Author Topic: Pay off student loan debt or save for future??  (Read 2223 times)

Cmdm

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Pay off student loan debt or save for future??
« on: July 21, 2019, 03:55:41 PM »
My wife and I (35 and 38 with 8month old) make about 7200 net. She works for the school district and has approx $65,000 in student loan debt. With the loan forgiveness program becoming exceedingly difficult to qualify for, and possibly becoming defunct we are torn whether we should tackle that or continue trying to save for ourselves and child's future. At this point with child care, mortgage, car payment we are putting what’s left, $200/month towards child’s college and $6000 annually towards our retirement/investment accounts, and paying the bare minimum on the student loan ($306/month) in hopes it might get forgiven. At that rate the balance is just going up every single month with the potential of tripling by the time we are in our 80s. We bought a home two years ago that we pay a little extra on to have it paid off in 20. We also bought a rental property last year  which rents for just $250 over the mortgage and put that extra towards the mortgage to have paid off right around the time our child goes to college in hopes to use the rent to help pay for college. We want to have one more child so we need to save for two kiddos college. My question is am I putting too much effort into saving for us and putting every extra penny towards making it possible to send our children to college debt free when I should be tackling that student loan debt?  Should we be putting the extra $450 going towards our mortgages to her debt instead each month? Would it be crazy to just pay the debt off with money from our brokerage and never have to think about it again? We started our family/careers a little late in life so we don’t plan to retire anytime too soon. I worry there is no right answer given the uncertainty with loan forgiveness but any insight would be appreciated.

Our details
7,200 net income
Brokerage/retirement $600,000
Home loan balance $216k
Rental loan balance $120k
5-8k in checking/savings
Current student loan debt $65,000
No other debts

roomtempmayo

  • Handlebar Stache
  • *****
  • Posts: 1142
Re: Pay off student loan debt or save for future??
« Reply #1 on: July 21, 2019, 05:43:27 PM »
How long has your wife been working for the school district and been in a qualifying income-based plan for PSLF?  How many payments does she have remaining for qualification?

FireAnt

  • Bristles
  • ***
  • Posts: 334
  • Age: 39
  • Location: Michigan
Re: Pay off student loan debt or save for future??
« Reply #2 on: July 21, 2019, 06:20:01 PM »
It's not increasingly difficult to get PSLF-- it is just currently. A higher percentage should be accepted as the years continue. The first applicants that were eligible was not until late 2017 (program began in 2007). At that time the terms were ambiguous and lots of misinformation was shared. They did not have forms created yet for employer certifications among other issues. As things have become more clear over the years, there should be more eligible applicants.

Ditto to what Caleb's questions--- that makes a big difference. I started with $70k, and still have that amount 9 years later. I only have 6 months left though. It's important that your wife is following the program closely including submitting her employer verification forms so she knows they are being tracked and accepted by the Dept of Ed. Any legislation that talks about repealing PSLF has grandfathered in those already working towards the program. I also read in a PSLF Facebook group I'm in that it's actually in our contract that they need to abide by.

Cmdm

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Pay off student loan debt or save for future??
« Reply #3 on: July 21, 2019, 08:30:03 PM »
She has about a year under her belt. We keep hearing stories of people getting the run around and being denied. I will have her read all the rules again  and ensure she is following it to the T.

remizidae

  • Bristles
  • ***
  • Posts: 289
Re: Pay off student loan debt or save for future??
« Reply #4 on: July 21, 2019, 10:54:26 PM »
Does your wife like her job enough to stay there (or in a similar PSLF-eligibld job) for nine years? It’s hard to decide that far in advance, but that’s what you two should be thinking about.

mcraw25

  • 5 O'Clock Shadow
  • *
  • Posts: 18
Re: Pay off student loan debt or save for future??
« Reply #5 on: July 22, 2019, 01:02:15 AM »
Hi,
Out of college I locked myself into a 10 year job contract. 4 or 5 years in I started disliking it. That was a terrible feeling. Working to run out a clock was NOT fun. I am very happy that is in the past. Freedom is valuable. 

9 years is a very long time. I would pay it off today, especially since you can easily afford to. Being free creates certainty for your family. It enables your wife to choose where to work, possibly for more money. You get to control your lives, not some bank or public school district. 

My 2 cents. Good luck!




roomtempmayo

  • Handlebar Stache
  • *****
  • Posts: 1142
Re: Pay off student loan debt or save for future??
« Reply #6 on: July 22, 2019, 07:14:03 AM »
Upsides to just paying it off as quickly as possible:
- Greater employment freedom.  Once you're 5+ years toward PSLF, it's going to be tough to abandon it for other opportunities.
- Greater psychological security from having less debt.  This varies by person.
- Lower debt to income ratio and greater creditworthiness.
- No danger that the government is going to somehow pull a bait-and-switch or otherwise refuse to follow through at the last minute.

Reasons for sticking with PSLF:
- Math.  Making 120 payments of $306 means you only pay $36,720 total.  Even if you pay the full amount in three years, PSLF results in about a 50% savings.  Putting that 50% savings in a 529 now would fund your child's education fully at a public university.
- Most of the objections above are unlikely to materialize. 
  • Once a teacher, it's unlikely that your wife is going to leave PSLF-eligible employment altogether, even if she leaves teaching. 
  • You already own a home and a rental, so you probably don't want to leverage yourself with further debt in the short run. 
  • And as mentioned above, the bait-and-switch is pretty unlikely.
    PSLF terms are in the master promissory note of the consolidation loan, so they should be an enforceable part of the loan contract.  Nobody has proposed revoking PSLF for people already in the pipeline.  Yes, Fedloan is incompetent, but I haven't read any stories of people meeting all the requirements to the letter with documentation and simply being told "no."

I think it comes down to weighing the savings and perceived risk against greater freedom and less perceived risk.

Peachtea

  • Bristles
  • ***
  • Posts: 289
Re: Pay off student loan debt or save for future??
« Reply #7 on: July 22, 2019, 07:23:04 AM »
What’s the interest rate on those loans? Are all 65k federal “direct” loans eligible forgiveness. Note that there are various types of direct loans, as long as Direct is somewhere in the long version of the loan name they’re eligible.

65k and only 1 year in is right at edge in terms of you might actually, depending on anticipated salary increases and interest, pay more with PSLF over 10 years than you would paying off the loans early. Is your wife on a payscale? That should make calculations easier. Do you know what average salary is in your industry for x years? Salary matters because your payments go up on PSLF as your salary increases. If she has a low interest rate where you be told to pay the minimum and invest anyways, since return on investment would be more than saving interest, then she needs to look at how much PSLF saves her over the course of 10 years.

Plug numbers into the federal payment estimator to understand how much she would pay in the three scenarios (payoff ASAP, payoff standard plan 10 years, payoff with PSLF). I wouldn’t go with dept of Ed’s top end or overall estimates b/c it plugs in standard assumptions about salary increases that might not be true, especially for public sector. It’s best to calculate payment each of ten years using your own best salary estimates. https://studentloans.gov/myDirectLoan/repaymentEstimator

Also, loan forgiveness is easier now, not harder, because the rules are very clear and you just need to make sure you guys understand them and follow them. Double check the type of loans she has are eligible, double check the payment plan she’s on is eligible (hint if she’s not on a plan that requires yearly income certification she’s not on a eligible plan), make sure she sends in annual employment certs to track her credits towards forgiveness. I feel bad for those who started the program 2008-11ish when Dept of Ed didn’t even have all the rules down. Your wife doesn’t fall in that camp, so apply some due diligence and she’ll be fine.

WheresMyMule

  • 5 O'Clock Shadow
  • *
  • Posts: 19
  • Location: NJ
Re: Pay off student loan debt or save for future??
« Reply #8 on: July 22, 2019, 11:26:14 AM »
At a minimum, I'd pay enough to cover the interest accruing.  You don't want those balances increasing and then something go sideways with the PSLF plan.

I'd also keep the $250 in rental profit in a separate account for rental maintenance and/or vacancies, rather than paying down the mortgage.

Please tell us your car loan is 0%?

charis

  • Magnum Stache
  • ******
  • Posts: 3162
Re: Pay off student loan debt or save for future??
« Reply #9 on: July 22, 2019, 11:52:27 AM »
Does your wife like her job enough to stay there (or in a similar PSLF-eligibld job) for nine years? It’s hard to decide that far in advance, but that’s what you two should be thinking about.

To this point, if the OP's wife is a school teacher or administrator, it would be difficult to find a job in the education field that is not eligible for PSLF.  So it's a bit less of a concern than other types of employment.  That being said, apparently teachers are leaving the field in droves due to high levels of job dissatisfaction, so it's still a concern nonetheless.

At a minimum, I'd pay enough to cover the interest accruing.  You don't want those balances increasing and then something go sideways with the PSLF plan.

I don't necessarily agree with this.  People have been saying that the PSLF will "go sideways" for the last decade.  It hasn't gone anywhere and likely won't for current participants.  I say either go for it (don't pay an extra dime) or don't (pay it off).  If you go for it, max all available tax-advantage accounts (403b, 457, 401K, HSA, IRAs) to the extent possible, to keep your monthly IB-payments low and certify your employment every year or every 6 months. 

Cmdm

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Pay off student loan debt or save for future??
« Reply #10 on: July 22, 2019, 04:23:36 PM »
Thank you all for the input. She is a speech therapist and loves the freedom of summers off especially now that we are starting a family so I doubt she will leave the public system. I am fairly certain 61k are direct loans and eligible for PSLF and range from 3.15%-6.5%. They are as follows:

Direct subsidized Stanford for $5414.00 @3.15%
Direct unsubsidized Stanford for $8637.00 @ 6.55%
Direct unsubsidized Stanford For $24,544.00 @ 5.96%
Direct unsubsidized Stanford For $23,003.00 at 5.59%
And the last is “nelnet” for $4647.00 @ 4.5%

Wheresmymule, the car loan is 1.9% and only 10K so it’s not on our radar as even a debt though it technically is. I’ve learned a from reading Mr. MM’s blogs and don’t plan on taking out loans down the road, but for now I’m just going to suck up the car loan as a lesson learned.

Re the rental we actually put $200 towards the mortgage and $50 in a safety net. Where we are housing is extremely tight so I’m not too concerned about a vacancy but do agree a safety net is important for incidentals.

Peachtea

  • Bristles
  • ***
  • Posts: 289
Re: Pay off student loan debt or save for future??
« Reply #11 on: July 22, 2019, 08:15:30 PM »
I would double check which payment plan she is on. I plugged her numbers and my estimates of your AGI based on info provided re net income in the student loan payment estimator and the only option around $300/month is the extended graduated payment plan. That’s a 25 year plan and not eligible for loan forgiveness. Even plugging in your net income as AGI (which should be way low) the lowest income driven plan was $450 a month. Now the estimator is not always precise...my numbers result in an estimated payment about $50 more than my actual one...but still a $150 difference is a red flag to at least confirm the plan. At your joint income, or at least my estimates of it (your joint AGI would be helpful info) it looks like an income driven plan is only briefly a few dollars less than the standard plan at the start and then matches the standard plan ($675/month). Essentially making PSLF and all its hoops meaningless.

If that really is the case, that your PAYE or REPAYE payment is about the same as the standard plan payment, then your question isn’t should she do loan forgiveness but should we pay off loans ASAP or on the 10 year standard plan. (If you’re on extended graduated plan I’d get out of that right quick, because it will take forever and cost much more.) I’d probably just pay them off in one swoop, because you’ll want to get rid of 5+% loans and then why bother making payments for 10 years on less than 10k in loans for the rest. That’s just a nuisance not worth it (at least to me...).

You might want to do a full case study with all your expenses, because you have a decent income, fairly low housing costs, but not that much surplus or annual retirement contributions. I’m sure child care is a big driver, but you might be surprised the different ways you can cut line items without sacrificing hapiness.

charis

  • Magnum Stache
  • ******
  • Posts: 3162
Re: Pay off student loan debt or save for future??
« Reply #12 on: July 23, 2019, 09:22:03 AM »
Peachtree - I have very similar stats as the OP with a monthly repaye of only $250 (probably due to an extra kid and spouse with 10K in fed loans), standard would be somewhere around $700.  So it doesn't sound off to me, but I agree that a full financial picture is needed.

Cmdm

  • 5 O'Clock Shadow
  • *
  • Posts: 16
Re: Pay off student loan debt or save for future??
« Reply #13 on: July 23, 2019, 11:26:21 AM »
Peachtee, I think the reason for the lower amount of $306 is because she still hasn’t worked a full year full-time  due to leaves. Her first year was cut short due to a difficult pregnancy/illness. Last year she had maternity leave. So her annual salaries have been quite low which I think made the income based payment significantly lower. I also recently got a raise so we suspect now that she will be going back full-time and it will be based on our current 7200 net it will be going up a bit. I guess once we figure out what the new payment will be now that she’ll be full time we can re-calculate to determine how much we will realistically  pay Over the next ten years. And yes, we have been working hard since having the baby to figure out ways to cut back while still living an enjoyable life. It’s a process but we are definitely making steps in the right direction. Thank you for your help.

FireAnt

  • Bristles
  • ***
  • Posts: 334
  • Age: 39
  • Location: Michigan
Re: Pay off student loan debt or save for future??
« Reply #14 on: July 23, 2019, 01:54:35 PM »
Peachtee, I think the reason for the lower amount of $306 is because she still hasn’t worked a full year full-time  due to leaves. Her first year was cut short due to a difficult pregnancy/illness. Last year she had maternity leave. So her annual salaries have been quite low which I think made the income based payment significantly lower. I also recently got a raise so we suspect now that she will be going back full-time and it will be based on our current 7200 net it will be going up a bit. I guess once we figure out what the new payment will be now that she’ll be full time we can re-calculate to determine how much we will realistically  pay Over the next ten years. And yes, we have been working hard since having the baby to figure out ways to cut back while still living an enjoyable life. It’s a process but we are definitely making steps in the right direction. Thank you for your help.

This is a helpful tool to compare payments: https://studentloans.gov/myDirectLoan/repaymentEstimator.action?_ga=2.2977456.1826454484.1563809617-399929696.1563809617

Also, if needed, you can change the repayment plan or tax filing status to benefit you. I had done married filing jointly, but after we tackled my husband's student loans and him receiving a raise, I began filing married filing separately. This is allowable under the IBR plan, but not some others like REPAYE. With REPAYE, I believe it's 10% or 15% of your income and you can never become ineligible, although you cannot file married filing separately. There's a lot of nuances about each one, but if you do the research, it will clearly outline these things. The payment estimator seems to be very helpful and puts in the numbers in if logged into your account.

Peachtea

  • Bristles
  • ***
  • Posts: 289
Re: Pay off student loan debt or save for future??
« Reply #15 on: July 30, 2019, 09:05:53 PM »
Charis, yes the extra kid probably reduces you $50 a month and the spouse SL depends on the plan but definitely reduces you filing jointly because the 10% discretionary income payment is split between you and the spouses bill. You’d have to add both your payments together to see what an IDR plan payment for one person with that joint income/family size would be.

Cmdm, yes her not having payment based on real annual salary makes a lot of sense of why it’s so much lower than the estimator. Another thing that lowers payments is contributing more to traditional 401k or Ira. I save over 4K a year in payments by DH and I each maxing the 401k and the family HSA. (You just times the amount put in 401k/Ira/HSA by 10% to figure out what you’d save.)