The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ReadySetMillionaire on June 27, 2015, 04:46:24 PM
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See Post #168 (page 4) for update as of 07/19/2018, or about three years into REPAYE program.
TL;DR (Only Read "The Numbers" if You Know How REPAYE Works)
$148,000 in federal student loan debt. My payments are eating almost 50% of my gross income and not allowing me to save at all.
I thus do not plan to pay off this debt and instead plan to enroll in REPAYE. This plan caps payments at 10% of AGI - discretionary income. Two key points: (1) payment is based on AGI, which means I could stuff money into tax-deferred retirement accounts to lower payments and increase my savings rate; and (2) under REPAYE, the government subsidizes 50% of unpaid interest, thus lowering my effective interest rate from 6.7% to 3.3%.
I thus do not plan to ever pay my loans back. I am going to put money away in tax-deferred retirement accounts and plan to retire at 45.
Is this a good plan, or do I have rose-colored glasses on?
Background
I graduated law school with $148,000 in student loan debt (all federal) and obtained a job earning just $47,500 per year.
I initially planned to work as hard as possible to pay off these loans, but I'm quickly starting to realize that I'm not going to even begin to be able to save for retirement for 8-9 years until after I'm done with aggressive debt repayment.
However, recent posts have shown me that there might be a better way to achieve financial independence/early retirement. And that involves strategically using Obama's new REPAYE program to lower my student loan payments, increase my savings rate, and retire early.
Traditional Repayment vs. The REPAYE Program
Again, I only make $47,500 per year as a lawyer and have $148,000 in student loans averaged at 6.743% interest. I have cut my expenses as much as possible and am able to make $1,200 monthly payments towards my loans. At that rate, it would take about 17 years and 7 months and $309,000 to pay off my loans.
Furthermore, paying off debt feels like throwing money into a black hole, has limited my financial flexibility, made things feel very tight, and made me feel like financial independence is a long, long way away.
Because of the above, I am now strongly considering using the REPAYE (the new PAYE) to pay back my loans. This will allow me to significantly reduce my student loan payments, provide more financial flexibility, begin saving for early retirement, and almost certainly pay less towards my loans (especially considering TVM) than if I were to pay them off in full.
How the REPAYE Program Works
The Obama administration recently created a new repayment option that will take place at the end of 2015 (October expected).
Pros of REPAYE
- No "partial financial hardship" required--you may always stay enrolled;
- Monthly payments are based on the following formula: AGI - 150% of poverty level, which equals your discretionary income; you then pay 10% of your monthly income;
- If your payment does not cover interest charges, the government will subsidize 50% of your accruing interest;
- All federal loan borrowers are eligible; and
- Unpaid balance is forgiven (and subject to tax) after 20 years for undergraduate students and 25 years for graduate students.
Cons of REPAYE
- Graduate students must stay in program five extra years;
- If you are married, spousal income counts towards your payment calculation whether you file jointly or separately; and
- There is no cap on monthly payment amount (i.e., it's 10% of your discretionary income, which could be more than the standard 10 year repayment amount).
In summary, I would make these minimum payments for 25 years, the remaining balance would be forgiven, then I would pay the tax liability on the forgiven debt.
Two of the pros are enormously huge in the early retirement context. First, your payment is based on adjusted gross income. That means you can stuff money in tax-deferred retirement accounts to minimize AGI and thus minimize student loan payments.
Second, if your payment does not cover interest, then the government subsidizes 50% of the accruing interest. That effectively lowers my interest rate from 6.7% to 3.3%.
The Plan
My plan is to lower my AGI as much as possible to decrease my student loan payments as much as possible, which would allow me to free up more money to invest and dramatically increase my savings rate.
Right now, for example, my gross income is $47,500. I can get that number significantly down quite easily this year by using the following investment vehicles:
- 401k contributions;
- Traditional IRA contributions;
- HSA contributions;
- Student loan interest deduction; and
- Eventually 529 plans.
Thus, I am now going to contribute $500 per month to my 401k, save the rest, and then shove in the max to my Traditional IRA at the end of the year (gives me a savings rate of about 18% for this entire year which isn't bad considering I was sending $1,200 or more towards debts for six months). Those measures, plus the student loan interest deduction ($2,500 per year), will reduce my AGI to $36,500.
That means my student loan payments next year will be $157 per month. All of those payments will apply to my student loan interest deduction (thus reducing my AGI next year), and the unpaid accruing interest will be subsidized at 50% by the government. My loan balance will thus not grow too significantly despite making such minimum payments.
Because my student loan payment will be lower, I can then reduce my AGI even more in later years, allowing me to save more and decrease payments, and the cycle continues.
The Numbers
Traditional Repayment vs. REPAYE
- Traditional: the quickest I could pay this off would be 8 years or so, which means $180,000 paid towards loans
- REPAYE Worst Case Scenario: $200,000 paid towards loans plus tax liability. But this is over 25 years, which I think is favorable to putting almost all of my money towards loans for 7-8 years
Assets at Age 45
- My Traditional IRA (Assuming 7% returns, maxed from age 27 to 45): $202,000
- GF's Traditional IRA (Assuming 7% returns, maxed from age 27 to 45): $202,000
- My 401k (Hard to Predict, but Goal is $10k/year in contributions until I get raises and can max): $650,000
- Her 401k (Again, Hard to Predict): $250,000
- Paid Off House: somewhere between $150,000-$225,000
- Brokerage Account: unknown
TOTAL: $1.3M + brokerage account
With a paid off house, we then expect to be able to live frugally off less than $60,000 per year (the 4% withdrawal rate).
Long Term Concerns
A Growing Balance: Again, even while I'm investing early on, the balance should not grow too significantly. The government is subsidizing 50% of unpaid interest, meaning that my loan (after applying payments) should only accrue about $4,000 per year while far more goes into retirement accounts. If I start making substantial enough income that REPAYE isn't worth it, then the loan won't have grown too much and I can just take care of the loan.
Joint Income: My girlfriend makes decent money ($67,500 gross per year) and we plan to get married in the near future, and she is on board with the plan. Thus, even combining our income, we can do all sorts of things to greatly reduce our combined AGI (i.e., save aggressively) and keep payments low.
Tax Liability: My biggest concern is the tax liability. If I wasn't clear on this before, after 25 years, your loans are forgiven. But if your assets exceed the forgiven debt (which would happen since I was stuffing money into accounts to lower my AGI), then the forgiven debt is taxed at year 25.
I calculate that--at worst--my forgiven debt would be around $250,000. I would do everything in my power to make sure that is taxed at the 28% rate (tax brackets are likely going to move due to inflation), meaning I would owe $70,000. But given the time value of money and the legislative pressure I expect to come towards Congress, I can't pass up this opportunity for something 25 years down the line. Nevertheless, I will come up with a way to pay the tax if it comes due.
High Income: As a young lawyer, I do expect to make more money eventually, whether that means becoming partner at my current firm or moving to a bigger firm in a nearby bigger market. But even if I started making $150,000 per year, I could either pay off the loan or get my AGI down to below $100,000 per year and my payments would be in the $650-$700 range and, more importantly, significantly increase my savings rate.
Your Thoughts?
So, with all of that said, I'd love to hear your thoughts about my plan.
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I was gonna try, but tl;dr
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If this administration can grant it, can't the next take it away?
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I was gonna try, but tl;dr
Wrote a TLDR and removed some fluff.
If this administration can grant it, can't the next take it away?
Thus far, with every change, participants have always been grandfathered in.
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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.
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You borrowed the money with the understanding that you would repay it. I would repay the loan even if that means you are not able to retire at 45 as a millionaire.
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You borrowed the money with the understanding that you would repay it. I would repay the loan even if that means you are not able to retire at 45 as a millionaire.
+1
Household income is >$100k working professional jobs, repay the loans.
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Agree with the above. I'm not American, nor have I ever had student loan debt, but I assume hat these repayment programs were designed to assist those who truly would be debilitated or have their lives ruined by the weight of a large loan hanging over their heads. They're not there to make people millionaires at 45. It's unethical to be taking advantage of this, IMO. I would pay the loans.
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I don't care if its ethical or unethical. My taxes were used to bailout huge banks who risked everything...but back to the OP. Being that you're just starting out (?) you're income will likely go up. And then you might pay it off anyway and you'll end up paying more interest, maybe. But here's my story: I paid 135K for a degree that's even less lucrative than yours.
My first job out of grad school I made 55k. I decided to pay it off within 5 years. I never made more than 55k a year during those 5 years and I was unemployed for a year and a half during that time. I paid off 125k over 5 years by paying 2k a month no matter what. Can you live some place super cheap for five years? Also can you refinance with sofi? For me it makes me nervous to have to have that burden for 25 years. That's a really long time.
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You borrowed the money with the understanding that you would repay it. I would repay the loan even if that means you are not able to retire at 45 as a millionaire.
I borrowed the money with the understanding that alternative repayment plans were an option. Put the shoe on the other foot and pretend this was mortgage debt instead of student loan debt.
Anyway, I don't want to get into the ethical debate. Hell, this entire forum and website are based upon individuals not playing by society's rules in order to achieve their own personal goals.
I guess the long story short is that I'd appreciate your critique on the math rather than the morals.
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If the programs were intended only for the poorest of the poor, they would not be included in the paperwork for every loan or advertised so heavily to the entire populace. This is one method through which the lender considers the debt to be paid.
That said, OP, with that degree and in your field, you should concentrate either on getting to a higher-paying job so you can knock this out fast, or, if you're working for less because you believe in doing good, work for a nonprofit or government agency and get on the PSLF program to get it gone, tax free, in only ten years.
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If the programs were intended only for the poorest of the poor, they would not be included in the paperwork for every loan or advertised so heavily to the entire populace. This is one method through which the lender considers the debt to be paid.
That said, OP, with that degree and in your field, you should concentrate either on getting to a higher-paying job so you can knock this out fast, or, if you're working for less because you believe in doing good, work for a nonprofit or government agency and get on the PSLF program to get it gone, tax free, in only ten years.
To your second point, I am going to try and get a higher paying job within 2-3 years. But for now, and with a higher paying job not guaranteed, the plan I described in my original post gives me more flexibility. The loans shouldn't balloon too much and I can always go back and pay them if I decide that this whole REPAYE plan isn't worth it.
In other words, at worst the REPAYE plan is a good short term strategy to begin freeing up my cash flow and saving for retirement.
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Aren't you the poster that wanted to write a blog/book about paying off high student loan debt enroute to FI?
As far as your plan, it seems mathematically possible. I agree with the other posters. I wouldn't do this, as paying my debts is important to me.
I'm about to come out of pocket tens of thousands of dollars, for example, for an underwater house I'm selling. I could stick the bank with that via various methods, but I signed the loan paperwork, and I will pay it.
Yes, I know some say it's a business decision, and that's fine. For me, ethics is a part of business decisions as well.
(Appreciate everyone expressing those opinions kindly. Personal attacks are not acceptable.)
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To me, your plan looks a lot like 25 years of indentured servitude to a government finance system.
I'd rather pay the loans off under my own steam.
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Aren't you the poster that wanted to write a blog/book about paying off high student loan debt enroute to FI?
Ha, yes indeed. But I've had some really good PM conversations with others in a similar boat and they've really made me think about my payoff strategy.
I think it's best to be open-minded and at least consider this as a plan.
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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?
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You borrowed the money with the understanding that you would repay it. I would repay the loan even if that means you are not able to retire at 45 as a millionaire.
I borrowed the money with the understanding that alternative repayment plans were an option. Put the shoe on the other foot and pretend this was mortgage debt instead of student loan debt.
Anyway, I don't want to get into the ethical debate. Hell, this entire forum and website are based upon individuals not playing by society's rules in order to achieve their own personal goals.
With a mortgage, they take your house if you don't repay. Difficult to foreclose on an education.
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Don't hate the player, hate the game. If you don't like that this ridiculous program is available, oppose the people putting it in place.
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My thoughts, 25 years is a long time. This would be my last option quite frankly, if it were me I would work for the government or non-profit, or I would accept that as a lawyer my earning potential is ginormous. My focus would be to crank up my earning asap and either pay it, or use a different kind of program where they pay your debts, again a lot can change in 25 years. Now, if the earning potential weren't there my answer may be different.
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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.
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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?
Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.
If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.
Then I guess you have already made up your mind, good luck :)
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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?
Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.
If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.
Are you certain it's based on AGI and not a modified AGI which would add back retirement contributions?
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Don't hate the player, hate the game. If you don't like that this ridiculous program is available, oppose the people putting it in place.
Who said we didn't like the program? Or hated the player or the game?
There's a difference between finding something unethical and hating people who do it.
There's lots of unethical stuff you can do to enrich yourself. This is just one. How far do you want to go?
Most of us are saying we wouldn't do this--we'd pay our debts. Us saying we'd do the ethical thing, in our minds, doesn't constitute "hating the player" of a person who does do it.
Like my house example--I'd rather work longer and pay my debts than shirk out of them, easy and legal as it would be.
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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.
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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.
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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?
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While I am not making a judgment on the OP, I would personally find this to be unethical and I would not do it.
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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.
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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?
Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.
If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.
Are you certain it's based on AGI and not a modified AGI which would add back retirement contributions?
Yes, it's AGI and not modified AGI.
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Dumb question but I thought Lawyers start out at quite a bit more than $48K/yr. Or is your salary going to eventually increase aggressively?
Other lawyers can comment on this, but my guess is 10% of graduates start in Big Law ($145k plus), about 25% get to mid and boutique firms ($75-125k), but the vast, vast, vast majority start solo or in small firms making $40-60k per year.
If my income does increase, I'd rather increase my savings rate as I described in my OP instead of pay towards my loans.
Are you certain it's based on AGI and not a modified AGI which would add back retirement contributions?
Yes, it's AGI and not modified AGI.
Thanks, I'll be sure to mention that in the letter to my representative. If your facts are correct, the problem is as much or more with the plan being offered as the borrowers gaming it. You borrowed $150k to go to law school, barring unforeseen circumstances both the lenders and the taxpayers would presume you intend to pay that back. 10% of income, who wouldn't consider taking advantage of a plan like that. Set it 20 - 40% on a sliding scale. Paying back debt should hurt. I'm not necessarily blaming you for considering the plan, but it never should have been offered in the first place.
Does this harm you credit?
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Thanks, I'll be sure to mention that in the letter to my representative. If your facts are correct, the problem is as much or more with the plan being offered as the borrowers gaming it. You borrowed $150k to go to law school, barring unforeseen circumstances both the lenders and the taxpayers would presume you intend to pay that back. 10% of income, who wouldn't consider taking advantage of a plan like that. Set it 20 - 40% on a sliding scale. Paying back debt should hurt. I'm not necessarily blaming you for considering the plan, but it never should have been offered in the first place.
Does this harm you credit?
Federal law requires that my lender only report my payments as current, no matter what payment plan I'm on (standard repayment or PAYE).
This is also important for me because PAYE lowers my debt to income ratio.
Also, I'd like to be clear that I'm just considering this as an option. I've been aggressively paying my loans since the beginning of this year and got them down from $148,000 to $143,500. But I haven't been saving anything for retirement and, more importantly, some people much smarter than I am (especially on another law school/lawyer forum) think I'm insane for not using PAYE. To them the math isn't even close--you should do PAYE if you can.
Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.
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Thanks, I'll be sure to mention that in the letter to my representative. If your facts are correct, the problem is as much or more with the plan being offered as the borrowers gaming it. You borrowed $150k to go to law school, barring unforeseen circumstances both the lenders and the taxpayers would presume you intend to pay that back. 10% of income, who wouldn't consider taking advantage of a plan like that. Set it 20 - 40% on a sliding scale. Paying back debt should hurt. I'm not necessarily blaming you for considering the plan, but it never should have been offered in the first place.
Does this harm you credit?
Federal law requires that my lender only report my payments as current, no matter what payment plan I'm on (standard repayment or PAYE).
This is also important for me because PAYE lowers my debt to income ratio.
Also, I'd like to be clear that I'm just considering this as an option. I've been aggressively paying my loans since the beginning of this year and got them down from $148,000 to $143,500. But I haven't been saving anything for retirement and, more importantly, some people much smarter than I am (especially on another law school/lawyer forum) think I'm insane for not using PAYE. To them the math isn't even close--you should do PAYE if you can.
Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.
I'm not arguing the math. I'm arguing the intelligence of offering such a plan in the first place.
Consider this, I have a good friend in his early 40's who is a partner at a small law firm in the midwest. Wife is also an attorney (she's much younger). Together, they probably make $250 (that's a guess). They have six figures of debt they are paying on. Your's get's forgiven, he is stuck with his. Effectively, he'll get to subsidize your loans through his taxes while paying on his.
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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.
This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).
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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.
This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).
This is something I'm admittedly confused about so I appreciate your input. I've been told by a lot of pretty intelligent posters (on this forum and others) that if I'm going to pay $200,000 towards my loans, it's better to do that over 25 years rather than 10. Doesn't the time value of money support stretching out my loans as long as possible?
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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.
This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).
This is something I'm admittedly confused about so I appreciate your input. I've been told by a lot of pretty intelligent posters (on this forum and others) that if I'm going to pay $200,000 towards my loans, it's better to do that over 25 years rather than 10. Doesn't the time value of money support stretching out my loans as long as possible?
It is better for you to pay the $200k over 25 years versus 10. Arguing that paying $200k over 10 years is the same as paying $200k over 25 years is the same is wrong. You are ignoring the time value of money.
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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.
This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).
This is something I'm admittedly confused about so I appreciate your input. I've been told by a lot of pretty intelligent posters (on this forum and others) that if I'm going to pay $200,000 towards my loans, it's better to do that over 25 years rather than 10. Doesn't the time value of money support stretching out my loans as long as possible?
It is better for you to pay the $200k over 25 years versus 10. Arguing that paying $200k over 10 years is the same as paying $200k over 25 years is the same is wrong. You are ignoring the time value of money.
I'm confused. In one sense you make it sound like my math is correct, but at the end you say I'm ignoring the time value of money. But it's my understanding that the time value of money is what actually supports my math. Where am I going wrong?
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Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term.
This is obviously not true. It is true only in nominal dollars, and to anyone who understands the time value of money it's just misleading (i.e. you'll only convince dumb people with this type of argument).
This is something I'm admittedly confused about so I appreciate your input. I've been told by a lot of pretty intelligent posters (on this forum and others) that if I'm going to pay $200,000 towards my loans, it's better to do that over 25 years rather than 10. Doesn't the time value of money support stretching out my loans as long as possible?
It is better for you to pay the $200k over 25 years versus 10. Arguing that paying $200k over 10 years is the same as paying $200k over 25 years is the same is wrong. You are ignoring the time value of money.
I'm confused. In one sense you make it sound like my math is correct, but at the end you say I'm ignoring the time value of money. But it's my understanding that the time value of money is what actually supports my math. Where am I going wrong?
I'm not arguing with you that it will save you money. I'll take your word on that. That's the issue I was initially addressing.
I wasn't addressing this statement -
Lastly, over the long haul, I'll pay the same amount to the government either way. The payments plus my tax liability will likely be more than $200,000, which is the exact amount Id pay if I paid this off in ten years. It just extends my repayment period, significantly freeing up cash flow over the course of the loan term."
The above ignores the time value of money. That's good for you and bad for the lender/govt.
When you make a statement that you are paying them the same amount either way (one over 10 years and one over 25), it misleads the uninformed. You are extending the loan terms by 15 years in that example. In nominal dollars you are paying them the same amount, but in reality you are paying substantially less due to the time value of money.
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Right.
Paying that same amount over a longer term helps you. If you can, go for it. I count that as paying your debts (rather than trying to not pay and get them forgiven).
But trying to convince someone that you're paying the same amount of money, so it's okay, ignores the time value, because you really aren't paying the same amount in real dollars.
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Have you considered simply extending your loan terms to 15-25 years through your lender if cash flow is the issue? It's a simple application, and the only thing you're changing is the amount of principle you are paying on the loan. It's not like a traditional loan refinance where you change the interest rate by extending the term. It also offers you the benefit to flow more cash to a loan with a higher interest rate that would otherwise be going to the minimum payment on a loan with a lower interest rate.
You could also refinance with Sofi, DRB, etc. to drop your interest rate to save on interest.
My wife and I are up to our eyelids in student loan debt. We currently send >50% of our take-home pay to debt payments each and every month. We probably could take advantage of one of these programs and decrease our loan payments (at least) five-fold. We might even be able to get John Taxpayer to pay off a good chunk of it by getting some forgiven down the road if we were to 'game' the system long enough. Having said that, a big part of the MMM philosophy to me is taking control of your financial future. We're doing that by paying back what we promised to, because we are able to.
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Right.
Paying that same amount over a longer term helps you. If you can, go for it. I count that as paying your debts (rather than trying to not pay and get them forgiven).
But trying to convince someone that you're paying the same amount of money, so it's okay, ignores the time value, because you really aren't paying the same amount in real dollars.
Okay, I see your point--you were just saying that my argument that I was paying back the same amount eventually was not true in terms of TVM. Got it.
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You repay your student loans over time regardless of what plan you are on (10 years, 20 years, etc). Are people actually trying to argue that you should repay your student loans as soon as possible to be on the ethical side of things? You don't think the exorbitant, and exponentially increased over the past two decades, cost of higher education might be part of the problem, ethically speaking? Yeah, maybe the OP shouldn't have taken out $150K in loans and maybe he should have foreseen that he would be making around 50K after graduation, which is what most lawyers make after law school (outside of NYC and other such cities). Maybe a time machine would be a better investment than his 401K, but here we are.
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This is a clever idea, and has me thinking too.
Do not plan on getting an student loan interest deduction on your taxes. In fact, expect the portion of the interest that the government pays for you to be considered income. To my amazement, I received 1098-INT statements when enrolled in direct debit for my wife's med school loans. Due to an interest rate deduction for enrolling in direct debit, the reduction was categorized as interest paid TO us, and was taxed as income. No student loan interest deduction was possible those years.
The retirement money won't be accessible without penalty until way later, but I assume you fully know that.
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This is a clever idea, and has me thinking too.
Do not plan on getting an student loan interest deduction on your taxes. In fact, expect the portion of the interest that the government pays for you to be considered income. To my amazement, I received 1098-INT statements when enrolled in direct debit for my wife's med school loans. Due to an interest rate deduction for enrolling in direct debit, the reduction was categorized as interest paid TO us, and was taxed as income. No student loan interest deduction was possible those years.
The retirement money won't be accessible without penalty until way later, but I assume you fully know that.
Really interesting point about the interest subsidies and tax liability. Can any other borrowers speak from experience about this?
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I can’t really comment on the math but as previously discussed, your income is expected to increase. I assume your girlfriend’s will also increase, meaning you could definitely find yourself with a combined household income of over 150K within the next few years. I think the bigger question is whether you feel more comfortable with the short term pain of throwing money at the debt and not seeing the decreases you would like, knowing you will be able to eliminate it in full later, or would you feel more comfortable trying to essentially hide money to keep your AGI artificially low long enough to make the plan work out for you after 20 years? That is a really really long time to play that game (psychologically speaking), especially if you have the means to just get out from under that black cloud sooner rather than later.
I started out from grad school with 97K in loans at 6.8% and making 35K/yr (yeah, ouch). 5 years later, we have a combined household income of 120K and have knocked the balance down to 43K, and expect to eliminate it completely within the next 2 years. Sure it will have taken a total of 6-7 years to pay back, and the first couple of years SUCKED watching all of that extra money essentially make no dent in the debt, but I’m so thankful that I don’t have to worry about this monstrosity for another decade. Just knowing it will be gone soon is immensely freeing. I just don't think I would have had the fortitude to stick with your plan for so long.
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I don't know much about how this works, and I share the same initial reaction that there's something unseemly about this.
BUT . . . it doesn't seem that much different to me than the numerous posts here about tweaking dividend earnings in retirement to optimize the Affordable Care Act subsidies.
I think OP's approach is a mistake because 25 years of debt to avoid paying less than $150,000 seems ridiculous to me, especially for a lawyer. My former assistant was a lawyer working as a contract paralegal and between her and her husband, they knocked off $150,000 in debt in 3 years.
That said, if OP has the numbers right, I think it's a good approach to maximize the 401(k) contributions for savings. It's good for retirement, and also gives him flexibility in case something goes south. From there, he most likely will begin to increase his income, which might kick him over to paying down the debt instead of following the 25-year plan.
OP, beware the golden handcuffs. I repeat, beware the golden handcuffs. Law is a very stressful job, and it's often a showy profession, and there is a LOT of spending by attorneys to (1) give yourself a break/reward yourself/"free up" your time, and (2) get a car, house, clothes, gadgets, etc. consistent with your "status." The concern I would have with viewing this as a 25-year plan is that law can often feel like a miserable profession--if not each day, at least many days--and 25 years will sometimes feel like a sentence. Accordingly, you may end up spending money to get you through the day/week/month, and then you're never going to make progress.
That's a worst-case scenario, but I've seen it with many lawyers I've worked with. If your plan works as you indicate, I don't think it's a bad idea, and if you stay committed to it, I think you'll pretty quickly switch over to paying down the debt. But just beware the risks.
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This is a clever idea, and has me thinking too.
Do not plan on getting an student loan interest deduction on your taxes. In fact, expect the portion of the interest that the government pays for you to be considered income. To my amazement, I received 1098-INT statements when enrolled in direct debit for my wife's med school loans. Due to an interest rate deduction for enrolling in direct debit, the reduction was categorized as interest paid TO us, and was taxed as income. No student loan interest deduction was possible those years.
The retirement money won't be accessible without penalty until way later, but I assume you fully know that.
Really interesting point about the interest subsidies and tax liability. Can any other borrowers speak from experience about this?
Hasn't happened to me, though I've gotten a small interest rate cut for paying through direct debit for several years now. Maybe the lender? MY loan's direct from the Dept. Of Ed.
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Are people actually trying to argue that you should repay your student loans as soon as possible to be on the ethical side of things?
No. No one has said that. Have you read the thread?
It's about not repaying your loans in order to get them forgiven as you retire a millionaire right when they are. Choosing not to repay, even though you can afford it. That's the part that some see as ethical, some see as okay because it's legal.
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Great posts Cycling Stache and Little Brown Dog.
You guys are very correct that this has a lot to do with psychology. In fact, I think the decision is 75% psychological and 25% financial. Would I be willing to do this for 25 years? I honestly don't know.
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How old are you now?
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How old are you now?
Girlfriend and I are each 27. I also forgot to add that she has $42,000 in student loans of her own.
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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.
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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.
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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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Can you get the subsidized interest while paying at a higher rate? That would get the monkey off your back fastest.
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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.
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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.
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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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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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?
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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.
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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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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."
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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.
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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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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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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.
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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. :)
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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
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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).
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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.
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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.
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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.
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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.
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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.
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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.
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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"
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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).
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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.
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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.
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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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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.
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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!
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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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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.
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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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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.
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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.
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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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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.
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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.
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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.
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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.
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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.
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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.
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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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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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/ (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.
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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.
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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.
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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).
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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.
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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.
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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.
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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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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.
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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.
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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
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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.
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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?
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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.
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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 :)
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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.
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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)...
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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
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...
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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.
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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."
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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. :)
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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..
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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.
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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
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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.
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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.
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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".
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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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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?
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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.
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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...
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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.
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So much here to digest, but wanted to bump this for later reading.
NDQ
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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.
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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/
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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.