Author Topic: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement  (Read 24113 times)

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #50 on: February 26, 2015, 09:15:19 PM »
I am the self appointed expert of stupid student loan decisions. I took out 100k for undergrad and 35k for accounting grad degree. So 135k. I got a job making 54k out of grad school. My rent was 550. I paid 2000 a month for 5 years. Then I bought a house for about 150k. I have about 15k in loans left at a super low rate. I preferred to grind it out because it was such a weight lifted off my back.

My concern is all these promises going around. You'll save for a downpayment if your gf promises to pay your loans? Your gfs parents promise to help pay her loans when the other daughter goes to school? At which point I guess the parents will promise the other daughter that they will pay for her loans once they paid off your gfs loans? My parents promised they would help me pay for my loans too and I am still waiting. I would prefer to keep things clean. You pay off your loans and she buys the house and you pay rent. You can always put your name on the deed later.

I think you should propose asap. Most women I know would prefer a smaller ring and get it sooner, so they can carry on with their life already and stop wondering. Then you can promise to get her a nicer ring in 10 years...
Ha, good advice on the ring. I'm waiting for what feels right, though.

As for the "promises," I'd characterize them more as understandings. We're very open about my debt and she understands that getting rid of that debt will be a huge win for us. So saving on a down payment isn't necessarily a quid pro quo transaction; it's my way of saying, "Hey, I'm here to help you achieve a huge goal (buy a house) because I know you'll help me out later."
« Last Edit: February 26, 2015, 09:17:20 PM by ReadySetMillionaire »

aschmidt2930

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #51 on: February 26, 2015, 10:06:52 PM »
Your expenses and lifestyle seem pretty solid. The focus for you needs to be on income, your salary is too low for that type of debt. Nothing to stress about, pretty much everyone starts lower than they would like. Work hard and aggressively pursue other opportunities.

dsutt

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #52 on: February 26, 2015, 10:12:55 PM »
$890 on a $48,000 income seems high. Is this including your wife's income, how much does she make? If so, does she have a high enough loan balance to get into IBR or PAYE? Also, is there any chance that she will want to be a stay at home mom someday; you should take that into consideration. Even if you end up having to file separately, the gains from IBR + her income likely outweigh the lost tax benefits and IRA opportunity. Not to mention that you still have 401k (or your other jobs retirement plan, law firms like SIMPLE IRAs) and HSAs to invest in.

It all really comes down to your goals. If you're thinking early retirement, then you need to use IBR so that you can have the rest of your money invested. If your situation ends up being such that Traditional and Roth IRAs are not an option, I'm confident people on this forum can give you some good guidance on where to put that money. Like everything else in this analysis, missing out on IRAs is unfortunate, but it is again a result of the fact that your wife is making money -- which is a good thing for the family net worth.
To clarify: yes, $890 is using both of our incomes. My payment just on my income is $375.

Her loans are mostly private, so she is ineligible for PAYE or IBR.

I don't think she'd ever be a permanent stay at home mom. Maybe some day down the road, but she has a professional degree, thoroughly enjoys her job and her profession, and I certainly don't want to bank on her not having an income to keep my payments low.

Ultimately, I just don't think IBR is as good of a long term plan as you think it is.

After refinancing, I expect to pay around $200,000 towards these loans. If my average payment over 25 years was $500 per month (a low estimate even if I filed separately), that would be $150,000 in payments alone. Add a huge tax bill (since I wasn't covering the interest) and I ended up paying more towards those loans.

Meanwhile, if I grind hard and pay these off ASAP, when I'm done (hopefully 7-8 years), my GF and I will have about $3000 per month to pay off the mortgage and eventually save. I'd much rather do that and control everything than play games with the tax code and pray the government doesn't change things midstream.

I do appreciate your counter arguments, though, so keep them coming.


Interesting discussion ReadySetMillionaire & Tank_Esq

I have a similar situation student debt wise and am curious how other people are handling the debt, and what MMM thinks of dealing with this.  I tend to agree with Tank_Esq.  I think ReadySetMillionare is right that the Income driven plans are a gamble, but they could pay off. 
 Here are a few points I don't think you have discussed yet regarding IBR and PAYE. 

If your loans just went into repayment, you get 3yrs of IBR or PAYE where the government will pay the leftover interest on the loans after you make your 10-15% of income payment.  No interest accrues during this time.  If you have extra income you could pay the minimum each month, have the government pay the rest of the interest for the month, and then make an additional payment directly to principal.

After three years, in either plan, as long as you maintain a financial hardship, (which with a loan of $150,000, is earning something under around $100,000,) interest accrued on the loan does not compound.  The unpaid interest just sits in a little side pile, that will be forgiven or paid off with all the money and compounding interest that you earned on the borrowed money that you did not put back in the loan. 
The situation will vary from person to person, but if you invest the difference your standard 10yr loan payment, and the 20 year PAYE each month, you should have around the same amount of money in your investment account and your debt account in 5-8 years.  That gives you 12-15 years of two accounts, investment with interest compounding, and debt with simple interest. 

20 yrs is up and if nothing changes, you do get a nasty tax bill on the 200,000 plus loan and interest you have accrued, but even if this is close to 40%, you can pay it out of your investment account no problem. 
Luckily Elizabeth Warren is working on non-taxable forgiveness for us--I believe she already put forth bill suggesting this.  There is a lot of talk about refinancing public loans too.  The government would have a hard time changing the rules on student loan forgiveness, as this would just bankrupt millions of people.

Obama did change the rules for PAYE for almost everyone.  ReadySetMillionaire, you and I will be allowed into the PAYE system in October of this year.   When you switch plans, the years on your loan do not reset.  If you already five yrs in, you only have 15 more to go for forgiveness. 

Lastly, check out this link.  It basically shows how the current income based repayment system is a cash cow for Lawyer and future high earner types.  It has a nice spreadsheet to accompany. 
http://newamerica.net/publications/policy/safety_net_or_windfall

Look forward to comments and rebuttals...


ZiziPB

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #53 on: February 27, 2015, 04:03:48 AM »
I commend the OP for his plan to pay off what he borrowed in full.

For all of you fairly new mustachians with large student loan balances, this thread should be a required reading before you make your decision on IBR or whatever other program.  http://forum.mrmoneymustache.com/welcome-to-the-forum/ethical-dimensions-of-student-loan-income-based-repayment-plans/

former player

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #54 on: February 27, 2015, 04:15:49 AM »
There is a lot to be said for paying off the student loans rather than going the IBR route: you are paying off your debts rather than relying on the government to do so, you are simplifying your life/taxes and you are buying your freedom from a 20 year obligation.  Just as some people would rather pay off their mortgage than invest for higher returns, it is a valid and mustachian choice.

I can quite see that the flat is too small.  But given that OP manages the building and gets a great break on the rent, would it be possible to move into a larger flat in the same building as soon as one becomes available?  It would take some of the pressure off the immediate need to buy a house, and give a bit of breathing room on savings/paying down debt.

The job sounds ideal apart from the pay.  So the question is: what are the likely pay rises in the next few years to partnership, how soon will they kick in, and what sort of financial rewards come with partnership?  What is the norm and is there likely to be room to negotiate?  OP should practice his negotiation skills to manage his pay upwards.

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #55 on: February 27, 2015, 04:51:19 AM »
Interesting discussion ReadySetMillionaire & Tank_Esq

I have a similar situation student debt wise and am curious how other people are handling the debt, and what MMM thinks of dealing with this.  I tend to agree with Tank_Esq.  I think ReadySetMillionare is right that the Income driven plans are a gamble, but they could pay off. 
 Here are a few points I don't think you have discussed yet regarding IBR and PAYE. 

If your loans just went into repayment, you get 3yrs of IBR or PAYE where the government will pay the leftover interest on the loans after you make your 10-15% of income payment.  No interest accrues during this time.  If you have extra income you could pay the minimum each month, have the government pay the rest of the interest for the month, and then make an additional payment directly to principal.

After three years, in either plan, as long as you maintain a financial hardship, (which with a loan of $150,000, is earning something under around $100,000,) interest accrued on the loan does not compound.  The unpaid interest just sits in a little side pile, that will be forgiven or paid off with all the money and compounding interest that you earned on the borrowed money that you did not put back in the loan. 
The situation will vary from person to person, but if you invest the difference your standard 10yr loan payment, and the 20 year PAYE each month, you should have around the same amount of money in your investment account and your debt account in 5-8 years.  That gives you 12-15 years of two accounts, investment with interest compounding, and debt with simple interest. 

20 yrs is up and if nothing changes, you do get a nasty tax bill on the 200,000 plus loan and interest you have accrued, but even if this is close to 40%, you can pay it out of your investment account no problem. 
Luckily Elizabeth Warren is working on non-taxable forgiveness for us--I believe she already put forth bill suggesting this.  There is a lot of talk about refinancing public loans too.  The government would have a hard time changing the rules on student loan forgiveness, as this would just bankrupt millions of people.

Obama did change the rules for PAYE for almost everyone.  ReadySetMillionaire, you and I will be allowed into the PAYE system in October of this year.   When you switch plans, the years on your loan do not reset.  If you already five yrs in, you only have 15 more to go for forgiveness. 

Lastly, check out this link.  It basically shows how the current income based repayment system is a cash cow for Lawyer and future high earner types.  It has a nice spreadsheet to accompany. 
http://newamerica.net/publications/policy/safety_net_or_windfall

Look forward to comments and rebuttals...

Interesting post, and I'll rebuttal point by point.

First, I guess I will qualify for PAYE this October. Yay me I guess.

Second, regarding forgiven interest, the government will only reimburse you for interest on your Subsidized Stafford loans. For me, these are only about 10% of my loans. More importantly, the rest of unpaid interest after three years capitalizes up to 110% of the loan (see here: http://www.ibrinfo.org/what.vp.html). Thus, by not being aggressive early on (and only paying $221 per month), my loan would balloon to over $160,000 easily, despite the forgiveness on my Subsidized Stafford Loans.

Side note: right now, I am enrolled in IBR even though I'm making huge payments. This means for the next three years, I'm barely putting anything towards my Stafford Loans, covering about $10 more than the monthly interest on all other loans (so they don't capitalize), and putting everything else towardsmy highest interest loans.

Third, my PAYE estimated my monthly payment to be $221, meaning there would be almost $600 in interest being added each month. What happens if I get a job paying $100,000 per year? Now my payment shoots up to $604 and I'm still not gaining ground on the interest. I'll get to the math later on why this is bad.

Fourth, your post assumes 7% returns in the market. I'm a believer in passive investing over the long haul, so that's fair. But what if the economy takes a hit in year 20 when your tax liability is due? This makes PAYE/IBR a HUGE gamble to me.

And this leads me to my fifth and most important point: I can't risk this plan with the hope that the government will amend the tax bill. This is for two reasons. First, the entire program becomes insolvent if you remove the tax burden. This would lead to even more increased tuition and outcries from a younger generation. Second, and more importantly, the present tax code accounts for people who really can't afford the tax liability. The IRS fact sheet on forgiven debt (http://www.irs.gov/pub/irs-pdf/p4681.pdf) provides, basically, that you are only accountable for forgiven debt to the extent that it exceeds your assets. So say the average Joe is on PAYE and paid for 20 years, thus allowing his loan to balloon to $250,000. Fortunately, because he's an average Joe and not a mustachian, all he has is a $150,000 house and $100,000 in his 401k. That means that his assets are equal to his forgiven debts and he therefore has no tax liability.

Of course, there are a lot of variations to this. But the point is that (1) the tax code already accounts for people who can't pay the tax liability and (2) the "tax bomb" problem people say will happen in 20 years isn't as bad as people think.

In Mustachian terms, however, this tax break wouldn't apply to you because you've been socking away money in a traditional brokerage account for 20 years (i.e., your assets would significantly exceed your forgiven debt). Thus, you would probably be the exception in having to actually pay the full tax liability.

Which leads me to the math.

The government estimates a 5% raise, which I think is fair. They estimate I'll pay $102,000 principal over the life of loan and have $249,000 forgiven.

Since I'll be stocking away money, my assets will dramatically exceed my liabilities, so I'll have to pay the full tax liability. Assuming a 38% tax bracket (which is certain given that the forgiven debt alone is $249,000), that comes to $94,620. So all in all, I'll have paid $196,620 towards the loan, or around the same amount if I just paid this off in 8 years.

But let's go even further. Let's look at everything else.

First, deductions lost because you had to file separately (this isn't negotiable for me...my GF makes substantially more than I do, and if I eventually made $100,000 per year, our incomes together would put me at a $1104 payment, or enough to pay the loan before it's forgiven).

Student loan interest deduction = $2500. Assuming 20 years of this and 25% tax bracket, you've missed out on either a deduction to your tax liability every paycheck or a $625 refund check from the feds every year.

Dependent care credit = $3000 per year per kid. Assume two kids (my plan) so $6,000 per year. Now you've missed out a $6,000 deduction on your taxable income or a $1,500 refund every year.

Married credit = $14,200 per year (compared to $6,200, which only one of you or your spouse can claim). That's an $8,000 difference in taxable income per year, or $2,000 in cash.

There are more than these three, but these are the three biggest ones. And putting your spouse in the equation (since he or she is filing separately as well), you're looking at $25,000 in lost deductions per year for 20 years ($500,000!!!). Again, assume a 25% tax bracket, and we're talking $125,000 in income taken out of your paychecks or tax refunds.

So now we're at your $196,020 in paying towards the loan plus $125,000 in lost deductions.

I feel like Billy Mays here--BUT WAIT, THERE'S MORE. Let's go back to the tax liability. Assume you've been throwing what would have been your student loans into an investment account, and now you need to cover your tax liability. Now you actually need to withdraw 16% more than your tax liability to cover capital gains, meaning you'd actually need to withdraw $111,383 to cover the tax liability.

Now we are at $102,000 principal payments + $125,000 in lost deductions + $111,383 to cover tax liability. Total cost is $338,383.

And by this 20th year, you've just substantially depleted your investment account when you are 47. You also haven't been able to contribute to a Roth IRA (since you can't when filing separately).

And I'll end on this: no matter what you guys are saying, IBR and PAYE will make you a slave to your loans more than paying would. Every financial decision you make will revolve around your payment and your tax liability for TWENTY YEARS. You also have no idea what will happen in terms of income--what if you've let interest balloon for ten years, but then you become a member of an incredibly lucrative LLC that nets you $500,000 income per year? Now you might not have a financial hardship and your loan would capitalize. Sure, you can pay off your loans with that much income, but my word, that will be WAY MORE than if you had just taken care of it.

Put most simply, IBR and PAYE are huge gambles due to the unknown tax liability, having to file separately, lost deductions, inability to forecast income, and having to pay capital gains when you do pay the tax liability. In the meantime, you CAN start making dents on your loans NOW if you put your mind to it and take control of the situation. If I pay my loans off in 8 years and maintain my lifestyle afterwards, using MMM's chart, I'll be about 7-10 years away from retirement. And that's way more optimal to me than risking everything on IBR/PAYE.

[Exits stage and waits for rebuttal...good discussion!].
« Last Edit: February 27, 2015, 06:05:42 AM by ReadySetMillionaire »

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #56 on: February 27, 2015, 05:00:17 AM »
I commend the OP for his plan to pay off what he borrowed in full.

For all of you fairly new mustachians with large student loan balances, this thread should be a required reading before you make your decision on IBR or whatever other program.  http://forum.mrmoneymustache.com/welcome-to-the-forum/ethical-dimensions-of-student-loan-income-based-repayment-plans/

Thanks for the link. Great thread.

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #57 on: February 27, 2015, 05:04:12 AM »
There is a lot to be said for paying off the student loans rather than going the IBR route: you are paying off your debts rather than relying on the government to do so, you are simplifying your life/taxes and you are buying your freedom from a 20 year obligation.  Just as some people would rather pay off their mortgage than invest for higher returns, it is a valid and mustachian choice.

I can quite see that the flat is too small.  But given that OP manages the building and gets a great break on the rent, would it be possible to move into a larger flat in the same building as soon as one becomes available?  It would take some of the pressure off the immediate need to buy a house, and give a bit of breathing room on savings/paying down debt.

The job sounds ideal apart from the pay.  So the question is: what are the likely pay rises in the next few years to partnership, how soon will they kick in, and what sort of financial rewards come with partnership?  What is the norm and is there likely to be room to negotiate?  OP should practice his negotiation skills to manage his pay upwards.

Thanks for the support.

We live in a 5 unit building, and all the units are identical. It's actually a decent one-bedroom loft, but there's no doors or anything. That doesn't stress me out, but my GF likes her privacy. We've done things like put curtains in front of the bathroom vanity so she can get ready in privacy. But, she's lived here for 3 years already. She works incredibly hard (she's a speech language pathologist; i.e., does swallow tests on nursing home residents, helps them with care, etc.) and just wants a house.

Also, I'm not sure about the pay increases here. I've been somewhat of a cyber stalker and looked to see where the partners live, and they all live in $250,000-300,000 houses, which are incredibly nice for my area. So they seem to be doing very well.

I did, however, ask the treasurer of the board so he can meet me to discuss how the firm works. He's a pretty candid guy, so I expect him to discuss the specifics of partnership tracks, profit sharing, etc. Until then, I'm in a black box and just trying to do the best work possible.

YTProphet

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #58 on: February 27, 2015, 06:19:57 AM »
Also, I'm not sure about the pay increases here. I've been somewhat of a cyber stalker and looked to see where the partners live, and they all live in $250,000-300,000 houses, which are incredibly nice for my area. So they seem to be doing very well.

I did, however, ask the treasurer of the board so he can meet me to discuss how the firm works. He's a pretty candid guy, so I expect him to discuss the specifics of partnership tracks, profit sharing, etc. Until then, I'm in a black box and just trying to do the best work possible.

Keep in mind that there is a definitive difference in pay between equity and non-equity partners. I know earlier in the thread that you said associates typically make partner after their fifth year. However, I can almost guarantee you that that's non-equity partner. Whether associates end up making equity partner is really the only thing that matters. That's where the money is at, because that's the only point at which you're making money off the work of the associates.

At most firms, when you make non-equity partner at year 5/6/7 you get a big pay bump. But it's generally not much of a pay bump at all (and sometimes it can be a pay loss). They bump you up because you're taxed differently as a partner (even though you're non-equity) and that generally results in an increased tax bill, so they have to gross you up for the amount of income you lose from increased taxes.

Just something to keep in mind.

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #59 on: February 27, 2015, 06:41:54 AM »
Keep in mind that there is a definitive difference in pay between equity and non-equity partners. I know earlier in the thread that you said associates typically make partner after their fifth year. However, I can almost guarantee you that that's non-equity partner. Whether associates end up making equity partner is really the only thing that matters. That's where the money is at, because that's the only point at which you're making money off the work of the associates.

At most firms, when you make non-equity partner at year 5/6/7 you get a big pay bump. But it's generally not much of a pay bump at all (and sometimes it can be a pay loss). They bump you up because you're taxed differently as a partner (even though you're non-equity) and that generally results in an increased tax bill, so they have to gross you up for the amount of income you lose from increased taxes.

Just something to keep in mind.

Thanks for the heads up. I'm looking forward to my meeting with a member of the BOD so I can clear all this up.

dsutt

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #60 on: February 27, 2015, 06:46:30 AM »
Interesting discussion ReadySetMillionaire & Tank_Esq

I have a similar situation student debt wise and am curious how other people are handling the debt, and what MMM thinks of dealing with this.  I tend to agree with Tank_Esq.  I think ReadySetMillionare is right that the Income driven plans are a gamble, but they could pay off. 
 Here are a few points I don't think you have discussed yet regarding IBR and PAYE. 

If your loans just went into repayment, you get 3yrs of IBR or PAYE where the government will pay the leftover interest on the loans after you make your 10-15% of income payment.  No interest accrues during this time.  If you have extra income you could pay the minimum each month, have the government pay the rest of the interest for the month, and then make an additional payment directly to principal.

After three years, in either plan, as long as you maintain a financial hardship, (which with a loan of $150,000, is earning something under around $100,000,) interest accrued on the loan does not compound.  The unpaid interest just sits in a little side pile, that will be forgiven or paid off with all the money and compounding interest that you earned on the borrowed money that you did not put back in the loan. 
The situation will vary from person to person, but if you invest the difference your standard 10yr loan payment, and the 20 year PAYE each month, you should have around the same amount of money in your investment account and your debt account in 5-8 years.  That gives you 12-15 years of two accounts, investment with interest compounding, and debt with simple interest. 

20 yrs is up and if nothing changes, you do get a nasty tax bill on the 200,000 plus loan and interest you have accrued, but even if this is close to 40%, you can pay it out of your investment account no problem. 
Luckily Elizabeth Warren is working on non-taxable forgiveness for us--I believe she already put forth bill suggesting this.  There is a lot of talk about refinancing public loans too.  The government would have a hard time changing the rules on student loan forgiveness, as this would just bankrupt millions of people.

Obama did change the rules for PAYE for almost everyone.  ReadySetMillionaire, you and I will be allowed into the PAYE system in October of this year.   When you switch plans, the years on your loan do not reset.  If you already five yrs in, you only have 15 more to go for forgiveness. 

Lastly, check out this link.  It basically shows how the current income based repayment system is a cash cow for Lawyer and future high earner types.  It has a nice spreadsheet to accompany. 
http://newamerica.net/publications/policy/safety_net_or_windfall

Look forward to comments and rebuttals...

Interesting post, and I'll rebuttal point by point.

First, I guess I will qualify for PAYE this October. Yay me I guess.

Second, regarding forgiven interest, the government will only reimburse you for interest on your Subsidized Stafford loans. For me, these are only about 10% of my loans. More importantly, the rest of unpaid interest after three years capitalizes up to 110% of the loan (see here: http://www.ibrinfo.org/what.vp.html). Thus, by not being aggressive early on (and only paying $221 per month), my loan would balloon to over $160,000 easily, despite the forgiveness on my Subsidized Stafford Loans.

Side note: right now, I am enrolled in IBR even though I'm making huge payments. This means for the next three years, I'm barely putting anything towards my Stafford Loans, covering about $10 more than the monthly interest on all other loans (so they don't capitalize), and putting everything else towardsmy highest interest loans.

Third, my PAYE estimated my monthly payment to be $221, meaning there would be almost $600 in interest being added each month. What happens if I get a job paying $100,000 per year? Now my payment shoots up to $604 and I'm still not gaining ground on the interest. I'll get to the math later on why this is bad.

Fourth, your post assumes 7% returns in the market. I'm a believer in passive investing over the long haul, so that's fair. But what if the economy takes a hit in year 20 when your tax liability is due? This makes PAYE/IBR a HUGE gamble to me.

And this leads me to my fifth and most important point: I can't risk this plan with the hope that the government will amend the tax bill. This is for two reasons. First, the entire program becomes insolvent if you remove the tax burden. This would lead to even more increased tuition and outcries from a younger generation. Second, and more importantly, the present tax code accounts for people who really can't afford the tax liability. The IRS fact sheet on forgiven debt (http://www.irs.gov/pub/irs-pdf/p4681.pdf) provides, basically, that you are only accountable for forgiven debt to the extent that it exceeds your assets. So say the average Joe is on PAYE and paid for 20 years, thus allowing his loan to balloon to $250,000. Fortunately, because he's an average Joe and not a mustachian, all he has is a $150,000 house and $100,000 in his 401k. That means that his assets are equal to his forgiven debts and he therefore has no tax liability.

Of course, there are a lot of variations to this. But the point is that (1) the tax code already accounts for people who can't pay the tax liability and (2) the "tax bomb" problem people say will happen in 20 years isn't as bad as people think.

In Mustachian terms, however, this tax break wouldn't apply to you because you've been socking away money in a traditional brokerage account for 20 years (i.e., your assets would significantly exceed your forgiven debt). Thus, you would probably be the exception in having to actually pay the full tax liability.

Which leads me to the math.

The government estimates a 5% raise, which I think is fair. They estimate I'll pay $102,000 principal over the life of loan and have $249,000 forgiven.

Since I'll be stocking away money, my assets will dramatically exceed my liabilities, so I'll have to pay the full tax liability. Assuming a 38% tax bracket (which is certain given that the forgiven debt alone is $249,000), that comes to $94,620. So all in all, I'll have paid $196,620 towards the loan, or around the same amount if I just paid this off in 8 years.

But let's go even further. Let's look at everything else.

First, deductions lost because you had to file separately (this isn't negotiable for me...my GF makes substantially more than I do, and if I eventually made $100,000 per year, our incomes together would put me at a $1104 payment, or enough to pay the loan before it's forgiven).

Student loan interest deduction = $2500. Assuming 20 years of this and 25% tax bracket, you've missed out on either a deduction to your tax liability every paycheck or a $625 refund check from the feds every year.

Dependent care credit = $3000 per year per kid. Assume two kids (my plan) so $6,000 per year. Now you've missed out a $6,000 deduction on your taxable income or a $1,500 refund every year.

Married credit = $14,200 per year (compared to $6,200, which only one of you or your spouse can claim). That's an $8,000 difference in taxable income per year, or $2,000 in cash.

There are more than these three, but these are the three biggest ones. And putting your spouse in the equation (since he or she is filing separately as well), you're looking at $25,000 in lost deductions per year for 20 years ($500,000!!!). Again, assume a 25% tax bracket, and we're talking $125,000 in income taken out of your paychecks or tax refunds.

So now we're at your $196,020 in paying towards the loan plus $125,000 in lost deductions.

I feel like Billy Mays here--BUT WAIT, THERE'S MORE. Let's go back to the tax liability. Assume you've been throwing what would have been your student loans into an investment account, and now you need to cover your tax liability. Now you actually need to withdraw 16% more than your tax liability to cover capital gains, meaning you'd actually need to withdraw $111,383 to cover the tax liability.

Now we are at $102,000 principal payments + $125,000 in lost deductions + $111,383 to cover tax liability. Total cost is $338,383.

And by this 20th year, you've just substantially depleted your investment account when you are 47. You also haven't been able to contribute to a Roth IRA (since you can't when filing separately).

And I'll end on this: no matter what you guys are saying, IBR and PAYE will make you a slave to your loans more than paying would. Every financial decision you make will revolve around your payment and your tax liability for TWENTY YEARS. You also have no idea what will happen in terms of income--what if you've let interest balloon for ten years, but then you become a member of an incredibly lucrative LLC that nets you $500,000 income per year? Now you might not have a financial hardship and your loan would capitalize. Sure, you can pay off your loans with that much income, but my word, that will be WAY MORE than if you had just taken care of it.

Put most simply, IBR and PAYE are huge gambles due to the unknown tax liability, having to file separately, lost deductions, inability to forecast income, and having to pay capital gains when you do pay the tax liability. In the meantime, you CAN start making dents on your loans NOW if you put your mind to it and take control of the situation. If I pay my loans off in 8 years and maintain my lifestyle afterwards, using MMM's chart, I'll be about 7-10 years away from retirement. And that's way more optimal to me than risking everything on IBR/PAYE.

[Exits stage and waits for rebuttal...good discussion!].

Good Points.

Investing $1600 dollars a month for 8 years, that's $250,000 in the bank before you even start investing after paying off your loan!  Any investor will tell you, time is the biggest advantage.  Even with the giant tax payment at year 20, you will have a hard time catching up if you pay your loan for 8 yrs first.  The only way I've seen these two number equal out for me in 20 yrs is if I were to pay off my loan in 3 years, which I just can't do. 

You do lose some advantages on the tax deductions, but not student loan interest deduction.  You will still be hitting the $2500 max with PAYE or IBR.  And you lose this deduction anyway when you start making around $65000. 
Also, you're not married yet, and you don't have any kids yet, so taking 20yrs of these deductions is not really fair, these events could be 2-10yrs away.




ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #61 on: February 27, 2015, 07:01:42 AM »
Good Points.

Investing $1600 dollars a month for 8 years, that's $250,000 in the bank before you even start investing after paying off your loan!  Any investor will tell you, time is the biggest advantage.  Even with the giant tax payment at year 20, you will have a hard time catching up if you pay your loan for 8 yrs first.  The only way I've seen these two number equal out for me in 20 yrs is if I were to pay off my loan in 3 years, which I just can't do. 

You do lose some advantages on the tax deductions, but not student loan interest deduction.  You will still be hitting the $2500 max with PAYE or IBR.  And you lose this deduction anyway when you start making around $65000. 
Also, you're not married yet, and you don't have any kids yet, so taking 20yrs of these deductions is not really fair, these events could be 2-10yrs away.

You cannot claim the student loan interest deduction if you file separately.

And I realize it might not be fair to include deductions for the entire course of the loan period, but my point is that these can add up to huge sums (even figure 15 years of these and you're looking at $90,000+) and people discredit how much of a financial loss it can be to file separately.

And yes, you're right, time is your biggest asset. But after establishing a frugal lifestyle and paying off my loans and mortgage, I feel like I could catch up extremely quickly while having more control over my overall financial situation.

Blonde Lawyer

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #62 on: February 27, 2015, 08:25:57 AM »
The other issue is IBR/PAYE only apply to the federal portion of loans.  For everyone that took out loans pre-2008 (I don't remember the exact year it changed) a good majority of their loans are private. 

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #63 on: February 27, 2015, 08:26:48 AM »

I was looking into refinancing, but somebody else on a separate forum said I wouldn't be eligible due to my mediocre income and high debt.

What was your experience?

And would you recommend variable over fixed? What are the pros and cons?

I am not sure what their minumum lending requirements are, I know if you have a worse debt to income ratio, the rates they offer won't be as good.  Another limitation on who can borrow: SoFi = Social Finance; they actually get alumni from your own university to lend the money, with the idea being that hopefully the social aspect of it will reduce default rates.  So if you didn't go to one of the schools that they have alumni lending from, you can't borrow from them.

Fixed vs variable, I don't know if I made a good decision or not.  The advantage to variable is that your starting rate will be over a full point lower.  The downside is that if LIBOR increases enough that your variable rate is higher than the fixed rate they offered you, you will wish you had locked in the rate.  I do know that SoFi caps rates at 8.95% regardless of how high LIBOR might get.

Regarding the second refinance, I got a lower rate not because rates went down, but because my debt to income ratio improved.  You can refinance at any time with no origination fee, which is nice.  So say you pick a really aggressive 5-year payoff (shorter payoffs get lower rates) and pay that for a couple years, but then have a baby on the way, you could refinance it again over 15 years, you'd get a higher rate but lower monthly payment.

When I first borrowed I had $153K, I chose 10-year repayment, got 3.92% interest, had to pay $1550 per month.  Once I was down to $105K, I refinanced again over 10 years, variable rate 3.26%, now my payment is $1050 per month (still paying over though).    Also the refinance the second time was super easy, I just called and told them I wanted to refinance it again, they did everything, I just had to send them updated pay stubs.

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #64 on: February 27, 2015, 09:07:02 AM »
I am not sure what their minumum lending requirements are, I know if you have a worse debt to income ratio, the rates they offer won't be as good.  Another limitation on who can borrow: SoFi = Social Finance; they actually get alumni from your own university to lend the money, with the idea being that hopefully the social aspect of it will reduce default rates.  So if you didn't go to one of the schools that they have alumni lending from, you can't borrow from them.

Fixed vs variable, I don't know if I made a good decision or not.  The advantage to variable is that your starting rate will be over a full point lower.  The downside is that if LIBOR increases enough that your variable rate is higher than the fixed rate they offered you, you will wish you had locked in the rate.  I do know that SoFi caps rates at 8.95% regardless of how high LIBOR might get.

Regarding the second refinance, I got a lower rate not because rates went down, but because my debt to income ratio improved.  You can refinance at any time with no origination fee, which is nice.  So say you pick a really aggressive 5-year payoff (shorter payoffs get lower rates) and pay that for a couple years, but then have a baby on the way, you could refinance it again over 15 years, you'd get a higher rate but lower monthly payment.

When I first borrowed I had $153K, I chose 10-year repayment, got 3.92% interest, had to pay $1550 per month.  Once I was down to $105K, I refinanced again over 10 years, variable rate 3.26%, now my payment is $1050 per month (still paying over though).    Also the refinance the second time was super easy, I just called and told them I wanted to refinance it again, they did everything, I just had to send them updated pay stubs.
Thanks for the reply. I simply don't think I have the credit history yet to refinance as of right now. Any drop in interest rates would be minimal and I don't think it would be losing the protections that federal loans provide.

For now, I'm applying the avalanche method and relentlessly attacking the loans that are above 7% interest.

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #65 on: February 27, 2015, 12:36:40 PM »
Quote
Second, regarding forgiven interest, the government will only reimburse you for interest on your Subsidized Stafford loans. For me, these are only about 10% of my loans. More importantly, the rest of unpaid interest after three years capitalizes up to 110% of the loan (see here: http://www.ibrinfo.org/what.vp.html). Thus, by not being aggressive early on (and only paying $221 per month), my loan would balloon to over $160,000 easily, despite the forgiveness on my Subsidized Stafford Loans.

Side note: right now, I am enrolled in IBR even though I'm making huge payments. This means for the next three years, I'm barely putting anything towards my Stafford Loans, covering about $10 more than the monthly interest on all other loans (so they don't capitalize), and putting everything else towardsmy highest interest loans.

Log into your SL account and make sure to pay the min ONLY to the Subsidized Stafford loans. Pay all the extra to one loan (highest interest rate)

Make sure your payments are distributed correctly. This may take some "work" by logging in, calling them, etc etc. but if you are already on IBR, then you should take advantage of the "forgiven interest"

Also, by maxing out (or putting more into it) your traditional 401k and/or traditional IRA, you will be lowering your monthly payment, maybe even low enough for 0% interest on the Subsidized portion.

You can do this for 3 years, so you can pay more towards the higher interest ones first...then pay those sukkas off!!!!

Good luck!! I feel your pain!!!

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #66 on: February 27, 2015, 01:03:28 PM »
Quote
Log into your SL account and make sure to pay the min ONLY to the Subsidized Stafford loans. Pay all the extra to one loan (highest interest rate)

Make sure your payments are distributed correctly. This may take some "work" by logging in, calling them, etc etc. but if you are already on IBR, then you should take advantage of the "forgiven interest"

Also, by maxing out (or putting more into it) your traditional 401k and/or traditional IRA, you will be lowering your monthly payment, maybe even low enough for 0% interest on the Subsidized portion.

You can do this for 3 years, so you can pay more towards the higher interest ones first...then pay those sukkas off!!!!

Good luck!! I feel your pain!!!
Yep, I'm only paying something like $12 per month towards my subsidized loans. The rest is going towards other loans to stay on top of interest (usually monthly interest + $10), with the entire remaining going to the 7.55% loan.

I also pay bi-weekly, which has a ton of advantages. Check out this calculator for savings (sad that you have to use a mortgage calculator to figure this out, but it's a useful tool nonetheless haha): http://www.dinkytown.net/java/Biweekly.html

Pooplips

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #67 on: February 27, 2015, 01:19:55 PM »
Interesting discussion ReadySetMillionaire & Tank_Esq

I have a similar situation student debt wise and am curious how other people are handling the debt, and what MMM thinks of dealing with this.  I tend to agree with Tank_Esq.  I think ReadySetMillionare is right that the Income driven plans are a gamble, but they could pay off. 
 Here are a few points I don't think you have discussed yet regarding IBR and PAYE. 

If your loans just went into repayment, you get 3yrs of IBR or PAYE where the government will pay the leftover interest on the loans after you make your 10-15% of income payment.  No interest accrues during this time.  If you have extra income you could pay the minimum each month, have the government pay the rest of the interest for the month, and then make an additional payment directly to principal.

After three years, in either plan, as long as you maintain a financial hardship, (which with a loan of $150,000, is earning something under around $100,000,) interest accrued on the loan does not compound.  The unpaid interest just sits in a little side pile, that will be forgiven or paid off with all the money and compounding interest that you earned on the borrowed money that you did not put back in the loan. 
The situation will vary from person to person, but if you invest the difference your standard 10yr loan payment, and the 20 year PAYE each month, you should have around the same amount of money in your investment account and your debt account in 5-8 years.  That gives you 12-15 years of two accounts, investment with interest compounding, and debt with simple interest. 

20 yrs is up and if nothing changes, you do get a nasty tax bill on the 200,000 plus loan and interest you have accrued, but even if this is close to 40%, you can pay it out of your investment account no problem. 
Luckily Elizabeth Warren is working on non-taxable forgiveness for us--I believe she already put forth bill suggesting this.  There is a lot of talk about refinancing public loans too.  The government would have a hard time changing the rules on student loan forgiveness, as this would just bankrupt millions of people.

Obama did change the rules for PAYE for almost everyone.  ReadySetMillionaire, you and I will be allowed into the PAYE system in October of this year.   When you switch plans, the years on your loan do not reset.  If you already five yrs in, you only have 15 more to go for forgiveness. 

Lastly, check out this link.  It basically shows how the current income based repayment system is a cash cow for Lawyer and future high earner types.  It has a nice spreadsheet to accompany. 
http://newamerica.net/publications/policy/safety_net_or_windfall

Look forward to comments and rebuttals...

Interesting post, and I'll rebuttal point by point.

First, I guess I will qualify for PAYE this October. Yay me I guess.

Second, regarding forgiven interest, the government will only reimburse you for interest on your Subsidized Stafford loans. For me, these are only about 10% of my loans. More importantly, the rest of unpaid interest after three years capitalizes up to 110% of the loan (see here: http://www.ibrinfo.org/what.vp.html). Thus, by not being aggressive early on (and only paying $221 per month), my loan would balloon to over $160,000 easily, despite the forgiveness on my Subsidized Stafford Loans.

Side note: right now, I am enrolled in IBR even though I'm making huge payments. This means for the next three years, I'm barely putting anything towards my Stafford Loans, covering about $10 more than the monthly interest on all other loans (so they don't capitalize), and putting everything else towardsmy highest interest loans.

Third, my PAYE estimated my monthly payment to be $221, meaning there would be almost $600 in interest being added each month. What happens if I get a job paying $100,000 per year? Now my payment shoots up to $604 and I'm still not gaining ground on the interest. I'll get to the math later on why this is bad.

Fourth, your post assumes 7% returns in the market. I'm a believer in passive investing over the long haul, so that's fair. But what if the economy takes a hit in year 20 when your tax liability is due? This makes PAYE/IBR a HUGE gamble to me.

And this leads me to my fifth and most important point: I can't risk this plan with the hope that the government will amend the tax bill. This is for two reasons. First, the entire program becomes insolvent if you remove the tax burden. This would lead to even more increased tuition and outcries from a younger generation. Second, and more importantly, the present tax code accounts for people who really can't afford the tax liability. The IRS fact sheet on forgiven debt (http://www.irs.gov/pub/irs-pdf/p4681.pdf) provides, basically, that you are only accountable for forgiven debt to the extent that it exceeds your assets. So say the average Joe is on PAYE and paid for 20 years, thus allowing his loan to balloon to $250,000. Fortunately, because he's an average Joe and not a mustachian, all he has is a $150,000 house and $100,000 in his 401k. That means that his assets are equal to his forgiven debts and he therefore has no tax liability.

Of course, there are a lot of variations to this. But the point is that (1) the tax code already accounts for people who can't pay the tax liability and (2) the "tax bomb" problem people say will happen in 20 years isn't as bad as people think.

In Mustachian terms, however, this tax break wouldn't apply to you because you've been socking away money in a traditional brokerage account for 20 years (i.e., your assets would significantly exceed your forgiven debt). Thus, you would probably be the exception in having to actually pay the full tax liability.

Which leads me to the math.

The government estimates a 5% raise, which I think is fair. They estimate I'll pay $102,000 principal over the life of loan and have $249,000 forgiven.

Since I'll be stocking away money, my assets will dramatically exceed my liabilities, so I'll have to pay the full tax liability. Assuming a 38% tax bracket (which is certain given that the forgiven debt alone is $249,000), that comes to $94,620. So all in all, I'll have paid $196,620 towards the loan, or around the same amount if I just paid this off in 8 years.

But let's go even further. Let's look at everything else.

First, deductions lost because you had to file separately (this isn't negotiable for me...my GF makes substantially more than I do, and if I eventually made $100,000 per year, our incomes together would put me at a $1104 payment, or enough to pay the loan before it's forgiven).

Student loan interest deduction = $2500. Assuming 20 years of this and 25% tax bracket, you've missed out on either a deduction to your tax liability every paycheck or a $625 refund check from the feds every year.

Dependent care credit = $3000 per year per kid. Assume two kids (my plan) so $6,000 per year. Now you've missed out a $6,000 deduction on your taxable income or a $1,500 refund every year.

Married credit = $14,200 per year (compared to $6,200, which only one of you or your spouse can claim). That's an $8,000 difference in taxable income per year, or $2,000 in cash.

There are more than these three, but these are the three biggest ones. And putting your spouse in the equation (since he or she is filing separately as well), you're looking at $25,000 in lost deductions per year for 20 years ($500,000!!!). Again, assume a 25% tax bracket, and we're talking $125,000 in income taken out of your paychecks or tax refunds.

So now we're at your $196,020 in paying towards the loan plus $125,000 in lost deductions.

I feel like Billy Mays here--BUT WAIT, THERE'S MORE. Let's go back to the tax liability. Assume you've been throwing what would have been your student loans into an investment account, and now you need to cover your tax liability. Now you actually need to withdraw 16% more than your tax liability to cover capital gains, meaning you'd actually need to withdraw $111,383 to cover the tax liability.

Now we are at $102,000 principal payments + $125,000 in lost deductions + $111,383 to cover tax liability. Total cost is $338,383.

And by this 20th year, you've just substantially depleted your investment account when you are 47. You also haven't been able to contribute to a Roth IRA (since you can't when filing separately).

And I'll end on this: no matter what you guys are saying, IBR and PAYE will make you a slave to your loans more than paying would. Every financial decision you make will revolve around your payment and your tax liability for TWENTY YEARS. You also have no idea what will happen in terms of income--what if you've let interest balloon for ten years, but then you become a member of an incredibly lucrative LLC that nets you $500,000 income per year? Now you might not have a financial hardship and your loan would capitalize. Sure, you can pay off your loans with that much income, but my word, that will be WAY MORE than if you had just taken care of it.

Put most simply, IBR and PAYE are huge gambles due to the unknown tax liability, having to file separately, lost deductions, inability to forecast income, and having to pay capital gains when you do pay the tax liability. In the meantime, you CAN start making dents on your loans NOW if you put your mind to it and take control of the situation. If I pay my loans off in 8 years and maintain my lifestyle afterwards, using MMM's chart, I'll be about 7-10 years away from retirement. And that's way more optimal to me than risking everything on IBR/PAYE.

[Exits stage and waits for rebuttal...good discussion!].
👌👍👊. 👏👏👏👏👏

CorpRaider

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #68 on: February 27, 2015, 02:28:28 PM »
You can knock down your AGI by 401(k) contributions as pointed out above.  If you're a good associate, after a year or two you might run a loan forgiveness package by your firm.  They might be willing to lend you the money to pay off your SLS and then forgive it over time as a sort of backdoor non-compete.  I have heard of this happening.  Usually doesn't hurt to ask, it costs them a lot to find and train good associates.  Keep your ears open for new rules expanding PAYE to be promulgated by ED this year, based on President's directive from last year. 

Also, obviously, incurring a tax liability for the relief of the debt is not a reason not to have the debt relieved.  It is just something to plan for maybe over the last 5 years.  If I offered to pay off someone's $100K mortgage they wouldn't say "pass, I would have to pay ~ 25% of the $100K you would be giving me in tax."  It might be a can flow issue to manage but its one that will get handled.
« Last Edit: February 27, 2015, 02:34:30 PM by CorpRaider »

Blonde Lawyer

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #69 on: February 27, 2015, 02:58:59 PM »
You can knock down your AGI by 401(k) contributions as pointed out above.  If you're a good associate, after a year or two you might run a loan forgiveness package by your firm.  They might be willing to lend you the money to pay off your SLS and then forgive it over time as a sort of backdoor non-compete.  I have heard of this happening.  Usually doesn't hurt to ask, it costs them a lot to find and train good associates.  Keep your ears open for new rules expanding PAYE to be promulgated by ED this year, based on President's directive from last year. 

Also, obviously, incurring a tax liability for the relief of the debt is not a reason not to have the debt relieved.  It is just something to plan for maybe over the last 5 years.  If I offered to pay off someone's $100K mortgage they wouldn't say "pass, I would have to pay ~ 25% of the $100K you would be giving me in tax."  It might be a can flow issue to manage but its one that will get handled.

The issue is if your loan grows to the point that it quadruples, your tax liability can be almost as much as you would have paid in the first instance.  Many IBR plans don't even cover the minimum interest so that loan is just getting bigger and bigger for twenty five years.

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #70 on: February 27, 2015, 03:06:39 PM »
You can knock down your AGI by 401(k) contributions as pointed out above.  If you're a good associate, after a year or two you might run a loan forgiveness package by your firm.  They might be willing to lend you the money to pay off your SLS and then forgive it over time as a sort of backdoor non-compete.  I have heard of this happening.  Usually doesn't hurt to ask, it costs them a lot to find and train good associates.  Keep your ears open for new rules expanding PAYE to be promulgated by ED this year, based on President's directive from last year. 

Also, obviously, incurring a tax liability for the relief of the debt is not a reason not to have the debt relieved.  It is just something to plan for maybe over the last 5 years.  If I offered to pay off someone's $100K mortgage they wouldn't say "pass, I would have to pay ~ 25% of the $100K you would be giving me in tax."  It might be a can flow issue to manage but its one that will get handled.

The issue is if your loan grows to the point that it quadruples, your tax liability can be almost as much as you would have paid in the first instance.  Many IBR plans don't even cover the minimum interest so that loan is just getting bigger and bigger for twenty five years.
Nice summary of the real heart of the problem, Blonde Lawyer.

CorpRaider: take a look at my example again. I originally borrowed $150,000, but if I stuck do PAYE and kept my AGI down (through 401k, as you recommend), then  my loan would balloon to $249,000 (at the least). Tax liability on that alone is pushing $100,000, or 2/3 of my original loan balance.

In other words, this isn't a 25% flat fee on a loan; it can become much, much, much bigger if you intentionally let your loans grow because you are keeping your payments down.
« Last Edit: February 27, 2015, 03:08:27 PM by ReadySetMillionaire »

CorpRaider

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #71 on: February 27, 2015, 03:44:29 PM »
Yeah, I see more details later in the thread.  Seems like you're on the analysis; if the after-tax marginal real rate of return on the dollar you don't pay toward the loan is higher than the marginal after tax real rate accruing on the loan then you're increasing your net worth by the spread over the period until the loan is discharged.  7.55% is a tough hurdle.  Check out that "root of good" guy's blog.  He was a law student and I believe there's a post on there somewhere that reflects a solid analysis of the issue.

Anyways, keep your head up.  That's pretty much par for the course as a professional.  If you like your position and focus on the work "on your desk."  I'm sure you'll have the SL knocked out before you know it.

I would really run that non-compete/loan by your partners, maybe in your annual review after you've been there a few years.  After a couple, three years of experience you will really have some value and I'm sure they will want to tie you down, if it doesn't cost them a ton, one less thing  for a busy partner to worry about.
« Last Edit: February 27, 2015, 04:12:03 PM by CorpRaider »

Mazzinator

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #72 on: February 27, 2015, 03:54:55 PM »
Quote
Log into your SL account and make sure to pay the min ONLY to the Subsidized Stafford loans. Pay all the extra to one loan (highest interest rate)

Make sure your payments are distributed correctly. This may take some "work" by logging in, calling them, etc etc. but if you are already on IBR, then you should take advantage of the "forgiven interest"

Also, by maxing out (or putting more into it) your traditional 401k and/or traditional IRA, you will be lowering your monthly payment, maybe even low enough for 0% interest on the Subsidized portion.

You can do this for 3 years, so you can pay more towards the higher interest ones first...then pay those sukkas off!!!!

Good luck!! I feel your pain!!!
Yep, I'm only paying something like $12 per month towards my subsidized loans. The rest is going towards other loans to stay on top of interest (usually monthly interest + $10), with the entire remaining going to the 7.55% loan.

I also pay bi-weekly, which has a ton of advantages. Check out this calculator for savings (sad that you have to use a mortgage calculator to figure this out, but it's a useful tool nonetheless haha): http://www.dinkytown.net/java/Biweekly.html

We were in a similar boat.. ~$150k SL, my hubs is a lawyer, me an architect...anyways, we were also bold (and pretty mustachian) and transferred some of the private SLs to a 0% 0 fee Credit card, we then knocked out some of the highest interest private loans, then went back to finish off the CC before the 0% expired.

We delayed IBR, until i quit working, had 3 kids and moved to hawaii, and now for 3 yrs we will take advantage of IBR to "get ahead" and then we will knock them out. $55k to go ($44k is IBR)

Anyways, good luck!!!

DFJD

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #73 on: February 27, 2015, 05:25:17 PM »
Very best of luck! 

I disagree with those folks who have recommended law-based side hustles; as others have noticed, that's a quick way to get yourself in real trouble with both your firm and the bar.

I can't tell from your post what the best-case scenario looks like for your firm.  Say you do great (which it seems like you're doing) - bring in clients, impress the partners, etc., etc.  What does salary look like for you as a senior associate?  As a junior partner?  You're doing such a good job on costs that income is going to be the big determinant for you in terms of when the loans get paid off.  If your firm is going to pay off in the end (and you like it), I don't see a reason not to take a slow but steady approach to loan repayment, and focus your efforts on doing the most bang-up job for your firm possible.

Spondulix

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #74 on: February 28, 2015, 01:06:08 AM »
Encouragement!
I agree!

Check out this podcast - she knocked out 30k of student loans in 3 years, and has some really unique tips:
http://www.listenmoneymatters.com/negotiating-side-hustle-student-loan-stephanie-halligan/
Or the short story is here:
http://www.empowereddollar.com/how-i-paid-off-student-loans/

Are you in a rush to get married? What's an extra year or two of waiting to get married to put yourself in a much better financial place? You will be together for life...

Spondulix

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #75 on: February 28, 2015, 01:09:40 AM »
Very best of luck! 

I disagree with those folks who have recommended law-based side hustles; as others have noticed, that's a quick way to get yourself in real trouble with both your firm and the bar.
But that doesn't mean don't side hustle. If anything, sometimes it's a nice contrast to have a side gig that's something totally different than your day job.

rafiki

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #76 on: February 28, 2015, 09:18:41 AM »
I am in a similar boat - graduated in 12 with ~75k or so in debt. Made about what you did my first year out of school. A couple years later I am down to ~45k. I have been paying very aggressively, at least doubling the minimum payment each month. My focus has been on paying down debt while leveraging the tax benefits of IRAs (a SEP IRA and ROTH in my case as I am self employed). What I mean by that is that I have not only been paying down the debt. Maybe not the most popular decision here, but you can only contribute so much to a roth each year and I'd sooner put some money in a SEP to lower my tax exposure than just give that money to the government.

Seeing a 75k loan with hundreds of dollars of interest accruing each week really pissed me off so the decision to be aggressive with it was easy. I do have a couple side hustles at this point not related to the practice of law. I enjoy business and trying to make money so has been more like a hobby for me. If I were in your position I'd likely focus on the debt and work on becoming the best lawyer you can so that some day you can make some real money. I stay late and come in on the weekends if I have to. I do not plan on buying a diamond ring or wedding soon. There is a time and a place for work life balance - for me it isn't when I am just starting out and have XX,XXX in student loans to my name! Good luck!

Bracken_Joy

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #77 on: February 28, 2015, 10:01:43 AM »
I am the self appointed expert of stupid student loan decisions. I took out 100k for undergrad and 35k for accounting grad degree. So 135k. I got a job making 54k out of grad school. My rent was 550. I paid 2000 a month for 5 years. Then I bought a house for about 150k. I have about 15k in loans left at a super low rate. I preferred to grind it out because it was such a weight lifted off my back.

My concern is all these promises going around. You'll save for a downpayment if your gf promises to pay your loans? Your gfs parents promise to help pay her loans when the other daughter goes to school? At which point I guess the parents will promise the other daughter that they will pay for her loans once they paid off your gfs loans? My parents promised they would help me pay for my loans too and I am still waiting. I would prefer to keep things clean. You pay off your loans and she buys the house and you pay rent. You can always put your name on the deed later.

I think you should propose asap. Most women I know would prefer a smaller ring and get it sooner, so they can carry on with their life already and stop wondering. Then you can promise to get her a nicer ring in 10 years...
Ha, good advice on the ring. I'm waiting for what feels right, though.

As for the "promises," I'd characterize them more as understandings. We're very open about my debt and she understands that getting rid of that debt will be a huge win for us. So saving on a down payment isn't necessarily a quid pro quo transaction; it's my way of saying, "Hey, I'm here to help you achieve a huge goal (buy a house) because I know you'll help me out later."

The way you've represented all of this seems very tit for tat. I know all relationships work differently, but this sends up red flags for me. Where is the sense of partnership? The "I do this because it matters to you, and thus to me, and I love us and our shared future"? It sounds like you guys need to get a book like "The hard questions: 100 questions before you say I do" or a list like this: http://www.libbieholmes.com/100-questions-to-ask-before-you-get-married/

I too was promised assistance with tuition... which didn't happen. Then promised assistance with loan repayment... which I guarantee won't happen. Don't bank on it is all I'm saying.

Edit to add: this is a good resource too, and from another mustachian no less! http://www.frugalwoods.com/2014/08/18/behind-the-scenes-of-a-happy-frugal-marriage/

bettyb

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #78 on: February 28, 2015, 10:43:08 AM »
I had roughly the same amount of debt, and just finished paying it off (9 years later). There were a few years where I didn't pay off as much as I could but, as time went on, the weight of the debt felt continuously heavier to the point where it became much more important to me to pay it off rather than save for a house downpayment or wedding.  I second the suggestion to talk out your financial goals with your partner because how you feel today about the debt may not be how you feel about it five years down the road.

For me, about 5-6 years in when I started evaluating career progression, I started to realize law firm life/partnership wasn't for me, and then having large outstanding debt felt constricting with respect to what alternatives I could choose. It was a lot of unnecessary stress - my hair on fire moment.

9 years ago, I probably would have been more excited about setting up house or having a big wedding party, but today being debt free is much more satisfying and less limiting (but my partner was on the same page with me on that one).  I guess my advice is to be cautious about whether a long term repayment plan is really how you want to structure your debt repayment given that how you feel today about your job or making minimum or close to minimum payments may change greatly down the road.

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #79 on: February 28, 2015, 12:16:54 PM »
The way you've represented all of this seems very tit for tat. I know all relationships work differently, but this sends up red flags for me. Where is the sense of partnership? The "I do this because it matters to you, and thus to me, and I love us and our shared future"? It sounds like you guys need to get a book like "The hard questions: 100 questions before you say I do" or a list like this: http://www.libbieholmes.com/100-questions-to-ask-before-you-get-married/

I too was promised assistance with tuition... which didn't happen. Then promised assistance with loan repayment... which I guarantee won't happen. Don't bank on it is all I'm saying.

Edit to add: this is a good resource too, and from another mustachian no less! http://www.frugalwoods.com/2014/08/18/behind-the-scenes-of-a-happy-frugal-marriage/

I must not be communicating things clearly enough if it can be construed as "tit for tat." The brass tacks of it is that buying a home is extremely important to her, and paying off my student loans is extremely important to me. Each of these are our number one financial goals.

For her, she looks in Zillow probably 2-3 times a week even though we are years away from buying a house. She has lived in an apartment for ten years now and lives well below her income level because she knows the situation I'm in. She's probably going to cry of happiness when she buys a house. Because that goal is obtainable in a relatively short period of time (2-3 years), I want to help her get there and make her that happy.

Meanwhile, for every time she's on Zillow, I'm reading MMM or some other blog trying to maximize my knowledge to pay off my loans. She knows how important it is to me. So once we get a house, she's going to help me pay off my loans.

And to clarify: she would help me with my loans right now if she could. But she's saving for a down payment, paying off her loans ($790/month), and paying off her car ($378 per month, which she bought before she met me haha). It just so happens that she will be done paying her student loans and car off around the same time that we would have finally saved enough for a down payment, thus clearing the way for her to help me out.

In short, it's more helping each other with our financial goals than "tit for tat" trade off.

Hope that makes sense.
« Last Edit: February 28, 2015, 12:19:03 PM by ReadySetMillionaire »

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #80 on: February 28, 2015, 12:20:53 PM »
Update: just got off the phone with a family friend who remodels homes and he hired me to do some side jobs at his properties (paint, lawn care, etc.) on the weekends. Should be a good side income!

ltt

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #81 on: February 28, 2015, 01:49:52 PM »
I had 94k when I graduated, best day EVER was the day I sent in the last payment.

I'd suggest some side hustles to increase your debt payment, I worked 2-3 jobs during repayment.  Everyone needs lawyers, think about posting on elance or something.

This.

Bracken_Joy

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #82 on: February 28, 2015, 02:01:00 PM »
The way you've represented all of this seems very tit for tat. I know all relationships work differently, but this sends up red flags for me. Where is the sense of partnership? The "I do this because it matters to you, and thus to me, and I love us and our shared future"? It sounds like you guys need to get a book like "The hard questions: 100 questions before you say I do" or a list like this: http://www.libbieholmes.com/100-questions-to-ask-before-you-get-married/

I too was promised assistance with tuition... which didn't happen. Then promised assistance with loan repayment... which I guarantee won't happen. Don't bank on it is all I'm saying.

Edit to add: this is a good resource too, and from another mustachian no less! http://www.frugalwoods.com/2014/08/18/behind-the-scenes-of-a-happy-frugal-marriage/

I must not be communicating things clearly enough if it can be construed as "tit for tat." The brass tacks of it is that buying a home is extremely important to her, and paying off my student loans is extremely important to me. Each of these are our number one financial goals.

For her, she looks in Zillow probably 2-3 times a week even though we are years away from buying a house. She has lived in an apartment for ten years now and lives well below her income level because she knows the situation I'm in. She's probably going to cry of happiness when she buys a house. Because that goal is obtainable in a relatively short period of time (2-3 years), I want to help her get there and make her that happy.

Meanwhile, for every time she's on Zillow, I'm reading MMM or some other blog trying to maximize my knowledge to pay off my loans. She knows how important it is to me. So once we get a house, she's going to help me pay off my loans.

And to clarify: she would help me with my loans right now if she could. But she's saving for a down payment, paying off her loans ($790/month), and paying off her car ($378 per month, which she bought before she met me haha). It just so happens that she will be done paying her student loans and car off around the same time that we would have finally saved enough for a down payment, thus clearing the way for her to help me out.

In short, it's more helping each other with our financial goals than "tit for tat" trade off.

Hope that makes sense.

I think it was this sentence that got me: "Hey, I'm here to help you achieve a huge goal (buy a house) because I know you'll help me out later." To me, you help your partner because that's what you do, not to mention "their goals" and "your goals" shouldn't be separate. It's not going to be *her* house, it will be both your house. They aren't *your* loans if you're getting married- they're both of your loans. I guess it just feels from all this that, in spite of approaching lifestyle the same (similar levels of spending, etc) it seems like you don't have a sense of co-ownership over your future together. And that's like... the point of marriage pretty much.

feelingroovy

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #83 on: February 28, 2015, 03:02:47 PM »
Congrats on the side hustle.  That sounds like a perfect one.

I was very much like your girlfriend about buying a house when I was in my 20s. I get it.

I don't think you've mentioned her interest rates on her car and student loan, but wouldn't she get to her down payment goal faster if she snowballed her loans?  You said she should finish all three at the same time, but that suggests she's paying interest on the others while getting virtually no interest on the house savings. Or does she have a 0-1% car loan?

ReadySetMillionaire

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Re: In $150,000 of Student Loan Debt and Need Some Advice/Encouragement
« Reply #84 on: March 01, 2015, 11:09:03 AM »
Congrats on the side hustle.  That sounds like a perfect one.

I was very much like your girlfriend about buying a house when I was in my 20s. I get it.

I don't think you've mentioned her interest rates on her car and student loan, but wouldn't she get to her down payment goal faster if she snowballed her loans?  You said she should finish all three at the same time, but that suggests she's paying interest on the others while getting virtually no interest on the house savings. Or does she have a 0-1% car loan?

Her student loan interest rates are close to 6%. She has 0% on her car loan. I'd love for her to pay off her student loans quicker, but she is already paying $790 a month towards them and has very little wiggle room because of the car.

She is also in the process of getting some side work, and I think she's committed to putting anything extra she earns towards her loans. We will see.