The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: alex.wilsonii on April 19, 2012, 01:48:18 PM
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Quick question: My wife is currently in grad school and when she finishes up next year, she'll probably not have any trouble finding a $80,000ish/year job (she'll be in the medical field and the hiring overall hasn't really declined in recent years). We also expect her to graduate with ~$85,000 in student loans because we're both recent college grads and though we got through undergrad debt free (!), we just couldn't swing it for the Masters. Our personal plan has always been to basically not change our standard of living one iota once she gets a job and then apply her income for the first year or so 100% to her student loans in order to have them paid down in a year or less. THEN we'll be debt free again and can start compounding everything into our 'stache!
However, she's mentioned to me that she's overheard many of her classmates talking about their student loans. Apparently, one of her classmate's dad actually told her that the best thing to do would be to make minimum payments on her (we're estimating ~$100,000) student loans and that then it'll all be forgiven after 25 years. I know the 'punishment' for this is that you have to pay income taxes on money forgiven and so I tried to do the math to determine if, in the end, you'd still end up paying more than you owned in the beginning, but I actually wasn't sure that'd be the case.
So, what are the reasons that paying minimum payments on student loans and waiting on them to be forgiven in 25 years is a bad idea? Or is it? Has she secretly stumbled onto something genius!? (I doubt it very much, but hey...maybe I've been led astray all this time!)
Thanks!
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Doesn't make sense to me.
Assuming minimum payment is interest only and an interest rate of 6.8% (Stafford last time I looked) then you are paying approximately:
$85000 * 0.068 = $5780
...each year until the loan is forgiven. That's $144k over 25 years. Plus income tax? Even worse.
My assumptions may be bad, but I played with the interest rate and the break even rate seems to be right around 3.2%. If you're loan rates are lower than 3.2% then minimum payment starts to make more sense (and you need to share your source of student loans ;-).
Another consideration: What are the odds that the gov't changes the rules in the next 25 years? Are there income limitations? If so, what are the odds your income surpasses the limitation before 25 years and you are then forced to repay?
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Her friend's father is likely wrong, I don't believe student loan debt is forgiven after 25 years. In fact, it can't even be cleared by declaring bankruptcy. It was just in the news that people over 60 still owe $36 billion in student loans. http://www.washingtonpost.com/business/economy/senior-citizens-continue-to-bear-burden-of-student-loans/2012/04/01/gIQAs47lpS_story.html?wprss= (http://www.washingtonpost.com/business/economy/senior-citizens-continue-to-bear-burden-of-student-loans/2012/04/01/gIQAs47lpS_story.html?wprss=)
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There are some stipulations I believe on 'qualifying' for the forgiveness, but federal loans (I forgot to mention that caveat before) can definitely be forgiven at 25 years if you make steady payments on it. Even after just 10 years if you qualify additionally (and I think work in the public sector...however they define that).
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(and you need to share your source of student loans ;-).
Sorry, federal loans are what I mean.
Another consideration: What are the odds that the gov't changes the rules in the next 25 years? Are there income limitations? If so, what are the odds your income surpasses the limitation before 25 years and you are then forced to repay?
Oh, nice, I didn't think about them deciding to change the law. As far as income, as far as I've been able to find doing some research, there aren't any. Though, you DO have to enroll in a plan to make payments BASED ON your income, so I think you'd actually be required to make higher minimum monthly payments than just interest.
I definitely can't see how, in the long run, you'd be saving money with this plan. Besides, surely someone at the government would have thought of that back when they introduced this concept, right...?
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I'm shocked that the minimum payment is calculated based on a 35 year repayment actually. That is cruel. Things have changed a lot since I went to school when loans were based on a ten year repayment.
Even if that was true, I would never play someone elses game here.
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I have looked into this. Under federal student loans, the Income Based Repayment plan provides for forgiveness of the remaining balance after 25 years. You can log in to your online loan account and play with the calculator to see what the payments would be. The payments are based on a percentage of your income above poverty level. I saw a write up of a plan to use this advantageously. Basically, if your adjusted gross income is around $24,000 or less, no payment is due in the following year. If you make more, but contribute the remainder to a 401k, you can stay under that threshold. This applies to middle & low income people who don't expect to be high earners in the future. One suggestion I heard was for folks who are already FI. It would then be possible to go back to school on loans, and given modest future income, never repay the loans. Note, repayment is based on income, not assets. I am not suggesting this, just playing devil's advocate. I don't expect the numbers to work out well for high earners, but play with the calculator and see.
Really, the forgivess is there for low income earners. I know an artist who doesn't expect to earn above 25,000 a year for their lifetime, and thus expects to have their loans forgiven in another 16 years.
Also, in terms of future law changes, I would expect the prior payment plan you agreed to will be grandfathered in. I currently have a repayment plan with fed loans that is no longer available, but my terms have not changed.
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Wow, FIRE'd people getting school loans with the intent not to pay them back. Not a fan of the idea, but I admire the cleverness.
Thanks for the thought provoking post Nunayo!
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You have to qualify for Income-based repayment, which generally means being relatively low-income. You then have to make that payment on time for 25 years. Only then do you qualify for forgiveness.
@Wilk- the payment would not necessarily be interest-only. For instance, if I stayed at my current income level, my payment on my loans would be $0. If I went 25 years without a significant increase in income, I could have my loans 100% forgiven, having payed $0.
I would not recommend planning on having your loans forgiven. Regulations change, and while you might be poor now, there's no guarantee you will be in the future, and even if you're paying $0, those loans still collect interest. You could end up paying way more than you would have if you'd gone the traditional route.
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I finished masters with $65k federal debt. I happened to lock at the lowest rate in history, under 3%. It would actually probably make the most sense to stop paying them back faster than minimum rate, and in 16 years I'd probably still have $10-20k left that might be forgiven. (I'm paying more than interest only with minimum payments) In the mean time I could put the extra money into stocks and make much more than 3%. But I hope to finish paying them off in full this year.
I look at it this way. They were given so I could attend school, which would have been extremely difficult otherwise. I could have done it, but with two kids and a wife staying home with them I'd have really been hurting. I wasn't given the loans so I can put that money in the stock market and make more than the interest costs, and I certainly wasn't given that money so I could sit on the loan for 25 years and have it forgiven. I just can't see that as right, though I'm not lecturing others, it's just my own thoughts.
I guess it's similar to walking away from a home that's underwater when you have the ability to pay the mortgage. Even if I could legally do so, I'm not sure I'd want to play the game that way. I can make money in ways that I feel good about, so I'll stick with that. But I'm not in a position to judge others, it's just my own life I'm worried about.
I also like the feeling of paying debt off. It hangs over my head as long as it exists. I'm not sure how much that plays into my subconscious and pushes me to find a reason to pay it off despite the financial advantage to keep the loan, but that's where I end up anyway.
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My sentiment is similar, my federal loan rate is 3.6, not much different than inflation. I have had people tell me not to rush paying it off because it is. "cheap money" that could be invested elsewhere. However, I don't like seeing the debt on my balance sheet.
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You can only have your loans forgiven if you meet certain conditions (http://ibrinfo.org/what.vp.html). Only IBR, ICR, and 10-year plan payments qualify. If her classmates make $80K/year, then they will end up paying the loan off with qualifying payments long before 25 years. If they use some other payment plan, like 30 years, none of the payments will qualify. There is no interest-only option. They could choose to take a job that pays $25K/year in order to have a low IBR payment, but why would you trade away ~$50K/year in order to gain $100K over 25 years?
I considered IBR for my wife. For that to work, we would have to file separately, which would wipe out any gains. Also, my wife wants to return to work someday, which would increase payments in the future. Public Service Loan Forgiveness sounds like a better deal, where you work 10 years (120 qualifying payments) at a non-profit, and the forgiven loan doesn't incur taxes. For a dual-income household, where the high-debt spouse works at a non-profit, and they already file separately, it sounds like a good deal.
I'm pretty sure that politicians wrote these laws so they could score political points without it costing the government much. It's really just a safety net for people who took on a lot of debt and either can't get a decent job or prefer a low-paying job.
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Depends.
Dumb if you do not lower your AGI to get IBR and make actual payment you're better off paying it off.
Smart - If you lower your AGI to a point that you have less than than interest payment or your payment is 0. People with high wages get better if you are able to lower AGI, but negotiating with your employer to pay you in additional stocks instead of cash. For example, you pay
less than $100 on loans that is valued at 300k in student loans (MD/JD maybe ), but have real income of about 80K while making
100-200k in stocks and other investments while investing in 401k, HSA, pretax commute to get a married couple no depends to about
60K AGI. 25 years = 30,000 - 50,000 in payments. Once forgiven you pay the tax on it so with the interest $500,000 forgiven and a tax bill about $152,000 + 30,000 = 180,000 versus paying the loan off 300,000.
Another example FIRE, pay yourself 38,000 and you agi gets to around 29k you pay 0 and only pay about 150,000 in tax that is 50% less than you paid
Is it ethical that is a different question. As a note this is what new med students are told plus uncle sam pays interest for the first 3 years on IBR. My thought is education should be provided as a public service at least undergrad...
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It's unethical . She didn't mind receiving the education which will provide a nice income. You have the means and a solid plan to pay it back. It's no different than maxing out the cc's then filing for bankruptcy to have that debt forgiven. Too bad the degree can't be repossessed.
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I'm considering the same idea. I took on a bunch of debt for med school, but have switched from private practice to teaching it. Which means a pretty significant drop in pay, but decent life. Since I'm teaching at a non-profit, things change that loans wipe off at 10 years instead. we're doing the IBR and we're already 4 years in, so I think it will work for us. though this plan I have to write a check for like 40k as income tax that year. Oh well, planning now makes it less scary.
because of the minimum payments, we've been able to buy a house (appreciating asset currently) and invest in retirement savings. If i wanted to seriously pay down the loan I could, but then I would lose a decade of compounding, so doesn't seem worth it to me.
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There is a Public Service Forgiveness program, but you have to have the "right" kind of loans to qualify. I heard about this program, looked at the information, applied thinking that I had just 2 years to go, but since I had the wrong type of loan, I'd have to convert and then start over with my 120 payments (10 years). I think I'll mostly be paid off in 10 years, so it's useless. Why it has to be a certain type of loan, I have no idea.
But what really gets my goat is that you can't refinance student loans. That to me is the most ridiculous thing ever - especially since many loans are backed by the federal government, making these loans theoretically the safest possible loans that can exist. Since the interest rate is based in part on risk, that should be low.
Furthermore, most people make more and more money as time goes on, and so their credit scores get higher and higher. It's stupid that I can refinance any type of loan at a lower rate if I qualify, but NOT the student loans I have.
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I may be in the minority thinking on this forum but I hate this idea, I was responsible to pay off my student loan debt ($35k) so it frustrates me when I see options where loans can be forgiven after "x" amount of years.
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You should seriously look at public service loan forgiveness. Going into the medical field, there is a good chance that the job will be for either a government or a 501(c)3, both of which qualify you for forgiveness after 10 years rather than 25 years. Additionally, if you qualify for PSLF the write off is not taxable income. Income based plans on federal loans can have payments as low as ten percent of your disposable income (calculated as AGI less the federal poverty guideline for your family size). For some borrowers this can even mean a payment of zero. You will just have to run the numbers and see which is most advantageous to your situation. You have no moral or ethical obligation to pay more than you are legally required to.
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I know there are many ways to minimize the loan interest and ways to seek loan forgiveness but my thoughts are - pay them off as soon as you can.
We simply budgeted the repayment and got ~$45K gone in ~2.5 years on less income that I think you have. Could have stretched out the repayment but interest.
We're also the pay off the mortgage early type too.
Freedom from debt so that if my wife's medical problems returned and she couldn't work, then we have less money going towards debt easing our budget. If economy did something like the Great Recession again, then we have a roof over our heads - taxes and insurance funded by a minimum wage job.
We also don't have to worry about some gov't policy that might change for the worse with an election. We would surely be grandfathered in but what if we weren't?
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Wow, FIRE'd people getting school loans with the intent not to pay them back. Not a fan of the idea, but I admire the cleverness.
Thanks for the thought provoking post Nunayo!
Here I was thinking, sure forgiving a loan, just means other people get stuck with the bill.
What? I'm FIRE and I can go back to school and stick someone else with the bill!
Send me the paperwork.
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Why are people replying to a thread 4.5 years old (with no new info, rather than one of the many more recent ones on the same topic)?
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Why are people replying to a thread 4.5 years old (with no new info, rather than one of the many more recent ones on the same topic)?
I paid no attention to the date, just wanted to throw in my little jab.
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Why are people replying to a thread 4.5 years old (with no new info, rather than one of the many more recent ones on the same topic)?
I paid no attention to the date, just wanted to throw in my little jab.
lol. Thumbs up, mission accomplished.
(http://cbsnews2.cbsistatic.com/hub/i/r/2008/05/01/d851091e-a642-11e2-a3f0-029118418759/thumbnail/620x350/370556ab70e834bc511b29e6dff5e71c/image4061139x.jpg)
:)