Author Topic: Friend’s student loans 110k @ 10%  (Read 1350 times)

Steeze

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Friend’s student loans 110k @ 10%
« on: June 10, 2020, 05:26:33 PM »
A kid I’ve mentored is going to graduate college 110k in debt.
His average interest rate is 10%, highest is 12.5%
I had no idea rates could even be that high. Mostly private salle Mae loans.

He has a job offer at PWC to be an accountant upon graduating a year from now.
They haven’t talked salary yet but he is expecting in the 55k range.
With 2k/mo living expenses he can swing the payments at 7% over 10 years.
Right now all interest is deferred, but accruing $1000/mo.

I want to help him out, but I don’t really know how. How to protect myself if I loaned him cash, or if it is possible to co-sign and consolidate the loans at 7% while he is still in school.

Maybe I should do nothing and let him struggle through it like I did. He is like a brother to me and his family is an important part of my life. His father was there for me and helped keep me stay on a good path when I was in a similar situation. Gave me a place to live and kept me employed if I ran out of money.

What would you do, and how would you do it?

Should add that I trust the kid, he is super responsible, highly intelligent, very high GPA, etc. Under no normal circumstances would he fail, but we don’t always fail on purpose.
« Last Edit: June 10, 2020, 05:28:43 PM by Steeze »

swashbucklinstache

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Re: Friendís student loans 110k @ 10%
« Reply #1 on: June 10, 2020, 06:26:06 PM »
He should look at consolidation since they're private loans anyway. Especially if he gets a big 4 accounting job, especially with interest rates so low. I haven't checked so I could be way wrong, but I'd be surprised if those percentages didn't drop significantly even on unsecured debt. I'd start there before getting your money involved directly.

Peachtea

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Re: Friendís student loans 110k @ 10%
« Reply #2 on: June 10, 2020, 07:13:38 PM »
Iím curious about the composition of his loans, because it can be key to triage them. I had high interest loans, including one at 10% and all my brotherís private loans were 10-12%. Yes, thatís what happens when your parents are lower income and/or have bad credit. Financial aid now mostly gets you various federal loans, and you can only take out a small amount of federal loans in undergrad, which leaves a gap too big for a part-time job to fill. Thus, the high interest private loans to fill the gap. (We both went to in-State schools).

If heís in grad school 110k debt makes sense, but it doesnít make sense that they would be private loans or an average of 10%. Grad school qualifies for the grad plus federal loans and so anyone in grad school nowadays should not be taking out private loans for the grad school portion. Similarly, not all of his undergrad loans should be private, it should be 1/3 to 1/2 federal (assuming state school for undergrad). Sometimes people think they have private loans when they are federal because the federal government isnít the servicer, private companies are. Itís an important distinction because 1) the federal loans today and in recent years have significantly lower interest rates and greater benefits, so he does not want to refinance these (at not until his income situation is where he can get like a sub 5% rate), and 2) federal loans have income based repayment plans that are no more than 10% of your AGI - 150% of the poverty line. Putting federal loans on an income based payment plan can be a good way to free up more money to throw at high interest rate private loans. He can log into his FSA account to see his federal loans and match them in Sallie Mae to see which of those listed in Sallie Mae are actually federal, not private loans that Sallie Mae just services. https://studentaid.gov/

For the private loans he can request lower payments and they have various payment plans like ones that start out lower and get higher as the years go on (graduated). Theyíre not as good as federal income based plans, but will help him afford them short term to have a history on-time, ďfullĒ payments to build up his credit score, so he can refinance for a lower rate.

What you can do is teach him how to increase his credit score (I.e. taking out a couple credit cards that he uses once a month for something and then pays off to build credit.) If you feel comfortable once the loan payments are set and if itís clear he canít afford them, you could pay a set amount towards them to subsidize the gap in affordability, until he has enough credit and income history to refinance. You could, while heís in school, make payments on his behalf to lower the accrued interest.

I wouldnít co-sign, because thatís a lot of responsibility to take on. Itís not just the what ifís of his future situation but yours too. You donít know if youíll always be in a position to help. I think my brothers private loans were ~30k. My husband and I decided to help out my brother (we offered, he didnít ask), because weíre in a position to do so and he has a low income. We were similarly worried about his ability to handle the very high interest rates with out sinking into a hole too difficult to climb out. I gave advice on his federal loans - like donít do deferments, because if your income is low enough, your payment on an income based plan is $0 and those $0 payments count towards the 20 year forgiveness if necessary. I also advised him to pay them off ASAP once he could afford higher payments. But I left him to figure those out and take action on, knowing that worst case scenario thereís IBR with reasonable payments and 20 year forgiveness available. For the private loans we started paying $1,000 a month towards them while he was in school and $1100 afterwards. (To pay off the loans in a few years instead of the 10 or 15 year term they had.) We made it clear this was a gift. We did not refinance, because at no point would he have been eligible for a better interest rate and I did not want to co-sign them. Monthly payments gave us the ability to end the gift if we ever needed or wanted to. We ended up paying all the private loans in 2.25 year; at the end we did a larger lump sum to wipe them out the remaining balance. I donít regret this, because while we paid more in interest, the ability to bow out if necessary was worth the extra costs. (If he could have refinanced alone for a better rate, I would have had him refinance and then we still would have helped made payments.)

« Last Edit: June 10, 2020, 07:19:55 PM by Peachtea »

Sibley

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Re: Friendís student loans 110k @ 10%
« Reply #3 on: June 10, 2020, 07:45:30 PM »
I agree, look into consolidation for lower rates. Be careful to properly identify federal vs private loans, and do not comingle them. He should also be careful not to forfeit the federal benefits, or at least have a clear understanding of what he's forfeiting.

I've heard that some of the Big 4 were starting repayment assistance. He should investigate that once he's working, including the handcuffs they come with. Once he graduates, he should also start working on the CPA license assuming that's the path he's going. Even if he doesn't stay in accounting, that cert carries value. PwC should provide assistance towards test prep, test fees, etc.

There are also sometimes perks of the job - free food, etc. That might help with the budget a bit as well.

Steeze

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Re: Friendís student loans 110k @ 8%
« Reply #4 on: June 10, 2020, 08:18:22 PM »
Thanks for the feedback - that is really awesome what you did for your brother. I am definitely not in a position to make those kinds of gifts! I suppose I could if I had to. I was more thinking along the lines of a co-sign or personal loan from me to him at a more reasonable interest rate say 5% or something. Something that helps us both out.

His loans upon graduating (undergrad) will be almost exactly 55k federal loans and 55k private. I wouldn't touch the federal loans for the reasons you mentioned. The private loans are my concern. The high numbers are from him taking out extra money to pay his rent. He also took a ton of extra classes with a double major in accounting and finance and a minor in Russian.

He is working part time and just paid off his first student loan which was about 9k. That is the reason I even asked all the details about everything else, because he was celebrating his victory. In any case he has a plan to get his loans paid off in 4-5 years from graduating. I went through the math with him and it all seems reasonable if he avoids buying anything like a car or a house during that time. He would still pay around 25k in interest over that period though.

I just re-did the math too - the average interest rate is actually 8% not 10%. He has 3 loans that are around 13k each that are 10%, 11%, 12.5%
Maybe I could just knock out that one 12.5% loan - give him a low interest loan on one just to keep his moral up.


mozar

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Re: Friendís student loans 110k @ 10%
« Reply #5 on: June 10, 2020, 08:34:13 PM »
I was in a similar situation. Accounting degree. Paid off 100k in student loans in 5 years. Is there anything you can do to help him lower his living expenses? 2k a month is ridiculous for a 21 year old. Unless he lives in NYC in which case he is being underpaid. Also I think he should pass the cpa ASAP. I had a cousin in law who finished college a semester early to spend the last semester studying. You could gift him the cost of the exam.

Steeze

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Re: Friendís student loans 110k @ 10%
« Reply #6 on: June 10, 2020, 08:44:24 PM »
@mozar ill take a closer look at his budget - seems like it is around $1600/mo with $100 of non essential spending. He has $400/mo unaccounted for which he surely needs to figure out.

Spending is high because he lives in Boulder, CO and his half of the rent is $1100.

LightStache

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Re: Friendís student loans 110k @ 10%
« Reply #7 on: June 10, 2020, 09:10:08 PM »
Keep in mind that Mustachian values are what we, on this forum, have decided to adopt, but they are not the "right" values. It's definitely not "ridiculous" for a 21 y/o to spend $2K/mo, even in a LCOL area. He also doesn't "need" to figure out where the mystery $400 is going. If you make these judgement and force frugal values on a young guy who doesn't share them, it could really backfire.

Steeze

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Re: Friendís student loans 110k @ 10%
« Reply #8 on: June 11, 2020, 04:14:15 AM »
Keep in mind that Mustachian values are what we, on this forum, have decided to adopt, but they are not the "right" values. It's definitely not "ridiculous" for a 21 y/o to spend $2K/mo, even in a LCOL area. He also doesn't "need" to figure out where the mystery $400 is going. If you make these judgement and force frugal values on a young guy who doesn't share them, it could really backfire.

Well said. I do think he shares the motivation for FI and has in the past asked me to review his spending for optimization. In the budget he sent me he had a line item ď$400 unknown - should be saving or student loansĒ  - so he is at least acknowledging the need.

I certainly donít advocate this mustachian path for anyone. Iíll explain what it is and why I want to do it, but in the end it is a big sacrifice for most people. It is a path walked by few and you have to be a bit of an outsider to be ok with it. I do think that most people should work with the idea of achieving FI in their lifetimes, but doing it in 10-15 years is not normal.

Iíve taught him about index funds, the 4% rule, and investment orders. Iíve told him to consider always saving half his after tax income for life. He has a lot to learn still, but he has a good head start. Once he gets through the loan payback period of his financial life he will be headed in a good direction.

Cpa Cat

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Re: Friendís student loans 110k @ 10%
« Reply #9 on: June 11, 2020, 06:40:18 AM »
Heíll be fine. The whole point of working at PWC is to jumpstart your career. It sure isnít the work-life balance. Heís not going to be making $55k for long. Within 5 years, heíll likely move to a $100k+ salary.

I donít think you need to intervene in this.


I think that your guidance and mentorship is most valuable in helping him with stress management tools. Firms like PWC are pretty notorious for having grueling work hours for junior accountants. A lot of them burn out. Avoiding burn out will be key to him having a successful career. The messaging and work culture will pressure him to keep putting in more time and he will be surrounded by people who think this is normal. His mental well being is far more at risk in the next 5 years than his financial well being.

swashbucklinstache

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Re: Friendís student loans 110k @ 10%
« Reply #10 on: June 11, 2020, 07:26:37 AM »
Heíll be fine. The whole point of working at PWC is to jumpstart your career. It sure isnít the work-life balance. Heís not going to be making $55k for long. Within 5 years, heíll likely move to a $100k+ salary.

I donít think you need to intervene in this.


I think that your guidance and mentorship is most valuable in helping him with stress management tools. Firms like PWC are pretty notorious for having grueling work hours for junior accountants. A lot of them burn out. Avoiding burn out will be key to him having a successful career. The messaging and work culture will pressure him to keep putting in more time and he will be surrounded by people who think this is normal. His mental well being is far more at risk in the next 5 years than his financial well being.
Hard agree. If you have an easy path to 100k income in your 20s, "not fucking it up" is the hardest part. And a lot of companies pay you that much because they're running you very, very hard so it is easy to "fuck it up" in that sense. It's like a black swan to your plans, but it shows up in  your mental health instead of the stock market. And, it happens to 30% of people within 5 years. Avoiding that, or accepting it and bowing out gracefully instead of painfully when the time comes, is easily worth 500k plus. If you need to hammer this message home and have the means to do it I think offering to loan him ~10k against his 12.5% loan along with hammering this message home makes a ton of sense. It might make sense for him to have a 3 or 5 year exit plan written like "unless xyz I will be quitting" and that might be "I haven't worked > 45 hours in a week in the last 6 months nor thought about work on the weekend once" even if he acknowledges he'll do both of those a lot of time, and can handle that, for a few years. If he's going to stay he'll need to, to establish himself, but he'll need to find a way to get to a survivable balance sooner rather than later. Today his risks to FIRE are lifestyle inflation and burnout in 2-3 years and the rest (e.g. returns, allocation) are mostly just details.

"he is super responsible, highly intelligent, very high GPA"
^these are actually the people most at risk here. Many of them haven't learned to fail at all, let alone gracefully yet. They also are used to being able to handle everything thrown at them, and firms like this will often give them, or not stop them from proactively taking on, "just another 10%" until they reach and surpass their own personal limit. With burnout most people don't realize until it is too late.
« Last Edit: June 11, 2020, 11:17:50 AM by swashbucklinstache »

mozar

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Re: Friendís student loans 110k @ 10%
« Reply #11 on: June 11, 2020, 07:30:54 AM »
I don't see a problem with nudging him towards mustachianism. He can always change his mind and waste all his money if he wants to.
It concerns me that he is taking out loans for rent. It is an indication that he is living above his means. It would be better if he focused on finding cheaper rent. Or at least figure out where that last 400 is going.

I got an offer of 54k at a non big 4 accounting firm in 2008. Cheap rent made it possible for me to pay off most of my loans quickly.

Rosy

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Re: Friendís student loans 110k @ 10%
« Reply #12 on: June 11, 2020, 11:47:06 AM »
Excellent input, thoughts and advice.

I disagree with Cpa Cat about the financial stress vs the corporate stress that can grind you to dust.
IMO that all depends on the individual, I thrived on the grueling corporate mill, every step forward, every exam made me feel stronger. Skills, connections and exams/certifications you will have forever - it gives you options in the world at large, negotiating power and confidence, you know you'll advance and make more money and no matter where you go from there, that exhausting training will be an asset and give you an advantage in your profession for life.
I didn't mind the overtime...

But debt - financial stress - the thought of helplessly watching while one thousand dollars interest accrues each month or worrying every damn month about whether I could make the next rent payment that is something that would grind me down within three months.

It's rough to go to work and have absolutely nothing to show for it other than dwindling debt - not a good time to press for MMM style living when one is already done for and has nothing else left to give.
Earning power is what will propel him forward to freedom, to me for instance FI matters the most - it gives you the option to RE whenever and however you want to "retire". I've always wanted that freedom of doing nothing or starting my own business and living precisely as I please.

My two cents
1. I suggest you tackle that 12.5% loan for him and are available to cover the rent if it should occasionally become necessary or contribute to the rent every once in a while. That will give him breathing room.
He does need to do the heavy lifting on his own but not having to worry about a roof over one's head is a huge relief.

2. I like the idea to have him finish a semester early - so he can get his CPA and maybe some R&R before he goes into slavery for the next five years:).
I think it would be a huge boost to his self-confidence and I imagine you can handle the one time fee.
Consider it as paying forward the kindness, money, and support that you have enjoyed in the past.
 
3. Time for a realistic plan and finding out where that elusive $400 disappeared to - that is unacceptable going forward, a quarter of his income!
If he cannot come up with a workable budget where every last penny is accounted for then I take that as a bad sign.
He needs to take apart every line item for optimization at least two or three times and then think again about how he could eradicate it or lower it.

I suspect he may have given up, temporarily at least, on a true budget, much less fixing his financial situation.
Staggering, overwhelming debt will do that to you.

Go slow until you know the lay of the land, both of you will have to test the waters as to what works and is comfortable - no co-signing.
Be clear in your intentions and ask the same of him, ask him to stick to a new budget for the next three months.
Continually adjusted along the way until it works well - budgets need to have some flexibility built-in to be successful. 

It isn't easy to maneuver through life in a financially responsible fashion when you are that young.
The rent being $1100 is a huge chunk out of the budget - only acceptable if there really are no cheaper alternatives.
1. How hard has he tried and thought about this - truthfully?
2. How close to work is it? Is it convenient for school now, but not when he starts working?
3. Does it give respite at the end of a long workday or is it party central? A place that works while attending school may become a problem once corporate demands change your entire world and you want nothing but peace and quiet.
4. Is it convenient to walk to somewhere - a park - a grocery store/gym/cafe/store whatever is important to him.
Does it offer some other advantages of any sort?
5. What about rent increases - how often - how high?
6. What about the lease itself - will he have to move in two years or can he stay for at least another five years or so?
It wouldn't do to have to move when he has neither the money for another deposit nor the time to deal with the expense of a move and the time required to find an affordable new place.
7. What about the people he is sharing the place with - are they good for him or is it time to move on?
Some pass like ships in the night others lift your spirits...or turn you into an irresponsible party hound.

I am not advocating a hole in the wall in a bad part of town just because it is cheaper.
He may already live in a good place and it would be foolish to try to shave off rent.

Unlike mozar any time I've tried to live in a place solely because it was cheap, I ended up totally depressed, it made me feel sad, discouraged, worth less than dirt. MMM may preach living frugal but when it comes to housing he likes a nice home.
You get to know your core self after a while, I know I need space, light, color, access to the outdoors and a few conveniences/entertainment within walking distance of one or two miles.
I've moved a lot, over twenty times in my lifetime. I'll take a nice place to live over paying off debt quicker anytime.
As long as you have a solid plan and your finances are in order then all is well, regardless of whether that loan takes another two years to pay off or not.
YMMV

This is a critical time in his life - I wish him luck, there will be hiccups along the way, but this is a good time to take stock and reverse course before the ship sinks. You are a good friend to help, you are doing the right thing in lending some monetary support and guidance.
Paying it forward is a good thing:).


Steeze

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Re: Friendís student loans 110k @ 10%
« Reply #13 on: June 11, 2020, 12:12:34 PM »
Thanks @Rosy - For now I think the living situation is good for him. He has had some very toxic living situations prior, and this is the first one that seems to work for him. His roommate is a mid/late 20's professional and a friend of the family as well. Neither of them are involved in the party scene at all, both are very busy & introverted. More of a neutral situation than really good or really bad. Location is great - walk to everything - work/school/grocery/park. I would live there in a heart beat - still trying to convince DW that snow is a good thing!

Broadway2019

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Re: Friendís student loans 110k @ 10%
« Reply #14 on: June 12, 2020, 11:56:02 PM »
PwC has a student loan refinance program, although not sure how good it is. Also he can probably go to SoFi.com right now and get like 4% interest without doing much work.

Why make this complicated? Interest rates are low, just give him advice to refinance.