I am hoping to get clarification on interest capitalization and the interest benefit with the REPAYE program.  If someone is graduating from school in May 2016 with unsubsidized loans and has had no income for 2015, they should then qualify for a $0 payment once they get out of school through the REPAYE program.  In regards to the interest benefit, the government should then subsidize half the interest payment for the first 12 months since there is a $0 payment.  Would this be correct even if the person is paying off some of the principal in the first year?

Also, with regards to interest capitalization, it looks like the interest will not be capitalized as long as you stay in the program and don’t go into deferment, forbearance, etc.  I was just hoping for confirmation on this. 

It seems as though for someone who is single and would qualify for a $0 payment, the REPAYE program would be a great option, especially if they could pay down some of the principal in that first year.  If anyone could confirm my line of thinking here, I would greatly appreciate it!

My reading of the rule is that the 50% reduction only occurs in a month to the extent your actual payment for that month is less than your accrued income (also, the actual payment needs to be at least your required minimum monthly payment, but under your scenario that’s $0.).  So say your required minimum payment is $0/mo and your accrued income is $500/mo and you pay $500 each month, you won’t save any money.  However, say it is $500/mo and you pay $0 for 5 months and $3000 in month six, you will have saved $250 in each of the first five months and $0 in month six.  Not very intuitive, to say the least.

That’s my take on it, but I am far from certain that this is how it works, and honestly I don’t think we’ll know for sure until someone tries it.

As for your question about capitalization, I believe you are correct, but note that switching to REPAYE from a different plan is a capitalization event.