$151k in Student Loans -- Pay Off in 2 Years; Refinance; or Middle Ground

[ReadySetMillionaire]

I disagree. It's best to go full storm one way or another. Choose math or emotions. Splitting doesn't do anything but delay the timing.

I'm actually very surprised you are choosing to pay them off based on previous posts. You had such a detailed REPAYE analysis to drive your original decision. It worked out in your favor better than you could have imagined. Now the payoff v. invest seems to have much simpler math but you chose the opposite.

I know either way you choose that you will laser focus and succeed. So in the end it doesn't really matter.

Funny you mention my REPAYE analysis, @therethere . I've thought about that a lot and went back and read it. I think it's interesting that, even when I was making $47k a year, I repeatedly mentioned it being a hedge until I earned a high income. And if I earned that high income, I wouldn't get any forgiveness, and I would end up having to pay back the loan anyway even if I followed REPAYE to the letter.

RSM, while I generally am in Arebelspy's camp (pay back the money you borrowed), I think your decision to take advantage of the REPAYE program is the right one in your current circumstances.  It will allow you to improve your cash flow and save for retirement.  However, if I were you, I would look at this program as a temporary measure and not plan on sticking with it for 25 years and taking advantage of the loan forgiveness feature.  As I understand it, you are not committed to this program for life.  If your situation changes and you get a better paying job, you should reassess and decide what makes sense then (and ultimately be prepared to repay your loans).

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).

Going solo not only accelerated my income much quicker than I anticipated, but it accelerated it into a stratum where now my REPAYE payments -- even after being manipulated -- are very, very, very high. My new payment is $729/month after my success last year, which is a big hit to my monthly cash flow. That means I am going to get almost zero interest forgiveness. And that would be $200,000 in payments over the next 20 years, and then I'd still have to pay the tax liability -- it all makes this even more than a big 7% loan over 25 years.

REPAYE was always a hedge until my income was big enough to just deal with them.

Ultimately, I think you're right. I've always done well when I laser focus. I laser-focused with REPAYE and did very well financially between 2015 and 2017 on a pretty modest income. I think I'm going to laser focus now.

Thanks for the kind words.

[Peachtea]

Sorry for delayed response, I went on vacation and unplugged a bit. :)

I’m glad to see you decided to stick to your plan of focusing on paying off the loans. When you’re talking about the short amount of time it will take you and the very, very, very minimal difference it makes for reaching other financial goals, the technicality of what’s mathematically better doesn’t matter (IMO). You realize this and are warring between the logic of it’s not really going to matter so let’s go with the huge emotional win vs the worry about well, I like to do things logically and mathematically it comes out slightly ahead to do y instead. Both your emotions and increased cash flow have value, but the “pure mathematics” doesn’t assign a value to them, wrongly in my opinion. For me, since this is 1.5 year plan, not say a 5+ year plan, the mental relief and cash flow benefits tips the scale towards an ASAP payoff.

How’s it coming on your July pay off goal?

[ReadySetMillionaire]

Sorry for delayed response, I went on vacation and unplugged a bit. :)

I’m glad to see you decided to stick to your plan of focusing on paying off the loans. When you’re talking about the short amount of time it will take you and the very, very, very minimal difference it makes for reaching other financial goals, the technicality of what’s mathematically better doesn’t matter (IMO). You realize this and are warring between the logic of it’s not really going to matter so let’s go with the huge emotional win vs the worry about well, I like to do things logically and mathematically it comes out slightly ahead to do y instead. Both your emotions and increased cash flow have value, but the “pure mathematics” doesn’t assign a value to them, wrongly in my opinion. For me, since this is 1.5 year plan, not say a 5+ year plan, the mental relief and cash flow benefits tips the scale towards an ASAP payoff.

How’s it coming on your July pay off goal?

Sorry for my delayed response this time.

We have about $32,000 in cash right now, so well on my way to pay that loan off at the end of the month. I could theoretically pay the $16k loan by mid-August if July's invoices get timely paid, which would blow even my wildest expectations out of the water.

[dandarc]

Invoices being paid on time would blow my wildest expectations out of the water too. I'll be here all night.

[TVRodriguez]

Congrats on the swift progress!  Paying down debt is very satisfying.  Where do the loans stand now?

When you say you have $32K in cash, that's including any e-fund or business reserve?  Or is all that cash available for paying off debt?  B/c if it's for paying off debt, I'm confused as to why you have so much.  If it includes e-fund/business reserve/money saved to pay taxes, then that makes more sense to me.

Invoices being paid on time would blow my wildest expectations out of the water too. I'll be here all night.

Hahaha I'm sorry to say that I can relate to that comment.

[ReadySetMillionaire]

Congrats on the swift progress!  Paying down debt is very satisfying.  Where do the loans stand now?

When you say you have $32K in cash, that's including any e-fund or business reserve?  Or is all that cash available for paying off debt?  B/c if it's for paying off debt, I'm confused as to why you have so much.  If it includes e-fund/business reserve/money saved to pay taxes, then that makes more sense to me.

Invoices being paid on time would blow my wildest expectations out of the water too. I'll be here all night.

Hahaha I'm sorry to say that I can relate to that comment.

I've collected every invoice I've ever sent, minus one $200 invoice.  I spend a lot of time on them and it usually results in happy clients.  I've also gotten very good at always, always, always getting a retainer and basically not working if they don't replenish (absent time-sensitive deadlines).

Regarding cash, that's all cash. We like $5,000 in the checking account, $5,000 in savings, and I like about $10,000 in my business account (we also have about $8,000 in HSA, although I do not consider this a cash asset).  So I have about $12,000 extra right now. I'm not exactly sure why I'm sitting on it other than I'm waiting to just transfer the money. Come to think of it I'll stop being a dumbass and transfer that now.

Current student loan balance is $113,357.57.  I am very, very close to getting that below $100,000 for the first time since I graduated law school. Geez. Still a ways to go but I'm pumped.

[TVRodriguez]

I have about $12,000 extra right now. I'm not exactly sure why I'm sitting on it other than I'm waiting to just transfer the money. Come to think of it I'll stop being a dumbass and transfer that now.

Current student loan balance is $113,357.57.  I am very, very close to getting that below $100,000 for the first time since I graduated law school. Geez. Still a ways to go but I'm pumped.

Great!  And now that you transferred that $12,000, you're so close to the $100,000 line!  It will be sweet to see the total drop below six figures.

[ReadySetMillionaire]

Update

7.65% Loans

$28,104 -- PIF 05/29/2019

6.55% Loans

$2,954 (Payoff by end of June) -- PIF 06/13/2019
$5,428 (End of June) -- PIF 06/13/2019
$8,753 (End of July) -- PIF 07/18/2019)
$16,340 (End of September)
$26,318 (Very Ambitious -- End of Year)

6.16% Loans

$8,095 (March 2020)
$23,239 (June 2020)

5.35% Loans

$5,766 (July 2020)

5.16% Loans

$23,619 (End of 2020)

[Fuzz]

Nice work! You're going to knock those loans out sooner than you think.

[robartsd]

Are you able to do this loan payoff while maximizing tax advantaged investment space? If so, I'd keep going full steam ahead. Even at 6.55% I'm not sure it's worth giving up tax advantaged investment space to pay off early - had you decided to give up Federal loan benefits to reduce the rate to 4.5% I would be fully in the pay on schedule camp. I might reevaluate loan payoff vs. taxable investment after eliminating loans with rates higher than 6%.

[Peachtea]

Awesome job! It’s so satisfying to watch you crush these loans. Hopefully those July invoices all come in timely and you can kill the September goal early.

[mistymoney]

well done!

your progress is very exciting!

[ReadySetMillionaire]

**Please note I do not want to turn this into a political debate**

So this is an interesting development: Elizabeth Warren has introduced legislation regarding student loan debt forgiveness: https://www.politico.com/story/2019/07/23/elizabeth-warren-cancel-student-loan-debt-1611374

In looking at the bill text ( https://www.politico.com/f/?id=0000016c-2058-d9ae-a76e-ebd91c3e0000 ), the forgiveness is based on either $100,000 in adjusted gross income for a single earner, or $200,000 for a family. Families making less than this amount would have $50,000 forgiven.

Even if I have some great years, I think I would qualify for the student loan debt forgiveness.

I think Warren has a lot of momentum right now, and I honestly think it's between her and Biden.

While my tendency is to ignore the primaries, I'm probably going to keep a close eye on how the Democratic field plays out.  If Warren gets momentum and ultimately wins, I think I'd be a fool not to at least slow down on my repayment and invest in some tax-advantaged accounts so I could wait and see what happens.

But...I'll still probably pay these off. I can't see Democrats taking control of the Senate given the map in 2020.  But this is certainly something to keep my eye on, perhaps short and long term.

Any thoughts?

[mozar]

Even if the Democrats win the house, Senate and presidency (lol, yea right) it could still be years until there is student loan reform, if they ever get to it at all.
But if you have not been taking advantage of tax advantaged space, you need to do that anyway.

[TVRodriguez]

I like Warren a lot, but I would not base my own financial plan on a political football.  All you can do is the best with the laws as they are right now.  There is not nearly enough momentum for student loan forgiveness, IMHO, to delay a repayment plan.

That said, I still would put as much as I could into retirement accounts before paying extra on my student loans (and that's what I did do).

[therethere]

I'd say that basing your student loan repayment on the popularity of candidates this early on is very similar to trying to time the markets. There's no guarantee it will happen at all or when it would happen. Your best bet is to pick a plan and stick with it. Feel good about it and continue on with your life. Payoff or hedge your bets. Changing your mind every few months based on whatever political crap people are spewing out is just waffling around.

Choosing to extend out your loans (by lowering rates and investing the excess in a brokerage) should be done because it's the right choice for you. Then count on any loan forgiveness as a bonus. Personally, that's what I'm doing. If I end up getting the 10-20k (or whatever is left at the time anything miraculously gets passed) then that will be a nice surprise.

[EvenSteven]

For anyone getting stressed out about the decision to pay down debt quickly or invest, I think it is important to accept that they are BOTH good decisions. Leasing an expensive luxury car is a bad decision. Buying a new house that's 6x your income with zero down is a bad decision. Paying down debt is a good decision. Investing in tax advantaged accounts is a good decision.

One will end up being optimal, and you won't know which one it will be until after the fact. If you have already decided to do one of the two, you are already in a win-win situation.

[Peachtea]

I’d keep going as planned and then reassess at the $50k left mark. Yeah, it would suck to pay off $50k and then a year or two later everyone gets that amount forgiven. But on the bright side, you still won the game at that point by being able to pay them off in the first place.

I think it would be more like 4-5 minimum before that would happen, if ever, since as you pointed out Dems would likely have to control senate first for it to pass. I could see the 20 year plan forgiveness plan being reduced to 10 or 15 years for non-public service before outright auto forgiveness happening.

Theoretically, at the 50k mark, if you had high degree of certainty that in 5 years it would be forgiven would you wait those five years of min payments or pay it all off in one year? At my income, my minimum payments for 5 years would be over 35k total, so IDK, even in that situation it might be worth the 15k loss to have 4 more years of debt free freedom.

[ReadySetMillionaire]

Current balance is $105,000, and I am strongly looking at pausing things a bit for personal reasons that I don't want to get into that much.  Basically, my wife wants us to pay her mom (who I love) to watch our son full time.  This will be about $10-12k per year.  Importantly, my in-laws are very financially responsible, so this is just a fallback account for them; the funds will be put in a savings account that they have access to, and if they don't need it, then they will return the funds to us.

Further, I need to start maintaining a better cash position.  Again, I don't want to get into too many personal details.

***

I think this requires me to pull back a bit on paying off my student loans full throttle. Given that, I think it might be time to pull the trigger on refinancing, which would allow me to be making more progress during this "pause" period.  I received some quotes from SoFi:

7 years = 4.32% ($1,463/month)
10 years = 4.395% ($1,096/month)
15 years = 4.92% ($839/month)

The rate difference does not seem to be that big between the 7 year and 10 year re-finance, so to maintain a better monthly cash flow position, the ten year re-finance seems just right.

My current rate (averaged) for my federal loans is 6.06%.  I could save almost 1.70% with that ten year re-finance, which is no small number on a $105,000 loan. In looking at the 10 year amortization schedule:

Current Loans (6.06%) = $1,169/month to pay off in ten years, with $530 going to interest at start of loan repayment.

Refinanced Loans (4.395%) = $1,096/month to pay off in ten years, with only $385 going to interest at the start of loan repayment.

***

I think the plan here is to re-finance, and then evaluate my cash position at the end of each year.  I think I'd pay these off before ten years given my income, but given that I think I need to hit the pause button, re-financing seems like the right move to save money on interest.

Any thoughts?

[therethere]

Have you checked Earnest? Earnest seems to give better rates for those with higher assets. While I've found Sofi gives better rates for high income. I've also received good quotes from LendKey, though I never followed through.

I think 10 years is a good happy medium. Especially since the interest rate compared to 7 years isn't a big difference.

[Dicey]

Was just going to post what therethere just said. Seconded.

[TVRodriguez]

Sounds like a plan.  Under 4.4% is still a great rate.

[ReadySetMillionaire]

Thanks for the suggestion @therethere -- Earnest has the following rates:

7 Years = 3.89% interest ($1,430.13/month)

10 Years = 4.12% interest ($1,069/month)

15 Years = 4.60% interest ($808.85/month)

That's .3% better than the SoFi ten year rate.

[Catbert]

I think a re-fi to a 10 year payback and focusing "extra" money on other things is a great idea.

[ReadySetMillionaire]

I've applied to both SoFi and Earnest.  I had some trouble with uploading stuff to Earnest so hopefully they spit out that really low 4.1% rate.

The one thing I forgot is that, if I keep my loans as federal loans, and stay in my REPAYE program, I get an interest subsidy on all unpaid interest every month.  Right now my payment is $536/month, and I am receiving about $136/month in an interest subsidy. 

I can't quite figure out the technical math here, but that interest subsidy effectively puts me pretty close to a rate in the mid-fours, but I get to keep all the benefits of maintaining a federal loan.

I have until mid-September to accept the offer from Earnest or SoFi, but just wanted to post this in case anyone else was considering refinancing.

[robartsd]

The one thing I forgot is that, if I keep my loans as federal loans, and stay in my REPAYE program, I get an interest subsidy on all unpaid interest every month.  Right now my payment is $536/month, and I am receiving about $136/month in an interest subsidy. 

Won't your REPAYE payments go up with your income, such that soon you'll be paying all the interest (and enough principal to end up paying off the loan before REPAYE forgiveness).

[ReadySetMillionaire]

Update

I just wanted to provide an update. As indicated in a prior post, I basically pressed "pause" on my plan for several family-related reasons. I was able to get my total loan balance down to $104,000 before this pause. My current loans look like this:

7.65% Loans

$28,104 -- PIF 05/29/2019

6.55% Loans

$2,954 (Payoff by end of June) -- PIF 06/13/2019
$5,428 (End of June) -- PIF 06/13/2019
$8,753 (End of July) -- PIF 07/18/2019)
$16,340
$26,318

6.16% Loans

$8,095
$23,239

5.35% Loans

$5,766

5.16% Loans

$23,619

***

Since that time, I ran into quite a bit of cash. When the market crashed due to COVID, I could not help but dump $24,000 in 2019 and 2020 Roth contributions for my wife and me. I know we are not supposed to market time but I could not pass this up.

Moreover, and since putting that money in the Roths, I also obtained a job at the city law department (while still maintaining my practice). This means that my employer is putting $16,000 into retirement anyway.

With these two points in mind, I am back towards trying to get rid of these by the end of the year.

Fortunately, the interest rates have been frozen at 0% until October due to COVID. So there's no use dumping money into them now.

I have about $51,000 in excess cash. I am sitting on this until rates go back up, but my goal is to try and earn $50,000 more by end of the year (doable) and dump all of this on the loans.

I am very excited and motivated by it. I will keep everyone advised.

[Dicey]

Update

I just wanted to provide an update. As indicated in a prior post, I basically pressed "pause" on my plan for several family-related reasons. I was able to get my total loan balance down to $104,000 before this pause. My current loans look like this:

7.65% Loans

$28,104 -- PIF 05/29/2019

6.55% Loans

$2,954 (Payoff by end of June) -- PIF 06/13/2019
$5,428 (End of June) -- PIF 06/13/2019
$8,753 (End of July) -- PIF 07/18/2019)
$16,340
$26,318

6.16% Loans

$8,095
$23,239

5.35% Loans

$5,766

5.16% Loans

$23,619

***

Since that time, I ran into quite a bit of cash. When the market crashed due to COVID, I could not help but dump $24,000 in 2019 and 2020 Roth contributions for my wife and me. I know we are not supposed to market time but I could not pass this up.

Moreover, and since putting that money in the Roths, I also obtained a job at the city law department (while still maintaining my practice). This means that my employer is putting $16,000 into retirement anyway.

With these two points in mind, I am back towards trying to get rid of these by the end of the year.

Fortunately, the interest rates have been frozen at 0% until October due to COVID. So there's no use dumping money into them now.

I have about $51,000 in excess cash. I am sitting on this until rates go back up, but my goal is to try and earn $50,000 more by end of the year (doable) and dump all of this on the loans.

I am very excited and motivated by it. I will keep everyone advised.

Wow, that's some heavy lifting! Good job.

[Peachtea]

That’s a pretty awesome update, RSM. I bet you’re glad you didn’t refinance now with the interest/payment freeze. I look forward to your update when you dump all that into the loans.

[ReadySetMillionaire]

That’s a pretty awesome update, RSM. I bet you’re glad you didn’t refinance now with the interest/payment freeze. I look forward to your update when you dump all that into the loans.

The plan is to AT LEAST get the loans down to $50,000 by the end of the year. That means I would have taken the "benchmark" approach I've referenced:

$151,000 > $104,000 in Year 1

$104,000 > $50,000 in Year 2

$50,000 > $0 in Year 3

Obviously I'd love to crush these all by end of year, but that's an extremely optimistic goal. I kind of liked the way I front-loaded my IRAs this year so I might hold some cash to do that right away.

It's a fluid situation, but with the interest freeze, holding cash seems like a good play right now. I will dump the loans down to $50,000 and then make my decision based on the financial landscape there.