The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: brokescientist on April 20, 2015, 08:51:20 PM
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Hello,
My fiancé is a teacher at an elementary school. She is able to take advantage of a public service federal loan forgiveness program. Does anyone have experience with this? Is anyone else taking advantage of it? What are you doing and how are you making payments? Is it worth it? Should we file taxes separately for the next 10 years to keep the payments down if the payments are 10% of your income?
Thanks! I just don't trust the government.
-TheBrokeScientist
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Yep, you definitely want to file separately even after you're married. That way the payment will just be based on her income, instead of your combined income. You've probably already checked out the calculator to see what her payment would be, but here it is just in case: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action
PSLF is a great deal and most definitely worth it. PAYE is the most generous repayment plan, if she's eligible. If not, IBR is also good and either of those qualify for PSLF. Personally I'm just now graduating and entering loan repayment through PAYE, and may also end up doing PSLF if I stay in the public sector for 10 years, not sure yet.
Many thanks to your fiancée for teaching those kiddos!
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My sister is doing this; she's got close to 3 years of qualified payments under her belt, so 7 more to go until forgiveness. I would advise your fiancee to get all of her documents each year and keep meticulous records of her work history (on the required form) and qualified payments (like, print out copies showing each monthly payment). Pretty sure my sister is doing IBR payments. For her, it is worth it because her loans (well over $100k for grad school) would cost her more than half her income each month as a speech language pathologist for a public school (income less than $50k), which she truly can't afford. She gets the employment eligibility form done every year, and she also does her taxes early so she can submit documentation of her income as soon as possible each year.
Read up on all of this stuff, too: https://studentaid.ed.gov/repay-loans/forgiveness-cancellation/public-service
My sister also doesn't trust that this program will exist in 7 years, but my hope is that people who are already enrolled (meaning they have the employment forms on file for a number of years) would be grandfathered in and allowed to complete the program.
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OK. So it sounds legit. Sort of.
I guess IBR for 10 years is the way to go. I'm not sure how much we will benefit as she makes 50k and the loans are about 45k for her masters and undergrad. 10% of her income for income based payments for 10 years comes to 50k.
Matt
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My loan was forgiven under a veteran's disability provision. I applied and about 4 weeks later, it was forgiven. I think there is some kind of tax burden, but they haven't sent me the forms yet.
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OK. So it sounds legit. Sort of.
I guess IBR for 10 years is the way to go. I'm not sure how much we will benefit as she makes 50k and the loans are about 45k for her masters and undergrad. 10% of her income for income based payments for 10 years comes to 50k.
Matt
It's not that simple, so it can be more advantageous. The payment is based off of a formula involving your AGI and the FPL. So, you can really benefit from IBR by making as much of your income tax deferred as you will lower you AGI and your regular monthly payment. My wife and I make just inside of 6 figures and our loan payment is about $300 on IBR (balance of $70k).
Be aware that there are other consequences to married filing separately that may not make it worth it.
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I guess IBR for 10 years is the way to go. I'm not sure how much we will benefit as she makes 50k and the loans are about 45k for her masters and undergrad. 10% of her income for income based payments for 10 years comes to 50k.
It's not that simple, so it can be more advantageous. The payment is based off of a formula involving your AGI and the FPL. So, you can really benefit from IBR by making as much of your income tax deferred as you will lower you AGI and your regular monthly payment.
Be aware that there are other consequences to married filing separately that may not make it worth it.
Definitely what Psychstache said. If you can get your married filing jointly AGI low enough, there is no need to file separately (most tax software will be able to compare joint v separate filing for you) and the plan can be a real benefit.
I am almost 5 years into the PSLF program myself and my husband is a teacher - 2015 is his first year. We plan to funnel all of his income into tax into tax deferred accounts to keep our AGI down and still intend to file jointly. It is easy for us because we, a family of 4, already live on one salary and will continue to do so. It would be a good option for you if you can swing it.
My husband is not going to do the PSLF probably, though, because he qualifies for some state loan forgiveness after 5 years teaching, so by then there won't be much left for us to pay.
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My loan was forgiven under a veteran's disability provision. I applied and about 4 weeks later, it was forgiven. I think there is some kind of tax burden, but they haven't sent me the forms yet.
What year did this happen? You should get a 1099-C at the beginning of the following year, but even if not, I noticed a line in the 1040 this year where you're supposed to enter the forgiven amount as income.
The PSLF program is great in that the forgiven amount does not have a tax burden. Sucks that the veteran's disability discharge is different.
I ran through the PSLF option with a couple of friends, and it wouldn't have worked out for either of them. One of them had refinanced into a private loan, which was unfortunate.
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I ran through the PSLF option with a couple of friends, and it wouldn't have worked out for either of them. One of them had refinanced into a private loan, which was unfortunate.
It is really easy to screw it up since people don't have all the correct info right out of school. I unfortunately made the standard payment for 2 years, not realizing that it wasn't payment plan eligible for the PSLF, so none of those payments qualified even though they were much higher than my IBR payments. A lot of the people IRL don't do it because they think their payments will be higher on the IBR, ignoring the fact that they can lower AGI through retirement savings.
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So since payments are based on the previous years pay, I should increase her 403b defferment to 18500/year Immediately? And she should obviously contributing 5500 to a std ira.
Then I should do the same. So in reality nothing changes and 401K and Standard IRAs are still beast mode. Just wait and see what happens during tax season to file jointly or seperate? But when do they determine monthly payment amounts based on income? And how would I figure out what filing is best for us seperate, or joint?
Thanks all the replies!
TheBrokeScientist
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I have to file my IBR paperwork in August. So this year, 8/2015, I will be sending them our tax return from 2014. In 8/2016, they will get our 2015 return, the year my husband started working and we maxed his IRA and 403. So hopefully, with the measures we took in 2015 to off-set his income, our IBR payments stay as low as possible. So, you have time to run the joint/separate scenarios at tax time. Also, my loan company has a calculator so you can predict the IBR payment based on AGI and other factors.
The addition of your income won't affect her payment until you are married and filing jointly, but the earlier you start maxing your retirement accounts, the better, anyway.
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After graduation there's a 6-month grace period. Most loan servicers won't process an income-based repayment application until the grace period is almost over and you're about to enter repayment.
When they process your application there are 2 methods to determine income:
- They can look at your most recent AGI, and apply the formula Psychstache mentioned: 10% of (AGI - [1.5x FPG]) for PAYE
--OR--
- If your most recent tax return "does not reasonably reflect" your current income, then you're supposed to provide alternative documentation, such as a contract or paystubs. As far as I'm aware, there is no definition of what "reasonably reflect" means. For example if you last filed taxes as a full-time student, but now you have a job, then last year's zero income is probably not a reasonable reflection of current. Either way it's probably best to assume whichever of the 2 methods shows higher income to be on the safe side.
Good tips from the other posters about the potential advantages of still filing jointly - I wasn't aware of those.
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So since payments are based on the previous years pay, I should increase her 403b defferment to 18500/year Immediately? And she should obviously contributing 5500 to a std ira.
Then I should do the same. So in reality nothing changes and 401K and Standard IRAs are still beast mode. Just wait and see what happens during tax season to file jointly or seperate? But when do they determine monthly payment amounts based on income? And how would I figure out what filing is best for us seperate, or joint?
Thanks all the replies!
TheBrokeScientist
I think you need to prove income to get the Income Based Repayment plan, so then annually after that, it would just be in whatever month you began. I can double check on this with my sister, though. Just do it ASAP and worry about it again next year whenever they ask for the paperwork. :) I would sock as much into 401k and IRAs as possible, just in general, but it also helps with keeping the taxes and payments low under IBR. Your fiancee may have a 457b (deferred compensation) option through her school, which is even better than a 401k in some ways, so she should look into that. My sister started putting all of her pay steps into her 457b so her payments actually seemed to go *down* this year for IBR, which was weird, but awesome.
You can play around with the payment calculator to see if filing jointly or separately will make much of a difference to the payments: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action The whole idea is to pay as little as possible toward the student loans, and get the balance forgiven after 10 years, so I suspect that keeping your income and hers separate (and keeping hers artificially low via 457b/401k and IRA would be most advantageous). DH and I always have filed jointly, so I don't have experience with filing separately, but perhaps if you started a thread with "tax question" in the title, our tax experts on the board would chime in!
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So since payments are based on the previous years pay, I should increase her 403b defferment to 18500/year Immediately? And she should obviously contributing 5500 to a std ira.
Then I should do the same. So in reality nothing changes and 401K and Standard IRAs are still beast mode. Just wait and see what happens during tax season to file jointly or seperate? But when do they determine monthly payment amounts based on income? And how would I figure out what filing is best for us seperate, or joint?
If you're planning to file separately, the IRA contribution limits are really low. https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
Am I the only one that would try to pay the $45k off as quickly as possible?
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Am I the only one that would try to pay the $45k off as quickly as possible?
I'm guessing that in most cases, getting a non-public-service job and paying the whole amount would be financially better overall.
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Definitely avoid filing separately if you can by lowering your AGI. There are a lot of benefits to filing jointly if you can.
If you're planning to file separately, the IRA contribution limits are really low. https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
Am I the only one that would try to pay the $45k off as quickly as possible?
It depends on the payoff, for me, whether to pay it off or not. 45K is not that much, as far as student loans go these days, so the OP might not derive much benefit from the PSLF. However, if you can get by on a small income, the benefit is two-fold. You sock away a bunch of money into retirement accounts that you wouldn't be able to if you just paid down your SL aggressively. Paying the SL doesn't lower your tax obligation by much since the interest deduction is limited to $2500 married or not, whereas contributing to the IRA/401K, etc, does. And having a low AGI is important for many tax advantages. Plus, with low enough IBR payments, you get a good chunk forgiven.
Getting a higher paying non-PS job and paying it off quickly is obviously another way to go. But that's not what the PSLF is for, and it's not feasible for a teacher unless she changes careers.
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Am I the only one that would try to pay the $45k off as quickly as possible?
I'm guessing that in most cases, getting a non-public-service job and paying the whole amount would be financially better overall.
I think this depends on how much income they have, which wasn't shared. I would also encourage this, as DH and I paid off nearly $54k in less than four years on pretty average incomes (less than $70k combined).
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Definitely avoid filing separately if you can by lowering your AGI. There are a lot of benefits to filing jointly if you can.
If you're planning to file separately, the IRA contribution limits are really low. https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
Am I the only one that would try to pay the $45k off as quickly as possible?
It depends on the payoff, for me, whether to pay it off or not. 45K is not that much, as far as student loans go these days, so the OP might not derive much benefit from the PSLF. However, if you can get by on a small income, the benefit is two-fold. You sock away a bunch of money into retirement accounts that you wouldn't be able to if you just paid down your SL aggressively. Paying the SL doesn't lower your tax obligation by much since the interest deduction is limited to $2500 married or not, whereas contributing to the IRA/401K, etc, does. And having a low AGI is important for many tax advantages. Plus, with low enough IBR payments, you get a good chunk forgiven.
I would worry about several things if I were in this situation: losing my PS position and not being able to locate another, rules being changed, and taxes due on the forgiven amount.
I obviously don't know the OPs situation, but I would consider tutoring for a few years to knock out that $45k debt. If the debt were much larger, I could understand the risk vs. benefits. With this amount of debt, I would cut back for a few years and work a side gig.
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I would worry about several things if I were in this situation: losing my PS position and not being able to locate another, rules being changed, and taxes due on the forgiven amount.
I obviously don't know the OPs situation, but I would consider tutoring for a few years to knock out that $45k debt. If the debt were much larger, I could understand the risk vs. benefits. With this amount of debt, I would cut back for a few years and work a side gig.
With respect to losing the job, the PSLF payments do not have to consecutive. And whether it might be hard to get another teaching position depends on what she teaches (there are a number of shortage areas in high needs districts). But I agree that, for that amount, the PSLF is probably not worth not paying it off within 5 or less years. Run the numbers before diving into it.
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To answer the money questions :
Our combined income is 110k before tax. I hope to get a 5 to 8k raise in 6 months.
13k cash
22k investments
Credit cards payed off every month
114k left on mortgage at 3.4%
We have approximately 5000 dollar cash flow each month.
This is her first year teaching. I bought the house 2 years ago with a 50k DP
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I have used this calculator to estimate how much money I could save with the PSLF. It might give you a clearer sense of what to do.
http://www.finaid.org/calculators/ibr.phtml
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I'm guessing that in most cases, getting a non-public-service job and paying the whole amount would be financially better overall.
I think this depends on how much income they have, which wasn't shared. I would also encourage this, as DH and I paid off nearly $54k in less than four years on pretty average incomes (less than $70k combined).
My point was more that many non-public-service jobs pay better by enough to more than offset the PSLF benefit, but I guess it's moo if OP's fiancée has decided on teaching elementary school.
brokescientist, definitely compare the married-filing-jointly benefit to the PSLF benefit.
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I'm guessing that in most cases, getting a non-public-service job and paying the whole amount would be financially better overall.
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I think this depends on how much income they have, which wasn't shared. I would also encourage this, as DH and I paid off nearly $54k in less than four years on pretty average incomes (less than $70k combined).
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My point was more that many non-public-service jobs pay better by enough to more than offset the PSLF benefit, but I guess it's moo if OP's fiancée has decided on teaching elementary school.
brokescientist, definitely compare the married-filing-jointly benefit to the PSLF benefit.
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If filing jointly does not move my tax bracket and you can contribute to IRAs the same amount albeit separately, is there really ever a benefit?
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If filing jointly does not move my tax bracket and you can contribute to IRAs the same amount albeit separately, is there really ever a benefit?
A benefit to what? The PSLF? Or filing jointly versus separately for tax purposes? Because those are two separate issues.
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If filing jointly does not move my tax bracket and you can contribute to IRAs the same amount albeit separately, is there really ever a benefit?
A benefit to what? The PSLF? Or filing jointly versus separately for tax purposes? Because those are two separate issues.
Filing jointly. I would imagine that filing jointly would never help PSLF.
Thanks for the inputs.
TheBrokeScientist
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If filing jointly does not move my tax bracket and you can contribute to IRAs the same amount albeit separately, is there really ever a benefit?
Filing separately means you can't make any Roth or pre-tax Traditional IRA contributions if you both make more than $10K/year.
http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015
You could do a backdoor Roth.
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The point I tried to make was that there are a lot of benefits to filing jointly that you might not want to lose out on, including higher income limits for certain deductions, and that filing jointly doesn't necessary hurt you with respect to the PSLF if you get your AGI low enough.
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If filing jointly does not move my tax bracket and you can contribute to IRAs the same amount albeit separately, is there really ever a benefit?
Filing separately means you can't make any Roth or pre-tax Traditional IRA contributions if you both make more than $10K/year.
http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2015
You could do a backdoor Roth.
Maybe we should hold off the wedding for another 10 years :]
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Drives me insane. You can never win with the government. Why (finacially) should we get married then?
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Drives me insane. You can never win with the government. Why (finacially) should we get married then?
Because you have higher income limitations on certain deductions. I'm confused - why do you think that you shouldn't get married.
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I can't see getting joint AGI low enough with $110K of annual income to make PSLF worth it. With full 401k and IRA deductions, you get down to $63K, which barely makes it worth it for new borrower IBR payments, and rules out standard IBR payments entirely. Do you have additional pre-tax opportunities beyond a 401k?
If you and your fiancee file separately, and she contributes to a 401k, then her IBR payment would be small. If you don't legally get married (you can still have a ceremony), then she can also deduct her Traditional IRA contribution, and her IBR payments would be tiny.
Getting married or not has impacts on things like medical decision making, social security, and estate planning. You can plan around some of that. Search online for financial marriage benefits. You have some due diligence to take care of before setting out on such a long-term plan.
Because you have higher income limitations on certain deductions. I'm confused - why do you think that you shouldn't get married.
Which deductions would make a difference? Their mortgage is small enough that unless they make significant charity donations or have outrageously high property taxes, they would probably just take the standard deduction.
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I can't see getting joint AGI low enough with $110K of annual income to make PSLF worth it.
We do.
2 403bs, 2 457s, 2 HSAs, and 2 Traditional IRAs = 89.6k in deferred savings that crushes that 6 figure income into the AGI poorhouse.
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I can't see getting joint AGI low enough with $110K of annual income to make PSLF worth it.
We do.
2 403bs, 2 457s, 2 HSAs, and 2 Traditional IRAs = 89.6k in deferred savings that crushes that 6 figure income into the AGI poorhouse.
Nice.
So the question is, do brokescientist and his fiancee have the 401k/403b, 457, and HSA options?
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I can't see getting joint AGI low enough with $110K of annual income to make PSLF worth it.
We do.
2 403bs, 2 457s, 2 HSAs, and 2 Traditional IRAs = 89.6k in deferred savings that crushes that 6 figure income into the AGI poorhouse.
Same here - We also file jointly and have a higher gross than the OP with low AGI on the PSLF If OP's wife is a teacher, they have access to 403b, 457, his 401K, and tIRAs at least.
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I'm just SMH at this one. You're earning north of $100k per year and want to alter the benefits of filing jointly just for a lousy $45k loan. Refinance the loan with a combination of the low interest rates by refinancing the loan into your house or some other means like with SoFi. If you choose not to refinance you'll probably end up paying that loan off early anyways.
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I currently do not have access to a 401k, or HSA. In 6 months I will have access to a 401K with 3% match and an HSA. I do contribute to a standard IRA.
The fiance has access to a 403b, IRA, and a 457. I am not sure about the HSA.
We had a brief discussion earlier and think we could pay it off in ~2 years.
She didn't like the idea of a non-legal marriage. I understand, but don't at the same time, because we are legally screwing ourselves.
Also, in 5 years I could see myself making closer to 80k than 70k and she would most likely be around 60k.
Thanks!
TheBrokeScientist
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I currently do not have access to a 401k, or HSA. In 6 months I will have access to a 401K with 3% match and an HSA. I do contribute to a standard IRA.
The fiance has access to a 403b, IRA, and a 457. I am not sure about the HSA.
We had a brief discussion earlier and think we could pay it off in ~2 years.
She didn't like the idea of a non-legal marriage. I understand, but don't at the same time, because we are legally screwing ourselves.
Also, in 5 years I could see myself making closer to 80k than 70k and she would most likely be around 60k.
Thanks!
TheBrokeScientist
If you have a health plan that meets the requirements, then you have access to an HSA right now. You would just need to set it up on your own instead of through your employer. I would actually recommend it unless you have a good HSA plan through the employer, most seem to just let you keep the money in a crappy savings acct earning effectively nothing.
see here for eligibility criteria per IRS:
http://www.hsabank.com/hsabank/education/irs-guidelines-and-eligible-expenses
Given that, once you are eligible for your 401k, you guys can defer $71,650 of income out of your AGI, getting you down 38k-ish, which with a household size of 2 makes your payment basically nothing, and as an added bonus, with the Saver's credit will also make your federal tax liability basically zero. Seems like a closer look at PSLF would be worth it if your wife thinks she can make it 10 years in a public school system.
Sidenote, that sounds optimistic on your wife's salary. If she remains a teacher, I would expect salary to do nothing mroe than keep pace with inflation (if that) unless she takes on more roles/gets side gigs tutoring or some such.
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op, i'm using PSLF. I've made 4.5 years of qualifying payments (although for several years the payment amt was $0). We use IBR, payment now is about $300, for another 6 months, then will probably bump up. I'm not optimistic the program will actually pay out in full come 2017, but just in case, i've done all the paperwork and have copies. I think there will be public backlash and they will either cap the pay out or charge taxes on forgiven amt or both. we shall see. but, my loak is currently at $210k, our income will bump to $195k this summer and we have 4 kids, so I think I could still stand to have a good bit forgiven, if the program is in place as is in 5 years.
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I'm also doing PSLFG. I've found it to be pretty easy, I wanted to nonprofit work anyway and I have killer student loans. I have close to 5years of qualifying payments confirmed. I'm on IBR and my payments have fluctuated between 100-350 as my income has changed. If I wasn't doing IBR my payment would be like 900/mo last I checked.
Definitely get her employer to complete the form every year to verify her employment and send it in. I also keep digital copies of mine just in case. There have been times that I had to send a form twice to get the payment number to show up.
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I currently do not have access to a 401k, or HSA. In 6 months I will have access to a 401K with 3% match and an HSA. I do contribute to a standard IRA.
The fiance has access to a 403b, IRA, and a 457. I am not sure about the HSA.
We had a brief discussion earlier and think we could pay it off in ~2 years.
She didn't like the idea of a non-legal marriage. I understand, but don't at the same time, because we are legally screwing ourselves.
Also, in 5 years I could see myself making closer to 80k than 70k and she would most likely be around 60k.
Thanks!
TheBrokeScientist
I like this idea much better than PSLF. I ran the numbers on forgiveness when I graduated in 2009 with about $38k in loans, DH with about $16k (only mine could be forgiven under PSLF, as I work in a public library). When I started my job, I was making about $44k/year, and DH was making about $20k, with both of us expecting regular raises. Paying under IBR basically just ended up with my interest being forgiven, and paying aggressively as possible saved us probably $5k or more so mathematically it was more logical, plus it just felt good, a huge psychological win to get out of debt. And, as we paid off the debt, FIRE seemed more possible, because we continued to live frugally (like students), and when the loans were paid, we started paying that money to investments instead. I suggest starting a journal here on MMM so people can cheer you on. :)
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Seems like a closer look at PSLF would be worth it if your wife thinks she can make it 10 years in a public school system.
She does not have to teach in the public school system. All teachers are in public service whether they teach at public school, private schools, or charter schools. For-profit schools are businesses (like Bryant & Stratton College) and are practically non-existent at K-12.
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Seems like a closer look at PSLF would be worth it if your wife thinks she can make it 10 years in a public school system.
She does not have to teach in the public school system. All teachers are in public service whether they teach at public school, private schools, or charter schools. For-profit schools are businesses (like Bryant & Stratton College) and are practically non-existent at K-12.
Also, many non-profits also qualify under PSLF. The main thing is that you have to read the requirements really carefully. I'm fairly certain the job must also be full time or the equivalent (like 37.5 contract hours or whatever weird thing they come up with for teacher contracts), and the employer must complete the qualification form to prove eligibility.
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Paying under IBR basically just ended up with my interest being forgiven, and paying aggressively as possible saved us probably $5k or more so mathematically it was more logical, plus it just felt good, a huge psychological win to get out of debt. And, as we paid off the debt, FIRE seemed more possible, because we continued to live frugally (like students), and when the loans were paid, we started paying that money to investments instead. I suggest starting a journal here on MMM so people can cheer you on. :)
I am thick when it comes to math, but I don't get this. If all of your interest would have been forgiven after 10 years, how do you save money by paying it off in two years - you are still paying interest for those years.
I would gladly take a 0% ten year loan and start investing my extra money a lot earlier.
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Could it be due to the fact that we would not be able to partake in IRAs for 10 years if filing separately?
If filing jointly, we would be able to get our income down by taking advantage of our IRA, 401k, 403b, but the IBR payments would still be based around a 60k salary. That is my major concern. The PSLF program seems slightly advantageous at best, and that is if nothing changes from now until 2025.
Thanks!
TheBrokeScientist
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Paying under IBR basically just ended up with my interest being forgiven, and paying aggressively as possible saved us probably $5k or more so mathematically it was more logical, plus it just felt good, a huge psychological win to get out of debt. And, as we paid off the debt, FIRE seemed more possible, because we continued to live frugally (like students), and when the loans were paid, we started paying that money to investments instead. I suggest starting a journal here on MMM so people can cheer you on. :)
I am thick when it comes to math, but I don't get this. If all of your interest would have been forgiven after 10 years, how do you save money by paying it off in two years - you are still paying interest for those years.
I would gladly take a 0% ten year loan and start investing my extra money a lot earlier.
Sorry, I didn't state that quite right, and I don't remember the specifics now, but using the IBR calculator, it looked similar to this (calculator: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action ):
Loan balance:
$36,000, 6.5% interest
Monthly payment under IBR:
$151 to $403
Forgiven amount:
$3,585
Total interest paid:
$37,539
Total amount paid:
$69,955
So we were better off just paying down the total of $54,000 very quickly (less than 3 years), and as we aggressively paid this down, the amount of interest also went down (when you only pay $151/mo toward a debt of $54k, you are barely paying off the interest each month, if at all, depending on your interest rate). I also didn't feel right about doing PSLF, since my income was higher than expected and our expenses were still low. Also, I didn't quite trust that I'd still be employed by a qualified employer, and that the program would still be around. We paid it all off in 2013, and are doing very well investing those large payments. :)
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Could it be due to the fact that we would not be able to partake in IRAs for 10 years if filing separately?
If filing jointly, we would be able to get our income down by taking advantage of our IRA, 401k, 403b, but the IBR payments would still be based around a 60k salary. That is my major concern. The PSLF program seems slightly advantageous at best, and that is if nothing changes from now until 2025.
Thanks!
TheBrokeScientist
If you file jointly, my post above showed how you can defer up to 70k, so you would not show income of 60k on you AGI (I thought you stated your income was around 110k). In that range, i believe your payment would be around 200-300 a month, which translates to a total of 36k repayed on a debt of 45k if you can continue to use tax deferred buckets to keep your income low.
At worst, you could apply for IBR payments, see what the payment is now, and make a determination about whether or not you want to aim for PSLF or if you want to go for aggressive repayment instead.
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At worst, you could apply for IBR payments, see what the payment is now, and make a determination about whether or not you want to aim for PSLF or if you want to go for aggressive repayment instead.
Yes, there is no reason you can't be on the IBR and aggressively pay your loan if you so choose. I got on the IBR in some part because I didn't want the obligation of making the standard payment if I lost my job.
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Using the calculator this is what I found. Am I missing something?
https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#view-repayment-plans
This is with a gross income of 50,000. Assuming I am able. To drop the gross by 60k.
Repayment Period
153 months
Initial Monthly Payment
$326
Final Monthly Payment
$518
Projected LoanForgiveness
$0
Total Interest Paid
$24,867
Total Amount Paid
$69,867
Even if the payments stay at 326 dollars for the 120 months, and nothing changes I still end up paying 40k saving only 5k which would be taxable.
I still feel like I'm missing something.
TheBrokeScientist
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Even if the payments stay at 326 dollars for the 120 months, and nothing changes I still end up paying 40k saving only 5k which would be taxable.
I still feel like I'm missing something.
TheBrokeScientist
Nope, that sounds about right, which is what I was trying to say above. It didn't make sense to drag it out to save only $5,000. By paying it off aggressively, you may save close to $5,000 in interest as you pay down the principal.
Edited to add: you can use a calculator like this one to see how the extra payments will affect the total amount of interest paid: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx (click amortization schedule to add in the extra payments).
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Now the devils advocate. I could file taxes separately, get her gross income down to about 24 to 26k a year, claim two people in our household and end up paying a total of around 21 to 24k on the loan. However, I would then sacrifice all IRA contributions for 9 years.
Is sacrificing 100k tax deferred income worth that 25000 dollars?
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Now the devils advocate. I could file taxes separately, get her gross income down to about 24 to 26k a year, claim two people in our household and end up paying a total of around 21 to 24k on the loan. However, I would then sacrifice all IRA contributions for 9 years.
Is sacrificing 100k tax deferred income worth that 25000 dollars?
Your marginal tax rate for the IRAs would be maybe 15%, so yes, the PSLF sounds like the better route, financially, as long as all goes according to plan. You would still have the backdoor Roths.
Seems like there's enough uncertainty to make it a toss-up, though.
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I actually just spoke with a fed loan rep today, as I am in a similar situation. Finishing grad school in a week, trying to decide between PSLF while contributing to early retirement, or holding off on retirement savings to go full force at SL's. I'm choosing PSLF.
I asked her directly about the possibility of the program not existing or being changed before my 10 year/120 payment mark. She said that once you are in the PSLF program, you're in under the terms in which you signed up. So once you apply, qualify and are signed up with PSLF, they WILL honor the agreement and your loans will be forgiven. Even if the program changes in the future or upcoming elections, etc, those changes would not affect you if you're already paying under PSLF. I made sure she clarified that three times during our conversation just to make sure. ha!
Also, loans forgiven under PSLF are NOT considered taxable income...a major plus!
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Using the calculator this is what I found. Am I missing something?
https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#view-repayment-plans
This is with a gross income of 50,000. Assuming I am able. To drop the gross by 60k.
Repayment Period
153 months
Initial Monthly Payment
$326
Final Monthly Payment
$518
Projected LoanForgiveness
$0
Total Interest Paid
$24,867
Total Amount Paid
$69,867
Even if the payments stay at 326 dollars for the 120 months, and nothing changes I still end up paying 40k saving only 5k which would be taxable.
I still feel like I'm missing something.
TheBrokeScientist
My big concern is that, in my experience, that calculator (and all the others you find when you google IBR), is pretty bad for some reason.
When I was looking into IBR, I used the exact calculator you linked to, plugged in my information, and was told that based on what I told them, I would not qualify for IBR and that I would need to do the standard repayment plan. That didn't seem right based on what I know, so I went ahead and sent in the app for IBR. When it was processed, I did qualify for IBR and my payment was about 40% of what the standard repayment was. I try to use the calculators from time to time when I reapply for IBR, and I can never get the right result, and everytime (reapplied 4 years thus far) it has worked out far more favorably IRL than what the calculator said.
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Yeah, I had a much higher AGI and my payment was close to initial payment you got out of the calculator.
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Yeah, I had a much higher AGI and my payment was close to initial payment you got out of the calculator.
Do you mind sharing your approximate AGI at the time of the IBRs?
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OK well here is the new plan.
We are going to maximize out her 457B, 403b, and if there is anything left over her HSA. She also has to pay 7% into her pension which is pretaxed. She is going to file separately. That will bring her AGI down to 7500 dollars a year. The payments at that AGI are 0. So, after 10 years the loan will be 100% paid off without me spending a dime.
I will just max out my 401K, pay for living expenses and any extra cash floating around will go through a backdoor roth IRA.
Thanks everyone whom contributed to this thread for all your help. If I should be thinking of anything else please let me know!
-TheBrokeScientist
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Make sure you run all the numbers both ways before you file separately. The amount you save on the loan could be outweighed by higher taxes and lost IRA deductions.
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Make sure you run all the numbers both ways before you file separately. The amount you save on the loan could be outweighed by higher taxes and lost IRA deductions.
Agreed. I like the plan, but you should still check. I pulled up the TurboTax Taxcaster (https://turbotax.intuit.com/tax-tools/calculators/taxcaster/), and based on the info I have, I got a $2800/year difference between the two for federal taxes. I didn't include itemized deductions, like mortgage interest and charity giving, which would reduce that difference a little bit.
And as you go along, make sure you're jumping through all the right hoops and double-check that each payment is being counted toward PSLF.
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Thought I would provide some more information to chew on.
I just finished processing my renewal for IBR. Quick reminder, entering my information in the calculators told me I am probably not eligible.
Outstanding Balance - $70kish
Standard Plan Payment - $466
IBR Payment for next year - $10.08 (not a typo, ten bucks)
This is on a MFJ gross salary just inside 6 figures, but with all the tax deferred options (457, 403b, IRA, HSA) this is the result.