Author Topic: Gaming REPAYE and the Student Loan System ($148,000 Debt) to Achieve FIRE at 45  (Read 42508 times)

iris lily

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

I edited my original [sarcastic] response. If this ploy is well within the rules of the payback game, I guess the op is just taking advantage of a path few will do.




« Last Edit: June 29, 2015, 12:33:16 PM by iris lily »

ShoulderThingThatGoesUp

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

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

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

You're chaining yourself to a bureaucracy's whim for 25 years and giving yourself no choice but to stay the course. And someday they might fuck you over anyway.

arebelspy

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I bet you can FIRE faster increasing income and paying them off than minimum paying for that long.
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ShoulderThingThatGoesUp

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Can you get the subsidized interest while paying at a higher rate? That would get the monkey off your back fastest.

NoraLenderbee

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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.

ReadySetMillionaire

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I bet you can FIRE faster increasing income and paying them off than minimum paying for that long.

I believe you (my girlfriend and I have been debating this pretty thoroughly tonight), but can you show me the math?

I ask because I'm almost certain I can pay less towards my loan using REPAYE (when considering TVM) than if I did standard repayment. And if that's the case, I feel like I can get to FIRE quicker by doing REPAYE.

That said, you also might be right.

arebelspy

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I bet you can FIRE faster increasing income and paying them off than minimum paying for that long.

I believe you (my girlfriend and I have been debating this pretty thoroughly tonight), but can you show me the math?

I ask because I'm almost certain I can pay less towards my loan using REPAYE (when considering TVM) than if I did standard repayment. And if that's the case, I feel like I can get to FIRE quicker by doing REPAYE.

That said, you also might be right.

Not if you're handicapping your income to do it.

In other words, if you make enough, you should be able to pay it off much quicker than the minimum amount over that timeframe and be able to then save enough to FIRE faster.

It will depend on income, but paying off a 150k debt isn't different than saving 150k, and that can be done in a matter of a few years at your income level (over six figures combined).   Just think of it as an extra 6k annual spending at a 4% SWR.
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ReadySetMillionaire

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I bet you can FIRE faster increasing income and paying them off than minimum paying for that long.

I believe you (my girlfriend and I have been debating this pretty thoroughly tonight), but can you show me the math?

I ask because I'm almost certain I can pay less towards my loan using REPAYE (when considering TVM) than if I did standard repayment. And if that's the case, I feel like I can get to FIRE quicker by doing REPAYE.

That said, you also might be right.

Not if you're handicapping your income to do it.

In other words, if you make enough, you should be able to pay it off much quicker than the minimum amount over that timeframe and be able to then save enough to FIRE faster.

It will depend on income, but paying off a 150k debt isn't different than saving 150k, and that can be done in a matter of a few years at your income level (over six figures combined).   Just think of it as an extra 6k annual spending at a 4% SWR.

I think there's a huge difference between "handicapping my income" and strategically lowering my AGI.

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'll leave it to Tank's post in another thread to address this:

I don't understand this argument. Every semester that you apply for a federal loan you are obligated to sign a "Master Promissory Note". While I imagine that most people don't actually read that note, if they did, they would see that there is an entire section on repayment options. One of these options, which is CONTAINED IN THE CONTRACT, specifies the option of PSLF and the other income based repayment plans.

So how is this in any way unfair or not paying your way?? It's part of the deal and memorialized in the contract. Just because you may think its a bad deal for the government (which it may or may not be), as long as its in the contract why would you have any issue with someone acting rationally and in their best interest to maximize their value under said contract.

Paul der Krake

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Don't underestimate the emotional burden of being subject to the whims and uncertainties of political tides for 25 years: pay it off. Your combined $200k of debt can be obliterated within 5 to 7 years at your current income level, faster after you two get raises.

arebelspy

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I bet you can FIRE faster increasing income and paying them off than minimum paying for that long.

I believe you (my girlfriend and I have been debating this pretty thoroughly tonight), but can you show me the math?

I ask because I'm almost certain I can pay less towards my loan using REPAYE (when considering TVM) than if I did standard repayment. And if that's the case, I feel like I can get to FIRE quicker by doing REPAYE.

That said, you also might be right.

Not if you're handicapping your income to do it.

In other words, if you make enough, you should be able to pay it off much quicker than the minimum amount over that timeframe and be able to then save enough to FIRE faster.

It will depend on income, but paying off a 150k debt isn't different than saving 150k, and that can be done in a matter of a few years at your income level (over six figures combined).   Just think of it as an extra 6k annual spending at a 4% SWR.

I think there's a huge difference between "handicapping my income" and strategically lowering my AGI.

Of course. But you should be doing that anyways. And past a certain point, there's only so much you can do. At that point your either be handicapping yourself purposefully to take advantage of this, or you'd just start paying it off so rapidly the forgiveness part becomes irrelevant.

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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Of course. But you should be doing that anyways. And past a certain point, there's only so much you can do. At that point your either be handicapping yourself purposefully to take advantage of this, or you'd just start paying it off so rapidly the forgiveness part becomes irrelevant.
If that's the case, why not use REPAYE to build up my assets and let the government subsidize 50% of unpaid interest? My balance will barely grow and then if I did get to a bigger firm in three years (and dramatically increase income), then yes, I'd pay it off and not worry about all the forgiveness crap.

Would that cost a little more money? Yes. But the flexibility that REPAYE provides is worth it to me, I think.

former player

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If you are looking to move to a bigger firm, you may need to do it after one or two years at your current firm: three years could be leaving it a bit late, as by that level of experience associates in a bigger firm are moving up a level and you may not fit into their employee structures any more.

ShoulderThingThatGoesUp

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Don't underestimate the emotional burden of being subject to the whims and uncertainties of political tides for 25 years: pay it off. Your combined $200k of debt can be obliterated within 5 to 7 years at your current income level, faster after you two get raises.

This is what I'm trying to say.

arebelspy

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Of course. But you should be doing that anyways. And past a certain point, there's only so much you can do. At that point your either be handicapping yourself purposefully to take advantage of this, or you'd just start paying it off so rapidly the forgiveness part becomes irrelevant.
If that's the case, why not use REPAYE to build up my assets and let the government subsidize 50% of unpaid interest? My balance will barely grow and then if I did get to a bigger firm in three years (and dramatically increase income), then yes, I'd pay it off and not worry about all the forgiveness crap.

Would that cost a little more money? Yes. But the flexibility that REPAYE provides is worth it to me, I think.

I don't think that's a bad plan at all.
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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Of course. But you should be doing that anyways. And past a certain point, there's only so much you can do. At that point your either be handicapping yourself purposefully to take advantage of this, or you'd just start paying it off so rapidly the forgiveness part becomes irrelevant.
If that's the case, why not use REPAYE to build up my assets and let the government subsidize 50% of unpaid interest? My balance will barely grow and then if I did get to a bigger firm in three years (and dramatically increase income), then yes, I'd pay it off and not worry about all the forgiveness crap.

Would that cost a little more money? Yes. But the flexibility that REPAYE provides is worth it to me, I think.

I don't think that's a bad plan at all.

We have agreement--yay!

In all seriousness, this decision seems about 75% emotional/psychological and 25% financial. I think everyone has made some good points. I'm not going to rush my decision, but I'm glad I posted this here and received these many critiques.

Avidconsumer

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I think you would be more inclined to increase your salary, given that you are contributing 50% of your disposable income to the debt and in turn, you will be much better off in the long run. I think this is the point a few are trying to make.

This definitely works for me anyway. I still think far too many on this forum too focused on saving rather than increasing their salaries.

bertrandhustle

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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.

You're a harsh judge but, I presume, a skilled lawyer when it comes to defending the loopholes you take advantage of. I'm certain you'll find a way to rationalize why, for example, taking advantage of a backdoor roth is ok for you to do when the time comes, if it hasn't already.

He borrowed "with full awareness" of his repayment options too. If you don't like the program write your congressman. As a taxpayer, I do support OP's plan and I consider it ethical. 
« Last Edit: June 29, 2015, 12:03:12 PM by bertrandhustle »

NoraLenderbee

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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.

You're a harsh judge but, I presume, a skilled lawyer when it comes to defending the loopholes you take advantage of. I'm certain you'll find a way to rationalize why, for example, taking advantage of a backdoor roth is ok for you to do when the time comes, if it hasn't already.


You ASSume a lot.

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.

You're a harsh judge but, I presume, a skilled lawyer when it comes to defending the loopholes you take advantage of. I'm certain you'll find a way to rationalize why, for example, taking advantage of a backdoor roth is ok for you to do when the time comes, if it hasn't already.

He borrowed "with full awareness" of his repayment options too. If you don't like the program write your congressman. As a taxpayer, I do support OP's plan and I consider it ethical.

Also, in what way is this a loophole? These repayment options are what they are.  Most people on this site are trying to increase their take home by decreasing their tax liability.   Do you find that to be equally unethical?

jackiechiles2

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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.

You're a harsh judge but, I presume, a skilled lawyer when it comes to defending the loopholes you take advantage of. I'm certain you'll find a way to rationalize why, for example, taking advantage of a backdoor roth is ok for you to do when the time comes, if it hasn't already.

He borrowed "with full awareness" of his repayment options too. If you don't like the program write your congressman. As a taxpayer, I do support OP's plan and I consider it ethical.

Devastating.  It's amusing how many people go out of their way to decry everyone else's "handouts" but their own.

arebelspy

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There's a difference between choosing a repayment plan that involves you paying a lower interest rate, and one that has you have loans forgiven entirely (such that you don't have to pay at all) at the same time you early retire a millionaire.  Do you not see the difference?
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charis

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There's a difference between choosing a repayment plan that involves you paying a lower interest rate, and one that has you have loans forgiven entirely (such that you don't have to pay at all) at the same time you early retire a millionaire.  Do you not see the difference?

Do you have an issue with the forgiveness program itself,  or is it the portfolio of the borrower once he gets on the other side?  So it would be ok if he was not retiring early and only had half a mil saved up?  Maybe there should be clause in the promissory note to close this "loophole."   


jackiechiles2

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There's a difference between choosing a repayment plan that involves you paying a lower interest rate, and one that has you have loans forgiven entirely (such that you don't have to pay at all) at the same time you early retire a millionaire.  Do you not see the difference?

That's kind of like saying there's a difference between you using your mortgage deduction because you only make $100k per year, but it's unethical for Bill Gates to use the mortgage deduction because he's rich.  Same goes for really any tax program. 

arebelspy

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There's a difference between choosing a repayment plan that involves you paying a lower interest rate, and one that has you have loans forgiven entirely (such that you don't have to pay at all) at the same time you early retire a millionaire.  Do you not see the difference?

Do you have an issue with the forgiveness program itself,  or is it the portfolio of the borrower once he gets on the other side?  So it would be ok if he was not retiring early and only had half a mil saved up?  Maybe there should be clause in the promissory note to close this "loophole."

Yes, I would support a means based (asset based) check upon "forgiveness" time.

And if this is implemented in the future, it will suck for those that had been relying on this, but since it'll only affect the "rich" (people will assets), there probably won't be much sympathy (and the truly rich won't bother to lobby, because it won't affect them).

I'm much more comfortable aligning myself with laws that seem unlikely to go away because they affect the majority (like SS), or they'd harm the rich if removed (like SEPP). Making something like this mean-tested doesn't seem like it'd stir up many people.  Then again, they may not bother, because such a narrow niche of people would be doing it.  All it takes is one case to get highlighted though and stir up anger for (mostly pointless) legislation to pass.
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arebelspy

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There's a difference between choosing a repayment plan that involves you paying a lower interest rate, and one that has you have loans forgiven entirely (such that you don't have to pay at all) at the same time you early retire a millionaire.  Do you not see the difference?

That's kind of like saying there's a difference between you using your mortgage deduction because you only make $100k per year, but it's unethical for Bill Gates to use the mortgage deduction because he's rich.  Same goes for really any tax program.

You could have just said "no, I don't understand the difference" rather than opening your mouth and proving it with a ridiculous irrelevant analogy. :)
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jackiechiles2

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There's a difference between choosing a repayment plan that involves you paying a lower interest rate, and one that has you have loans forgiven entirely (such that you don't have to pay at all) at the same time you early retire a millionaire.  Do you not see the difference?

That's kind of like saying there's a difference between you using your mortgage deduction because you only make $100k per year, but it's unethical for Bill Gates to use the mortgage deduction because he's rich.  Same goes for really any tax program.

You could have just said "no, I don't understand the difference" rather than opening your mouth and proving it with a ridiculous irrelevant analogy. :)

It's perfectly relevant.  Your problem isn't that he's using the program, it's that he'll also have a lot of money while using it.

bertrandhustle

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There's a difference between choosing a repayment plan that involves you paying a lower interest rate, and one that has you have loans forgiven entirely (such that you don't have to pay at all) at the same time you early retire a millionaire.  Do you not see the difference?

The scenario you've proposed isn't the OP's. He is making payments and will pay taxes on the forgiveness. And the question isn't whether we see the difference in your hypo - the differences are manifest in what you wrote - it's whether we believe the differences are material. Since apparently the goal is to be pedantic. :)
« Last Edit: June 29, 2015, 01:03:10 PM by bertrandhustle »

Field123

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I am in a similar situation to the OP and have been enrolled in the PAYE plan for over two years. I sent most of the following to the OP in a PM, but I think it would add to the dialogue.

A few thoughts:

1) I 100% completely support the OP's 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. The OP knows 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 longer 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 or less. 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.

Lastly, how is using this program to your benefit any different than using a Roth Ladder or other estate planning mechanism to minimize taxes? There's no moral issue here... its simply people being rational and optimizing their net worth under the current rules.

3) Keep in mind that PAYE and IBR is pretty nuanced stuff with a lot of detail. I don't think most of the posters on this thread are familiar with the details of the program... why would they be unless they had $$$ loans. Like most things, the devil (or in this case, the benefits) are in the details. For someone who graduates college with a liberal arts or other non-marketable degree, in my opinion, Grad School + IBR/PAYE/REPAYE etc is 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 every $1.00 you earn.

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. I recently read a stat about the number of people using IBR programs.. I can't find it now, but it is shockingly high.

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.


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

charis

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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).

CommonCents

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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.

Tax liability for debt forgiveness has been in the tax code for a long while.  Why do you think it's a 50/50 chance it'll change in your favor?  As time goes on (and the govt has more issues balancing the budget) I get more skeptical of tax code changes in my favor.

ReadySetMillionaire

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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.
« Last Edit: June 29, 2015, 02:02:08 PM by ReadySetMillionaire »

KCM5

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Ultimately with that sort of debt hanging over your head it'll be a consideration in most of your life decisions.

For example, I know someone who

a) wants children
b) won't have children without getting married
c) won't get married because IBR means that payments would be calculated on their combined AGI rather than individual

It just seems so crazy. Now this person doesn't have the income potential that a lawyer has, so has fewer options. If it were me I would sign up for REPAYE, work on getting a higher paying job, and then hit those loans and pay them off in two or three years.

charis

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Ultimately with that sort of debt hanging over your head it'll be a consideration in most of your life decisions.

For example, I know someone who

a) wants children
b) won't have children without getting married
c) won't get married because IBR means that payments would be calculated on their combined AGI rather than individual

It doesn't have to be like this, and people who are putting off getting married because of the IBR probably haven't looked at the actual math for both scenarios.  I was worried about this too, b/c everyone said, you "have to" file separately, but then I realized that my IBR payment was based on an income where anything above that we want to put into tax-advantage retirement accounts anyway (for two lowly public servants).  And the payment was at least half of the standard payment.   When you are worried more about maxing your tax-advantaged accounts than the size of your IBR payment, the combined AGI issue becomes less of a concern.

Fact is, there are almost too many nuances to debate, and it comes down to one's personal circumstances. 

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

You can take $5k on SL deduction?  That's news to me.  Pretty sure $2500 is the max.

ReadySetMillionaire

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

You can take $5k on SL deduction?  That's news to me.  Pretty sure $2500 is the max.
Both my GF and I have student loans, so $2,500 each if we aren't married yet.

charis

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

You can take $5k on SL deduction?  That's news to me.  Pretty sure $2500 is the max.
Both my GF and I have student loans, so $2,500 each if we aren't married yet.

Oops, sorry, when you said combined, I thought you meant married/joint.

Field123

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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.

Tax liability for debt forgiveness has been in the tax code for a long while.  Why do you think it's a 50/50 chance it'll change in your favor?  As time goes on (and the govt has more issues balancing the budget) I get more skeptical of tax code changes in my favor.

I don't think the tax code will be amended to waive debt forgiveness as income generally but there does seem to be a push to exempt student loan forgiveness. Several bills to this effect have been introduced by congress and it was an element in Obama's budget this year.

http://askheatherjarvis.com/blog/presidents-fy-2015-budget-recommends-tax-breaks-for-students

"Targeted Tax Relief for Federal Student Loan Forgiveness Programs

The President's budget will also seek to exempt from taxation the student loan forgiveness the federal government provides to borrowers after they have made payments for 20-25 years through income-driven repayment programs.  The federal government forgives the debt of borrowers working in the public or nonprofit sectors after as few as 10 years, and this Public Service Loan Forgiveness is already exempt from taxation (but some in Congress want to change that).  However, forgiveness on outstanding debt after 20 or 25 years of repayment is not tied to employment and is taxable as income under current law.
- See more at: http://askheatherjarvis.com/blog/presidents-fy-2015-budget-recommends-tax-breaks-for-students#sthash.hDxWUiJc.dpuf"

cripzychiken

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

You can take $5k on SL deduction?  That's news to me.  Pretty sure $2500 is the max.
Both my GF and I have student loans, so $2,500 each if we aren't married yet.

If you're not married, then why would her income/deductions apply to your loans/AIG?  Once you are married, you don't get the full 5k for student loans, only $2,500 per return - regardless of single or married (it sucks, I know).  So a few small things to look at for the next few years.

Another related yet not quite said question - if you FIRE at 45, you still have 7 years of loan payments left (25 years and starting at 27) - with your AIG dropped to almost nothing, do your loan payments drop as well?   Or are you figuring SO will stay working at that point so you'll still have a decent AIG.

Once married - is it 10% of AIG for both loans (10% each, or 20% total), 10% total (5% to each) or would you just pay hers normally (and quickly) and yours thru REPAYE?  Our loans are a 160/40 split, so I'd be interested if you know this/what your plan is (currently, subject to change of course).

« Last Edit: June 29, 2015, 03:16:19 PM by cripzychiken »

Field123

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

You can take $5k on SL deduction?  That's news to me.  Pretty sure $2500 is the max.
Both my GF and I have student loans, so $2,500 each if we aren't married yet.

If you're not married, then why would her income/deductions apply to your loans/AIG?  Once you are married, you don't get the full 5k for student loans, only $2,500 per return - regardless of single or married (it sucks, I know).  So a few small things to look at for the next few years.

Another related yet not quite said question - if you FIRE at 45, you still have 7 years of loan payments left (25 years and starting at 27) - with your AIG dropped to almost nothing, do your loan payments drop as well?   Or are you figuring SO will stay working at that point so you'll still have a decent AIG.

Once married - is it 10% of AIG for both loans (10% each, or 20% total), 10% total (5% to each) or would you just pay hers normally (and quickly) and yours thru REPAYE?  Our loans are a 160/40 split, so I'd be interested if you know this/what your plan is (currently, subject to change of course).

Once he FIRE's and has an income near 0, his student loan payments will be near $0 for the following 7 years. This is why PAYE is such a great deal for mustachians.

Once married the payments are roughly 10% total based on the combined total AGI of both spouses.

Assuming both you and your wife have all federal loans you sound like a prime candidate for PAYE or REPAYE as well.

ReadySetMillionaire

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If you're not married, then why would her income/deductions apply to your loans/AIG?  Once you are married, you don't get the full 5k for student loans, only $2,500 per return - regardless of single or married (it sucks, I know).  So a few small things to look at for the next few years.

Her income doesn't matter while we are single. But because we intend to get married, it's definitely something to consider in the long term calculation.

Also, under REPAYE, once you are married, spousal income counts whether you file separately or jointly. So your spouse's income is a big factor in all this.

Another related yet not quite said question - if you FIRE at 45, you still have 7 years of loan payments left (25 years and starting at 27) - with your AIG dropped to almost nothing, do your loan payments drop as well?   Or are you figuring SO will stay working at that point so you'll still have a decent AIG.

My girlfriend recently agreed on 45 as a good mutual target retirement date. Tank gave a pretty good rundown of the benefits of REPAYE after you are FIRE.

Once married - is it 10% of AIG for both loans (10% each, or 20% total), 10% total (5% to each) or would you just pay hers normally (and quickly) and yours thru REPAYE?  Our loans are a 160/40 split, so I'd be interested if you know this/what your plan is (currently, subject to change of course).
I'm honestly not sure about this question, but I think it would be 10% total.

A huge part of me doing REPAYE is to free up my discretionary income to help my GF pay off her loans as quickly as possible (we have a 148/41 split). She has several private loans at 7.9% interest and those are a killer. By enrolling in REPAYE, I can free up almost $900 per month and, based on my calculations, we can pay off her $41,000 in loans in about 18 months.

Once she is done with those, we can then really increase our savings rate and, more importantly, it will give her a lot of career flexibility (she would really like to work part time when we have kids, and paying off her loans will greatly help her with that).

I don't know what I would do in your case if your GF's loans are all federal. But a large portion of my GF's loans are private, so they don't qualify for REPAYE and we need to get rid of them ASAP.



« Last Edit: June 29, 2015, 03:57:39 PM by ReadySetMillionaire »

arebelspy

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It seems that most (all?) of the critiques are people who are advancing some kind of moral argument. The OP knows 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.

This is clearly where you and I disagree (and a number of other people).

You may want to--if many other people disagree with you--consider why that is. 

It's worth thinking about at least, but for many of us, paying our debts we agreed to pay is important, even if we can legally get out of them.  As I said earlier in the thread, I could get out of paying the mortgage on the house I'm underwater on, legally and easily.  Yet I'll come out of pocket tens of thousands instead.

Why?  Because of the moral issue.

It's not because I'm stupid and don't know how.  It's because a measly few grand isn't worth my integrity.

But again, we differ on whether or not it's a moral issue.

Best of luck to you.
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ReadySetMillionaire

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It seems that most (all?) of the critiques are people who are advancing some kind of moral argument. The OP knows 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.

This is clearly where you and I disagree (and a number of other people).

You may want to--if many other people disagree with you--consider why that is. 

It's worth thinking about at least, but for many of us, paying our debts we agreed to pay is important, even if we can legally get out of them.  As I said earlier in the thread, I could get out of paying the mortgage on the house I'm underwater on, legally and easily.  Yet I'll come out of pocket tens of thousands instead.

Why?  Because of the moral issue.

It's not because I'm stupid and don't know how.  It's because a measly few grand isn't worth my integrity.

But again, we differ on whether or not it's a moral issue.

Best of luck to you.

But I also agreed to a loan where this was explicitly stated as a repayment option. It's literally a term of my loan documents.

I don't see how it's a moral issue at all.

Cycling Stache

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It seems that most (all?) of the critiques are people who are advancing some kind of moral argument. The OP knows 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.

This is clearly where you and I disagree (and a number of other people).

You may want to--if many other people disagree with you--consider why that is. 

It's worth thinking about at least, but for many of us, paying our debts we agreed to pay is important, even if we can legally get out of them.  As I said earlier in the thread, I could get out of paying the mortgage on the house I'm underwater on, legally and easily.  Yet I'll come out of pocket tens of thousands instead.

Why?  Because of the moral issue.

It's not because I'm stupid and don't know how.  It's because a measly few grand isn't worth my integrity.

But again, we differ on whether or not it's a moral issue.

Best of luck to you.

But I also agreed to a loan where this was explicitly stated as a repayment option. It's literally a term of my loan documents.

I don't see how it's a moral issue at all.

I don't see this as a moral issue either.  If the post left out the words "Gaming" and "to achieve FIRE at 45," this would be an unobjectionable post that would have included a reasoned discussion of whether paying down or deferring made sense, with I suspect most people encouraging OP to pay down the debt (myself included).

The issue came up because OP paired the idea with making money and retiring early.  Yes, it's taking advantage of the system, but in way the system permits.  That's how taxes work too.  The tax laws expressly permit people to structure their conduct in a way that takes advantage of the tax laws, so long as the sole purpose isn't to defeat taxes.  And things like churning credit cards or signing up for bonuses just for the bonuses are things that MMM himself has done and many posts on the blog and forum encourage as well--even though the banks most likely exact the costs from others through higher interest rates, etc.

The reason OP's plan is not a problem is because it likely won't happen.  He'll almost certainly do well with his finances and pay the debt off early.  If he really makes it 25 years without paying it off, he likely won't have ever made much money or have fallen into the trap of not saving much money over time.

To me, this is analogous to federal workers starting off by paying the minimum amounts with the intent to seek loan forgiveness after working there for so long.  If they change their mind or could pay more along the way, I doubt anyone here sees that as a real problem.  It's one of the benefits of choosing to work for the federal government.

Why do I care?  Because OP proposed something that I wouldn't do, but laid it out for meaningful discussion.  He's not a bad person or doing something immoral because he's considering his (lawful) options, even though many of us would choose differently.  I think recognizing that fact promotes a more constructive discussion and encourages people to contribute.   

Or maybe I'm just trying to get my post count past 5'O Clock Shadow!

arebelspy

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But I also agreed to a loan where this was explicitly stated as a repayment option. It's literally a term of my loan documents.

I don't see how it's a moral issue at all.

Yes, that is how people justify it.

And how people justified walking away from their underwater homes, even if they could pay for them.

What the lender can do (recourse) if I don't pay my debt is part of my mortgage document as well.  That doesn't mean--to me--not paying the loan I agreed to pay is moral, just because there is an out for me not paying it.

If the post left out the words "Gaming" and "to achieve FIRE at 45," this would be an unobjectionable post that would have included a reasoned discussion of whether paying down or deferring made sense, with I suspect most people encouraging OP to pay down the debt (myself included).

Do you think this is the first time we've seen this plan?  Feel free to do a search.  :)

All of this has been hashed out before, multiple times.
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ReadySetMillionaire

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It seems that most (all?) of the critiques are people who are advancing some kind of moral argument. The OP knows 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.

This is clearly where you and I disagree (and a number of other people).

You may want to--if many other people disagree with you--consider why that is. 

It's worth thinking about at least, but for many of us, paying our debts we agreed to pay is important, even if we can legally get out of them.  As I said earlier in the thread, I could get out of paying the mortgage on the house I'm underwater on, legally and easily.  Yet I'll come out of pocket tens of thousands instead.

Why?  Because of the moral issue.

It's not because I'm stupid and don't know how.  It's because a measly few grand isn't worth my integrity.

But again, we differ on whether or not it's a moral issue.

Best of luck to you.

But I also agreed to a loan where this was explicitly stated as a repayment option. It's literally a term of my loan documents.

I don't see how it's a moral issue at all.

I don't see this as a moral issue either.  If the post left out the words "Gaming" and "to achieve FIRE at 45," this would be an unobjectionable post that would have included a reasoned discussion of whether paying down or deferring made sense, with I suspect most people encouraging OP to pay down the debt (myself included).

The issue came up because OP paired the idea with making money and retiring early.  Yes, it's taking advantage of the system, but in way the system permits.  That's how taxes work too.  The tax laws expressly permit people to structure their conduct in a way that takes advantage of the tax laws, so long as the sole purpose isn't to defeat taxes.  And things like churning credit cards or signing up for bonuses just for the bonuses are things that MMM himself has done and many posts on the blog and forum encourage as well--even though the banks most likely exact the costs from others through higher interest rates, etc.

The reason OP's plan is not a problem is because it likely won't happen.  He'll almost certainly do well with his finances and pay the debt off early.  If he really makes it 25 years without paying it off, he likely won't have ever made much money or have fallen into the trap of not saving much money over time.

To me, this is analogous to federal workers starting off by paying the minimum amounts with the intent to seek loan forgiveness after working there for so long.  If they change their mind or could pay more along the way, I doubt anyone here sees that as a real problem.  It's one of the benefits of choosing to work for the federal government.

Why do I care?  Because OP proposed something that I wouldn't do, but laid it out for meaningful discussion.  He's not a bad person or doing something immoral because he's considering his (lawful) options, even though many of us would choose differently.  I think recognizing that fact promotes a more constructive discussion and encourages people to contribute.   

Or maybe I'm just trying to get my post count past 5'O Clock Shadow!

In retrospect, using "gaming" in my post title was really dumb and distracted a lot from the discussion.

arebelspy

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In retrospect, using "gaming" in my post title was really dumb and distracted a lot from the discussion.

Again, no.  It wouldn't "trick" us if you didn't use that word--it's not the first time we've seen this, and it won't be the last.  We'd know exactly what you meant to do, regardless of if you used the word gaming or not.  That is exactly what it is.

Whether or not the gaming is ethical is the question people differ on.  :)

Do a search.  Here's a few to get you started:
http://forum.mrmoneymustache.com/ask-a-mustachian/gaming-student-loan-forgiveness-unethical/
http://forum.mrmoneymustache.com/welcome-to-the-forum/ethical-dimensions-of-student-loan-income-based-repayment-plans/
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Field123

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But I also agreed to a loan where this was explicitly stated as a repayment option. It's literally a term of my loan documents.

I don't see how it's a moral issue at all.

Yes, that is how people justify it.

And how people justified walking away from their underwater homes, even if they could pay for them.

What the lender can do (recourse) if I don't pay my debt is part of my mortgage document as well.  That doesn't mean--to me--not paying the loan I agreed to pay is moral, just because there is an out for me not paying it.

If the post left out the words "Gaming" and "to achieve FIRE at 45," this would be an unobjectionable post that would have included a reasoned discussion of whether paying down or deferring made sense, with I suspect most people encouraging OP to pay down the debt (myself included).

Do you think this is the first time we've seen this plan?  Feel free to do a search.  :)

All of this has been hashed out before, multiple times.

PAYE and REPAYE are "repayment options". Just think about the definition of the word repayment for a moment. Under the terms of the contract the borrower is presented with a number of repayment options. They can do a 10 year repayment, 30 year, several different type of deferral programs etc etc. Income based repayment is one of those options. On the Student Loan.gov website it actually has a section where it recommends the best repayment option.

What the OP is proposing is not some kind of trick or a loophole. He is simply selecting the best repayment option that his loan provider offered him. Under the terms of this agreement repayment doesn't mean "pay back everything you borrowed plus interest". It could mean that, or it could mean "comply with the terms of the program, ie. pay 10% of your income for a period of 20-25 years". In this context, following that procedure is repayment.

And you know what else, I'd bet you that if the OP follows this program he will enrich the government more than $158,000. Between his contributions and his income tax paid (from a higher income because he is a lawyer), I feel pretty confident that the government is coming out ahead on this deal. Just because the OP is too doesn't make him immoral.

charis

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In retrospect, using "gaming" in my post title was really dumb and distracted a lot from the discussion.

Again, no.  It wouldn't "trick" us if you didn't use that word--it's not the first time we've seen this, and it won't be the last.  We'd know exactly what you meant to do, regardless of if you used the word gaming or not.  That is exactly what it is.

Whether or not the gaming is ethical is the question people differ on.

Your example of getting out of your mortgage is completely unlike the situation here, it's simply not analogous, regardless of how much you seem to dislike the governmental student loan repayment options.  Your mortgagee having "recourse" if you walk away from your loan is not equal a repayment plan established under the terms of the contract.  When someone agrees to take on a loan for school, their options for repayment are part of the contract, so it's not just "legal," it is a contractual term between the parties.   Being against student loan forgiveness as unethical, but being for FIRE and paying as little tax as possible strikes me as a wee bit hypocritical.

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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.

arebelspy

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What about the ethics of the schools who are jacking up tuition, increasing class sizes so they make more money and claiming there is a need for professionals, when there isn't one? What about the for profit schools that are opening up schools and offering these programs?

Don't go there?  I try to avoid doing business with unethical people.

I'm not sure what your point is, unless it's "they're unethical, so it's okay to be unethical as well" (i.e. two wrongs make a right?), in which case I disagree.
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