Author Topic: Student Loans / Housing / Kids / Los Angeles  (Read 5344 times)

economista

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Re: Student Loans / Housing / Kids / Los Angeles
« Reply #50 on: June 10, 2019, 07:38:52 AM »
At tax time I would run the numbers before filing separately. That was my plan too but when I ran our taxes both ways the tax savings by filing jointly outweighed the higher loan payments, even ignoring the IRA rules that come into play. In our case that might just be because the loans are all mine and I make 2x what my husband makes, but itís still something to look at.

uneven_cyclist

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Re: Student Loans / Housing / Kids / Los Angeles
« Reply #51 on: June 15, 2019, 12:07:13 AM »
OP I feel like you donít really understand loan forgiveness b/c your response doesnít really make sense. Maybe Iím wrong due to lack of details and filling in with assumptions, but Iím going to give you a detailed explanation and hopefully itís helpful in making an informed choice.

Iím specifically talking about PSLF and your wife would be eligible if she works for a public school, has all federal direct loans or consolidates her federal loans to federal direct loans, and applies for an income based repayment plan. If she is on an income based repayment plan, the payments are less than the normal 10 year amount. Since the balance is forgiven with no tax consequences, this means you pay less in that 10 year period and can put that money elsewhere like retirement accounts or say extra rent for a larger place when you have a kid.

I can give more specific info if you provide more details.How long has your wife worked at a public school? Are all her loans direct federal loans (word direct is somewhere in title of the loan)? When did she occur the loans, pre or post 2007, before or after she started working for a public school? What payment plan is she on?

For example, if you consolidate using Sofi or another private company, you lose the federal benefits. If you get a 5% interest rate for 115k and 10 repayment schedule, thatís $1220 a month in payments. With a federal repayment plan like REPAYE, based on your income and assuming no retirement contributions that would be a $872 a month. But PSLF also encourages you to save for retirement (traditional accounts only, Roth doesnít count) by reducing your payment the more you put in a 401k or IRA since itís based on your AGI. So if you max two 401ks (38k a year combined), your monthly payment drops to $555 a month. Add a kid and it drops to $500 a month. If your income goes up, so does your payments, but if your wife has access to a 403b she can stash even more in retirement to keep payments down. Hereís the repayment calculator to estimate based on various incomes etc:

https://studentloans.gov/myDirectLoan/repaymentEstimator.action?_ga=2.16679477.2046159223.1557190475-832702481.1556456894#

At your income, PSLF + maxing 401ks would both let you save for retirement now and be rid of the loans in 10 years (if you have to start from scratch). I estimate maxing 401ks would save you $9650 in federal and state taxes a year, plus it lowers her payments $7,980 a year. Essentially itís like getting 38k in savings for only $20,370, which is only about 15% of your income and IMO the minimum you should be putting towards retirement.

Also for rent vs buy, check out the nytimes calculator which takes all the variables into account compared to just a mortgage calculator.

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Progress update:
*We have submitted our application to refinance under the PAYE program. This will be at roughly a 7% interest rate and will require 120 qualifying payments over the course of 10 years.
*We are working on getting her paperwork filled out to max out her 403(b) plan at work in order to pull down her AGI by 19K/year and to lower her monthly payment. I made the mistake of filing a joint tax return when I did our taxes this year, so that will unfortunately boost our monthly student loan payment to something like $700/month for the year, but it should go down to $500/month or less for next year.
*We'll plan to file separately rather than jointly on next year's tax return, because it looked like this really brought down the monthly payments a lot on the Federal Student Aid website's online calculator.
*I'll continue to see what I can do about finding more income and maybe a 401(k)...that's an ongoing effort.
*I might begin making traditional (rather than Roth) retirement contributions. I am not sure if it would make a significant difference for me to pull my AGI down by $6000 (personal IRA max annual contribution) if we were filing separately. I'll have to get back on the website to confirm, but I believe that it did help.

Other news:
*I called the insurance company and took myself off of her car insurance policy, so that will bring our monthly expenses down by a bit. I very rarely drive anyway, so it made little sense to pay hundreds a year for that luxury.
*I'll continue to investigate home ownership and electric cars and rentals and so on.

Thank you all for your time and advice.  We are on a much better course at this point.

Thatís great that your getting started on handling the loans AND saving for retirement! Must feel good! A short cut for estimating how much traditional contributions will save on the loans is to times it by 10%, since PAYE is 10% of discretionary income. So 6k in a tIRA should lower the payments $600 a year or $50 a month. This is only true for tIRAs if you file jointly though.

You have to do the maths on filing individually for 2019 (loan savings vs tax loss) because when you file individually neither of you can contribute to a Roth IRA and cannot receive deductions for tIRA. You also lose the (up to $2500) student loan interest deduction. So you would only be able to contribute with no deductions to a tIRA this year and would have to withdraw or recharacterize whatever you have put into Roth so far this year. (If you wanted to file separately 2019 rather than wait until 2020.)

This happened to us first year DH and I were married, because we didnít know the IRA rule for filing individually, and my DH had no 401k plan. Luckily his Roth was down like $5, so we were able to just withdraw it with no tax penalties. If you do a tIRA filing individually it wonít help with lowering student loan payments since you wonít get deductions to lower income and your income isnít counted anyways. Also if you decide to contribute to a tIRA filing separately make sure itís a new one, so you donít make our mistake of being unable to track what portion of tIRA received deductions and what didnít. Apparently if you keep track of this then you donít pay taxes on the contributions with no deductions when pulling it out. (I donít know much about how to do this.)

Due to the filing individually and IRA rule, it would be a huge bump in pay for you to get a job with a 401k plan even if the pay is the same. Then you could contribute 19k to 401k and file jointly, the 19k should bring your income down enough that it doesnít increase or even lowers student loan payments when file jointly. Youíll save a bunch on taxes by being able to contribute the 19k. And if your income goes up, then you can both also contribute to either a tIRA or Roth for more retirement saving. Again this is what happened with us. For last 4 years, the savings on student loans by filing individually has outweighed the tax loss. This year DH has a job with 401k that heís maxing, plus a family HSA, so it is finally is better for us to file jointly for 2019. Now we also get to contribute to Roth IRAs. (Weíre incomed out of traditional.) Iím inordinately excited to only have to do taxes once this year.

Hi Peachtea,
Thanks -- we are now going through the process of signing up for her 403(b) plan at work and getting into a plan that will track the S&P 500 with a low management fee.  It seemed like the simplest / most straightforward option. 

*I believe that we already have a high enough joint income, at 130K, that we would be ineligible for making deductible Traditional IRA contributions as a means of lowering our AGI.
*Good to know about the disconnect when filing individually -- i.e. if I were to set up a traditional individual IRA that it would not lower our monthly payment.
*I am working on finding a 401(k) for myself: that would certainly be the ideal scenario!  Who knows, maybe I could even convince my current employer to employ me as a contractor and then I could invest in a solo 401(k).  I doubt it :-)

I'll keep on chipping away at things and post updates as they come along.  Thank you so much for all of your time and advice. 

uneven_cyclist

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Re: Student Loans / Housing / Kids / Los Angeles
« Reply #52 on: June 15, 2019, 12:10:55 AM »
At tax time I would run the numbers before filing separately. That was my plan too but when I ran our taxes both ways the tax savings by filing jointly outweighed the higher loan payments, even ignoring the IRA rules that come into play. In our case that might just be because the loans are all mine and I make 2x what my husband makes, but itís still something to look at.

Okay, thanks economista.  This sounds like a similar situation to mine.  When it comes time to file taxes again I will certainly be investigating things carefully after receiving all of the advice on this thread :-)

Peachtea

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Re: Student Loans / Housing / Kids / Los Angeles
« Reply #53 on: June 15, 2019, 02:05:43 PM »
I also make 2x my husband and have all the loans, but it was still better until this year to file separately. (2016 83k/40k, 2017 100k/45k) The difference in single vs joint federal tax is very low unless you add the value of IRA and student loan interest deduction. To be fair, IL has a flat tax rate so no matter how we file IL tax is the same, itís only federal that we had to calculate and compare to payment savings. Regardless I wouldnít make assumptions one way or the other and do the math. You can use the tax brackets to calculate now. It would make me nervous to wait until tax time to figure out what to do with potential over contributions to your IRA. Although I always double check again before filing.

It was always very clear one way or the other when I ran the numbers, so I never had to factor in this, but I also think $1000 in SL savings is worth more than a $1000 in less taxes since taxes are coming from gross income and SL payments from after tax income.

Youíre probably ineligible for traditional this year depending on how much 403b contributions your wife can make by end of year. If you both contributed 19k to a 401k or 403b next year, it would drop your MAGI enough to qualify for additional tIRAs. (130-38k=92k, phaseout doesnít start until 101k joint.)

MoseyingAlong

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Re: Student Loans / Housing / Kids / Los Angeles
« Reply #54 on: June 18, 2019, 08:24:14 AM »
Something a lot of people forget (or are unaware of) is that California is a community property state so your earned income while married is community property so should be divided evenly between spouses. So filing separately probably won't help as much as you expect.

Many people just claim their own individual income and don't divide it. Which is not the way it should happen. You should make adjustments to split the income and tax withholding. I don't believe this is automatically flagged by the IRS but would probably be caught in an audit.

Luz

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Re: Student Loans / Housing / Kids / Los Angeles
« Reply #55 on: June 22, 2019, 11:15:53 PM »
For #3: I've lived in a 1 bedroom (420 sq ft) apartment with my husband and baby this first year of her life. The saving grace was the walk-in closet where we set up her mini crib. Whala, basically 2 bedrooms. Does your apartment have a spacious closet, by any chance (with good ventilation)?  A small apartment is also nice when they start crawling and getting into everything because you can basically always see them from different vantage points. Other perks are that small spaces don't allow for extra junk (pro-tip: the baby bjorn bouncy seat is awesome because it folds up for storage when not in use) and it's so nice not to have to worry about the time and money required for maintenance (especially pool maintenance). Downsides are mostly feeling that her crying bothers the neighbors (although they often comment that they can't hear her) and the fact that my husband and I have to tiptoe around when she's napping as not to wake her. The very loud garbage truck also comes at 5am, so there's that. I would LOVE to stay in our space for at least a few more years, but if we have another baby next year, max capacity laws won't allow it. Babies are the best!