376660_10101750186069893_383044409_nThis is an in-depth discussion about whether to go for Revised Paye As You Earn (REPAYE) or refinance your student loans with private banks like DRB or LinkCapital.

Reader wrote:

“My current thought is if someone wants to stay and pursue non-profit jobs with PSLF route, they have to consider the marriage or a partner with income if you will be on REPAYE/PSLF. When you no longer receive subsidy benefit (that’s when my AGI is 155k for 230k loans), it is better to switch to IBR/PAYE at that point. If your income or combined income is over 300k, then it is better to switch to standard or graduated plan to pay the minimum cap to get the full benefit from PSLF forgiveness at the end. These are my current thoughts if one wants to go for PSLF and try to pay the minimum monthly as much as possible considering the marriage factor for those who are on REPAYE. But, then one will be only limited to 503c organizations when job hunting comes. In addition, the salary difference b/t academic and private in radiology is likely at least greater than 50k plus from what I heard in average.

Since I am open to both academic/private for a job, I will likely start with REPAYE/PSLF (since I am a single) for ~6 yrs of training and hopefully I will know where I will end up during the fellowship year. Then, decide whether I want to pursue PSLF if I will end up in academic. If I get a job at PP, then I know it is time to finance ASAP at that time.

I have a follow up question…

Would you pay extra payment to prevent the interest accrued over these 6 yrs of training or pay the minimum only during these 6 yrs when you are not sure whether you are going to get a job at either academic or private place? I heard about Obama’s proposal on maximum gov can forgive is around 57k two years ago and nobody can guarantee how the gov will execute PSLF program for the next 10 yrs. Should I try to pay the extra amount only to prevent interest accrued over 6 yrs of training under REPAYE and save any leftover cash flow into IRA ROTH? What is your stance on this if you were in my shoes?

One more point…It seems like refinance with bank right now may not be a right idea due to two things: I still consider academic/private jobs AND difference in amount of saving being on REPAYE for 6 yrs (~25k total saving over 6 yrs under REPAYE) vs. refinance now (~22k total saving for 6 yrs under 4.5% fixed rate). So, in fact, it will be better off to stay on REPAYE just during residency and if I end up in academic, then I will switch to standard or graduated plan to finish 120 payments for PSLF route OR if I get PP job, then refinance asap at that point. What do you think?

I really appreciate your time reading and commenting on this, DWM!”

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My response:

you got it. there are more variables to consider when you are on REPAYE as it is the most complex IDR. but that’s life; life changes and change is the only constant.

  1. yes PSLF can diminish or vanish all together, but hopefully those who are already signed up will be grandfathered in. ie. government may cap or get rid of forgiveness for those who have not signed up for PSLF yet, but if you are already in the program, the fed should not change the terms on you… (that’s the hope, not a promise…)
  2. your 2 questions are thoughtful but can only be best answered in hindsight. I say this because, I would have a totally different approach during training if I Knew I’m for sure getting a job that’s 1/4 the available jobs in the radiology job market, i.e. 503c W2 jobs. I will pay the very minimum, switch back and forth between programs to minimize my monthly & total lifetime payment and maximize forgiveness.

if I Knew that I’m working PP out of training, I would pay my student loans aggressively even during training so that I minimize how expensive my education could become when all is said and done (all the interests over the life of the loan).

But since no one truly knows whether they will get a 503c W2 job or PP job out of training, especially during MS4, PGY1 year, it is impossible to say which of the above 2 approaches to take.

personally I don’t like surprises, which is why I destroyed my 6.8% student loans before contributing to my Roth IRA/Roth 403b, even though I could have potentially increased my net worth faster by channeling cash towards index funds (7-8% long term return) rather than paying down student loans 6.8%. I like the Guaranteed return of paying my debt. So yes, if I were in your shoes, I’d put majority of my cash flow towards paying my student loans aggressively. but if you ask someone else, like WCM, he’d probably say the opposite. (You can ask him to answer your questions too so you consider both ends of the spectrum.)

Dec2015_300x250_bAnswer to your first question:
your calculations sound about right, “6 yrs (~25k total saving over 6 yrs under REPAYE) vs. refinance now (~22k total saving for 6 yrs under 4.5% fixed rate).”

As long as you take into account that with each successive year, you are making more AGI, getting less REPAYE subsidy, and effectively, your interest rate on REPAYE is rising each year. So personally, I like to reevaluate annually and refinance as soon as I see that my refinance rate is lower than the effective REPAYE interest rate. If you did the calculation to get your above total savings figure, you will know exactly during which PGY, your REPAYE interest exceeds refinanced interest (it is entirely possible for some PGY’s, not-married, not much moonlighting, that REPAYE interest is always lower than Refi until becoming attending).

Answer to your second question:
Evaluate how you want to balance between cash flow and interest savings.

Assuming REPAYE saves you more interests based on your calculations, 3k over 6 years.

REPAYE also ties up more of your cash flow, REPAYE payment climbs with your AGI, refinanced monthly payment stays the same @ $100/month with DRB, $0/month with LinkCapital.

For simplicity sake, let’s just assume your average annual REPAYE payment throughout 6 pgys is $3000/yr (clearly, for a typical single pgy, pgy1 REPAYE is near $0/mo and pgy6 REPAYE is probably above $300-400/mo).
compare this to the $1200/yr on DRB refinanced loans. This means you can direct additional $1800/year to index funds investment: you leverage your 4.5% interest refinanced student loan for the potential long term profit @7-8% from investment.

While I decided against leveraging my 6.8% student debt for a potential 7-8% investment return, I could have probably gone with leveraging 4.5% student debt for a potential 7-8% investment return. The greater the differential between the interest I pay and the potential interest I collect, the more likely I will go with the refinancing to a lower monthly payment route.

DFD DRBI suggest that you run an apple to apple comparison.
Run 2 parallel scenarios based on REPAYE vs. Refi.

PGY3 income (include your projected moonlighting)
on REPAYE vs. on Refi
Find out the following,

calculate your effective interest rate on REPAYE, compare to refi interest rate.

if REPAYE interest rate exceeds refi, then I’d go with Refi as PGY3 and not even bother the rest of the calculation/comparison. because this means Refi gets me the best of both worlds: more long term interest savings (due to lower interest rate) AND greater today cash flow (due to lower monthly payments.)

but if Refi interest rate exceeds REPAYE, then check the rest of the comparisons below.

  1. total minimum payments in 1 year on REPAYE vs. Refi.
  2. total debt balance at year’s end on REPAYE vs. Refi.
  3. assuming you put the difference between REPAYE & Refi minimum payments into index fund, earning you 7-8% long term annualized return. calculate how much total investment (principle & gain) you have at year’s end.
  4. compare your net worth (debts subtract from assets) at year’s end on REPAYE vs. Refi.

This way you can see the numbers and know which approach gets the bigger bang of the buck:
paying more towards student loans at a lower interest on REPAYE vs. paying less towards student loans (but investing the difference) at a slightly higher interest rate on Refi loans.

300x250_10_143Also, I ask you to run the numbers based on PGY3 income because likely our PGY1 REPAYE beats Refi on both financial considerations: interest savings with lower rates, & greater cash flow with lower monthly required payments.

Any time either plan beats the other (REPAYE vs. Refi) in BOTH interest savings & cash flow, the decision is clear, go with the double winner.

It’s when REPAYE or Refi each wins in 1 consideration, that’s when you need to do the projected calculations to see the numbers for yourself.

Hope this helps.



  • REPAYE or Refi for you?
  • Do you value cash flow or long term interest savings more?
  • Do you pay down your student loans more or invest more?

Share your insights, experiences, and questions below!

Revised Pay As You Earn (REPAYE) or Refinance?

4 thoughts on “Revised Pay As You Earn (REPAYE) or Refinance?

  • April 23, 2016 at 12:00 PM

    question from reader via email:

    “Let’s imagine I keep my $1,000 every month (cash flow) in my saving account, then over 6 yrs of training, I have $72,000 cash flow. On top of that, beginning of PGY2 till PGY5 in my radiology program, moonlight chances are numerous and I will be expected to make AT LEAST >$80,000 just during 4 yrs from moonlight alone. So, overall, over 6 yrs, I am expected to have a cash flow of at least >$152,000 after spending on my monthly rent/food/gas/utilities/insurances/others and IRA ROTH (didn’t include 403b ROTH). That is a tremendous cash flow over 6 yrs.

    Thus, here is what I’ve thought so far:
    Due to the fact that I did not totally exclude my future job at academic (i.e. MD Anderson Cancer Center at Houston – my dream place to work and actually they are 503c1 organization), I had to consider a PSLF route. If I end up getting a job at private after 6 yrs, no big deal since I saved up cash flow to use toward student loans to make a dent at once before I refinance with bank after 6 yrs of being on REPAYE/PSLF. Therefore, I am more leaning toward paying only the minimum even under the REPAYE/PSLF route so I will have more cash flow.

    My current plan is to save at least $1,000/mo cash flow into my emergency or saving account in bank for my use in the future (i.e. paying all or portion of these saved amount toward student loans after 6 yrs if I end up with a private job before refinancing, also considering marriage, car, home payments, etc) starting this July and if I STILL have leftover cash flow monthly (expected to have $200-400 leftover/month even after paying monthly rent/others/IRA ROTH), I will put it into 403b ROTH (no employer match at Houston). When I earn moonlighting salary, then I may put more into 403b ROTH if I want to down the road. Or, do you recommend me to aggressively put more into 403b ROTH early on as well?

    What is your thought on my plan after considering my expected cash flow amount? Hopefully, after you guide me the #3 and #4 steps you suggested me to do, I may have to approach differently.

    UPDATED INFO for those who need to consolidate for make your loans PSLF eligible: Since I have two Perkins loans I need to consolidate for the sake of PSLF eligible, Fedloan servicing person told me I have to use one of my Direct loan with these two Perkins to make my Perkins consolidated into Direct loans. I will likely use one of the lowest interest rate from Direct loans ($44,900 at 5.41%) with my two Perkins (each $8,000 at 5%). I think new rate after consolidating these three loans comes out to be 5.375% according to myfedloan.gov consolidation estimator.

    I really appreciate for your valuable time and every feedback so far, Amanda! You are an amazing person 🙂 As always, thank you for putting up with my questions!”

  • April 23, 2016 at 11:56 AM

    Great job on calculations above. So carrying forward from what you had:

    Minimum payment/yr + 5.5k/yr IRA ROTH to max out between REPAYE vs. DRB ($100/mon):
    PGY1: 0+5500 (5500) vs. 1200+5500 (6700)
    PGY2: 624+5500 (6124) vs. 1200+5500 (6700)

    PGY3: 4224+5500 (9724) vs. 1200+5500 (6700)
    PGY4: 5964+5500 (11464) vs. 1200+5500 (6700)
    PGY5: 6972+5500 (12472) vs. 1200+5500 (6700)
    PGY6: 7524+5500 (130240) vs. 1200+5500 (6700)

    Yes, I agree with our general prediction that PGY1/PGY2 REPAYE wins on both cash flow & interest savings.

    Now starting PGY3, you see that REPAYE limits your annual cash flow by 9724-6700 = 3024. REPAYE limits your cash flow more subsequently as you income increases each year.

    The difference between REPAYE and Refi payment is the freed up cash you can contribute to 401 Roth or 403b Roth.

    So to calculate how much this $3024 “CAN” (remember with investment, the gain is potential, not guaranteed, with paying off debt, your interest savings is guaranteed) become in the matter of a few years, you can do so:

    1. Assume you make contribution with each paycheck, ie, biweekly, so that means $3024/26 =$116 per paycheck. The stock market on average return 8% over long term (403b/401 are long term investment because most people don’t withdraw money from these accounts until 59.5 year old to avoid penalties for early withdrawals).
    2. If you contribute =$116 per paycheck during PGY3 instead of paying the difference to stay on REPAYE, your PGY3 aggregate contribution of $3024 (will be $3145 at year’s end @ presumed 8% return) CAN become $3998 in 3 more years (by end of training).

    3. You can use this calculator and plug in the other years and see how much you can make with each year’s investing the difference between REPAYE and Refi payments into index funds.

    4. Note that the $116 you freed up every 2 weeks by Not paying the higher REPAYE payments can get you a potential return of 8% on each dollar you investe in index funds. This is not to mention the fact that you are contributing to Roth space in 401k or 403b (above and beyond the 5.5k that’s in Roth IRA). Remember the tax savings of paying PGY cheap taxes as opposed to paying attending or retired attending taxes on your retirement savings. So the idea is that you are using 4.5% refinanced student loan money to get a potential gain of 8% + future tax savings by putting the freed up cash into index funds.

    5. You could have an amazing year, when your index funds return you 13% and you feel amazing about borrowing relatively cheap money @ 4.5% to do so. You could also have a crappy year and made -1% on the index funds, and thought in hindsight that you should have paid student loans down more because the interest savings is Guaranteed. But if you can stay patient and rational, the point is on average over time, your annualized return on index funds is 7-10% (I like using 8% because I’m conservative). So it makes mathematical sense that you would delay paying debt @ 4.5% and channel your cash towards investment @ 8% + tax savings.

    6. Last thing to consider is that if you can manage to max out Roth 5.5k & Roth 401k or 403b 18k, totaling 23.5k without switching from REPAYE to Refi, you can consider staying with REPAYE instead to keep you option for PSLF open. But if you can’t afford to max at 23.5k without using the difference between REPAYE and Refi, than I suggest to consider Refi as REPAYE interest and payment rises each year.

    Hope this helps!

    • April 23, 2016 at 5:20 PM

      As always, your answers are crystal clear 🙂

      Based on what you provided me with so many helpful feedback and what I thought so far:

      1) REPAYE will beat refinance during PGY1-2 for both interest save and more cash flow, no question about this.

      2) If I decide to lean more toward private practice somehow in next 2 yrs, it will be the best to switch from REPAYE to refinance after PGY2. Of course, this is assuming that regardless where I will end up (non-profit or profit), I have to pay loans on my own (forgiveness option is gone). Also, we have to assume and hope that refinance interest rate is still good after two yrs.

      3) If I decide to lean more toward non-profit job, I will stay on REPAYE/PSLF for 6 yrs and switch to Standard 10 yr plan for additional 4 yrs trying to pay the minimum monthly as much as possible. If I do that, using this helpful calculator link, http://www.doceden.com/PSLFplanner.html then, after 10 yrs, a government will forgive ~96k.

      4) For the sake of the reality, my 6th year-fellow year will be critical for me to get a clear idea which job path I will lean over to. So, let’s just say I decide to stay on REPAYE/PSLF for 6 yrs during training years to keep my both paths opened. Even after maxing out IRA Roth and 403b Roth (23.5k/year for the next 6 yrs during my training), I will still have cash flow monthly which expects to give me ~40k cash balance over 6 yrs. If I consider moonlight salary on top of this, then I will have at least 70k+ during PGY2-5 (4 yrs). So, I will at least have 110k+ cash in my saving account after 6 yrs even after maxing out both IRA and 403b ROTH spaces.

      I will have to re-evaluate each year like DWM mentioned and stay on top for any changes on PSLF and REPAYE options. As long as federal repayment option is viable option for at least next 6 yrs of my training years, So, I think REPAYE is not a bad option compared to refinance option since I consider both private and public jobs…

      • April 24, 2016 at 1:57 PM

        so glad to hear that it helped.
        exactly, since you are able to max out 23.5k in Roth space anyways, i would just stick with REPAYE.
        an additional tax-advantaged vehicle of savings you’d like to look into are:
        1. HSA: health savings account
        2. SEP-IRA or Solo 401k if your moonlighting income is given in 1099 instead of W2 form
        3. 529 if you do end up have kids in PGY, it’s good idea to start saving for their college

        these additional tax advantaged saving vehicles give you saving space above and beyond the 23.5k.
        so it would be up to do go further as much as you like 🙂 sky is the limit
        good job for figuring out your budget and set saving goals.

        if you’ve got goals and discipline, you have 100% better chance at accomplishing them than not setting goals.

        also, any additional cash flow you don’t put in tax-advantaged saving accounts (Roth IRA, Roth 403b, 529, HSA, SEP-IRA etc.), you can always put in a taxable brokerage account in hopes of making better return than the student loan interest rate.

        if your loans got forgiven, you get to keep your investment.
        if you chose private jobs and needed to pay off your loans on your own, you can just use the money saved in a brokerage account to pay it off!

        I’ll be posting information about various tax-advantaged savings account beyond Roth IRA & Roth 403b/401k soon!

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