Learning from repayment mistakes

Throughout the month of June, we had an amazing time as the featured guest on Ryan Inman’s Financial Residency podcast. We covered a number of topics and shared loads of client stories, it was a blast! We had one real tear-jerking segment, however, when we discussed a number of mistakes we had seen people take with their student loans, ones that often involved making a decision on their loans (or trusting the advice of their loan servicer) and only afterwards checking with us to make sure they had already done the right thing.

Sometimes it’s a fairly easy fix to correct, but others can take months or even years to rectify a mistake you made, or even one made by the servicer themself. If you’re pursuing Public Service Loan Forgiveness (PSLF), these errors can cost you valuable months of qualifying payments, dragging your repayment out even longer and adding unnecessary cost.

Don’t wait until you’ve made an irreversible mistake (Attending physicians, take note!)

Most of the mistakes we see in repayment come when folks are recertifying their incomes or submitting their PSLF  employment certification form. These sorts of errors don’t typically sink the ship and can be fixed as long as you were on the proper course to begin with. The big sort of “S.O.S.” problems come when clients think they were on track to begin with, then wait too long for a course correction.

One of the biggest problems—and one that we, sadly, are seeing more and more—is when borrowers get onto a particular repayment plan, then wait too long to switch to a better plan and wind up no longer qualifying for it. What would have been a fairly easy and painless change is now off the table, and could end up being an enormously expensive mistake.

Getting on the right repayment plan early

There are several repayment plans available to borrowers, including the four income-driven repayment (IDR) plans, and they’re all different; knowing which one is right for you is crucial! Each of the plans has its own terms (length of repayment, payment amount, etc.) and knowing the different pros and cons will affect which you choose on your repayment journey.

We just saw a new client get walloped by the realization that being on the wrong plan was going to completely redirect her repayment journey away from PSLF toward a much more costly trajectory. After completing her residency in 2018, Dr. Daniella landed her dream job as an attending at a major hospital in the Midwest. While still a resident, she enrolled in the REPAYE income-driven repayment plan. Since her resident’s salary was just over $50,000, her payment was low and she loved that the government subsidy for REPAYE was helping pay down her interest (what a deal, right?!). Now, as an attending, we projected that her income put her PAYE payment a few dollars over the threshold for Partial Financial Hardship (PFH)—so she wouldn’t qualify for it. Lucky for her, her family size was growing, and including the ‘new addition’ in the formula, her estimated payment dropped just enough to qualify as a PFH and be eligible for PAYE.

While REPAYE is appealing to many because it means you pay less interest on your loans, it doesn’t have the same payment cap that the other IDR plans have. With the cap, you never pay more than the standard 10-year payment amount, regardless of your salary; under REPAYE, there is no cap on how much you pay—it’s determined by a percentage of your income. PFH means your repayment amount under the IBR or PAYE  plan would be less than the 10-year standard plan amount. If you don’t have a PFH, you won’t be eligible for IBR or PAYE,, so you want to make sure you’re on the right plan before you start making an attending’s full salary.

Don’t wait until it’s too late

Dr. Daniella was fortunate that she had the right mixture of circumstances to move from REPAYE to PAYE, but not everyone will be so lucky. You could find yourself caught between a rock and a hard place, paying the full loan balance without PSLF as a realistic option. This is one of the most painful situations we encounter because it was a fairly simple mistake, but will end up costing thousands and thousands of dollars. Student loan repayment is a long, stressful, and messy process, but borrowers don’t get a whole lot of opportunities to really practice or get better at it. Especially at the beginning of your attending career, don’t wait until it’s too late to double check your strategy by “phoning a friend,” and give your friends at Navigate a call.