Author Topic: Gaming REPAYE and the Student Loan System ($148,000 Debt) to Achieve FIRE at 45  (Read 42543 times)

ReadySetMillionaire

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It's because a measly few grand isn't worth my integrity.

+1

No amount of money is worth my integrity.
All of these blanket statements have yet to explain why utilizing a repayment term set forth in the contract--mutually agreed to by both parties--is unethical.

I've held off this label this entire thread, but I consider these criticisms to be ad hominem arguments: they are indirectly attacking my "character," "ethics," and "integrity" without responding to the merits of my argument.

It's frustrating and quite disappointing.

Fuzz

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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.

This is a huge red flag for me. You have this mindset that you can't make more money because law is "hierarchical" or something. You can make a buttload of money as an attorney (not even a good attorney, just as a mediocre attorney with good business sense). If you think it's a hierarchy, figure out the damn hierarchy. The people at the top are not special.

$48K/year for an attorney is exploitation. I thought you were working a public interest job. If you're working for a private firm and making only $48K/year, you're being exploited by terrible attorneys. PM me. I've been there.

Also, read this thread:  http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-newbie-no-savings-huge-sls-where-to-start/ (yeah, I just quoted myself).

And stay away from those forums on the internet where other recent grads go to bitch about law school. Nothing good will come of it.

$150K debt for a 27yo? Not that bad. You went to law school cause you're smart and ambitious. Now go do something smart and ambitious.

arebelspy

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It's because a measly few grand isn't worth my integrity.

+1

No amount of money is worth my integrity.
All of these blanket statements have yet to explain why utilizing a repayment term set forth in the contract--mutually agreed to by both parties--is unethical.

I've held off this label this entire thread, but I consider these criticisms to be ad hominem arguments: they are indirectly attacking my "character," "ethics," and "integrity" without responding to the merits of my argument.

It's frustrating and quite disappointing.

Saying your plan is something we wouldn't ethically do is different than attacking you as a person.  We are not saying you are unethical for asking the question, but we are saying this plan is unethical to us, and not something we would do.

And yes, if you purposefully shirked debts (even legally) you agreed to pay (and then didn't), I would likely not do business with you. 

without responding to the merits of my argument.

It's frustrating and quite disappointing.


We're not arguing with the "merits" of it, because obviously the math behind not paying your debts favors whatever you can get away with.  If bankers can legally get away with taking money from taxpayers, the math favors their argument that they should do it.  Doesn't mean I would do so, personally.
« Last Edit: June 29, 2015, 08:21:19 PM by arebelspy »
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charis

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We're not arguing with the "merits" of it, because obviously the math behind not paying your debts favors whatever you can get away with.  If bankers can legally get away with taking money from taxpayers, the math favors their argument that they should do it.  Doesn't mean I would do so, personally.

You are joking right?  The IBR plans aren't taking money away from anyone except the borrower, voluntarily.  The federal government is making a crap ton of money off of ever-increasing higher education costs and often high interest rates.   Let's be clear about who is coming out ahead in this profitable industry - it's not the students. 

arebelspy

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We're not arguing about the merits of the educational industry, or whether one ought to take out a loan, or whether it will pay off for them, or whatever you're trying to point out.

We're talking about paying a debt that one has the means to pay, but the choice whether or not to.  It's as simple as that.

It's legal not to pay it.  The people making the loan made money off of it (the educational company--the government/public won't, when a bunch of it is forgiven).  I'm talking about the person taking the loan, and then choosing not to pay it back when they could.  It's not something I would do myself, and be able to consider myself an ethical person.
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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ReadySetMillionaire

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We're not arguing about the merits of the educational industry, or whether one ought to take out a loan, or whether it will pay off for them,or whatever you're trying to point out.

We're talking about paying a debt that one has the means to pay, but the choice whether or not to.  It's as simple as that.

It's legal not to pay it.  The people making the loan made money off of it (the educational company--the government/public won't, when a bunch of it is forgiven).  I'm talking about the person taking the loan, and then choosing not to pay it back when they could.  It's not something I would do myself, and be able to consider myself an ethical person.

To be fair, this thread should have been about exactly what I bolded until you used it as a platform to compare your superior ethics to mine.

arebelspy

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To be fair, this thread should have been about exactly what I bolded

Huh?  This thread is about if a person should take out a loan and if it will pay off for them?

I thought you already took out the loan and were thinking about different ways to pay it off, or not.

If it's about what you bolded, well, then it depends on the school, major, etc.  We can have that conversation, but no, it's not what this thread should have been about, because nothing in the OP is about that, at all.


until you used it as a platform to compare your superior ethics to mine.

lol. I never said my way is superior.

Don't put words in my mouth.

Let's be clear on what I said. I said I wouldn't do it. I said I consider not paying one's debts unethical. I said I wouldn't do business with someone that took on a debt then shirked on payment.

You do whatever you like though.
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ReadySetMillionaire

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To be fair, this thread should have been about exactly what I bolded

Huh?  This thread is about if a person should take out a loan and if it will pay off for them?

I thought you already took out the loan and were thinking about different ways to pay it off, or not.

If it's about what you bolded, well, then it depends on the school, major, etc.  We can have that conversation, but no, it's not what this thread should have been about, because nothing in the OP is about that, at all.


until you used it as a platform to compare your superior ethics to mine.

lol. I never said my way is superior.

Don't put words in my mouth.

Let's be clear on what I said. I said I wouldn't do it. I said I consider not paying one's debts unethical. I said I wouldn't do business with someone that took on a debt then shirked on payment.

You do whatever you like though.

On my phone and don't have my glasses on so I bolded the wrong thing.

My point was that this thread should have been about the math behind my path to FI, not your own personal ethics.

Cpa Cat

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My problems with these kinds of student loan repayment schemes for individuals with high earning potential is always the same: too much can happen in 25 years to F your math all up. When you set that against the certainty of being able to pay the loans off in under 10 years, the loan forgiveness scheme has a lot of long-term risk.

Your opinion is that if your income rises or you get married, you'll just lower your AGI by "saving." I understand this to mean that you will max our 401k-style deferment. You are probably thinking about HSAs, too, but you can't be certain that this will be a good option for you and your future spouse for the next 25 years, so you should discount it. So you're down to $18,000 in 401k contributions (each), plus an additional $2500 student loan interest deduction (assuming you keep your MAGI low enough). I am not counting IRA contributions, because if you get married, your joint income is already high enough to start phasing you out of that deduction when a 401k is available, so it's not a long-term option.

When you consider your options for reducing your AGI, the roughly $20,000 that's available to you is not a whole heck of a lot. Are you really willing to sign you (and your spouse) up for 25 years of being worried about earning too much money? Making choices along the way to avoid extra income?

On the other hand, if you chose the 10-year traditional repayment plan, you would have motivation to pursue higher incomes rather than lower incomes and more freedom in your financial decisions as a whole.

I believe you said that you're 27 years old. Look back at when you were 2 years old. How much has changed since then? Do you make different choices now? Have different dreams? While the difference between 2 and 27 is more vast than the difference between 27 and 52, the difference is still pretty fricken huge.

I don't think the decision is an ethical one. I do think the cost of "gaming" the system is likely to be too high. I think that over the next 25 years, you'll find that it limits your choices and frequently enters your thoughts and plans. Multiple times over the next couple of decades, you will find yourself saying, "I'm interested in doing X, but I'm not sure that I can because of the impact it has on my student loan repayment scheme." Even worse, I think, is that your future spouse will also be forced to constantly consider the impact of her career choices on your student loan payments.

Your plan gets easier, at least, if you choose to not get married. But then, you'd already be letting your student loan repayment plan make life decisions for you and you've barely even begun.

arebelspy

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My point was that this thread should have been about the math behind my path to FI, not your own personal ethics.

I guess I'm not following. What do you need a thread for?

Answer is obvious:
We're not arguing with the "merits" of it, because obviously the math behind not paying your debts favors whatever you can get away with.  If bankers can legally get away with taking money from taxpayers, the math favors their argument that they should do it.  Doesn't mean I would do so, personally.

Usually when people post about this, they're asking about the ethics.

See the previous threads I linked to on the exact same topic?

See the multiple people who posted before me about the ethics of it?

That's what most are concerned with. 

The math is pretty obvious, and supports doing whatever you can get away with.
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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Avidconsumer

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Good post by Tank, and I hope it prompts a dialogue about the math of this approach towards student loans rather than the emotional/psychological aspects. A few things to add:

Tank said with more earnings I get to keep $.90 for every $1.00 I make. It's actually better than that if I strategically lower my AGI. Say my GF and I make $150,000 combined in 2018. We can (combined) deduct the following:

$36,000 401k
$11,000 Traditional IRA
$5,000 Student Loan Interest Deduction
$5,000 HSA Contributions.

That lowers AGI to $93,000. Subtract 150% of the poverty line ($22,000) and that gets down to $71,000 (my discretionary income). Then 10% of that is my student loan payment, or $7,100 per year ($591 per month). That's just 4.7% of income, or 5 cents for every dollar I'd make. Thus, there's no way I'd pass up income opportunities.

Second, I think posters are underestimating the value of the interest being subsidized. Having the government pay 50% of interest not covered drastically reduces my effective interest rate, which will have a huge effect over 25 years.


I also want to echo Tank's statements that I'm a bit disappointed with how this thread has played out. This message board is packed with threads of how to utilize certain systems to one's own personal needs. I see threads daily about lowering AGI to obtain Obamacare subsidies; backdoor Roth; Roth IRA ladders; etc. Nobody objects to these because the math clearly says this is the best thing to do.

But a large majority of posters have pretty much ignored the details and math in my OP and responded with ethical, moral, psychological, and emotional objections to my plan. I understand those concerns and, looking back, titling this "gaming the system" instead of "optimizing REPAYE" likely led to some of these objections; with that said, these arguments have dominated the thread so thoroughly that little has been accomplished in educating other readers as to whether optimizing REPAYE is a mathematically viable plan.

Frankly, I went to bed last night convinced by everyone in this thread that my plan sucked. But then I did the math again this morning and I'll be damned, the math isn't even close. REPAYE is so much better for my personal situation that it would be  insane to pursue any other route.

In a sense, this is kind of like the "should I pay off my mortgage" debate. The posters more focused on the emotional and psychological aspect of debt have soundly said to put all my discretionary income towards my loans. But those who have done the math and understand the details (Tank, Jezebel, jackiechiles2) all agree that my plan is a good one.

And I agree with them. When I get emotionally or psychologically worried about all this, I'll run the numbers. And the numbers point to a clear answer--use REPAYE to achieve FIRE as soon as possible.

All that said, I have enjoyed the civil debate in this thread and hope it continues. I welcome and want people to disagree with my math, even though I'm pretty sure I'm right.

Personally I couldn't care less about whether this is ethically moral or not. I think psychologically it's a poor play.

Just because it's legal doesn't make it ethical. Just because everyone's doing it, doesn't make it ethical. A program designed to help a few is abused by many.
« Last Edit: June 30, 2015, 07:25:17 AM by Avidconsumer »

charis

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That's what most are concerned with. 

No, there have been few on this thread that are concerned, not most.  And the OP never asked about whether it was ethical. 

justajane

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This is quite an about-face from what you have been posting on this forum for the last few months. I'm surprised.

ReadySetMillionaire

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What do you need a thread for?

Answer is obvious:
We're not arguing with the "merits" of it, because obviously the math behind not paying your debts favors whatever you can get away with.  If bankers can legally get away with taking money from taxpayers, the math favors their argument that they should do it.  Doesn't mean I would do so, personally.

Usually when people post about this, they're asking about the ethics.

See the previous threads I linked to on the exact same topic?

See the multiple people who posted before me about the ethics of it?

That's what most are concerned with. 

The math is pretty obvious, and supports doing whatever you can get away with.

I made the thread for posts like CPA Cat. He or she posted a really detailed analysis of where my deduction calculations might be a little wrong, the risk that this plan poses over the long term, and the possibility that student loans will affect life decisions. Those are all very good points which I will respond to below.

A lot of other posters—Fuzz, Rural, Cycling Stache, Midwest, Coop, and others—have made similarly good posts about alternative repayment options, career advancement, and other factors that will play a large role in my decision. These posts have made me realize that my career goals (rather than AGI alone) is more parallel to my student loan repayment plan than I previously imagined. 

I did not make the thread to be endlessly criticized about the "ethics" and "integrity" of this repayment plan. I’ve already internally answered that question (I don’t think it’s unethical) and you’re not going to change my mind (or Tank’s, Jezebel, etc.).

Once you wash through all the ethical discussions, this has been a very valuable thread for me personally and for others in a similar position that might look into this plan.

My problems with these kinds of student loan repayment schemes for individuals with high earning potential is always the same: too much can happen in 25 years to F your math all up. When you set that against the certainty of being able to pay the loans off in under 10 years, the loan forgiveness scheme has a lot of long-term risk.

Your opinion is that if your income rises or you get married, you'll just lower your AGI by "saving." I understand this to mean that you will max our 401k-style deferment. You are probably thinking about HSAs, too, but you can't be certain that this will be a good option for you and your future spouse for the next 25 years, so you should discount it. So you're down to $18,000 in 401k contributions (each), plus an additional $2500 student loan interest deduction (assuming you keep your MAGI low enough). I am not counting IRA contributions, because if you get married, your joint income is already high enough to start phasing you out of that deduction when a 401k is available, so it's not a long-term option.

When you consider your options for reducing your AGI, the roughly $20,000 that's available to you is not a whole heck of a lot. Are you really willing to sign you (and your spouse) up for 25 years of being worried about earning too much money? Making choices along the way to avoid extra income?

On the other hand, if you chose the 10-year traditional repayment plan, you would have motivation to pursue higher incomes rather than lower incomes and more freedom in your financial decisions as a whole.

I believe you said that you're 27 years old. Look back at when you were 2 years old. How much has changed since then? Do you make different choices now? Have different dreams? While the difference between 2 and 27 is more vast than the difference between 27 and 52, the difference is still pretty fricken huge.

I don't think the decision is an ethical one. I do think the cost of "gaming" the system is likely to be too high. I think that over the next 25 years, you'll find that it limits your choices and frequently enters your thoughts and plans. Multiple times over the next couple of decades, you will find yourself saying, "I'm interested in doing X, but I'm not sure that I can because of the impact it has on my student loan repayment scheme." Even worse, I think, is that your future spouse will also be forced to constantly consider the impact of her career choices on your student loan payments.

Your plan gets easier, at least, if you choose to not get married. But then, you'd already be letting your student loan repayment plan make life decisions for you and you've barely even begun.

Good post concerning the downsides. I definitely see your point about the deductions phasing out in the Traditional IRA and, more importantly, the uncertainty that can happen in 25 years.

That uncertainty, however, is why I think REPAYE is at least a good strategy for the first few years of repayment. As Tank pointed out in a previous post, REPAYE, if used correctly, is a tremendous hedge:

The program is also a tremendous hedge. If you die or become disabled, your loans are extinguished but your savings and retirement accounts are not. If you become unemployed, your student loans go to $0, while your bank accounts remain intact. Literally the worst thing that can happen to you with this plan is that you make too much money... what a nice problem to have.

As to your points about making decisions around making too much money, I already discussed how I can adjust AGI to have student loans account for just 5-6% of my gross income. Considering your points about deductions, maybe it's 7-8%. But that's still a good deal. Furthermore, Jezebel has been in the program for several years and described her experience as follows:

I just want to chime in on the myth of handicapping your salary when you are on an IBR plan.  It's just a myth.  I don't know anyone who has turned down more money because they are on this plan.  I certainly haven't, I recently left a job to make more money around the same time my husband started making more money, and we file jointly.  Yeah, I could make more money joining the private sector, but in the last 15+ years, I have never wanted to, and I don't see that changing (this is obviously specific to the PSLF).


Lastly, I know 25 years is a long time. But if done correctly, then I only have to worry about adjusting AGI for a much shorter period of time. As Tank correctly pointed out, if I can retire early, then my income will be low and then my payments will be close to $0. I will adjust my FIRE date to pay for the tax liability when it comes due.

Good points all around, though, and you really nailed home the negative long term concerns.

CommonCents

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My problems with these kinds of student loan repayment schemes for individuals with high earning potential is always the same: too much can happen in 25 years to F your math all up. When you set that against the certainty of being able to pay the loans off in under 10 years, the loan forgiveness scheme has a lot of long-term risk.

Your opinion is that if your income rises or you get married, you'll just lower your AGI by "saving." I understand this to mean that you will max our 401k-style deferment. You are probably thinking about HSAs, too, but you can't be certain that this will be a good option for you and your future spouse for the next 25 years, so you should discount it. So you're down to $18,000 in 401k contributions (each), plus an additional $2500 student loan interest deduction (assuming you keep your MAGI low enough). I am not counting IRA contributions, because if you get married, your joint income is already high enough to start phasing you out of that deduction when a 401k is available, so it's not a long-term option.

When you consider your options for reducing your AGI, the roughly $20,000 that's available to you is not a whole heck of a lot. Are you really willing to sign you (and your spouse) up for 25 years of being worried about earning too much money? Making choices along the way to avoid extra income?

On the other hand, if you chose the 10-year traditional repayment plan, you would have motivation to pursue higher incomes rather than lower incomes and more freedom in your financial decisions as a whole.

I believe you said that you're 27 years old. Look back at when you were 2 years old. How much has changed since then? Do you make different choices now? Have different dreams? While the difference between 2 and 27 is more vast than the difference between 27 and 52, the difference is still pretty fricken huge.

I don't think the decision is an ethical one. I do think the cost of "gaming" the system is likely to be too high. I think that over the next 25 years, you'll find that it limits your choices and frequently enters your thoughts and plans. Multiple times over the next couple of decades, you will find yourself saying, "I'm interested in doing X, but I'm not sure that I can because of the impact it has on my student loan repayment scheme." Even worse, I think, is that your future spouse will also be forced to constantly consider the impact of her career choices on your student loan payments.

Your plan gets easier, at least, if you choose to not get married. But then, you'd already be letting your student loan repayment plan make life decisions for you and you've barely even begun.

I've been watching this thread and I think this best sums up my thoughts.

It seems the largest benefit from this uncertain 25 year horizon is the reduced interest.  Have you looked into refinancing to a lower rate? 

btw, I have had this same choice as you but elected not to take it. 
« Last Edit: August 14, 2015, 04:19:56 PM by CommonCents »

ReadySetMillionaire

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This is quite an about-face from what you have been posting on this forum for the last few months. I'm surprised.

My very first thread here (http://forum.mrmoneymustache.com/ask-a-mustachian/in-$150-000-of-student-loan-debt-and-need-some-adviceencouragement/) was about aggressively paying off my loans. That was about four months ago.

Since then, I have been in constant dialogue via private messages with people who really know how the student loan repayment plans work. More importantly, the Obama Administration released this new PAYE plan in May (Revised PAYE, which I've abbreviated REPAYE). That has drastically changed the game for me because I was ineligible for PAYE until these revisions.

Trust me, this has been a very stressful process for me. But I've read and researched everything available to me and amended my plan accordingly.

TrulyStashin

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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.

I can vouch  for this.  I'm a 2011 law grad and though I'm in BigLaw, I'm stuck in a part-time staff attorney position that has no possibility of advancement.  Law is a very conservative old boys network and once you're typecast then odds are against you.

That said, it's entirely possible for solo's to make A LOT of money.  If you can stomach family law, you'd likely build a lucrative practice.

NoraLenderbee

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I've held off this label this entire thread, but I consider these criticisms to be ad hominem arguments: they are indirectly attacking my "character," "ethics," and "integrity" without responding to the merits of my argument.

I don't think anyone is attacking you or your ethics; they are voicing their opinions about a proposed course of action. You know you can't post a question on the Internet and expect all the answers to stay on point. 

My comment was something of a knee-jerk reaction and I didn't understand the facts of REPAYE, for which I apologize. I still don't like the plan, but obviously it's not the same as defaulting on a loan.

ZiziPB

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RSM, while I generally am in Arebelspy's camp (pay back the money you borrowed), I think your decision to take advantage of the REPAYE program is the right one in your current circumstances.  It will allow you to improve your cash flow and save for retirement.  However, if I were you, I would look at this program as a temporary measure and not plan on sticking with it for 25 years and taking advantage of the loan forgiveness feature.  As I understand it, you are not committed to this program for life.  If your situation changes and you get a better paying job, you should reassess and decide what makes sense then (and ultimately be prepared to repay your loans).

CommonCents

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It seems the largest benefit from this uncertain 25 year horizon is the reduced interest.  Have you looked into refinancing to a lower rate? 

I'm just following up on this question because you haven't yet responded to it.

justajane

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It seems the largest benefit from this uncertain 25 year horizon is the reduced interest.  Have you looked into refinancing to a lower rate? 

I'm just following up on this question because you haven't yet responded to it.

I think most people won't entertain this idea, because once you refinance, IBR or REPAYE is off the table, at least that's my understanding.

ReadySetMillionaire

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RSM, while I generally am in Arebelspy's camp (pay back the money you borrowed), I think your decision to take advantage of the REPAYE program is the right one in your current circumstances.  It will allow you to improve your cash flow and save for retirement.  However, if I were you, I would look at this program as a temporary measure and not plan on sticking with it for 25 years and taking advantage of the loan forgiveness feature.  As I understand it, you are not committed to this program for life.  If your situation changes and you get a better paying job, you should reassess and decide what makes sense then (and ultimately be prepared to repay your loans).

This, I think, is the most plausible result.  I think REPAYE is a great hedge and provides infinite flexibility when it comes to my cash flow. I can modify my repayment philosophy at any time.

It seems the largest benefit from this uncertain 25 year horizon is the reduced interest.  Have you looked into refinancing to a lower rate? 

I'm just following up on this question because you haven't yet responded to it.

Justajane is correct. Refinancing to a private lender would reduce my interest rate but would make me ineligible for federal student loan protections. These protections include not only the repayment plans (IBR, PAYE, and REPAYE), but the ability to go into deferment and other protections.

arebelspy

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RSM, while I generally am in Arebelspy's camp (pay back the money you borrowed), I think your decision to take advantage of the REPAYE program is the right one in your current circumstances.  It will allow you to improve your cash flow and save for retirement.  However, if I were you, I would look at this program as a temporary measure and not plan on sticking with it for 25 years and taking advantage of the loan forgiveness feature.  As I understand it, you are not committed to this program for life.  If your situation changes and you get a better paying job, you should reassess and decide what makes sense then (and ultimately be prepared to repay your loans).

100% agree.
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dpfromva

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This discussion is so on point for me it made me join MMM! My kid graduated undergrad 3 years ago with student loan debt around $30K. We always said the parents would cover undergrad for both kids, so I was making the loan payments on the regular 10 year schedule. A serious medical issue came up and we needed to maximize available cash, so I switched to the IBR program. Kid is in the starving artist/waitstaff field, so $0 monthly payments resulted. In fact, I got student indebted friends referred to me for instructions on signing up for IBR (it wasn't as user friendly back then) and I should have charged consulting fees, but they're all starving artists too so it would have been pointless. So things are now financially more stable and I began my plan to overpay so the debt would be gone in 2 years. What a great feeling. BUT . . .while I was roaming around FedLoan's site to figure out how to apply my payments to principal, which makes sense since the interest doesn't capitalize, I found their crude calculator for the 25 year forgiveness amount. It's a fair assumption that the kid is never going to make a lot of money, so paying more now rather than less (the tax hit on the forgiveness) later suddenly seemed kinda financially dumb. Better to repurpose the loan payments into an investment fund so kid can pay off the tax at the forgiveness date, right? And, given the kid's field, the possibility of working for a nonproft for 10 years, with no tax penalty for debt forgiveness, is a real one.  I am really on the fence as it was always a goal to have the kids starting out debt-free. (Of course this is a much more compelling arbitrage for those with ginormous grad school debt.) I chatted with Auntie R., a retired high-powered corporate type, and to my surprise she said, I just feel there is something not quite right about deliberately choosing not to pay it back. I said, seriously, would you expect the Koch brothers to lose sleep over their tax avoidance maneuvers? She said, I know, I know. And I said, I know, I know, I also feel something is not quite right, which is why I called you for advice. So this entire thread in condensed form has been playing back and forth in my head.

justajane

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This discussion is so on point for me it made me join MMM! My kid graduated undergrad 3 years ago with student loan debt around $30K. We always said the parents would cover undergrad for both kids, so I was making the loan payments on the regular 10 year schedule. A serious medical issue came up and we needed to maximize available cash, so I switched to the IBR program. Kid is in the starving artist/waitstaff field, so $0 monthly payments resulted. In fact, I got student indebted friends referred to me for instructions on signing up for IBR (it wasn't as user friendly back then) and I should have charged consulting fees, but they're all starving artists too so it would have been pointless. So things are now financially more stable and I began my plan to overpay so the debt would be gone in 2 years. What a great feeling. BUT . . .while I was roaming around FedLoan's site to figure out how to apply my payments to principal, which makes sense since the interest doesn't capitalize, I found their crude calculator for the 25 year forgiveness amount. It's a fair assumption that the kid is never going to make a lot of money, so paying more now rather than less (the tax hit on the forgiveness) later suddenly seemed kinda financially dumb. Better to repurpose the loan payments into an investment fund so kid can pay off the tax at the forgiveness date, right? And, given the kid's field, the possibility of working for a nonproft for 10 years, with no tax penalty for debt forgiveness, is a real one.  I am really on the fence as it was always a goal to have the kids starting out debt-free. (Of course this is a much more compelling arbitrage for those with ginormous grad school debt.) I chatted with Auntie R., a retired high-powered corporate type, and to my surprise she said, I just feel there is something not quite right about deliberately choosing not to pay it back. I said, seriously, would you expect the Koch brothers to lose sleep over their tax avoidance maneuvers? She said, I know, I know. And I said, I know, I know, I also feel something is not quite right, which is why I called you for advice. So this entire thread in condensed form has been playing back and forth in my head.

It seems a little labor-intensive to utilize IBR for a loan that is "only" $30K. I would just accelerate the loans and pay them off in the next few years. 25 years is a long time to have a manageable amount of debt hanging over your or your child's head.

jorjor

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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.

IANAL, but I am familiar with the bimodal distribution of entry-level law salaries.

http://www.nalp.org/salarydistrib

northernlights

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What flavor lawyer are you? 25 years is just too long to have that debt over your head, even if it does go away.

I get what it's like to have law school debt. It's why I work for the government and am taking advantage of PSLF. I'll pay my loans for 10 years and then the balance will get forgiven. Do I work to reduce my AGI during those 10 years? Of course I do. I'm willing to do this for 10 years. Do I want to be in my 50s and still having debt over my head? HELL NO. I know that what you're proposing is maybe not different than what I'm doing, but I just couldn't live with the debt for that long. Being a lawyer is terrible! Do you really want to still be practicing in your 50s because you have to?

That being said, if your number one objective is to game the system, don't marry your GF. Getting married will increase your AGI dramatically and reduce the amount of loan interest you can deduct because the $2500 is for both of you and that phases out at a certain income level. I married my husband in 2012 because we wanted to start a family and moral values trumped financial ones, but marrying him caused my loan payments to double.

humbleMouse

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Popping in to say +1 to the OP, do what makes mathematical sense for you.  I am honestly surprised that ethics are even being debated here.  Like someone previously said in this thread, it all goes to the same place. 

Sometimes I feel like the people on this forum are largely from upper middle class backgrounds and have little to no experience being very poor, hanging out with very poor people, or hanging out with financial and economics gurus.  Finance people are cutthroat and don't give a shit about you or your ethics.  They would not be making programs like PAYE if the numbers didn't make sense for them. 

Disclaimer: I view the government as a mafia-esque orgranization.  Do people understand how politicians get money?

charis

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In November, I'll be half way through the PSLF with about 66K left and I go back and forth on it.  The bottom line is that the math works and we are investing or paying down my husband's SLs with the cash we could be using to pay mine.  We also trying to save for our children's educations and future home repairs that are inevitable.  We can't do it all, even if we wanted to.   We got a very late start on making contributions to our retirement accounts so we need to make good use of these next five years if we can.

TheDudeReturns

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Man, this is why I avoid personal finance forums! All I see are a lot of butthurt ethics trolls who want to be good little slaves and pay off their loans nice and quick even though the system has given them the middle finger.

OP, your plan is solid. There is nothing to lose and everything to gain by putting off the loans as much as possible. Student loans have a good chance of being the next bailout (wait till all these Millennials start making the laws; they're in massive debt and just waiting to pawn their bad decisions on the next generation). Even if they aren't, I'm pretty sure interest rates will rise within the next 25 years. Hell, it wouldn't surprise me if we saw a period of 10%-15% yearly inflation. If it's all federal student loan debt, the rate isn't that high really (home loans were 6%-10% just a decade or so ago). 5%-6% on unsecured debt that you don't have to pay off is a STEAL!

Looking at the information on REPAYE, it seems like PAYE is better if you are eligible for it, or am I missing something OP?

Anyway, my thinking with stuff like this is to just enjoy life. You only get one. Personally, you couldn't pay me for all the sacrifices and wasted time to make partner or something like that. I'd rather make a decent amount and have a low-impact work life. This is what people seem to forget in their rush to pay off all debt immediately. OP can bust his ass, pay off the loan, and then burn out and have nothing to show for it (aside from a paid off loan, but who gives a crap about that). On the other hand, he can pay off the minimum, save his money, and then when he gets burnt out, pay even less off on the loan in the long-run.

Hell, near the time the $70k tax bill comes, he can tell his boss to scram, be unemployed with $0, and then only have the student loan discharge be his only income :)

TomTX

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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?

Most lawyers would be better off financially going to a trade school and becoming plumbers, electricians, etc... Start work years earlier, higher pay.

genealogist

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My problems with these kinds of student loan repayment schemes for individuals with high earning potential is always the same: too much can happen in 25 years to F your math all up. When you set that against the certainty of being able to pay the loans off in under 10 years, the loan forgiveness scheme has a lot of long-term risk.

Your opinion is that if your income rises or you get married, you'll just lower your AGI by "saving." I understand this to mean that you will max our 401k-style deferment. You are probably thinking about HSAs, too, but you can't be certain that this will be a good option for you and your future spouse for the next 25 years, so you should discount it. So you're down to $18,000 in 401k contributions (each), plus an additional $2500 student loan interest deduction (assuming you keep your MAGI low enough). I am not counting IRA contributions, because if you get married, your joint income is already high enough to start phasing you out of that deduction when a 401k is available, so it's not a long-term option.

When you consider your options for reducing your AGI, the roughly $20,000 that's available to you is not a whole heck of a lot. Are you really willing to sign you (and your spouse) up for 25 years of being worried about earning too much money? Making choices along the way to avoid extra income?

On the other hand, if you chose the 10-year traditional repayment plan, you would have motivation to pursue higher incomes rather than lower incomes and more freedom in your financial decisions as a whole.

I believe you said that you're 27 years old. Look back at when you were 2 years old. How much has changed since then? Do you make different choices now? Have different dreams? While the difference between 2 and 27 is more vast than the difference between 27 and 52, the difference is still pretty fricken huge.

I don't think the decision is an ethical one. I do think the cost of "gaming" the system is likely to be too high. I think that over the next 25 years, you'll find that it limits your choices and frequently enters your thoughts and plans. Multiple times over the next couple of decades, you will find yourself saying, "I'm interested in doing X, but I'm not sure that I can because of the impact it has on my student loan repayment scheme." Even worse, I think, is that your future spouse will also be forced to constantly consider the impact of her career choices on your student loan payments.

Your plan gets easier, at least, if you choose to not get married. But then, you'd already be letting your student loan repayment plan make life decisions for you and you've barely even begun.

This is perfectly summed up. OP is likely going to feel very differently in three years than today. You'll still have 22 years left on this plan, but ready to just be done and move on. You'll be making really good money, decide to kick your debt repayment into high gear and pay it off in a year or 2. Then you'll laugh thinking about how, at one time, you were all prepared to keep this albatross around your neck for 25 years.  Good god - 25 Years! I say go for the REPAYE, then don't be surprised three years from now (or sooner)...

Field123

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There has been some debate in this thread and others about the tax consequence of loan forgiveness under PAYE... As you can see from my posts, I'm very pro-PAYE and expect that the debt forgiven will be made non-taxable by the time it happens. Others have argued that the tax consequence of PAYE forgiveness renders the benefits of the program obsolete. The information below is slightly outdated, but I think it supports my belief that forgiven loans will be treated as non taxable in the future:

Page 149 of the Treasury Department's General Explanations of the Fiscal Year 2015 Budget Proposals states:
http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf

Quote
PROVIDE EXCLUSION FROM INCOME FOR STUDENT LOAN FORGIVENESS FOR STUDENTS IN CERTAIN INCOME-BASED OR INCOME-CONTINGENT REPAYMENT PROGRAMS WHO HAVE COMPLETED PAYMENT OBLIGATIONS

Current Law
In general, loan amounts that are forgiven are considered gross income to the borrower and subject to individual income tax in the year of discharge. Exceptions exist for certain student loan repayment programs. Specifically, students who participate in the National Health Service Corps Loan Repayment program, the Public Sector Loan Forgiveness program, certain state loan repayment programs, and certain profession-based loan programs may exclude discharged amounts from gross income.
Students with higher education expenses may be eligible to borrow money for their education through the Federal Direct Loan Program. Prior to July 1, 2010, they may also have been eligible to borrow money through the Federal Family Education Loan Program. Both programs are administered by the Department of Education. These programs provide borrowers with options for repaying their loans that are related to the borrowers’ income after completing their educations (the income-contingent and the income-based repayment options). Under these options a borrower completes the repayment obligation when he or she has repaid the loan in full, with interest, or has made all payments that are required under the terms of the specific plan. For borrowers who reach this point, any remaining loan balance is forgiven. Under current law, any debt forgiven by these programs is considered gross income to the borrower and thus subject to individual income tax.

Reasons for Change
At the time the loans are forgiven, the individuals who have met the requirements for debt forgiveness in the income-contingent and the income-based repayment programs would have been making payments for many years. In general, these individuals will have had low incomes relative to their debt burden for much or all of this time. For many of these individuals, paying the tax on the forgiven amounts will be difficult. Furthermore, the potential tax consequence may be making some student loan borrowers reluctant to avail themselves of these loan repayment options.

Proposal
The proposal would exclude from gross income amounts forgiven at the end of the repayment period for certain borrowers using the income-contingent repayment option or the income-based repayment option.
The provision would be effective for loans forgiven after December 31, 2014.


I don't believe this proposal has been enacted as law, but I do think it is indicative of where the Obama Administration is headed with regard to this issue. It is definitely something worth monitoring going forward...

ShoulderThingThatGoesUp

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I don't believe this proposal has been enacted as law, but I do think it is indicative of where the Obama Administration is headed with regard to this issue. It is definitely something worth monitoring going forward...

The Obama administration ends in January 2017. Anything they can change on their own, President Cruz (Aaah!) could change back. Anything they can't change has to go through Congress.

charis

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Relatedly, has the expansion (increasing eligibility to those with older loans) to the PAYE gone into effect?  My payments just went up under the IBR so I'll be switching plans as soon as possible.  My loan servicer says they should have more information in "several weeks."

Field123

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I don't believe this proposal has been enacted as law, but I do think it is indicative of where the Obama Administration is headed with regard to this issue. It is definitely something worth monitoring going forward...

The Obama administration ends in January 2017. Anything they can change on their own, President Cruz (Aaah!) could change back. Anything they can't change has to go through Congress.

Certainly. I'm not saying this proposal is proof of what the law will be in 20 years, I'm just sharing because I think it supports my hope of where the law is going, which is a necessary consideration one must weigh when deciding whether to enter this program.

As other changes to student loan policy have been enacted, people in the program have been "grandfathered in" to their existing benefits. For example, the Dept of Ed has confirmed that the proposed PSLF cap will not apply to existing borrowers. However, I don't think rights under tax laws (which this is) would be eligible for grandfathering.

ReadySetMillionaire

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OP here. I haven't read any of the posts since August (until now), so it's a surprise to see this at the top of the forums again.

It's obviously been a short time since my OP, but here's a little update. To summarize all of my previous posts regarding loans: I had $148k in loans when I graduated, but had about $1300/month to either pay towards my loans or save. From December to April I absolutely pounded at my loans. Then I continued to educate myself about PAYE and evenutally opted to enroll in PAYE so I could save my money.

Because I'm on PAYE, I've been able to save that $1,300-1,400 per month since April (about a 50% savings rate). $500/month to 401k, $100/month to Traditional IRA, and the rest to an Ally account. I have saved so quickly that my soon-to-be fiancee and I are closing on a $127k house next Thursday, and there's no way that could have happened for a long time had I not been on PAYE.

In the near future, and because I have successfully lowered my 2015 AGI, I expect my SL payment to drop even more for 2016. I'm expecting a $160/month payment. This will decrease my expenses and thus increase my savings rate.

And by this time next year, I hope to have started my own solo law practice, which will allow me to be even more aggressive/flexible in reducing my AGI. To be clear: I'm going solo for a million other reasons than reducing my AGI (check my other posts--mainly has to do with autonomy, being my own boss, being flexible, wanting to build my own practice, etc.). But reducing AGI is a side-benefit that I plan to enjoy.

Just one example of reducing AGI is my 401k: right now I can contribute up to $18k per year, but once I'm self-employed, I can contribute 20% of income PLUS $18,000. So even if my income goes from $47.5k (current income) to $100k, I can knock that down to $62k, then $5,500 Traditional IRA, etc. I don't expect my payment to ever get too out of control. And if it does, that means that I'm making a boatload of money, and that's an okay problem to have.

And that leads me to my last point: I'm still surprised at this forum's negative attitude towards leveraging debt in general, but most especially leveraging student loan debt. PAYE makes student loan debt much different than credit card debt or a mortgage.

Yet many posters seem to be of the mindset that this debt is hovering over me and completely dominating my financial life when it's the complete opposite. Being on PAYE has unleashed a ton of financial freedom. I've been able to start saving for retirement and even bought a house. I do everything automatically--student loan payment is automatically withdrawn, 401k contributions taken out of my paycheck, traditional IRA contributions go out of my account at the same time every month, etc.

I very rarely even think about my student loans. Being in PAYE is a tool that makes everything else run automatically and makes everything else fall into place. It's been great, and I encourage anyone with large student loan debt to do it until they are making six-figure income.
« Last Edit: October 28, 2015, 10:31:07 AM by ReadySetMillionaire »

Easye418

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If you anit cheatin', you anit tryin'


Note to self for 2nd life:  never rack up 3 X starting income on a degree.

Responses look typical for someone trying to take the easy route.  I'm okay with it.

Good luck OP.

KittyFooFoo

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I get super excited when this thread resurfaces because a fresh round of shit-flinging is nigh.

Am I understanding correctly that your balance has increased $148-->$153 or so since you cut back on prepayments?

I had a very similar post here a year and change ago, but eventually chose to pay down the loans (wife's $180k law school debt, the post reads $170k but that was wrong) for a variety of reasons.  Balance is currently $141k, minimum payment $1900. The experience generally sucks ass.

Good luck and keep us posted.

ReadySetMillionaire

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I get super excited when this thread resurfaces because a fresh round of shit-flinging is nigh.

Am I understanding correctly that your balance has increased $148-->$153 or so since you cut back on prepayments?

I had a very similar post here a year and change ago, but eventually chose to pay down the loans (wife's $180k law school debt, the post reads $170k but that was wrong) for a variety of reasons.  Balance is currently $141k, minimum payment $1900. The experience generally sucks ass.

Good luck and keep us posted.

Thanks for the reply. Here's a little more detailed summary.

-I graduated with about $148,000 in student loan debt. I paid them aggressively as possible for about six months and got them down to $144,000. But, like you said, that completely sucks ass and makes the rest of life generally miserable.

-I then had a lot of good conversations on here (via PM) about why PAYE can be used as a hedge. Go and read this entire thread if you want to read all those arguments.

-So when I stopped aggressively paying my loans, my balance was exactly $143,791. That was in April or so.

-Today my balance is $147,493. I expect it to end the year at about $148,500.

-Next year I expect my balance to increase by about $400/month. So it will end next year at about $152,000.

-If I start making a ton of money soon (i.e., more than $150,000) then yes, I might just pay it off. But I think the math strongly favors using PAYE as a hedge until that income breakthrough happens (I can elaborate on this much more if you want).

And that leads me to your situation: I just perused your thread and the responses had much the same tone as this thread here--PAYE is unethical, what happens if an administration changes things, making taxpayers foot the bill is bullshit, your marginal tax rate might be huge in 20 years, etc. One poster called the law "amoral," another said using PAYE is akin to "bringing your life savings to the black jack table."

I can tell you with a lot of confidence that all of these arguments come up short against the math of PAYE.

I debated PAYE for a long, long, long time. And despite all these arguments, the math almost always comes in favor of PAYE. Almost always. The only risk is that your wife eventually makes too much money--and damn that's a nice problem to have.

Sounds like you are very well educated about the issue. Again, I took this board's advice and aggressively repaid for a while. But that sucked and stalled a lot of other aspects of my life. I pivoted to my PAYE strategy and haven't looked back. I think you should consider the same.

Dee18

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i think all of the student loan repayment plans should have a means test that considers assets, rather than just an income test.  We'll see what happens over the next several years.  I think there would be a lot of public support for a means test before loan forgiveness.

charis

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i think all of the student loan repayment plans should have a means test that considers assets, rather than just an income test.  We'll see what happens over the next several years.  I think there would be a lot of public support for a means test before loan forgiveness.

Probably, but with as every SL proposal, it would likely apply to future borrowers. 

arebelspy

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Thanks for the reply. Here's a little more detailed summary.

-I graduated with about $148,000 in student loan debt. I paid them aggressively as possible for about six months and got them down to $144,000. But, like you said, that completely sucks ass and makes the rest of life generally miserable.

(Emphasis added.)

If you made your life completely miserable for six months and only paid down 4k of debt over that time (less than 1k/mo.), I don't see how you ever expect to FIRE, even with gaming REPAYE, so it seems all to be a moot point.

In other words: given the above bolded sentence, you should consider maybe that you're doing something wrong (REPAYE being irrelevant to that sentence), and it may be time to approach something differently. :)
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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Scandium

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Why in the word would anyone pay $150,000 for a degree where the majority (?) of graduates make <$50,000?! That sounds insane. My loans are 1/3 of yours and my starting salary 50% higher..

Anyway, your plan sounds ok I guess. Hope you enjoyed my tax dollars when you retire before I do..

ReadySetMillionaire

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If you made your life completely miserable for six months and only paid down 4k of debt over that time (less than 1k/mo.),

It's bold to assume I was paying less than $1,000 per month towards my loans. Your calculation ignores how much 6.8% interest is on $148,000 ($834/month).

I actually went back and looked at my payments. I actually paid aggressively from only January to April (four months). And in that time I paid $5801, or $1,450/month. Not bad when my gross monthly income (post-taxes) is $2650.

*Note: I was paying towards individual loans. So I knocked out a $2,500 loan with a high interest rate, and that is why I was able to get my principal down $4,000 in just four months.

I don't see how you ever expect to FIRE, even with gaming REPAYE, so it seems all to be a moot point.

I'm not trying to be rude here, but you've argued against my plan this entire thread without providing any mathematical evidence to support your constant criticism. It's all been "I wouldn't do this, as paying my debts is important to me." All I care about is the math.

With that in mind, in case there's any newcomers to the thread, I'll summarize: REPAYE reduces my student loan payment to $190/month. I'm now taking the remainder of that $1,450/month that was going towards loans (so $1,260) and putting that towards FI. I'm sending $500/month to 401k, $100/month to traditional IRA, and the rest to an Ally account.

My FI accounts (without including returns) are therefore increasing about $1,260 per month. My student loan is increasing about $650/month (more on that later). In the meantime, I at least have that cash available (strong believer in "cash is king") and my assets and time in the market are increasing.

(Side note: Just bought a house and closing on it November 5. Being on REPAYE not only allowed me to save for my down payment, but having a lower monthly payment via REPAYE reduced my debt/income ratio and allowed me to qualify for the loan...wouldn't have happened on traditional 10 year repayment).

These savings, in turn, reduce my AGI. And the lower the AGI, the lower my student loan payments. And the lower my student loan payments, the more my savings rate increases.

And in the meantime of all of this, the government subsidizes 50% of unpaid interest. So earlier I said my loan is going up about $650/month. Well come April the government will chop half of that off. So my balance is really only increasing $325/month, or $3,900 per year (which is where I got the $4,000 number from in my earlier post).

As life goes on and income increases, the importance of keeping AGI low incentivizes me to have great financial behavior--I will increase 401k contributions, increase traditional IRA contributions, increase HSA contributions, increase 529 contributions, on and on.

And if I make too much income? Well, then I'll be making $150-200k/year, then Christ, having too much income is a great problem to have.

If I reach this point (i.e., the point in which my income is high enough that it's not worth doing REPAYE) in five years, my loans will have increased to about $163,000. My FI accounts (7% rate of return) would be at $74,000. And if I reach this point in ten years, my loans will have increased to about $183,000. My FI accounts (no rate of return) would be at $177,000.

Bottom line: doing REPAYE is a temporary hedge that allows you to build up assets. You should use it because the worst case scenario is that you make too much money, and 10% of that money (actually less than that) will go to your loans.

In other words: given the above bolded sentence, you should consider maybe that you're doing something wrong (REPAYE being irrelevant to that sentence), and it may be time to approach something differently. :)

I agree: the one thing I need to do is increase my income. Luckily I've had some great exchanges on here with other attorneys and am set to open my own law firm within the next year or so.

And if income increases to the point that REPAYE isn't worth it, then damn, that's a good problem to have.
« Last Edit: October 29, 2015, 02:03:08 PM by ReadySetMillionaire »

ReadySetMillionaire

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Might be breaching some trust here, but considering Field123's (formerly known as Tank) pretty much posted this comment earlier, I'm going to post his PM to me.

This was the message I received after reading a lot of criticism. Go re-read this entire thread and you'll pretty quickly see that a vast majority of people thought I was being unethical, that my plan was bad, that I was becoming an indentured servant to the government, etc. Field123's PM confirmed that I had in fact done my homework, my math was right, etc.

I encourage all others with high student loan debt to read it in its entirety:

Hey RSM,

Thanks for the message. I just read through the entire thread. I'm pretty disappointed with the feedback.

A few thoughts:

1) I 100% completely support your plan. I think the math checks out and it is clearly in your best interest. I've been pushing you toward this on every thread we've both been on.

2) It seems that most (all?) of the critiques are people who are advancing some kind of moral argument. You know where I stand on this and even quoted me in the thread. It's a business decision and the terms are spelled out in the contract. I don't see any type of moral component whatsoever.

Moreover, to this point, I think IBR programs actually work out in the government's favor. PSLF is obviously a good outcome because it allows highly qualified workers to take lower paying jobs. Certainly I think the government comes out ahead there. But a greater point is people like you and I. We are in somewhat similar situations and I fully expect that we will benefit from the IBR programs by paying less money back and over a long period of time. What people do not consider is that our incomes and therefore our income taxes are so much higher because we took out student loans. If it weren't for law and MBA school, I'd probably be making 40k a year. Now I'm 6 figures and the sky is the limit ... all the while these taxes are going to uncle sam. Remember, it all goes to the same place.

3) Keep in mind that PAYE and IBR is pretty nuanced stuff with a lot of detail. Most of the posters on here clearly do not understand the program. I'd be hesitant to take advice from your thread. Also, it seems that the MMM crowd is so hardcore anti-debt that they seem to struggle with the very real opportunities to use it to your advantage. Grad School + IBR/PAYE/REPAYE etc is, in my opinion, the surest way to FIRE if used correctly.

4) Some people think these programs give you an incentive not to make the most money possible. Totally incorrect. You know this, but as long as you're paying a % of income, you should always try to make as much as you can. At the end of the day you still keep $0.90 of ever $1.00.

5) Being chained to the whims of the government issue -- I suppose this could be a concern. Although we do have a contract spelling out the terms of PAYE and I've been making payments under this contract for over two years, so I don't think, legally speaking, it could be amended at this point. I also remember that congress is a bunch of elected officials (and millennials are now the largest population group) so I cannot imagine any scenario where they would take benefits away from so many people using the program.

6) Tax issue. Yes, this is definitely a concern and a drawback. However, I do believe that there is a better than 50% chance the law changes and the forgiven amount is nontaxable. That said, I'm preparing for the worst and just budgeting for the tax bill. $100,000 due in 20 years really isn't that difficult to save for. And considering time value of money, that is much much less than $100,000 in real dollars today. Considering all the benefits of IBR and the amount you will be able to save because of it, this drawback is really kind of minor. Also, (and admittedly I have not even scratched the surface of researching this), I bet there are some estate planning techniques that one can use to move assets around and become insolvent when the tax bill comes.

Another idea I had, and this is probably completely crazy, but hear me out -- I assume I will be FIRE in 10-12 years, which is 6-8 years before the loans are forgiven and the tax bill hits. My theory is that if you establish residency in Puerto Rico (no income tax!!) then you will avoid the tax bill when it comes. Again, more research is necessary here, but the point is, when you're a FIRE millionaire, you will have opportunities to be creative.

I've thought about posting a complete thesis showing all the math and how I designed my plan around IBR (I was thinking about FIRE and IBR before even starting grad school and have pushed the envelope WAY farther than you are), but I just don't think this is the crowd for it. Most posters here don't have student loans and aren't motivated to learn the nuances of the programs and clearly there is a prevailing idea that what we are doing is unethical.

In summary, I think your plan is a good one and the numbers check out. It is difficult to project your income for the next 25 years and it is very possible that you will end up paying more money back under REPAYE. However, if you do, that means you made A LOT of money over that time period. That is a good outcome. The goal is not to somehow beat the government into paying less, the goal is FIRE and this is a tool to get you there. If you manage to wind up paying more back under the program you will also have millions of dollars saved, that is a WIN. The program is also a tremendous hedge. If you die or become disabled, your loans are extinguished but your savings and retirement accounts are not. If you become unemployed, your student loans go to $0, while your bank accounts remain intact. Literally the worst thing that can happen to you with this plan is that you make too much money... what a nice problem to have.

Good luck.

-Tank


therethere

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I feel like you are walking on the edge of a time bomb. But maybe I'm too conservative (or jealous that this crap wasn't around for me). I hope that houses in your area are cheap, if you were able to somehow save for one in less than 6 months with only 1k/month in extra cash.... I also hope job loss and catastrophic home repairs do not hit you prior to making good money.

I admit I get pissed at people trying to get out of paying off their loans. Personally I think its crap and amoral as a whole. On top of that I'm not only paying for my loans but for all these other crappy people who don't want to pay for theirs either. That said, if this was available when I graduated (and I was as informed as I am now) I probably would have concocted a similar plan.

DH and I have been dutifully paying down their 220k in loans for 8+ years now. And I mean for 4-5 years we were paying between 40-50k towards loan payments and STILL have 50k left. I will admit we've sacrificed a ton to be responsible and start paying our loans down. So I get irked and bitter over new graduates preaching loan forgiveness and other seemingly scammy schemes to get around their obligations. No matter how much the numbers make sense (which I agree they do right now) the people who paid off their loans are never going to look at you in a positive light. So there really is no point in wasting your energy defending it. If you are comfortable with your plan then stick with it. But don't say no one warned you when you wake up one day 10 years from now and your loans are at 210k.... I would recommend to just give up trying to defend yourself on here and take comfort in that you are doing what's right for you at this very moment.





justajane

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No matter how much the numbers make sense (which I agree they do right now) the people who paid off their loans are never going to look at you in a positive light. So there really is no point in wasting your energy defending it. If you are comfortable with your plan then stick with it. But don't say no one warned you when you wake up one day 10 years from now and your loans are at 210k.... I would recommend to just give up trying to defend yourself on here and take comfort in that you are doing what's right for you at this very moment.

Yeah, I was thinking this as well when I was reading this thread. Ultimately you have to accept that lots of people are not going to like this program and that they are going to think you are skirting your responsibility. But hey, you're coming out ahead financially and that's what matters right? Not everyone is going to like what you are doing - especially since the idea of gaming the system is in the title of the thread.

Field123

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No matter how much the numbers make sense (which I agree they do right now) the people who paid off their loans are never going to look at you in a positive light. So there really is no point in wasting your energy defending it. If you are comfortable with your plan then stick with it. But don't say no one warned you when you wake up one day 10 years from now and your loans are at 210k.... I would recommend to just give up trying to defend yourself on here and take comfort in that you are doing what's right for you at this very moment.

Yeah, I was thinking this as well when I was reading this thread. Ultimately you have to accept that lots of people are not going to like this program and that they are going to think you are skirting your responsibility. But hey, you're coming out ahead financially and that's what matters right? Not everyone is going to like what you are doing - especially since the idea of gaming the system is in the title of the thread.

Yeah, I mentioned this to the OP in a PM a long time ago.... I suspect that people's reaction would be much different if the title was different. Maybe "REPAYE as a tool to FIRE" would go over better than "gaming".

arebelspy

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If you made your life completely miserable for six months and only paid down 4k of debt over that time (less than 1k/mo.),

It's bold to assume I was paying less than $1,000 per month towards my loans.

I didn't make that assumption. I said you paid down only 4k of debt, not that you paid only 4k towards debt.  I had no other information, so made no assumptions either way, just that your debt balance was reduced by only 4k over 6 months by making your life miserable.

Nothing is worth making your life miserable, whatever repayment plan you're on.
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