Please advise on my approach to student loan debt.

[kable357]

    Hello, and thank you for reading this. I greatly appreciate anyone who takes the time to read this and respond. I am 36 years old, single with no children. I graduated in 2009 with $48,436 in student loans. Less than a year later I had health problems and could not work for several years. The loans were in deferment and I remained in good standing, however interest did accrue. My situation and health have improved. I have been employed full time for the past three years . I have made minimum payments on the loans for those three years. Total balance as of today is about $75,000. Below is a summary of theses loans. All are federal loans being repaid under Income Based Repayment.

   Stafford Unsubsidized @ 6.8%
   Outstanding Balance......$44,457
   Accrued Interest..............$9,242

   Stafford Subsidized @ 6.8%
   Outstanding Balance......$13,246
   Accrued Interest.............$1,237

   Stafford Subsidized @ 4.23%
   Outstanding Balance......$16,772
   Accrued Interest.................$191

  My Finances

  Bring home after deductions......$2,250/month
  Savings.................................$17,000
 
  Bills
  Rent.................400
  car payment......200
  phone................50
  food.................200
  Gasoline.............80
  Auto Insurance....85
  Student loan......120
  cloths/other.......100
  total................1,235
 
  Now for the actual question, is the following a good plan? I am planning to pay off the accrued interest on all loans ($10,670) and consolidate all loans to a direct loan. Then get on the REPAYE plan. I would avoid the interest capitalization and end up with a loan of $64,330 at approximately 6% interest. It is my understanding that the rate is fixed. My lower interest rate loans have increased from 2.8 to 4.23 in the last 2 years.
  This seems to me like a good approach but it gets very confusing trying to figure out all of the variables. Such as the interest subsidy and if paying the 10k now is even a smart idea. I know it will not reduce my monthly payment. However it would greatly help to keep the balance from ballooning. The increasing balance due causes me a lot of stress even though the balance is supposed to be forgiven in 20 years. Also I am really working toward increasing my income so I can just pay this off. At the $64,330 balance I could pay it off in 10 years at $720 per month, which is not too far from possible. So that is question #1, basically what is the smartest thing to do?

Question #2. Do the 3 years of payments I have made on the IBR plan transfer to REPAYE?  Meaning I would only make payments for 17 years?

Question #3. What is your opinion on how these forgiveness programs may change going forward? What I mean is can the program be changed, say 10 years from now they extend the forgiveness term from 20 to 30 years. Maybe this is silly thinking on my part, but I honestly don't know. Is it like any other contract, and the terms can not be altered? Or is it charity and we get what we get?

I hope this is enough information, and that I have been somewhat coherent. I patiently wait for advice from people much smarter than me.

Josh

[therethere]

Why REPAYE instead of paying them off?

[nurseart]

Not a student loan expert at all.

To me your savings (I'm assuming its an emergency fund) is pretty high given how much debt you have and how low your expenses are. Beside your loans you are spending 1115 a month or $6690 every six months. Can you keep ~7k in an emergency fund and use the rest towards the loan?

How long have you been sticking to the budget below? If you have been working for 3 years and the income had been stable you would have 36.5k in savings/about half your debt would be gone.

If you took 10k from savings and started paying all extra money (2250-1115 = 1135 a month) towards the smaller 6.8 it would be gone in just a few months. Maybe you could even cut a bit from the clothes/other budget or food and be paying off 1200 a month! Yep it's hard but all your loans would be gone before your 41th bday. If you got a a side gig that made another 800 a month they would be gone in less than 3 years.

[therethere]

I must have skipped a paragraph in your explanation.

First, stop thinking about the accumulated interest separately. It doesn't really do any good. For the purposes of loans it's now principal. Where it came from doesn't particularly matter.

Personally, since you have an extra 1k a month I would plan to pay them off. It's empowering and you won't have them hanging over you for 20 more years (your 3 years doesn't count BTW). With this in mind, I personally would not consolidate them into a REPAYE loan. I would look into consolidating with a private lender (Earnest, SOFI, Credible, etc.). Do the quotes based on paying down the balance with as much as you're willing with your efund.

That being said, since you are lower income and mid-30s, REPAYE may allow you to catch up on 401k savings while keeping your payments really low or zero. This is something that may be worth investigating further and pondering on yourself. There is a website out there with a comparison spreadsheet on REPAYE v. paying it off. ReadySetMillionaire has a big detailed post in the forums from a year or two ago on his plans to utilize REPAYE allowing him to max out a 401k to keep his AGI (and  therefore payments) low. This method may be a better plan for you in particular to catchup on retirement savings. But you have to run through the math and be cognizant of the emotional side of things. You'll have 20more years of payments. A tax burden at the end of 20 years. And some people are morally opposed. 

[charis]

A) If you are truly planning on loan forgiveness at the end of 20 years (or whatever it is now), why would you make a $10K lump sum payment?  That would be crazy.

B) If you are planning to pay it off as soon as possible, then making large payments is fine of course. 

C) I would not refinance your federal loans into private loans whether you are planning to pay it down quickly or not.  If you get laid off, you will want to be on the REPAYE. 

D) Payments that you made on the IBR plan should count toward forgiveness if you switch to REPAYE, but do your research to find out for sure.  A consolidation usually restarts the clock on forgiveness so I stay away from that if you are really planning to pursue forgiveness.

[therethere]

C) I would not refinance your federal loans into private loans whether you are planning to pay it down quickly or not.  If you get laid off, you will want to be on the REPAYE. 

Okay I don't know if they qualify as "private lenders" but I meant the student loan refinance companies Sofi, Earnest, and the like. They DO have provisions for deferring loans in hardships, job loss, etc. You can also refinance again whenever if the payment is too high. Definitely don't transfer the debt to a personal loan or whatever.

[charis]

C) I would not refinance your federal loans into private loans whether you are planning to pay it down quickly or not.  If you get laid off, you will want to be on the REPAYE. 

Okay I don't know if they qualify as "private lenders" but I meant the student loan refinance companies Sofi, Earnest, and the like. They DO have provisions for deferring loans in hardships, job loss, etc. You can also refinance again whenever if the payment is too high. Definitely don't transfer the debt to a personal loan or whatever.

They are private - as in not federal.  REPAYE is income-based, so she won't need to defer even if she loses a job while on that plan.  And the OP can still pay it down quickly, but she still has the option for loan forgiveness if she decides to go that route.  I would not recommend forgoing the federal benefits on a loan of that size until she's paid it down for a while, firmly decided against forgiveness, and feels secure enough financially/job-wise to do a private refinance. 

However, I would also not recommend the loan forgiveness program if you can avoid it.  The REPAYE forgiveness term is 25 years, not 20, and you will get a substantial tax bill for the forgiven amount at the end of that time. 

[therethere]

Here's the calculator I was thinking of.... https://studentloanhero.com/calculators/student-loan-revised-pay-as-you-earn-calculator/

The big variables are your expected future income and any reductions to your income to calculate AGI. Remember there is the mathematically optimal solution and then there is a solution including your risk tolerance. Do you have any expectation to drastically increase your income?

[ReadySetMillionaire]

I got your PM (for the board's reference, OP PM'd me regarding my "Gaming REPAYE" thread, which kind of blew up here).  Good for you thinking critically about this.  @jezebel has given you tremendous advice thus far.

First, and as she already correctly opined, I would definitely not refinance because you lose your federal loan rights.

Second, I would pay off your loans. My situation is different from yours in that my debt was considerably larger.  This made the benefits of REPAYE better for me--interest forgiveness was better, forgiveness at the end was better, and I would ultimately pay less over the long term using REPAYE than if I tried paying them off.

I hope you read my entire thread, because the biggest point of my strategy is this: at worst, I would have used REPAYE as a short term hedge to increase my cash flow, increase savings at a young age, and if I ever made a ton of money, then I could pay them off with ease.  That thread includes these posts from me:

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.

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).

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.

Currently, I am still at a point where I am using REPAYE.  I've been using the program for about three years.  I've paid probably $4,500 towards my loans and they have only gone up about $9,000.  My wife and I have also saved $115,000 in retirement assets, bought a house, paid off her car, and currently have about $22,000 in cash.

However, I just started my own law office, and my income is probably going to increase this year.  If it keeps on increasing and keeps on increasing, and say there's a year where I blow up and make $300,000, I'll just pay the damn loans off and move on.



So all of this brings me to you: I don't think your situation is comparable.  You have a decent amount of cash and $75,000 in loans.  If you really do have an extra $1,000/month, then seriously go for paying these off.  If you want to save a bit, then put 75% towards loans, 25% towards savings, or whatever. But if my loans were only $75,000, I would have paid them off ASAP. 

Best of luck to you.

[kable357]

Thank you everyone for the response. Special thank you to Readysetmillionaire, I appreciate the advice. I did not include this info in the OP and really should have. I am currently not putting anything in to retirement fund, and as of now have nothing in retirement. All apologies, I wish I had stated that in the OP. My finances have been a disaster for a long time, and for the past few years I have been focused on getting credit card debt knocked out. As of now I have no CC debt. My biggest concern with paying this 75k debt off is that I will not be able to save anything for at least 8 years. Thanks again.

[kable357]

I do expect my income to increase. In 2 years I expect a 15k annual increase.