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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: evergreen on April 26, 2013, 02:29:02 PM

Title: $105K student loans - what to do?
Post by: evergreen on April 26, 2013, 02:29:02 PM
Hi folks,

My question is how to deal with my student loans - as of right now they're around $105K with interest mostly 6.8%, about 18K is at 8.5%.

I make $60K/yr at my job, and my partner makes around $25K/yr.  We bought a house about a year ago (family gifted us the small downpayment).  It's a modest house and with lots of DIY work we have equity of probably around $25-30K. We rent a room in the house out which brings in income of $7K/yr.

Currently because my income is so low relative to my loans I am in the IBR plan (% of income plan) where they cap your payments at a % of income and then forgive remainder after 25 years. The payments are around $500/mo and essentially cover interest only. We just paid off all our credit cards. We have a car payment and a mortgage. The mortgage is doable (around $1200/mo including taxes/ins, etc).  We currently save 100% of my partner's income to build up emergency savings and savings to go towards paying off the car loan.  We also currently use 100% of the rental income to make improvements to the house so that it is ready for good resale if need be.  The improvements we are doing are low cost materials/high labor and we do the labor ourselves, they are necessary (i.e. things are broken/falling apart) in order to live/resell. We have probably 1-2 years more of that to go before the house is in good condition and we can realize this rental income.  Essentially we live on my income alone. House is in my name, I take all deductions. We do not currently have any retirement savings. We are really just getting going, as I'm only 2 years out of school.  Credit cards just paid off this month.

My question is this: if I leave my job and go to work for a nonprofit or public service agency my student loans will be forgiven in 10 years (vs. 25) with the same program.  My income would probably also drop immediately to around $35-40K/yr, with gradual increases.  My student loan payment would be around $300/mo with that income.  Additionally, I dislike my job and would like nonprofits better. There are not very good options for me where we live to make more money (aside from a 2nd job, which I am considering).

My initial thought is to switch to a nonprofit, pay the minimum (since I won't make a dent in principal without serious $$) for 10 years and then be done with it. In the meantime I'll build up retirement savings and other investments. I don't see a good way to touch the principal on these loans without spending at least 5-7 years of serious scrimping and staying at my job that I don't like, vs. 10 years of a job I'd probably like more, but a 30% pay cut is daunting. Thoughts?
Title: Re: $105K student loans - what to do?
Post by: mustachecat on April 26, 2013, 02:44:54 PM
Well, what do you do now, what would you like to do at a nonprofit, and why do you think you'd like nonprofit life better?
Title: Re: $105K student loans - what to do?
Post by: anastrophe on April 26, 2013, 02:58:46 PM
Yeah, "a nonprofit" is pretty nonspecific, that covers a zillion organizations both huge and small. What kind of nonprofit? What field? What kind of work? Ten years is a pretty long time--you need a clearer vision.
Title: Re: $105K student loans - what to do?
Post by: AJ on April 26, 2013, 03:21:55 PM
It's a plan that many people in your position consider. However, if the only reason you want to move to non-profit is the loan forgiveness don't do it. You will not come out ahead. What you give up in income will far surpass the amount of your loan forgiveness in the 10 years - and will continue to cost you for the rest of your career.

Now - if you were already planning on forgoing a decent income to work in non-profit for personal reasons (meaning: that's what you really want to do anyway) then by all means take advantage of the forgiveness. But, as daunting as six figure student loans look right after college, it is indeed possible to pay them off - especially as your income increases over the next few years.
Title: Re: $105K student loans - what to do?
Post by: Cecil on April 26, 2013, 03:28:06 PM
Guessing at some numbers here...

You make about 4k/month after tax. Your partner makes $1700/month. Your rental income is $600/month.

That's $6300/month total. Your mortgage is $1200. You don't say what your car payment is but it can't reasonably be more than about $400/month, right? Add food, gas, insurance, utilities, clothing, and some entertainment, and you should be able to get by under $3k/month pretty well, no?

That means you can chuck $3300/month at your loans, which would pay them off about 3 years from now.

Is this wildly off base?
Title: Re: $105K student loans - what to do?
Post by: Zaga on April 26, 2013, 06:42:20 PM
We've been in the place you are with 6 figure student loans and barely enough money to cover the interest.  It's 6 years later and we've paid off almost half of them slowly, while saving much more than that into retirement accounts.  All because both of us have increased our incomes greatly.

You're only 2 years out of school, don't give up on your future income just yet!
Title: Re: $105K student loans - what to do?
Post by: Fuzz on April 26, 2013, 07:32:10 PM
I'm guessing your an attorney--cause you have big loans and don't like your job. ;) Me too, somedays.

I was working for the government at 60K a year and was not in the IBR. I agree with AJ--don't do IBR unless you were going to work in the non-profit world anyway. In general, I think the burden o proof is on the folks in IBR to make sure the numbers work. My friend has had his loans go up from 100 to 115K in the 3 years he has been on the IBR payment plan. He's locked into government work, which is exactly where he wants to be, but if he ever lost his job and had to find another one, he is pretty limited.

You're married, you guys have a nice combined income, you can do a lot to reduce your principal. It sucks, I feel your pain. I'm right there with you. But I would say to think carefully about ways you can increase your income, and work like hell to pay it off. Good luck,
Title: Re: $105K student loans - what to do?
Post by: secondcor521 on April 26, 2013, 09:49:29 PM
Looking at the numbers a different way...

You're considering a $20K/year drop in income that has two benefits:  (a) a lowering of your loan payment by $200/month for the next 10 years, and (b) loan forgiveness of the balance at the end of that time.

(a) works out to $2400 per year, so subtracting that from the $20K/year drop leaves $17.6K per year.

Taking your first paragraph at face value and worst case, you have $18K at 8.5% and $87K at 6.8%.  This means you're paying interest at a blended (weighted average) weight of just under 7.1%.

(I'm ignoring the tax deductibility of the interest, but I don't think it will affect the outcome much.)

Assuming your payment is fixed at $300 per month and the remaining interest capitalizes and further accrues interest at the blended rate of 7.1%, over 10 years your remaining balance would grow to $160,107.50.

So what is the rate of return on investing $17.6K per year for 10 years and ending up with a payoff of $160,107.50 at the end of 10 years?  Well, that means you're turning $176K of lost income into ~$160K of loan forgiveness in 10 years, which is the same as taking that amount of money and putting it into a savings account in which you would be paying the bank 0.1458% interest!  That really doesn't make financial sense when you have the alternative option of taking that income and investing it in loan paydown at a rate of 7.1%.

I agree with the other posters, if you want to work for a non-profit, then go ahead, but from a purely financial point of view it doesn't make really any sense with the numbers you gave.

Oh, one other comment.  It sounds to me a little like you think the grass is greener with non-profits vs. other companies.  It sounds to me like you're in your first job out of college and are assuming that non-profit means that there are not office politics or people who are difficult to get along with, or other similar thoughts.  I sincerely doubt that this is true and strongly suggest you do your due diligence to confirm your assumptions before making a move.  Perhaps talk over lunch with someone you know who works for a non-profit and ask for the straight scoop.  I haven't worked for a non-profit (unless you count the start-up I worked for :-) ), but I have worked for a number of different companies over the years - some are somewhat better than others, but they all have warts of various kinds.

Good luck.