Many people are intrigued when they read about the REPAYE interest subsidy. However, very few know the financial details surrounding it.<\/p>\n
In this article, I detail what you need to know about the REPAYE interest subsidy and how to take advantage of it.<\/p>\n
FitBUX<\/a> Members’ that do this strategy correctly save between $20,000 and $30,000 (Note: Average owed is $144,000).<\/p>\n There are a lot of moving parts to the REPAYE interest subsidy. The repayment strategy I\u2019m going to be reviewing in this article can save you the most money. However, its also the most complex student loan repayment<\/a> strategy.<\/p>\n Therefore, I do not recommend this strategy for most people.\u00a0 The reason is statistically, if you don\u2019t understand how a financial strategy works, you aren\u2019t going to do it in the long-run.\u00a0 Even worse, you may do it wrong.<\/p>\n Thus, this is my warning to you.\u00a0 If you don\u2019t understand the information in this article, don\u2019t do it<\/strong><\/span>.<\/p>\n Stick to something more simplified that you do understand and you\u2019ll be better off in the long run.<\/p>\n There are now nine different repayment plans that the Federal Government offers and they are confusing.\u00a0 Therefore, at FitBUX, we break it down into two categories: Pay Off Strategies<\/a> and Loan Forgiveness strategies.<\/p>\n This is where the REPAYE Interest Subsidy and the corresponding repayment plan gets complex. REPAYE is classified as a loan forgiveness plan.<\/p>\n However, the complex repayment plan is where you use REPAYE but actually pay off your loans.<\/p>\n Before I explain the REPAYE interest subsidy and how to take advantage of it, you have to understand how income-driven repayment plans work.<\/p>\n As I discuss in our income driven repayment guide<\/a><\/u>, one of the key items to understand when it comes to student loans is the monthly interest charge.<\/p>\n The interest charge is the portion of your monthly required payment which is used to pay the interest on your loan. \u00a0The rest of your payment is used to reduce how much you owe.<\/p>\n If you are on an Income Driven Repayment<\/a> (IDR) plan and your required monthly payment is lower than the monthly interest charge, that \u201cunpaid\u201d interest is deferred and added to your loan balance.\u00a0 Translation, how much you owe increases each month.<\/p>\n When you are on an IDR plan other than REPAYE, 100% of that unpaid interest is deferred <\/a><\/u>i.e. its all added to your loan balance.<\/p>\n REPAYE is different than other IDR plans such as PAYE<\/a> because it incorporates an interest subsidy. Each month on the 1st<\/sup>, 2nd<\/sup>, or 3rd<\/sup> business day, the government will forgive half of the interest that you deferred from the previous month.<\/p>\n For example, let\u2019s say you are charged $1,000 per month in interest.\u00a0 If your required monthly payment on REPAYE is $300 then you defer $700 in the current month ($1,000-$300).\u00a0 On the 1st<\/sup>, 2nd<\/sup> or 3rd<\/sup> business day of the following month, the government will subsidize $350 of the interest ($700\/2=$350). Therefore, your balance only grows by $350.<\/p>\n Note: We include the REPAYE interest subsidy in our income driven repayment calculator<\/a><\/u>.\u00a0 This is important because it gives you a better estimate of your tax liability when your loans are forgiven.<\/em><\/p>\n Another Important Note: Under President Biden’s REPAYE proposal that is pending, the REPAYE interest subsidy would change to 100%!<\/em><\/p>\n Before diving into the strategy of using REPAYE to pay off your student loans, we have to first discuss who benefits from the REPAYE interest subsidy and who doesn\u2019t.<\/p>\n Many get enticed by the subsidy that is unique to REPAYE.\u00a0 However, when you do the math, REPAYE doesn\u2019t make financial sense for most<\/u><\/strong> people when compared to other IDR plans.<\/p>\n Specifically, if you are pursuing student loan forgiveness<\/a><\/u> and plan on working full-time for 25 years. \u00a0REPAYE most likely is a major disadvantage from a cost perspective.\u00a0 This occurs because REPAYE last 25 years vs. 20 for the other IDR plans.\u00a0 (Note: REPAYE is 25 years for graduate students only).<\/p>\n In most cases, your income in years 20 \u2013 25 will likely be higher than years 1 \u2013 20.\u00a0 Therefore, the amount you pay as a monthly payment will increase faster AND you\u2019ll have to make 60 additional monthly payments!<\/p>\n These extra 5 years of payments often times negate the savings you get from the interest subsidy. Thus, you\u2019d be better off sticking with a 20-year plan and use PAYE or IBR<\/a> For New Borrowers.<\/p>\n Also, if you get married then regardless of how you file, your taxes are based on dual incomes and combined Federal student loan debt. This can cost you a lot in the long run as well. This is also why undergrads will most likely not want to use REPAYE vs PAYE.<\/a> (Note: This also may be changing if Biden’s REPAYE proposal goes into law).<\/p>\n We typically see this advanced pay off strategy work for approximately 1 \u2013 4 years.\u00a0 After this time period you\u2019ll want to switch to a standard plan or refinance your student loans.<\/a><\/p>\n Here are the steps to take to use this strategy:<\/p>\n Ashley paid off $220k in student loans in four years using this strategy. You can check out her story here.<\/a><\/p>\n Earlier, I mentioned that you\u2019d want to do this strategy for 1 \u2013 4 years.\u00a0 One of the keys to determining when to stop is the effective interest rate.<\/p>\n Once your effective interest rate is about the same rate as you could get by refinancing your student loans, then you\u2019d most likely benefit by refinancing.<\/p>\n Let\u2019s look into how to go about calculating the effective interest rate while incorporating the REPAYE interest subsidy.<\/p>\n We\u2019ll assume that your required monthly payment is $0 per month and your interest charge each month is $720 (I\u2019m assuming I have $144k in loans at a 6% interest rate). \u00a0Therefore, I am deferring $720 per month ($720 – $0).<\/p>\n On the first business day of the next month, the government is subsidizing half of my deferred amount.\u00a0 Thus, I\u2019m only deferring $360 per month.\u00a0 I multiply the $360 by 12 which results in $4,320. That is a rough estimate of how much I\u2019m charged over 12 months.<\/p>\n I then take $4,320 and divide it by the amount I owe which is $144,000.\u00a0 The result is 3%. That is my effective interest rate.<\/p>\n Calculating the effective interest rate is key to understanding why this strategy only works for 1 \u2013 4 years.\u00a0 There are two factors that determine this.<\/p>\n Factor 1: Your income goes up.<\/p>\n Factor 2: The amount you owe goes down.<\/p>\n Let\u2019s look at an example to see how this works:<\/p>\n Using the example in the preceding section, let\u2019s assume one year has past.<\/p>\n My monthly payment is now $300 per month and I defer $273 in interest.\u00a0 Half of the deferred interest is subsidized the first of the month. Therefore, I owe $136.50 in interest.<\/p>\n I have to add the amount I actually paid plus the deferred interest ($300 + $136.50 = $436.50).\u00a0 The result of this number is how much I owe in interest so I multiply it by 12.\u00a0 The result is $5,238.<\/p>\n Let\u2019s also assume that I was able to reduce how much I owe from $144,000 down to $113,400.<\/p>\n Therefore, I take $5,238 and divide it by $113,400 for an effective interest rate of 4.62%.<\/p>\n At that point, I\u2019d want to either look into refinancing to see if the rate is below 4.62%\u00a0or I\u2019d want to switch into a standard repayment plan.<\/p>\n Those that want to pay off their student loans fast and want to do so in the most efficient way possible benefit most from the REPAYE interest subsidy.<\/p>\n We are going to deeper dive into how this works in the next section. However, before we do, I want to discuss other situations that you may find yourself in whereby you can take advantage of the REPAYE interest subsidy.<\/p>\n If you plan on paying off your loan the \u201ctraditional\u201d way, i.e. using a pay off strategy but have a short-term decline in income, then you can benefit from the REPAYE interest subsidy.\u00a0 Here is why.<\/p>\n Using REPAYE in the short-run would decrease your monthly payment.<\/p>\n The REPAYE interest subsidy would benefit you since you only plan on using REPAYE for a short period of time.<\/p>\n If you elect to go that route, you can change back to a traditional repayment strategy easily when your financial situation improves and you\u2019re able to make the higher monthly payments. You can switch from REPAYE to a pay off strategy any time at no cost.<\/p>\n For example, we see many physicians or physical therapist doing their residency. \u00a0During this time their income is low but after the residency is completed, their income will increase and they will want to pay off their loans.<\/p>\n These individuals can benefit from the interest subsidy because they would defer less interest. \u00a0Therefore, how much they owe would grow more slowly and, ultimately, the amount they would have to repay when they go back to a traditional pay off strategy would be lower.<\/p>\n You can also benefit from the REPAYE interest subsidy if you don\u2019t expect to work full-time for 25 years.\u00a0 The reason being is you wouldn\u2019t have to make the extra 60 payments in years 20 \u2013 25 of the loan because you wouldn\u2019t be working.<\/p>\n Lastly, if you are on Old IBR, you\u2019ll want to look into REPAYE for a couple of reasons:<\/p>\n However, if you are on Old IBR, the switch is not automatic.\u00a0 Two things to be aware of:<\/p>\n The REPAYE interest subsidy is supposed to happen the first business day each month. However, to put it nicely, loan servicers suck.\u00a0 Therefore, they don\u2019t always do it.\u00a0 Some don\u2019t do it all.\u00a0 Other times, they randomly will do it every three months.<\/p>\n Bottom line, make sure you are getting the subsidy if you are using a strategy that involves the REPAYE interest subsidy.\u00a0 This is also one of the reasons why many people don\u2019t use this strategy, i.e. they don\u2019t want the headache of dealing with the Federal loan servicers.<\/p>\n Item 1: Your monthly payment is based as a percentage of combined incomes & combined Federal student loans if you are married.<\/p>\n Item 2: Certify your income each year. This is where you have to show the government how much you made the year before and it determines your monthly payment for the next year.<\/p>\n Item 3: You have to know when to stop. As previously mentioned, the effective interest rate is important as well as your required monthly payment.<\/p>\n Item 4: Subsidized loans are charged 0% interest for the first 3 years post-graduation. This is a major benefit to you and decreases the effective interest rate.<\/a><\/p>\n REPAYE is based on your income. One of the ways you certify your income is by using your tax return.\u00a0 This in turn determines your monthly payment for the next twelve months.<\/p>\n Therefore, you\u2019ll want to file a tax return while you are in school because your income will be lower than it will be once you graduate.\u00a0 Thus, your monthly payment will be low or $0 for the first 12 \u2013 24 months post-graduation.\u00a0 The lower your monthly payment is the more you benefit from the REPAYE interest subsidy.<\/p>\n How did we find out about this trick? We\u2019ve been on multiple phone calls with FitBUX Members and their loan servicer whereby the loan servicer actually advised them to do this!\u00a0 Thus, you can take advantage of this as well.<\/p>\n Most people will not benefit from the REPAYE interest subsidy and are better off using PAYE or IBR.<\/p>\n There are unique situations however where you may take advantage of it.\u00a0 Primarily, if you are paying off your loans aggressively you can save a ton of cash.<\/p>\n Also, if you are only going to be using REPAYE for the short-term or you are on old IBR then you’ll want to think about it.<\/p>\n If you need help discussing the REPAYE interest subsidy or just generally need help building out your financial plan, we are here for you.<\/p>\n Our financial planning technology is built specifically for young professionals and our FitBUX Coaches are expert student loan planners<\/a>.<\/p>\n To get help, simply go to FitBUX.com<\/a>, become a member, and schedule a call when you get to your dashboard.<\/p>\n By Joseph Reinke, CFA<\/a><\/u>, Founder of FitBUX<\/a><\/u><\/em><\/p>\n","protected":false},"excerpt":{"rendered":" Many people are intrigued when they read about the REPAYE interest subsidy. However, very few know the financial details surrounding it. In this article, I detail what you need to know about the REPAYE interest subsidy and how to take advantage of it. FitBUX Members’ that do this strategy correctly save between $20,000 and $30,000 […]<\/p>\n","protected":false},"author":1,"featured_media":15919,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[185,183],"tags":[706,111,145,1609],"class_list":["post-11718","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-student-loan-forgiveness","category-student-loan-repayment","tag-income-driven-repayment","tag-repaye","tag-student-loan-forgiveness","tag-student-loan-help","post-wrapper","thrv_wrapper"],"yoast_head":"\nFirst Things First: The REPAYE Interest Subsidy Is Complex<\/h2>\n
REPAYE Is An Income Driven Repayment Plan: Know How They Work<\/h2>\n
How The REPAYE Interest Subsidy Works<\/h2>\n
Who Shouldn\u2019t Use The REPAYE Interest Subsidy<\/h2>\n
The Best Pay Off Strategy Using The REPAYE Interest Subsidy To Your Advantage<\/h2>\n
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Calculating The Effective Interest Rate<\/h2>\n
Understanding Why This Advanced Strategy Only Works For 1 \u2013 4 Years<\/h2>\n
Who Else Can Take Advantage Of The REPAYE Interest Subsidy?<\/h2>\n
Taking Advantage Of The REPAYE Interest Subsidy When Having A Short-Term Decline In Income<\/h3>\n
Not Expecting To Work Full-Time<\/h3>\n
If You’re On Old IBR, Then Switch To REPAYE<\/h3>\n
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Make Sure You Get The Interest Subsidy<\/h2>\n
Extra Items Too Know About REPAYE<\/h2>\n
Extra Tips For Students & New Grads To Maximize Savings<\/h2>\n
Conclusion On Using The REPAYE Interest Subsidy To Your Advantage<\/strong><\/h2>\n