Author Topic: Would you keep Student Loans or Life Savings?  (Read 1323 times)

tenzo

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Would you keep Student Loans or Life Savings?
« on: September 14, 2018, 09:14:43 AM »
Dear Mustachians,

I'd like your help and advice. I have a dilemma and I'd like an outsider's perspective. 

I'm 41 y/o, carry $83,000 in consolidated student loans (4.65% interest) and have $146,000 saved between my IRA/Roth.

The loans are currently in an Income-based repayment plan. I currently pay $0 per month because I earn so little. I don't want to earn at poverty for 20 years just to have the debt monkey off my back. However, if I start earning more the payments jack up to $700/month, which I can't afford. Right now, I also have time to devote to my life passion and goal: writing, directing and making films. I'm committed to this dream like most of you are to FI/RE.

UPDATED w Financial Snapshot
Rent: $995 for a bedroom in a shared flat in Los Angeles
4 Months Avg Income $2871.25
Emergency Fund: $2600

No car.
No pets.
No assets.
Yes frugal.

I'm curious to get your Badass advice on this question: does it make sense to liquidate my savings, wipe out the student loans, and start building my savings all over again?

The alternatives, ranked by pragmatic likelihood, are: (a) give up my life and passion as a writer, actor and director to work in corporate hell to pay back the loans, or (b) earn less than $20,000 for 20 years therefore the government discharges my loan in 20 years and I won't have to pay on the loan for that time.

You may have a creative solution to my situation I've not thought of yet. I'm open to hearing them.

Thank you mes badass amis!
- Gordi Knott

PS. I enjoy working as a writer, actor and director so I'm not looking to FIRE myself from my passion.

« Last Edit: September 14, 2018, 03:01:33 PM by tenzo »

Nick_Miller

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Re: Would you keep Student Loans or Life Savings?
« Reply #1 on: September 14, 2018, 02:10:31 PM »
Hey Gordi!

Fellow writer/creative here! I'm also in my 40s, and I also still have sizable student loan debt (around $48K, at a similar rate), so we're coming from similar places.

Personally, I would not liquidate my investments to pay off debt. Giving up the standard market return of 10-11% to pay down under 5% doesn't make sense to me, and plus you're likely looking at taxes/penalties on your withdraws.

I get that it would be awesome to see ZERO in your debts column, I totally get that. If you want to focus on paying down your loan for a few years, and to save less, I think people will argue about that, but it's a middle ground type of call. But that's different than going backwards in savings.

The big unknown here is, what do you earn? Any other debts or assets? You might want to do a full case summary for folks to give you more input.
 

reeshau

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Re: Would you keep Student Loans or Life Savings?
« Reply #2 on: September 14, 2018, 02:30:08 PM »
I agree that you need a more complete case study to get advice on what to do--notably, income and income prospects.  I would not liquidate retirement savings to pay off the debt.  Assuming your Roth is not 100% contributions, you will pay hefty penalties to do so.  If it was savings or a taxable account, I would pay it off in a heartbeat.  Just the fact you are considering hanging onto this for 20 years tells me it weighs on you.  Mathematically it can work out better to invest the difference, but there is a psychological cost to hanging on to the debt that long.

ixtap

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Re: Would you keep Student Loans or Life Savings?
« Reply #3 on: September 14, 2018, 02:41:14 PM »
I would continue to follow the order of investments, which means that not only should you not draw down your tax sheltered savings, but you should have a substantial emergency fund, and only then start putting extra towards your loans.

Why are you considering either giving up income or maximizing income rather than continuing to pay? Are you on an income based repayment plan? Have you considered going into public service, such as teaching, or using your creative skills for a non profit?

tenzo

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Re: Would you keep Student Loans or Life Savings?
« Reply #4 on: September 14, 2018, 02:57:38 PM »
Thanks for your thoughts and questions. I updated the original with more information.

IXTAP
My monthly student loan payments (IBR) are at $0. If I keep that up for 20 years, my loans discharge 100% but I will have to pay capital gains on that value. If I earn more now, my payments balloon to $700 or more per month.

I don't fancy locking myself full-time into any organization for 10 years. Plus, there's an increasing chance the government could decide that specific non-prof I work for is not eligible. (https://www.cnbc.com/2018/06/25/education-department-is-failing-to-provide-public-service-loan-forgive.html

Bottom line question: what cost will I pay for freedom from debt and indentured servitude?

« Last Edit: September 14, 2018, 03:10:45 PM by tenzo »

patchyfacialhair

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Re: Would you keep Student Loans or Life Savings?
« Reply #5 on: September 14, 2018, 03:26:42 PM »
How is is that your loans go from 0 to 700 if you "start earning more"

I'm not a student loan expert, but wouldn't an income based program have some sort of sliding scale to where unless you're making far, far more than you're currently making, the payments would be limited to X% of your income?

tenzo

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Re: Would you keep Student Loans or Life Savings?
« Reply #6 on: September 14, 2018, 04:47:05 PM »
How is is that your loans go from 0 to 700 if you "start earning more"

I'm not a student loan expert, but wouldn't an income based program have some sort of sliding scale to where unless you're making far, far more than you're currently making, the payments would be limited to X% of your income?

Great question. It's because I'm in an IBR that isn't based on a percentage of what I earn. The Keeper of My Loan sent me a snapshot of payments that read my payments balloon to $784 if I move out of my current status. Ah, the benefits of graduation.

However helpful your question is, would you also have a thought to contribute to my initial question?

ixtap

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Re: Would you keep Student Loans or Life Savings?
« Reply #7 on: September 14, 2018, 05:19:44 PM »
How is is that your loans go from 0 to 700 if you "start earning more"

I'm not a student loan expert, but wouldn't an income based program have some sort of sliding scale to where unless you're making far, far more than you're currently making, the payments would be limited to X% of your income?

Great question. It's because I'm in an IBR that isn't based on a percentage of what I earn. The Keeper of My Loan sent me a snapshot of payments that read my payments balloon to $784 if I move out of my current status. Ah, the benefits of graduation.

However helpful your question is, would you also have a thought to contribute to my initial question?
.

Are you currently in forebearance?

Have you looked into refinancing into an actual IBR? (I have no idea if you even can refinance while in forebearance). You need to double check with your servicer. The absolute highest IBR plan is 20% of income, so $780 would be making  about $50k, more than twice the $20k you mentioned earlier. Most IBR plans are capped at 10% of income.

I didn't even do IBR and my payments were less than half of $780, for a loan amount of ~$70k. There is no way your extra $13k should double the payments...unless you have private loans with a much shorter repayment period, in which case you may not have access to IBR, either.

patchyfacialhair

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Re: Would you keep Student Loans or Life Savings?
« Reply #8 on: September 14, 2018, 09:49:11 PM »
How is is that your loans go from 0 to 700 if you "start earning more"

I'm not a student loan expert, but wouldn't an income based program have some sort of sliding scale to where unless you're making far, far more than you're currently making, the payments would be limited to X% of your income?

Great question. It's because I'm in an IBR that isn't based on a percentage of what I earn. The Keeper of My Loan sent me a snapshot of payments that read my payments balloon to $784 if I move out of my current status. Ah, the benefits of graduation.

However helpful your question is, would you also have a thought to contribute to my initial question?
.

Are you currently in forebearance?

Have you looked into refinancing into an actual IBR? (I have no idea if you even can refinance while in forebearance). You need to double check with your servicer. The absolute highest IBR plan is 20% of income, so $780 would be making  about $50k, more than twice the $20k you mentioned earlier. Most IBR plans are capped at 10% of income.

I didn't even do IBR and my payments were less than half of $780, for a loan amount of ~$70k. There is no way your extra $13k should double the payments...unless you have private loans with a much shorter repayment period, in which case you may not have access to IBR, either.

Yup. This info is pretty crucial for folks to make good suggestions. Types and amounts of loans can impact repayment options

cripes7

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Re: Would you keep Student Loans or Life Savings?
« Reply #9 on: September 16, 2018, 08:40:04 AM »
Beyond the financial aspect, what is it doing to you psychologically to carry this debt until your 60s, worried about earning more than a minimal income? What opportunities will you forego for 20 years, in order to avoid increasing your income? Then what happens when the loans are forgiven, but you have minimal savings without the ability to earn big money because you're 60 and need money to support you through 80+. That would create more stress for me than finding a job, where you can pursue your passions on the side.

ItsALongStory

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Re: Would you keep Student Loans or Life Savings?
« Reply #10 on: September 16, 2018, 09:30:00 PM »
You seem to indicate that you are voluntarily giving up (much) higher pay so you wouldn't have to pay the student loans. A college education is valued by most for it's earning potential in the future, are you not taking advantage of that benefit in this scenario?

Not saying you should but I would feel a personal obligation to make sure I monetize what I spent so much time, money and effort on. You refer to it as corporate hell so it's likely that your education isn't in a field that aligns with your current creative goals.

Do these creative goals currently take up a lot of your time? Why not get a side hustle and use that income to pay off your loans? This way it's clearly a temporary situation until the loans are paid off and you can still progress with the creative goals.

Samuel

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Re: Would you keep Student Loans or Life Savings?
« Reply #11 on: September 17, 2018, 03:57:47 PM »
By paying nothing the loans are just going to keep growing. $83,000 at 4.56% is right around $200,000 in 20 years, so it'll cost you $40,000 or so in taxes in the best case scenario of loan forgiveness. Personally, I couldn't ignore that ticking time bomb for 20 years of poverty level living on the hope that the loans would be forgiven. THAT would be more hellish than 2-3 years in a corporate job to zero out the loan before embarking on the film making dream.

moonpalace

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Re: Would you keep Student Loans or Life Savings?
« Reply #12 on: September 20, 2018, 11:01:02 AM »
By paying nothing the loans are just going to keep growing. $83,000 at 4.56% is right around $200,000 in 20 years, so it'll cost you $40,000 or so in taxes in the best case scenario of loan forgiveness. Personally, I couldn't ignore that ticking time bomb for 20 years of poverty level living on the hope that the loans would be forgiven. THAT would be more hellish than 2-3 years in a corporate job to zero out the loan before embarking on the film making dream.

^^^^
YES to what @Samuel , @ItsALongStory , and @cripes7 said. Don't just let it ride.

The *best case* scenario if you keep $0/month IBR payments going for 20 years is that you have to pay a huge capital gains bill in 20 years. And I would think that you would feel at least some stress under that scenario as you (1) continue to earn very little money and live in a shared studio apartment; and (2) watch the balance of your loan balloon to $200k while you worry about....

....the *worst case* scenario which is that you let the balance grow for 20 years, continue to earn very little money and then some politician pulls the rug out from under you by eliminating either the forgiveness program, IBR more generally, or both, and you suddenly have an unforgiven loan balance of $200k and a nondischargeable loan payment that's 100% of your take-home pay.

At a minimum, pay an amount that makes the principal go down every month. Better yet, find a job that's somewhere in between what you do now and "corporate hell" and pay the loans down. The (a) and (b) in your OP are a false dichotomy - there's a huge spectrum of happy, remunerative options in the middle.

The statement that "if my income goes up the payment will go up to $700/month, which I can't afford" is defeatist and I would really encourage you to try to flip your attitude on it. $700 per month is not that big a deal if you're truly frugal and you have some marketable skills. If you currently earn $2870/month on average, your rent is $1k, and you're single with no kids, there's no reason you couldn't pay a good chunk of that monthly amount already.

The investment order post is about deciding whether to pay *extra* on loans to pay them off early, not about making the decision to pay $0/month on loans and let the balance grow for decades.