo-401K (or independent 401K) is a little more complicated to set up, this is preferable to a SEP-IRA as it allows you to still participate in a backdoor Roth IRA.
A SEP-IRA prevents this as it counts against you with the pro rata rule/calculation. This may not seem like a big deal in residency, but when you finish and want to participate in a backdoor roth IRA as an attending – it will matter.
Student Loan Hack #4: Increase Your Family Size
This one is pretty basic, and not necessarily advised. It does decrease your REPAYE payment, but whether that is worth it or not will be up to you.
Increasing your family size by getting married or having children will raise your 150% poverty line. Naturally, this decreases your discretionary spending, because kids cost a lot of money.
In REPAYE, this must be carefully balanced as getting married will also force you to include your spouse’s income in the AGI calculation. So, if your spouse earns a substantial income, then this can actually increase your monthly payment.
Hopefully, some of these ideas were helpful to you. If so, please share this with your peers.
The take home is simple. Know the ins and outs of your repayment programs. Take advantage of the REPAYE loop hole and REPAYE hacks to decrease your payment and increase your subsidy.
And for the moral pundits, don’t hate the player – hate the game. Or talk to your local congressman or congresswoman to change the game.
Do you know of any other hacks that belong on this page? If so, tell me below and I’ll toss it up there if it’s worth mentioning. Were the REPAYE hacks and REPAYE loop hole helpful? Leave a comment.