The PAYE (Pay As You Earn) plan has been a popular choice for doctors amongst the income driven student loan repayment (IDR) options available through the federal government, in large part due to its income caps. However, PAYE is in the process of phasing out and will no longer be accepting new applicants beginning in the summer of 2024. While this will not affect physicians who have already enrolled in the program before the July 1st end date, many graduating residents and fellows as well as practicing physicians with federal student loans are scrambling to figure out what to do about their plan for debt repayment. Below, we cover what physicians need to know about the end of the popular PAYE program, do a deep dive into the new SAVE program and other student loan repayment plan options that will still be available, as well as cover how to assess and calculate the best option for you. Although SAVE has been very popular since its inception last year, including among doctors, it’s important to know that SAVE has some drawbacks for high income physicians which may make it a poor choice in the long run. As always, it’s important to do real number calculations to figure out the best repayment option for you, as well as consider whether student loan refinancing is a better option if you are not pursuing student loan forgiveness through one of the federal pathways.
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What do physicians with federal student loans need to understand about Income Driven Repayment Plans?
Physicians that hold federal student loans have had a lot to keep up with over the last few years. When the pandemic hit and federal loan repayments were paused, those that were holding them found themselves in an unprecedented situation of not having to make payments or accrue interest for over 3 years. There were 9 extensions of the deadline to resume payments over this period of time, which left many in flux when deciding whether to refinance at historically low interest rates or hold on to federal loans, which offered not just the 0% interest and hold on payments, but also the potential for student loan forgiveness. This rollercoaster of announcements and possibilities meant that many felt holding on to federal loans just in case it would turn out to be advantageous to do so in the long run made sense. However, in 2024, payments on federal loans have restarted, and most efforts at further student loan forgiveness have stalled or been halted. Therefore, physicians holding federal student loans have some decisions to make. One big one as the PAYE program phases out is which income drive repayment plan makes the most sense (and if staying in the federal system makes sense over private student loan refinancing).
In order to calculate the best option, doctors should take into consideration a few questions:
What is your discretionary income calculation under each of the Income Drive Repayment (IDR) options, which include the PAYE, SAVE, IBR (both the old and new versions), and the ICR?
Are you going for Public Student Loan Forgiveness (PSLF)?
What rates are you getting for student loan refinancing?
What is the potential for a ‘tax bomb’ if not doing PSLF and how does that factor into the total amount paid if you have to pay taxes on the amount forgiven?
How long do you want a student loan payment hanging over your head?
Income driven payments vary quite a bit based on the plan you choose and what your income is, and could be as low as $0 if you’re unemployed or make less than 150% or 225% of the poverty threshold.
Many federal loan income based repayment programs use a percentage of your discretionary income as the basis for your monthly payment amounts. Your discretionary income will be calculated as your Adjusted gross income (AGI) minus a multiplier of the poverty threshold for your household size and location (state), so it is important to know this number.
The poverty thresholds for 2024 are:
In PAYE and IBR, the government limits your payments so that even if your income increases, your payments never go higher than what you’d pay on the Standard Plan, where payments are set to a fixed amount that ensures your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans). This is not the case for the new SAVE program. You can see why when you have a low income, such as in residency or fellowship training, these programs are quite favorable, as a percentage of your discretionary income is likely a small amount. However, especially if you have a high income or a small family size, the discretionary income calculation can really start to work against you when the payments are not capped. This is why although the new SAVE program is excellent for the majority of the population, it's not a slam dunk for high income professionals. If your med school loan balance isn't that high, you may be better off just paying back your loans normally under the standard repayment program or using one of the other income driven repayment plans (or refinancing).
It's important to realize that if you are not planning on pursuing student loan forgiveness through PSLF, you'll need to do the math on whether going through an income driven repayment plan for eventual forgiveness makes sense. It may be that you will pay more over the life of the loan with one of the income driven repayment options over paying off your student loans earlier. Even though your monthly payments may look lower, if you are paying them off over 20-25 years, you could payi more out of pocket than you would had you paid them off early. And if the forgiveness amount is taxed at the end (the so called 'tax bomb' that exists under current IRS rules), you may end up paying more overall because of this as well.
If the numbers are close or in the favor of paying off your loans, you should consider if you can get a lower rate through student loan refinancing to further reduce how much you pay on these loans, as well as pay them off quicker. In the past, when the rates for student loan refinancing were much lower, this was a slam dunk decision for many. Nowadays, with interest rates being higher, many recommend that your student loan refinance rate should be at least 1% less than the interest rates on your federal loans before considering it. Also note that once you refinance your student loans, you can't go back to the federal system if there are new forgiveness options in the future. If your plan is to pay them off ASAP no matter what, that may not matter to you.
Let’s go into the various federal income driven repayment options so you narrow down which ones may be good options for you, keeping in mind the factors above.
What Is the PAYE Repayment Plan That Is Ending?
The Pay As You Earn (PAYE) Plan is a 20-year income-based repayment plan for federal student loans where your monthly payment is based on your discretionary income.
In general, your monthly payment is equal to 10% of your 'discretionary income,' divided by 12, up to a maximum of your standard 10-year repayment amount.
Your discretionary income for the PAYE plan is calculated by:
Discretionary income = Adjusted Gross Income (AGI) - 1.5 * the poverty threshold for your household size and location (state).
In order to qualify for eligibility for PAYE, you have to show partial financial hardship. Under this qualification, you have to start with a monthly payment calculation that is lower than the standard 10-year repayment amount. You can, however, remain in the program as your income increases past this threshold, which allows you to keep your payments below the 10-year standard payment cap.
As a reminder, the 10 year standard payment cap means the government limits your payments so that even if your income increases, your payments never go higher than what you’d pay on the Standard Plan, where payments are set to a fixed amount that ensures your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans).
If your monthly payment does not cover the interest accruing on your student loans balance, the government pays any surplus interest charges on subsidized loans for the first three years.
One of the benefits of the PAYE repayment plan is the ability to exclude your spouse’s income when filing your taxes as Married Filing Separately.
To be eligible for the PAYE plan before it phases out, you must be a “new borrower.” This means you cannot have had a federal student loan balance on October 1, 2007; your loan has to have been disbursed on or after October 1st of 2011. Parent PLUS loans are not eligible.
PAYE Repayment Program Enrollment Deadline
Doctors hoping to take advantage of the PAYE repayment program before it’s phased out must enroll before July 1, 2024. As mentioned above, current enrollees will be able to remain in the program after this phase out date, but no new enrollment will be allowed.
PAYE Repayment Strategy for Doctors
A common strategy physicians use for student loan repayment is enrolling in the PAYE program while they are still in their residency or fellowship program and have a lower income. This trainee income sets the baseline for your repayment before you reach your first attending salary. Under the PAYE guidelines above, when your income increases, your monthly payments can only increase up to the program cap, regardless of how much your income increases by.
The PAYE repayment plan typically offers the lowest monthly payment option for physicians, which has been a strategy for doctors working toward the Public Student Loan Forgiveness (PSLF) route. The largest asterisk to be aware of for the PAYE plan before the government phases it out is that the write off of unpaid interest charges only lasts for three years under the PAYE plan. If you go the PAYE route and don’t get PSLF, you can easily find yourself in a situation where your student loan balance grows even while making your monthly payments, which can leave you in an even worse position than when you graduated. If you find yourself in a situation where your minimum payment doesn’t cover the interest, make sure you are hyper diligent about tracking and following your PSLF progress. If you aren’t eligible for PSLF through your employer, you will likely want to consider one of the other repayment plan options we cover below.
Learn more about PSLF in our student loans and refinancing primer for physicians.
SAVE Repayment Plan
The SAVE repayment plan is a popular option doctors often consider, and is the newest of the options, so the one that we tend to see the most questions about lately on our physician communities. It has some features in common with the retiring PAYE plan, but one fundamental difference that can be key for many physicians – it does not have a monthly payment ceiling. Therefore, the previous strategy of signing up for PAYE at the end of training to lock in the monthly income cap won’t work with the SAVE repayment plan.
Discretionary income for the SAVE repayment plan is calculated differently than the PAYE plan. Under the SAVE plan:
Discretionary income = AGI - 2.25 * poverty threshold
This lowers what the government counts as your discretionary income, which can help physicians with lower- and mid-range incomes. For high-income earners or lower student loan balance borrowers, however, you may find your payments significantly higher than what you could expect under the PAYE plan.
An advantage to the SAVE plan is that, unlike the PAYE plan, if you have a high student loan balance ratio to your income, there is no cap on how much unpaid interest the government will subsidize, unlike the 3-year cap under the PAYE plan.
As we discussed in our coverage of the new SAVE plan, payment calculations for undergraduate loans reduced from 10% to 5%. Grad school and medical school follow the same 10% calculation that the PAYE plan uses. If you have both a mix of undergrad and grad school/medical school loans, then the percentage used to calculate your monthly payment is a weighted average between the two.
SAVE Repayment Strategy for Doctors
The SAVE repayment plan can be a great option for physicians with lower incomes, especially if they have higher student loan balances. This route can also be a good fit for doctors who aren’t going the PSLF route and want to tackle their student loans effectively so that they can jump start their retirement savings and wealth building.
If you have a large family, the SAVE plan might also be a good option, as the poverty threshold used to calculate your discretionary income is based on family size.
An important caveat to note: beginning on July 1, 2024, you will no longer be able to leave the SAVE repayment plan for another income-driven repayment option after you’ve made 60 payments. This is a factor to consider if you expect your income to increase significantly over the next several years, especially if your income will exceed your federal student loan debt balance.
If you aren’t eligible for or not interested in the PSLF route, tackling your balance aggressively to save on years of accruing interest is another popular route if you find your SAVE payments snowballing as your income increases.
Another option to consider outside of the PSLF is refinancing your federal student loans to a private student loan with a lower interest rate.
Using the SAVE repayment plan for your medical school loans puts you on a 25 year repayment timeline versus a 20-year plan with PAYE, which can keep you in debt longer, keeping your actual discretionary income available tied up in repayments. If you’re able to pay off your loans faster and aren’t on the PSLF track, the SAVE payment may not be the best option for you.
Alternative Student Loan Repayment Plan Options
Below, we compare some of the other repayment plan options outside of the PAYE and SAVE plans that exist to help you figure out which might be the best option for your situation.
New IBR (Income-Based Repayment) Plan
The New IBR has similar characteristics as the PAYE plan and can be a good fit for physicians who fit the criteria for the PAYE plan but miss the phase out eligibility deadline to sign up.
Under the New IBR, partial financial hardship is required. In addition, you must borrow loans after the important July 1, 2024 deadline. This is a key requirement in this distinction between the PAYE and New IBR plans.
If you meet this requirement, the monthly repayment calculation is the same as for PAYE, and you will still have a payment cap as your income increases.
As a reminder, the 10 year standard payment cap means the government limits your payments so that even if your income increases, your payments never go higher than what you’d pay on the Standard Plan, where payments are set to a fixed amount that ensures your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans).
Old IBR (Income-Based Repayment) Plan
There is also an “old” IBR that applies for loans before the July 1, 2024 eligibility requirement, but under this plan, your monthly repayment amount is calculated at 15% of your discretionary income. Thus, the old IBR plan typically has higher monthly payments than the other options discussed, except for the ICR plan below.
Discretionary income under Old IBR is the same as PAYE and New IBR:
Discretionary income = AGI - 1.5 * poverty threshold
The payment cap still applies. As a reminder, the 10 year standard payment cap means the government limits your payments so that even if your income increases, your payments never go higher than what you’d pay on the Standard Plan, where payments are set to a fixed amount that ensures your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans).
ICR (Income Contingent Repayment) Plan
The same holds true for the ICR plan, except it bumps the percentage to 20% of your discretionary income. The monthly payment cap is slightly different, under a 12-year standard repayment amount versus the 10-year for PAYE and both IBR plans. Discretionary income is also calculated at a lower rate:
Discretionary income = AGI - poverty threshold
The ICR is generally the highest monthly payment amount required under the different plans.
Refinancing Options for Student Loans
If you aren’t going the PSLF route and hope to minimize the impact of your student loans on your financial future, refinancing to private student loans if you can get a better interest rate can be a great way to save money while tackling the debt. A lower interest rate can help increase the amount of your monthly payment that goes to lowering your balance versus paying accruing interest on the loan. Additionally, if you're in the Financial Independence, Retire Early (FIRE) camp, you may not want large monthly payments for decades, as this can stretch your budget in retirement.
Unlike refinancing a house, student loan refinancing usually doesn’t cost you anything in terms of closing costs, so there isn’t a downside to refinancing if you aren’t eligible for forgiveness and plan to pay time off quickly versus extending the life of your loans with refinancing. You will just need to spend a little time researching interest rates to make sure it’s a better deal versus what you already have. Remember that if you refinance your student loans, you lose access to the federal programs.
As interest rates (hopefully!) continue to drop, refinancing at a lower interest rate can also help you leverage your income for investing more toward retirement. We’ve spoken about this trade off and debate as it pertains to paying off your home early or investing the money instead. You can use a similar evaluation for your student loans.
PSG Perk: We have partnered to help you find resources to refinance your student loans. Many of our partners also offer special perks and discounts exclusively to PSG members. Visit our student loan refinancing resources page to explore the options available.
Additional Student Loan Resources for Physicians
If you’re exploring student loan repayment options for the first time, or considering changing your strategy as options or your situation have changed, check out additional student loans and early career resources we have for physicians: