Author Topic: Gaming REPAYE and the Student Loan System ($148,000 Debt) to Achieve FIRE at 45  (Read 42263 times)

charis

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Everyone who said people who paid their loans off aren't going to like what you are doing is right.  Let it go.

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.

We are talking about an income-based plan.  So your statements about job loss are confusing to me. One of  benefits of the income-based plan is that your payment goes down when you have less income, i.e., $0 if you lose your job. 

The OP has done the math, right?  So he knows how much he'll owe then the loans get forgiven, which might be a lot.  That's not a time bomb, it's something he is aware of and will have to be prepared for.  I wouldn't want a $70K tax bill either, but that's the price, right? 

ReadySetMillionaire

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Everyone who said people who paid their loans off aren't going to like what you are doing is right.  Let it go.

Ya, I need to remember this. I feel like I'm trying to convince/defend my plan pretty much all the time, almost the same way people on here constantly post threads about "How do you explain [insert MMM behavior] to people?" It's kind of the same thing but within this community.

As for my choice to title this thread "gaming" the system, that was probably poor. But I don't see how it's anything different than things you see on Go Curry Cracker and Mad Fientist to use every tax law imaginable to never pay income taxes.

But again, I guess I'm not going to win that battle on here. I will continue to share my story and defend my plan in the hope that I can help others who are similarly situated.

Mazzinator

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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.

Why are you sending so much to an Ally account? Is this low interest rate?

Also, I woukd suggest you "study" taxes. Getting married may change things a lot for you.

ReadySetMillionaire

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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.

Why are you sending so much to an Ally account? Is this low interest rate?

Also, I woukd suggest you "study" taxes. Getting married may change things a lot for you.

Ally account was for our emergency fund/down payment on a house. Now we just bought a house and are looking to save for a wedding. My GF and I both have high healthcare deductibles, too, so we need to carry a bit higher of an emergency fund than some.

Having to file jointly is definitely something people should look into. I agree that things will change. But before I did this, I had talks for months with my GF to make sure she was on board, and she too agrees that the REPAYE plan makes most financial sense for us both short term (as a temporary hedge) and long term.

charis

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Also, I woukd suggest you "study" taxes. Getting married may change things a lot for you.

I am on an income-based plan, and I am married and file jointly.  Do you have a specific issue in mind?

KittyFooFoo

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Also, I woukd suggest you "study" taxes. Getting married may change things a lot for you.

I am on an income-based plan, and I am married and file jointly.  Do you have a specific issue in mind?

He's almost certainly referring to the fact that if you file jointly, your IBR payment is calculated from your joint AGI.

ReadySetMillionaire

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Also, I woukd suggest you "study" taxes. Getting married may change things a lot for you.

I am on an income-based plan, and I am married and file jointly.  Do you have a specific issue in mind?

He's almost certainly referring to the fact that if you file jointly, your IBR payment is calculated from your joint AGI.


Just going to lay out a numerical example here so other people can reference later.

My Gross Income: $47,500
GF Gross Income: $67,500
Total Gross Income: $115,000

Take my AGI alone (about $37,500 this year) and next year's payment should be $170ish per month. As KFF correctly pointed out, Mazzinator's concern is presumably that when you add my GF's income then the payment would increase significantly and make the plan futile. But if you work as a team you can save a ton and bring the AGI down to a point where the payment would increase only a small amount.

So take an example:

Me:
Contribute $15,000 to 401k/Traditional IRA
Contribute $2,500 to HSA

Her:
Contribute $20,000 to 401k/Traditional IRA
Contribute $2,500 to HSA

Note other deductions like $2,500 student loan interest deduction (which doesn't phase out until $130k joint income)--those decrease combined AGI as well.

These contributions and deductions bring the total AGI down to $72,500. Note that we could do more, but the above is what's currently feasible (she has student loans that we are trying to pay off and also has a pretty high car payment). Because will be a family of 2 after we get married, 150% of the poverty line is now a little higher than it was when I was filing on my own.

So $115,000 income - $40,000 tax deductible contributions - $2500 deductions (would probably be more, but just be conservative) = $72,500 AGI. Now take our AGI and subtract 150% of the poverty line for a family of 2 ($24,000) and that leaves $48,500 in what the government defines as "discretionary income." The 10% of income is based on that number, so $48,500 x 10%, divided by 12 = $405 monthly payment. That's about $5,000 per year.

Then half of that ($2,500) is deductible student loan interest so I get $625 back in tax refund. Then half of any unpaid interest is subsidized on the loan. So because my loan is increasing about $800 per month in interest, my payment is cutting $400 off that, the government is subsidizing half the remainder of that $400 in outstanding interest, and the loan is going up about $200 per month, or $2,400 per year. All while, in the above example, we've stashed away about $40,000 in assets.

---

As for how I expect things to take their course in my personal life, my GF and I plan to get married in the spring of 2017. We plan to have kids shortly thereafter. My GF plans to be (aside from some PT work) a stay at home mom during these years, thus driving income down (note: REPAYE had nothing to do with her decision to be a SAHM...it's something she was going to do regardless). Having a household of 3 brings the 150% poverty line up to $30,000; up to 4 and it's $36,500. So the payment would get lower. Then we have kids and also have more deductions. Hell, if I'm only making $60,000 per year then, REPAYE means that my payment will be close to nothing.

I also plan to open my own law firm within about a year. So most business expenses will be deductible from my AGI as well.

Bottom line is that as life goes on, the deductions will increase and the payment should stay roughly in the ballpark of $200-500 and perhaps even lower.

Moving further along, if I'm successful in opening my own firm and my future wife enjoys being a SHAM and part-timing, then she can continue to do so. What an amazing blessing that would be for our kids--my parents were very caring (wouldn't change a thing), but my parents weren't around a lot when I was younger (both were professionals). I'd love for my GF to be able to be involved in their lives as much as possible.

Long story short is that REPAYE provides us with an almost infinite amount of flexibility--it currently allows us to save for a house and wedding; it will allow me to take the risk of opening my own law firm; it will allow my GF to be a SAHM, which I'll reiterate would be awesome.

If my solo practice becomes very successful ($150,000 gross income or so), then there's still all sorts of deductions to bring that AGI way down--especially as a sole proprietor. And if the income exceeds that, then the loans would have only gone up about $2,000 per year, and I'll pay them off within a couple years.


I guess all of this is exactly what I said I wouldn't do a few posts ago--one last big manifesto in defending my decision to utilize REPAYE. Hopefully it also illuminates why I think the plan is perfect for the future that my GF and I have planned together.

Most importantly, I hope it serves to educate those with significant student loan debt to consider going down the same path. Take emotion out of it and run the numbers, and I think you'll see why it might be a good plan for you to achieve FI as well.

Cheers. 

Malum Prohibitum

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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 people think this.  Movies and television would have us believe attorneys are all rich or upper middle class.  The reality is different.  A year after graduation, only 59% of 2014 law graduates had any sort of job at any salary that required a law degree.  That's right, a little over half.  Plenty of the remaining half would feel lucky to be making $48K.  The law field is changing, and not necessarily for the better.

I know attorneys who have made seven figures a year, plenty who have made six figures a year, and even one who made $400K practicing part time, while working another full time job (I am still trying to figure out how he did that!).

I know, however, several attorneys who attended a top 20 school who make in the 30s and 40s annually.

I am an attorney, and I do better than $48k, but I would not want to be coming out of law school today.

Could you imagine if only 59% of those who attended medical school could find a job as a doctor (ANY doctor job, at ANY salary?).  It's hard to imagine, isn't it?  But law schools just keep churning out more and more unemployable lawyers.

Mazzinator

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Also, I woukd suggest you "study" taxes. Getting married may change things a lot for you.

I am on an income-based plan, and I am married and file jointly.  Do you have a specific issue in mind?

He's almost certainly referring to the fact that if you file jointly, your IBR payment is calculated from your joint AGI.

Yes, plus as RSM says below, your family size counts too, also the state you live in...(well it does for IBR, i don't know much about PAYE)

At "high" incomes other things phase out too...i'm no tax expert...but your IRA deductions start to phase out with a higher MAGI, then your SL interest deductions, etc... I just wanted to point it out that it would benefit him (or others) to study the trickery tax code!

-for the record, i'm on IBR, and eligible for pslfp, but we're using it as a temp tool to increase savings but do plan to pay them all off.

-sorry for my typos, i have 3 kids...

TheDudeReturns

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What the hell, I'll bump this thread. OP YOU ROCK!!!

I'm sure you've looked at PAYE vs REPAYE, yes? Is there any way you can get under PAYE? It has even *sweeter* terms, the main of which is capitalized interested is limited to 10% of principal once you "leave" PAYE (though I think you can stay in PAYE forever, and just pay the 10 year standard rate as a top limit). I haven't investigated it, but I think you could get some federal loan money for a semester (say do one semester of a grad program/or even community college). Then, since you have PAYE-eligible funds, you can consolidate into one PAYE eligible package. I'd say check it out!

And if you all really want to talk about "gaming" the system, I recall a post on the Student Doctor's Forum where, before all this PAYE/REPAYE stuff I think, a doctor kept enrolled part-time in community college online (after getting a MD), which meant no loan payments on his $500k+. His mom/wife or someone did the work, and he kept investing the excess in startup biotech firms that he had personal experiences with. Sure it's the Internet, and everyone can just pretend, but it was interesting to say the least...

Also to OP, have you investigated what you're going to be doing for insurance once you go solo? That is one area where it looks like you can be paying out the ass even if you're making just moderately decent money as you can't sock away as much as you can from a regular job's 401k, 457, etc. unless you start getting at a stable enough income level to setup some of the more complex LLC structures as well as investment accounts.

Nickels Dimes Quarters

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So much here to digest, but wanted to bump this for later reading.

NDQ

Lski'stash

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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.

Go this route if you can. Half of the payments with the same strategy. I currently pay $282 per month as a teacher with $70,000 in student loans. I make 120 payments- and then I'm done! This works for any public service related job.

Sofa King

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You borrowed it with full awareness of what you were doing. You should pay it back, not take advantage of loopholes to avoid paying in full. As a taxpayer, I do not support your plan and I consider it unethical.

I concur!  http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/hard-to-feel-sorry-for-these-people/

ReadySetMillionaire

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You borrowed it with full awareness of what you were doing. You should pay it back, not take advantage of loopholes to avoid paying in full. As a taxpayer, I do not support your plan and I consider it unethical.

I concur!  http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/hard-to-feel-sorry-for-these-people/

Meh. I'm going to pay back as little as possible towards my loans and not lose a second of sleep over it.

charis

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You borrowed it with full awareness of what you were doing. You should pay it back, not take advantage of loopholes to avoid paying in full. As a taxpayer, I do not support your plan and I consider it unethical.

I concur!  http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/hard-to-feel-sorry-for-these-people/

There is nothing objectively unethical about using a government-lender repayment plan that will result in almost no one paying back less than they borrowed (if they make to the end).

ReadySetMillionaire

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You borrowed it with full awareness of what you were doing. You should pay it back, not take advantage of loopholes to avoid paying in full. As a taxpayer, I do not support your plan and I consider it unethical.

I concur!  http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/hard-to-feel-sorry-for-these-people/

There is nothing objectively unethical about using a government-lender repayment plan that will result in almost no one paying back less than they borrowed (if they make to the end).

I'm either going to make this my signature on the forums or get this tattooed on my ass so I can stop getting baited into these silly arguments.

charis

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By the way, has anyone been switched to the REPAYE yet?  My application has been in "processing" since December.  No one at Fed Loan Servicing seems to have ANY idea what the heck they are talking about.

ReadySetMillionaire

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By the way, has anyone been switched to the REPAYE yet?  My application has been in "processing" since December.  No one at Fed Loan Servicing seems to have ANY idea what the heck they are talking about.

I faxed mine last week. Going to call this week to see what's up.

ReadySetMillionaire

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***UPDATE POST***

I receive a PM every month or so about this thread, so I wanted to provide the board with an update.

It's been three years since I have been in REPAYE. Overall, it has worked as I intended it: my student loan payments have been relatively low (averaging about $250/month), and I've been able to accumulate a decent amount of savings by the age of 30.

My student loan balance started at $148k, and it is now at $158k, meaning that it has only accrued $10k in interest over three years despite minimal payments.  This is mostly due to REPAYE's benefit of subsidizing unpaid interest, meaning that my effective interest rate is far lower than 6.8%.

To date, I have only paid $9k towards my loans. In the interim, we have:

1. Purchased a house (which would not have been possible without REPAYE because it significantly lowered our debt/income ratio);
2. Paid off my wife's car;
3. Purchased a new car for me; and
4. Acquired a decent amount of assets (see below).

Meanwhile, my assets are as follows:

-Retirement accounts: $115,000
-Home equity: $15,000
-Cash Savings: $22,000
-HSA: $5,000

The one con I will admit to is that re-applying every year is a pain in the ass.  It's basically like filing taxes twice a year, and there's no way to sugarcoat how much of a pain in the ass it is every year.  Thus, if I do ever have a great year financially (perhaps by settling a big claim), then I will just pay these off with a single check.

Ultimately, the benefits of REPAYE have been great.  It's allowed me to purchase a home, save for retirement, and not have student loans dictate every damn aspect of my financial life.  Having a low payment also gave me the flexibility to leave my employer and start my own law practice, and that has been the greatest professional endeavor to date.  I seriously have never been happier, and I don't know if I would have made such a plunge if I was paying $2k per month towards student loans.

But, I don't expect to go the whole 25 years on REPAYE.  I will hedge and keep my payments as low as possible for as long as possible, but if I ever have a huge year, these loans will be paid in full, period.
« Last Edit: July 19, 2018, 12:06:48 PM by ReadySetMillionaire »

ReadySetMillionaire

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And wow to this post from three years ago...

As for how I expect things to take their course in my personal life, my GF and I plan to get married in the spring of 2017. We plan to have kids shortly thereafter. My GF plans to be (aside from some PT work) a stay at home mom during these years, thus driving income down (note: REPAYE had nothing to do with her decision to be a SAHM...it's something she was going to do regardless). Having a household of 3 brings the 150% poverty line up to $30,000; up to 4 and it's $36,500. So the payment would get lower. Then we have kids and also have more deductions. Hell, if I'm only making $60,000 per year then, REPAYE means that my payment will be close to nothing.

I also plan to open my own law firm within about a year. So most business expenses will be deductible from my AGI as well.

Bottom line is that as life goes on, the deductions will increase and the payment should stay roughly in the ballpark of $200-500 and perhaps even lower.

Moving further along, if I'm successful in opening my own firm and my future wife enjoys being a SHAM and part-timing, then she can continue to do so. What an amazing blessing that would be for our kids--my parents were very caring (wouldn't change a thing), but my parents weren't around a lot when I was younger (both were professionals). I'd love for my GF to be able to be involved in their lives as much as possible.

Long story short is that REPAYE provides us with an almost infinite amount of flexibility--it currently allows us to save for a house and wedding; it will allow me to take the risk of opening my own law firm; it will allow my GF to be a SAHM, which I'll reiterate would be awesome.

If my solo practice becomes very successful ($150,000 gross income or so), then there's still all sorts of deductions to bring that AGI way down--especially as a sole proprietor. And if the income exceeds that, then the loans would have only gone up about $2,000 per year, and I'll pay them off within a couple years.
Cheers.

The balls on me! I wasn't even engaged at the time and had been a lawyer for less than a year. But I did get married in the spring of 2017, and while it took me longer than a year to start my own firm, I did so in April of this year. Life's a peach.

« Last Edit: July 19, 2018, 12:06:06 PM by ReadySetMillionaire »

charis

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Thanks for the  update.  I would like to add my experience over the past few years regarding the frequently-cited concern that IBR plans discourage borrowers from seeking salary increases.  That has not been the case for my household. Even though our combined income has increased 50K+ over the past four years, my payment remained relatively low and actually decreased slightly last year due to maxing out two 401ks, two IRAs, an HSA, and a DCFSA (the last of which isn't savings but still - it's pre-tax and we would have those costs nonetheless).  We are public employees so our incomes usually rise slowly and will eventually stagnate, but that's probably true for many people.