As the title says, I’ve spent enough time being a doofus about the loan repayment plan problem. So, I did a couple hours of research today, and made some tables, and basically decided that I’ll likely wind up on the REPAYE plan, almost by default.
The basic plan is we need to get on an income-driven plan so we can at least try and keep up with interest, and be making regular payments that fit our budget. The cheapest option is still to pay off the loans as quickly as possible, but refinancing continues to be difficult because of our debt to income ratio, which with the loss of my paycheck just got worse. So, we’ll get on a plan for now, and increase our payments as we have income to do so, and then can fall back to the minimum if we need to.
As a basic breakdown, there are multiple student loan repayment plans. In general, I could choose to pay a set amount every month based on time to repay the loan (say, 10 or 20 years), or I could choose one of the income-based repayment strategies. Currently, we are paying $620 to my loans every month but keeping up with interest would require $1,400 each month. The lowest term-based option I have would be $1,442.82 per month, which amount would rise every two years until the loan is paid off, scheduled for 25 years in the future. This could work, except there’s a bit of risk baked in – if I don’t do well at the business, or get sick, or the spouse gets sick and our income is slashed, we’re back at square one needing an income based plan.
So, that leaves the income-driven plans. I don’t qualify for PAYE because I have loans from before 2007 (I graduated university in 2006.) So, if you were all excited to hear my talk about PAYE, sorry, not happening.
That basically leaves REPAYE, IBR (the old one, I don’t qualify for the new one), and ICR. That last one there is the oldest version of income-driven repayment, and the one that’s getting thrown out first. I didn’t really investigate the pros/cons of this one since it consistently came out as being the most expensive over time.
Basically, what I did, because I hate math and I’m terrible at it, was run our numbers through a couple different calculators. First, I determined the weighted average of the interest rates on my loans, then ran that through this handy spreadsheet (also found in the Resources page) and finally compared those results to the government’s calculator. The numbers come out different, but the basic result for how the plans line up is roughly the same.
|Total Payments (Until Payoff or Forgiveness)||Remaining Loan Balance (When Loans Are Forgiven)||Taxes Due (using assumptions in the cells at the top right hand corner)||Total Cost of Loan Program||Year of Total Repayment (if before forgiveness)||Year First Eligible for Forgiveness||First Monthly Payment|
|Private Refinancing (5 Year Variable Rate avg Interest 3%)*||$ 266,569.84||Forgiveness not available for private loans||$ 2,034.00||$ 266,569.84||2022||N/A||$ 4,442.83|
|Standard||$ 314,502.94||$ –||$ 314,502.94||2023||N/A||$ 4,052.00|
|PAYE||$ 95,850.50||$ 602,291.49||$ 291,509.08||$ 387,359.58||2034||2033||$ (230.37)|
|REPAYE||$ 409,583.23||$ 174,968.92||$ 84,684.96||$ 494,268.18||2038||$ 419.63|
|Old IBR||$ 225,480.54||$ 663,128.71||$ 320,954.29||$ 546,434.83||2038||$ (345.55)|
|Public Service Loan Forgiveness||N/A||N/A||N/A||N/A||2034||N/A||N/A|
|Repayment Plan||First Monthly Payment||Last Monthly Payment||Total Amount Paid On Loan||Projected Loan Forgiveness||Repayment Period||Estimated Taxes||Total Paid|
|Pay As You Earn (PAYE)||$351||$1,068||$156,968||$445,721||240 months||$215,728.96||$372,696.96|
|IBR for New Borrowers||$351||$1,068||$156,968||$445,721||240 months||$215,728.96||$372,696.96|
|Revised Pay As You Earn (REPAYE)||$351||$1,407||$232,820||$350,505||300 months||$169,644.42||$402,464.42|
|Income-Based Repayment (IBR)||$527||$2,110||$349,230||$342,432||300 months||$165,737.09||$514,967.09|
|Extended Fixed||$1,778||$1,778||$533,264||$0||300 months||$0||$533,264.00|
|Extended Graduated||$1,483||$2,479||$576,164||$0||300 months||$0||$576,164.00|
|Income-Contingent Repayment (ICR)||$827||$3,034||$516,121||$208,712||300 months||$101,016.61||$617,137.61|
As you can see, PAYE (which I’m not eligible for) does really well, following only the variations on time-based repayment, and IBR doesn’t do nearly as well.
So, on REPAYE, which is really the next best option, interest won’t capitalize unless I leave the program, and payments will be calculated at 10% of our income over 150% of the poverty line (a line which is laughable on the West Coast, but that’s a complaint for a different day.) The spouse’s income and federal loan amounts will be counted under REPAYE whether we file jointly or separately, which does give us a bit of flexibility in filing, if we find we need to file separately for some reason (another question to investigate.)
IBR would be 15% of our income over 150% of the poverty line, since I only qualify for the old version. There is no difference in the time for forgiveness since, as a graduate degree loan holder even under REPAYE the forgiveness period is 25 years. Not that we’re trying to go that long before paying off the debts.
Finally, an additional bonus of REPAYE is that 50% of the interest not covered by my payments will be paid by the government. There should be some significant savings there, especially during this time where we’re building up the business and won’t have so much money to throw at the loans.
In theory, according to the math behind those spreadsheets up there, the initial payments under REPAYE should be in the $350 to $450 range, since only the spouse is working. That puts the minimums well within the $620 we’d set aside for the loans. So even though we wouldn’t be making up the interest, we would at least be avoiding default until we can some more money scraped together.