Author Topic: Gaming REPAYE and the Student Loan System ($148,000 Debt) to Achieve FIRE at 45  (Read 42204 times)

ReadySetMillionaire

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See Post #168 (page 4) for update as of 07/19/2018, or about three years into REPAYE program.

TL;DR (Only Read "The Numbers" if You Know How REPAYE Works)

$148,000 in federal student loan debt. My payments are eating almost 50% of my gross income and not allowing me to save at all.

I thus do not plan to pay off this debt and instead plan to enroll in REPAYE. This plan caps payments at 10% of AGI - discretionary income. Two key points: (1) payment is based on AGI, which means I could stuff money into tax-deferred retirement accounts to lower payments and increase my savings rate; and (2) under REPAYE, the government subsidizes 50% of unpaid interest, thus lowering my effective interest rate from 6.7% to 3.3%.

I thus do not plan to ever pay my loans back. I am going to put money away in tax-deferred retirement accounts and plan to retire at 45.

Is this a good plan, or do I have rose-colored glasses on?

Background

I graduated law school with $148,000 in student loan debt (all federal) and obtained a job earning just $47,500 per year.

I initially planned to work as hard as possible to pay off these loans, but I'm quickly starting to realize that I'm not going to even begin to be able to save for retirement for 8-9 years until after I'm done with aggressive debt repayment.

However, recent posts have shown me that there might be a better way to  achieve financial independence/early retirement. And that involves strategically using Obama's new REPAYE program to lower my student loan payments, increase my savings rate, and retire early.

Traditional Repayment vs. The REPAYE Program

Again, I only make $47,500 per year as a lawyer and have $148,000 in student loans averaged at 6.743% interest. I have cut my expenses as much as possible and am able to make $1,200 monthly payments towards my loans. At that rate, it would take about 17 years and 7 months and $309,000 to pay off my loans.

Furthermore, paying off debt feels like throwing money into a black hole, has limited my financial flexibility, made things feel very tight, and made me feel like financial independence is a long, long way away.

Because of the above, I am now strongly considering using the REPAYE (the new PAYE) to pay back my loans. This will allow me to significantly reduce my student loan payments, provide more financial flexibility, begin saving for early retirement, and almost certainly pay less towards my loans (especially considering TVM) than if I were to pay them off in full.

How the REPAYE Program Works

The Obama administration recently created a new repayment option that will take place at the end of 2015 (October expected).

Pros of REPAYE
  • No "partial financial hardship" required--you may always stay enrolled;
  • Monthly payments are based on the following formula: AGI - 150% of poverty level, which equals your discretionary income; you then pay 10% of your monthly income;
  • If your payment does not cover interest charges, the government will subsidize 50% of your accruing interest;
  • All federal loan borrowers are eligible; and
  • Unpaid balance is forgiven (and subject to tax) after 20 years for undergraduate students and 25 years for graduate students.

Cons of REPAYE
  • Graduate students must stay in program five extra years;
  • If you are married, spousal income counts towards your payment calculation whether you file jointly or separately; and
  • There is no cap on monthly payment amount (i.e., it's 10% of your discretionary income, which could be more than the standard 10 year repayment amount).

In summary, I would make these minimum payments for 25 years, the remaining balance would be forgiven, then I would pay the tax liability on the forgiven debt.

Two of the pros are enormously huge in the early retirement context. First, your payment is based on adjusted gross income. That means you can stuff money in tax-deferred retirement accounts to minimize AGI and thus minimize student loan payments.

Second, if your payment does not cover interest, then the government subsidizes 50% of the accruing interest. That effectively lowers my interest rate from 6.7% to 3.3%.

The Plan

My plan is to lower my AGI as much as possible to decrease my student loan payments as much as possible, which would allow me to free up more money to invest and dramatically increase my savings rate.

Right now, for example, my gross income is $47,500. I can get that number significantly down quite easily this year by using the following investment vehicles:
  • 401k contributions;
  • Traditional IRA contributions;
  • HSA contributions;
  • Student loan interest deduction; and
  • Eventually 529 plans.

Thus, I am now going to contribute $500 per month to my 401k, save the rest, and then shove in the max to my Traditional IRA at the end of the year (gives me a savings rate of about 18% for this entire year which isn't bad considering I was sending $1,200 or more towards debts for six months). Those measures, plus the student loan interest deduction ($2,500 per year), will reduce my AGI to $36,500.

That means my student loan payments next year will be $157 per month. All of those payments will apply to my student loan interest deduction (thus reducing my AGI next year), and the unpaid accruing interest will be subsidized at 50% by the government. My loan balance will thus not grow too significantly despite making such minimum payments.

Because my student loan payment will be lower, I can then reduce my AGI even more in later years,  allowing me to save more and decrease payments, and the cycle continues.

The Numbers

Traditional Repayment vs. REPAYE
  • Traditional: the quickest I could pay this off would be 8 years or so, which means $180,000 paid towards loans
  • REPAYE Worst Case Scenario: $200,000 paid towards loans plus tax liability. But this is over 25 years, which I think is favorable to putting almost all of my money towards loans for 7-8 years

Assets at Age 45
  • My Traditional IRA (Assuming 7% returns, maxed from age 27 to 45): $202,000
  • GF's Traditional IRA (Assuming 7% returns, maxed from age 27 to 45): $202,000
  • My 401k (Hard to Predict, but Goal is $10k/year in contributions until I get raises and can max): $650,000
  • Her 401k (Again, Hard to Predict): $250,000
  • Paid Off House: somewhere between $150,000-$225,000
  • Brokerage Account: unknown

TOTAL: $1.3M + brokerage account

With a paid off house, we then expect to be able to live frugally off less than $60,000 per year (the 4% withdrawal rate).

Long Term Concerns

A Growing Balance: Again, even while I'm investing early on, the balance should not grow too significantly. The government is subsidizing 50% of unpaid interest, meaning that my loan (after applying payments) should only accrue about $4,000 per year while far more goes into retirement accounts. If I start making substantial enough income that REPAYE isn't worth it, then the loan won't have grown too much and I can just take care of the loan.

Joint Income: My girlfriend makes decent money ($67,500 gross per year) and we plan to get married in the near future, and she is on board with the plan. Thus, even combining our income, we can do all sorts of things to greatly reduce our combined AGI (i.e., save aggressively) and keep payments low.

Tax Liability: My biggest concern is the tax liability. If I wasn't clear on this before, after 25 years, your loans are forgiven. But if your assets exceed the forgiven debt (which would happen since I was stuffing money into accounts to lower my AGI), then the forgiven debt is taxed at year 25.

I calculate that--at worst--my forgiven debt would be around $250,000. I would do everything in my power to make sure that is taxed at the 28% rate (tax brackets are likely going to move due to inflation), meaning I would owe $70,000. But given the time value of money and the legislative pressure I expect to come towards Congress, I can't pass up this opportunity for something 25 years down the line. Nevertheless, I will come up with a way to pay the tax if it comes due.

High Income: As a young lawyer, I do expect to make more money eventually, whether that means becoming partner at my current firm or moving to a bigger firm in a nearby bigger market. But even if I started making $150,000 per year, I could either pay off the loan or get my AGI down to below $100,000 per year and my payments would be in the $650-$700 range and, more importantly, significantly increase my savings rate.

Your Thoughts?

So, with all of that said, I'd love to hear your thoughts about my plan.
« Last Edit: July 19, 2018, 11:57:37 AM by ReadySetMillionaire »

forummm

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I was gonna try, but tl;dr

ShoulderThingThatGoesUp

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If this administration can grant it, can't the next take it away?

ReadySetMillionaire

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I was gonna try, but tl;dr
Wrote a TLDR and removed some fluff.

If this administration can grant it, can't the next take it away?
Thus far, with every change, participants have always been grandfathered in.

forummm

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The tl;dr sounds nice but doesn't have a question in it.

I think your loan balance is forgiven after 20 (25?) years. Check out the public service forgiveness option. Your loan balance gets forgiven after 10 years of working for almost any non-profits or government organizations. You can even have a break in service (say 5 years qualifying employment, 2 years non-qualifying, 5 years qualifying) to get the credits.

NV Teacher

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You borrowed the money with the understanding that you would repay it.  I would repay the loan even if that means you are not able to retire at 45 as a millionaire.

Civex

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You borrowed the money with the understanding that you would repay it.  I would repay the loan even if that means you are not able to retire at 45 as a millionaire.

+1

Household income is >$100k working professional jobs, repay the loans.

morning owl

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Agree with the above. I'm not American, nor have I ever had student loan debt, but I assume hat these repayment programs were designed to assist those who truly would be debilitated or have their lives ruined by the weight of a large loan hanging over their heads. They're not there to make people millionaires at 45. It's unethical to be taking advantage of this, IMO. I would pay the loans.

mozar

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I don't care if its ethical or unethical. My taxes were used to bailout huge banks who risked everything...but back to the OP. Being that you're just starting out (?) you're income will likely go up. And then you might pay it off anyway and you'll end up paying more interest, maybe. But here's my story: I paid 135K for a degree that's even less lucrative than yours.

My first job out of grad school I made 55k. I decided to pay it off within 5 years. I never made more than 55k a year during those 5 years and I was unemployed for a year and a half during that time. I paid off 125k over 5 years by paying 2k a month no matter what. Can you live some place super cheap for five years? Also can you refinance with sofi? For me it makes me nervous to have to have that burden for 25 years. That's a really long time.

ReadySetMillionaire

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You borrowed the money with the understanding that you would repay it.  I would repay the loan even if that means you are not able to retire at 45 as a millionaire.

I borrowed the money with the understanding that alternative repayment plans were an option. Put the shoe on the other foot and pretend this was mortgage debt instead of student loan debt.

Anyway, I don't want to get into the ethical debate. Hell, this entire forum and website are based upon individuals not playing by society's rules in order to achieve their own personal goals.

I guess the long story short is that I'd appreciate your critique on the math rather than the morals.
« Last Edit: June 28, 2015, 07:36:53 AM by ReadySetMillionaire »

Rural

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If the programs were intended only for the poorest of the poor, they would not be included in the paperwork for every loan or advertised so heavily to the entire populace. This is one method through which the lender considers the debt to be paid.


That said, OP, with that degree and in your field, you should concentrate either on getting to a higher-paying job so you can knock this out fast, or, if you're working for less because you believe in doing good, work for a nonprofit or government agency and get on the PSLF program to get it gone, tax free, in only ten years.

ReadySetMillionaire

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If the programs were intended only for the poorest of the poor, they would not be included in the paperwork for every loan or advertised so heavily to the entire populace. This is one method through which the lender considers the debt to be paid.


That said, OP, with that degree and in your field, you should concentrate either on getting to a higher-paying job so you can knock this out fast, or, if you're working for less because you believe in doing good, work for a nonprofit or government agency and get on the PSLF program to get it gone, tax free, in only ten years.

To your second point, I am going to try and get a higher paying job within 2-3 years. But for now, and with a higher paying job not guaranteed, the plan I described in my original post gives me more flexibility. The loans shouldn't balloon too much and I can always go back and pay them if I decide that this whole REPAYE plan isn't worth it.

In other words, at worst the REPAYE plan is a good short term strategy to begin freeing up my cash flow and saving for retirement.
« Last Edit: June 28, 2015, 08:01:46 AM by ReadySetMillionaire »

arebelspy

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Aren't you the poster that wanted to write a blog/book about paying off high student loan debt enroute to FI?



As far as your plan, it seems mathematically possible. I agree with the other posters. I wouldn't do this, as paying my debts is important to me.

I'm about to come out of pocket tens of thousands of dollars, for example, for an underwater house I'm selling. I could stick the bank with that via various methods, but I signed the loan paperwork, and I will pay it.

Yes, I know some say it's a business decision, and that's fine. For me, ethics is a part of business decisions as well.

(Appreciate everyone expressing those opinions kindly. Personal attacks are not acceptable.)
« Last Edit: June 28, 2015, 07:57:02 AM by arebelspy »
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former player

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To me, your plan looks a lot like 25 years of indentured servitude to a government finance system.

I'd rather pay the loans off under my own steam.

ReadySetMillionaire

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Aren't you the poster that wanted to write a blog/book about paying off high student loan debt enroute to FI?

Ha, yes indeed. But I've had some really good PM conversations with others in a similar boat and they've really made me think about my payoff strategy.

I think it's best to be open-minded and at least consider this as a plan.

Davids

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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?

Midwest

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You borrowed the money with the understanding that you would repay it.  I would repay the loan even if that means you are not able to retire at 45 as a millionaire.

I borrowed the money with the understanding that alternative repayment plans were an option. Put the shoe on the other foot and pretend this was mortgage debt instead of student loan debt.

Anyway, I don't want to get into the ethical debate. Hell, this entire forum and website are based upon individuals not playing by society's rules in order to achieve their own personal goals.


With a mortgage, they take your house if you don't repay.  Difficult to foreclose on an education.


ShoulderThingThatGoesUp

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Don't hate the player, hate the game. If you don't like that this ridiculous program is available, oppose the people putting it in place.

Murse

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My thoughts, 25 years is a long time. This would be my last option quite frankly, if it were me I would work for the government or non-profit, or I would accept that as a lawyer my earning potential is ginormous. My focus would be to crank up my earning asap and either pay it, or use a different kind of program where they pay your debts, again a lot can change in 25 years. Now, if the earning potential weren't there my answer may be different.

ReadySetMillionaire

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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?

Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.

If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.

Murse

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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?

Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.

If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.
Then I guess you have already made up your mind, good luck :)

Midwest

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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?

Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.

If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.

Are you certain it's based on AGI and not a modified AGI which would add back retirement contributions?

arebelspy

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Don't hate the player, hate the game. If you don't like that this ridiculous program is available, oppose the people putting it in place.

Who said we didn't like the program?  Or hated the player or the game?

There's a difference between finding something unethical and hating people who do it.

There's lots of unethical stuff you can do to enrich yourself. This is just one. How far do you want to go?

Most of us are saying we wouldn't do this--we'd pay our debts. Us saying we'd do the ethical thing, in our minds, doesn't constitute "hating the player" of a person who does do it.

Like my house example--I'd rather work longer and pay my debts than shirk out of them, easy and legal as it would be.
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arebelspy

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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?

Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.

I wouldn't call 65% (according to your estimate) a "vast, vast, vast majority". And you start there, but what's preventing you from moving up?

If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.

Paying principal on debt is part of your savings rate.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

ShoulderThingThatGoesUp

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I guess I don't see how this is any more unethical than people who used HARP, or people using Obamacare subsidies after FIRE. I wish the government didn't inflate the cost of education by involving itself with this, but it does. So OP's education cost a lot more than it should have because of the government, and now there's an option to pay less. I still think it's a bad idea for flexibility reasons, though.

I didn't intend to imply you hate OP, I was just using the expression as an idiom.

ReadySetMillionaire

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I guess I don't see how this is any more unethical than people who used HARP, or people using Obamacare subsidies after FIRE. I wish the government didn't inflate the cost of education by involving itself with this, but it does. So OP's education cost a lot more than it should have because of the government, and now there's an option to pay less. I still think it's a bad idea for flexibility reasons, though.

I didn't intend to imply you hate OP, I was just using the expression as an idiom.

Can you expand why you think it's a bad idea for flexibility reasons?

Blatant

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While I am not making a judgment on the OP, I would personally find this to be unethical and I would not do it.

ReadySetMillionaire

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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?

Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.

I wouldn't call 65% (according to your estimate) a "vast, vast, vast majority". And you start there, but what's preventing you from moving up?

If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.

Paying principal on debt is part of your savings rate.

I would love to move up to a bigger firm and earn more. But the legal industry is very hierarchical and that's definitely not guaranteed.

ReadySetMillionaire

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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?

Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.

If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.

Are you certain it's based on AGI and not a modified AGI which would add back retirement contributions?

Yes, it's AGI and not modified AGI.

Midwest

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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?

Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.

If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.

Are you certain it's based on AGI and not a modified AGI which would add back retirement contributions?

Yes, it's AGI and not modified AGI.

Thanks, I'll be sure to mention that in the letter to my representative.  If your facts are correct, the problem is as much or more with the plan being offered as the borrowers gaming it.  You borrowed $150k to go to law school, barring unforeseen circumstances both the lenders and the taxpayers would presume you intend to pay that back.  10% of income, who wouldn't consider taking advantage of a plan like that.  Set it 20 - 40% on a sliding scale.  Paying back debt should hurt.  I'm not necessarily blaming you for considering the plan, but it never should have been offered in the first place. 

Does this harm you credit?
« Last Edit: June 28, 2015, 10:45:38 AM by Midwest »

ReadySetMillionaire

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Thanks, I'll be sure to mention that in the letter to my representative.  If your facts are correct, the problem is as much or more with the plan being offered as the borrowers gaming it.  You borrowed $150k to go to law school, barring unforeseen circumstances both the lenders and the taxpayers would presume you intend to pay that back.  10% of income, who wouldn't consider taking advantage of a plan like that.  Set it 20 - 40% on a sliding scale.  Paying back debt should hurt.  I'm not necessarily blaming you for considering the plan, but it never should have been offered in the first place. 

Does this harm you credit?

Federal law requires that my lender only report my payments as current, no matter what payment plan I'm on (standard repayment or PAYE).

This is also important for me because PAYE lowers my debt to income ratio.

Also, I'd like to be clear that I'm just considering this as an option. I've been aggressively paying my loans since the beginning of this year and got them down from $148,000 to $143,500. But I haven't been saving anything for retirement and, more importantly, some people much smarter than I am (especially on another law school/lawyer forum) think I'm insane for not using PAYE. To them the math isn't even close--you should do PAYE if you can.

Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.

Midwest

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Thanks, I'll be sure to mention that in the letter to my representative.  If your facts are correct, the problem is as much or more with the plan being offered as the borrowers gaming it.  You borrowed $150k to go to law school, barring unforeseen circumstances both the lenders and the taxpayers would presume you intend to pay that back.  10% of income, who wouldn't consider taking advantage of a plan like that.  Set it 20 - 40% on a sliding scale.  Paying back debt should hurt.  I'm not necessarily blaming you for considering the plan, but it never should have been offered in the first place. 

Does this harm you credit?

Federal law requires that my lender only report my payments as current, no matter what payment plan I'm on (standard repayment or PAYE).

This is also important for me because PAYE lowers my debt to income ratio.

Also, I'd like to be clear that I'm just considering this as an option. I've been aggressively paying my loans since the beginning of this year and got them down from $148,000 to $143,500. But I haven't been saving anything for retirement and, more importantly, some people much smarter than I am (especially on another law school/lawyer forum) think I'm insane for not using PAYE. To them the math isn't even close--you should do PAYE if you can.

Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.

I'm not arguing the math.  I'm arguing the intelligence of offering such a plan in the first place. 

Consider this, I have a good friend in his early 40's who is a partner at a small law firm in the midwest.  Wife is also an attorney (she's much younger).  Together, they probably make $250 (that's a guess).  They have six figures of debt they are paying on.  Your's get's forgiven, he is stuck with his.  Effectively, he'll get to subsidize your loans through his taxes while paying on his. 
« Last Edit: June 28, 2015, 11:03:11 AM by Midwest »

arebelspy

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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.

This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).
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ReadySetMillionaire

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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.

This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).

This is something I'm admittedly confused about so I appreciate your input. I've been told by a lot of pretty intelligent posters (on this forum and others) that if I'm going to pay $200,000 towards my loans, it's better to do that over 25 years rather than 10. Doesn't the time value of money support stretching out my loans as long as possible?

Midwest

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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.

This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).

This is something I'm admittedly confused about so I appreciate your input. I've been told by a lot of pretty intelligent posters (on this forum and others) that if I'm going to pay $200,000 towards my loans, it's better to do that over 25 years rather than 10. Doesn't the time value of money support stretching out my loans as long as possible?

It is better for you to pay the $200k over 25 years versus 10.  Arguing that paying $200k over 10 years is the same as paying $200k over 25 years is the same is wrong.  You are ignoring the time value of money.

ReadySetMillionaire

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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.

This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).

This is something I'm admittedly confused about so I appreciate your input. I've been told by a lot of pretty intelligent posters (on this forum and others) that if I'm going to pay $200,000 towards my loans, it's better to do that over 25 years rather than 10. Doesn't the time value of money support stretching out my loans as long as possible?

It is better for you to pay the $200k over 25 years versus 10.  Arguing that paying $200k over 10 years is the same as paying $200k over 25 years is the same is wrong.  You are ignoring the time value of money.

I'm confused. In one sense you make it sound like my math is correct, but at the end you say I'm ignoring the time value of money. But it's my understanding that the time value of money is what actually supports my math. Where am I going wrong?

Midwest

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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.

This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).

This is something I'm admittedly confused about so I appreciate your input. I've been told by a lot of pretty intelligent posters (on this forum and others) that if I'm going to pay $200,000 towards my loans, it's better to do that over 25 years rather than 10. Doesn't the time value of money support stretching out my loans as long as possible?

It is better for you to pay the $200k over 25 years versus 10.  Arguing that paying $200k over 10 years is the same as paying $200k over 25 years is the same is wrong.  You are ignoring the time value of money.

I'm confused. In one sense you make it sound like my math is correct, but at the end you say I'm ignoring the time value of money. But it's my understanding that the time value of money is what actually supports my math. Where am I going wrong?

I'm not arguing with you that it will save you money.  I'll take your word on that.  That's the issue I was initially addressing.

I wasn't addressing this statement -

Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term."

The above ignores the time value of money.  That's good for you and bad for the lender/govt. 

When you make a statement that you are paying them the same amount either way (one over 10 years and one over 25), it misleads the uninformed.  You are extending the loan terms by 15 years in that example.  In nominal dollars you are paying them the same amount, but in reality you are paying substantially less due to the time value of money.

« Last Edit: June 28, 2015, 12:02:22 PM by Midwest »

arebelspy

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Right.

Paying that same amount over a longer term helps you.  If you can, go for it.  I count that as paying your debts (rather than trying to not pay and get them forgiven).

But trying to convince someone that you're paying the same amount of money, so it's okay, ignores the time value, because you really aren't paying the same amount in real dollars.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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Coop

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Have you considered simply extending your loan terms to 15-25 years through your lender if cash flow is the issue? It's a simple application, and the only thing you're changing is the amount of principle you are paying on the loan. It's not like a traditional loan refinance where you change the interest rate by extending the term. It also offers you the benefit to flow more cash to a loan with a higher interest rate that would otherwise be going to the minimum payment on a loan with a lower interest rate.

You could also refinance with Sofi, DRB, etc. to drop your interest rate to save on interest.

My wife and I are up to our eyelids in student loan debt. We currently send >50% of our take-home pay to debt payments each and every month. We probably could take advantage of one of these programs and decrease our loan payments (at least) five-fold. We might even be able to get John Taxpayer to pay off a good chunk of it by getting some forgiven down the road if we were to 'game' the system long enough. Having said that, a big part of the MMM philosophy to me is taking control of your financial future. We're doing that by paying back what we promised to, because we are able to.

ReadySetMillionaire

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Right.

Paying that same amount over a longer term helps you.  If you can, go for it.  I count that as paying your debts (rather than trying to not pay and get them forgiven).

But trying to convince someone that you're paying the same amount of money, so it's okay, ignores the time value, because you really aren't paying the same amount in real dollars.

Okay, I see your point--you were just saying that my argument that I was paying back the same amount eventually was not true in terms of TVM. Got it.

charis

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You repay your student loans over time regardless of what plan you are on (10 years, 20 years, etc).  Are people actually trying to argue that you should repay your student loans as soon as possible to be on the ethical side of things?   You don't think the exorbitant, and exponentially increased over the past two decades, cost of higher education might be part of the problem, ethically speaking? Yeah, maybe the OP shouldn't have taken out $150K in loans and maybe he should have foreseen that he would be making around 50K after graduation, which is what most lawyers make after law school (outside of NYC and other such cities).  Maybe a time machine would be a better investment than his 401K, but here we are.

patrat

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This is a clever idea, and has me thinking too.

Do not plan on getting an student loan interest deduction on your taxes. In fact, expect the portion of the interest that the government pays for you to be considered income. To my amazement, I received 1098-INT statements when enrolled in direct debit for my wife's med school loans. Due to an interest rate deduction for enrolling in direct debit, the reduction was categorized as interest paid TO us, and was taxed as income. No student loan interest deduction was possible those years.

The retirement money won't be accessible without penalty until way later, but I assume you fully know that.

ReadySetMillionaire

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This is a clever idea, and has me thinking too.

Do not plan on getting an student loan interest deduction on your taxes. In fact, expect the portion of the interest that the government pays for you to be considered income. To my amazement, I received 1098-INT statements when enrolled in direct debit for my wife's med school loans. Due to an interest rate deduction for enrolling in direct debit, the reduction was categorized as interest paid TO us, and was taxed as income. No student loan interest deduction was possible those years.

The retirement money won't be accessible without penalty until way later, but I assume you fully know that.

Really interesting point about the interest subsidies and tax liability. Can any other borrowers speak from experience about this?

little_brown_dog

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I canít really comment on the math but as previously discussed, your income is expected to increase. I assume your girlfriendís will also increase, meaning you could definitely find yourself with a combined household income of over 150K within the next few years. I think the bigger question is whether you feel more comfortable with the short term pain of throwing money at the debt and not seeing the decreases you would like, knowing you will be able to eliminate it in full later, or would you feel more comfortable trying to essentially hide money to keep your AGI artificially low long enough to make the plan work out for you after 20 years? That is a really really long time to play that game (psychologically speaking), especially if you have the means to just get out from under that black cloud sooner rather than later.
I started out from grad school with 97K in loans at 6.8% and making 35K/yr (yeah, ouch). 5 years later, we have a combined household income of 120K and have knocked the balance down to 43K, and expect to eliminate it completely within the next 2 years. Sure it will have taken a total of 6-7 years to pay back, and the first couple of years SUCKED watching all of that extra money essentially make no dent in the debt, but Iím so thankful that I donít have to worry about this monstrosity for another decade. Just knowing it will be gone soon is immensely freeing. I just don't think I would have had the fortitude to stick with your plan for so long.

Cycling Stache

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I don't know much about how this works, and I share the same initial reaction that there's something unseemly about this.

BUT . . . it doesn't seem that much different to me than the numerous posts here about tweaking dividend earnings in retirement to optimize the Affordable Care Act subsidies.

I think OP's approach is a mistake because 25 years of debt to avoid paying less than $150,000 seems ridiculous to me, especially for a lawyer.  My former assistant was a lawyer working as a contract paralegal and between her and her husband, they knocked off $150,000 in debt in 3 years.

That said, if OP has the numbers right, I think it's a good approach to maximize the 401(k) contributions for savings.  It's good for retirement, and also gives him flexibility in case something goes south.  From there, he most likely will begin to increase his income, which might kick him over to paying down the debt instead of following the 25-year plan.

OP, beware the golden handcuffs.  I repeat, beware the golden handcuffs.  Law is a very stressful job, and it's often a showy profession, and there is a LOT of spending by attorneys to (1) give yourself a break/reward yourself/"free up" your time, and (2) get a car, house, clothes, gadgets, etc. consistent with your "status."  The concern I would have with viewing this as a 25-year plan is that law can often feel like a miserable profession--if not each day, at least many days--and 25 years will sometimes feel like a sentence.  Accordingly, you may end up spending money to get you through the day/week/month, and then you're never going to make progress.

That's a worst-case scenario, but I've seen it with many lawyers I've worked with.  If your plan works as you indicate, I don't think it's a bad idea, and if you stay committed to it, I think you'll pretty quickly switch over to paying down the debt.  But just beware the risks. 

Rural

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This is a clever idea, and has me thinking too.

Do not plan on getting an student loan interest deduction on your taxes. In fact, expect the portion of the interest that the government pays for you to be considered income. To my amazement, I received 1098-INT statements when enrolled in direct debit for my wife's med school loans. Due to an interest rate deduction for enrolling in direct debit, the reduction was categorized as interest paid TO us, and was taxed as income. No student loan interest deduction was possible those years.

The retirement money won't be accessible without penalty until way later, but I assume you fully know that.

Really interesting point about the interest subsidies and tax liability. Can any other borrowers speak from experience about this?


Hasn't happened to me, though I've gotten a small interest rate cut for paying through direct debit for several years now. Maybe the lender? MY loan's direct from the Dept. Of Ed.

arebelspy

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Are people actually trying to argue that you should repay your student loans as soon as possible to be on the ethical side of things?

No.  No one has said that.  Have you read the thread?

It's about not repaying your loans in order to get them forgiven as you retire a millionaire right when they are.  Choosing not to repay, even though you can afford it.  That's the part that some see as ethical, some see as okay because it's legal.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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ReadySetMillionaire

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Great posts Cycling Stache and Little Brown Dog.

You guys are very correct that this has a lot to do with psychology. In fact, I think the decision is 75% psychological and 25% financial. Would I be willing to do this for 25 years? I honestly don't know.
« Last Edit: June 28, 2015, 06:23:30 PM by ReadySetMillionaire »

arebelspy

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How old are you now?
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

ReadySetMillionaire

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How old are you now?

Girlfriend and I are each 27. I also forgot to add that she has $42,000 in student loans of her own.