Income based repayment, taxes, medical professionals, and marriage

[Vidalia]

I'm marrying a talented and down to earth woman later this year, but our assets are wildly different.  I've been (unwittingly) practicing the principles of Mustachianism since I was in college (now 31), graduated with no debt and have since amassed about $330k in taxable accounts and 100k in retirement accounts.  Net worth: 430k.  In retrospect, I made a ton of mistakes and if I had done everything right I could be financially independent today.

My soon to be lovely wife, however, has a $270k student debt at roughly 8% all federal, but she qualifies for income based repayment (IBR).  She has one more year of residency, and by the time she is finished with her residency she will have completed 4 or the 10 years necessary at a nonprofit for loan forgiveness.  She will be able to reasonably make about $170k/year when she graduates.  She has not yet fully embraced Mustachianism, so our expenses are a little higher than they would otherwise be, but she loves her job (for now).  Our expenses are relatively high at about 55k per year including loan repayment and payments on a 120k mortgage.  We own both used cars.  I would drop down to one car, but my hobby (playing music in bars late at night for tiny amounts of money) isn't compatible with her occasional long hours.

My personal job satisfaction has dropped substantially in the past couple of years for a couple of reasons, and I'm considering taking a big pay cut (from 70-80k or so) and doing freelance work (unknown $$, $40-100k depending on how hard I network and work?), however if we file taxes jointly, any income I make will increase the expense we have for paying back her student debt.  We technically do not have to pay it off entirely, and the maximum payment we have to make is the payment to pay the loan off in 10 years.  When she takes an attending physician's salary, we will probably be paying the maximum payment, but since she has already done 4 years of nonprofit service, the loan will vanish with 4 years remaining to pay.  To make things even more complicated, i'm in a "Community Property" state, and if we file separately 50% of her income is counted as mine and 50% of mine is counted as hers.  I feel like I'm going to end up having to pay a tax professional to be able to handle this.

My question is: where to go from here? 

1. Plan to pay off the 270k loan through IBR filing jointly (seems like a bad idea, skims 15% off my personal income and dividend/interest income)
2. Pay off the 270k loan through IBR filing separately which seems like it will be a tax preparation nightmare
3. Pay off the 270k loan as fast as we can, this would deplete my 'stache and make the prenup agreement much more complicated since I would effectively convert part of my 'stache into marital property.
4. Pay off the 270k loan as fast as our incomes and savings will allow, trying to finish and pay the extra before the 7 years are up at which point it would vanish

After we're married we also have to figure out where to put any new investments: new home mortgage in a new city, joint investment accounts, etc.  The loan repayment situation makes holding joint assets complicated for filing until we exceed the 10 year repayment maximum loan payment on the IBR with our combined salaries and investment income.

[Catbert]

My knowledge of student loans is pretty slim, however, I would vote for option 1.  It's uncomplicated and seems to be in the *spirit* of IBR.  As a practical matter, I think that filing "married filing separately" can have other impacts on tax returns (IRA limits and such) that you may not anticipate.  It also seems that since you will be reaping the benefits of being married to a doctor it's fair that you share with the student loan repayment. 

     

[Karl]

I am married and I strongly endorse this type of living situation.  However, I wonder if (for financial reasons) the two of you should wait until her loans are either paid in full or forgiven.  It may sound a bit less romantic, but make more sense financially.

[Dynasty]

I agree.

I think the simplest, but least romantic, but BEST option would be to let marriage wait until the future wife's 270K  in loans are paid.

I would have very very bad anxiety getting into a legal relationship with that kind of baggage.


 

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[Vidalia]

Waiting until the loans are paid off is not an option because that will happen after we want to start on a family, more complicated though it might be.  We want to have our last child within 7 years, and we are planning on two which will happen before the loan repayment is complete via IBR.

[mm1970]

At $170k per year for her income, do you think she could pay off her loans in about 3 years?  Would that make having kids done in 7 years possible?

[Vidalia]

Fundamentally there are two ways to do loan repayment (without considering tax filing):
1. Pay it off as quickly as possible by saving aggressively and overpaying
2. Pay it off at the 10 year schedule or 15% (whichever is lower) but get the last 4 years "free"

The principal in 6 years on choice number 2 is approximately 110k (which also happens to be approximately the amount of interest paid), so by paying it slowly we get a "bonus" 110k of income.  This requires putting down 3300/month only on student loans which is actually higher than 15% of her income.  Total payment: 237k.  But if we're in a non-community property state which we plan to be, our maximum monthly payment will be less: 2187.  At that payment rate, we will have 230k left on the loans in 6 years and we get a magical 230k in income through loan forgiveness.  Total payment: 157k.

Paying it off in 3 years requires monthly payments on the student loan of 8460/month, or a total payment of 305k.

This is something that would be feasible if she were not planning on working for a nonprofit since the salaries are higher, but that's not the job and career path she wants to pursue.  My math says that paying the loan off as slowly as possible makes the most financial sense, because all of that money saved can be invested sooner and converted into a nest egg for an early retirement when the loans are forgiven.

[chicagomeg]

It's a huge risk though. What if the non profit route doesn't work out and she forced to switch to private sector? What if she wants to stay home after having kids? What if you have a kid with special needs and one of you has to stay home? The amount you could save is enormous, but so is her income. If it were me, I would pay it off ASAP and move on. Also, I'm not convinced that the PSLF program will last 6 more years. All it takes is one act of Congress.

[meadow lark]

Since you said you're planning on a pre-nup just put it in the contract that if the marriage lasts 2 years, you get paid back x for all the money you put into loan repayment.  If it lasts 3 years you get paid back x-y.  Etc, etc.  and talk about finances more.  She will make great money, but whatever it is she will very quickly become used to it, and possibly spend it all.  When you have kids do you think she will work less, or will you?  The female MD's I work with with kids seem to always look miserable, except the ones with stay at home husbands.  $170k is a lot, but it is what my wife and I made combined this year, and somehow I don't feel rich...

[Jamesqf]

Waiting until the loans are paid off is not an option because that will happen after we want to start on a family...

This may come as a surprise, but you actually can have kids without being married :-)

You could even have a (quasi-) religious ceremony, or major celebration, if that's what you want.  Just don't file the legal papers.

[wearfannypacks]

Are you certain your fiancee can secure a job working for a non-profit? For 6 more years? That she will be happy with working at full-time? Even when she has kids?

My husband and I are facing a similiar situation with IBR. Turns out 90% of physician groups which staff hospitals and clinics are NOT non-profit entities. In his field, which is emergency medicine. So for us to decide IBR, we decided it should strictly be to get yourself through residency without having to go on forbearance or deferment. Getting the 10 year non-profit loan forgiveness is unlikely in our situation.  We are planning on having him moonlight his last years of residency and have this 200k loan sum GONE by year 2 out of residency.

Also if you free yourself from not having to do non-profit work (in our situation community clinics where pay is crap or academic centers) your wife can make bank. Especially if she starts to embrace being more mustachian she could replace her loan debt very, very quickly.  Or replace your savings very, very quickly.

Another option, we've had friends who negiotiated contracts out of residency in more rural physican groups who are just DYING for providers. This one chick went out to WV and they are paying her student loans on the 10 year repayment AND increasing her salary to compensate for the extra taxes she would owe. And she is making about 1.5-2x salary than she would in a more populated suburban environment. If your wife's specialty is in high demand, feel free to get aggressive with negotiations and get those student loans paid by her contract.

Now THAT is romantic.

[Left]

does your future wife "need" to be part of a non-profit? I mean just saying... there are options such as the army that help pay for it, also guarantees  that she has a job... unless she does something to get herself fired (not saying she would) http://www.goarmy.com/amedd/physician/benefits.html I'm not sure if this counts as non-profit :S

plus 20 years in army, she would have a pension, one of last places to still offer them. That said, she'd have to be happy with being in the army...

yes I'm aware this runs counter to being mustachian about being tied to a job for decades, but hey, everyone needs a job to at least get to retirement... And it opens some doors on saving through military benefits too.

[grantmeaname]

If it's anything like non-med school loans, I think some you guys are confusing IBR and PSLF.

[Vidalia]

To answer a few questions from some of the responses here: I don't think military service is going to be an option, but working for a VA hospital is definitely not out of the question.  She likes to serve people who can't afford to pay their own way.

There's another option for repayment, I suppose, but I don't know how I would put it into a prenup to cover myself in case of a divorce, and that is to wipe out all of the debt myself immediately since I have enough funds to do that, but then my nest egg stops producing interest.  However, if we end up having to pay the whole thing off because of other circumstances like inability to find a public sector job, this ends up being not that much more expensive because we avoid a couple years of outrageous 8% interest.

Another option related to this would be for me to buy the loan myself, and have her repay it to me at a low interest rate like 4% to keep up with inflation, but then it would add a "borrower/lender" dynamic to the marriage, and I'm not sure I want that.

As far as not getting married at all until the debt is repaid and waiting to file papers until afterward, that would make future joint purchases like a house in two years more complicated.  It also makes it more difficult for me to switch to potentially more fun and lucrative freelance work because I wouldn't be able to be on her (much better) insurance.

[Dynasty]

You are in a sticky situation that could turn out badly for you.

Have you spoken to your soon to be wife about this? 

[DebtDerp]

Hey Op, I don’t think you are in that bad of a situation. You state that your future wife will soon be making $170k a year and that when you switch jobs you will be in the $40k – $100k range. Right now you have enough cash to cover the $270k debt your gf is in should she decide to get a job at a private company. However, your gf needs just 6 more years of public service/non-profit full time work and her debt will be forgiven! So, my suggestion to you is to plan your finances around paying as little to the student loans as possible. Sounds like that will be married filing separately and you will want to move as soon as possible. You will also need to figure out how maternity leave will affect that repayment plan. My understanding is that you have to average 30-hours a week over a year for that year of service to count towards the forgiveness plan; I am not sure how they account for maternity leave through the plan. If you are able to keep your expenses down and get the remaining debt forgiven in 6 years you should be pretty close to FI! By my conservative calculations you should be able to grow your stache to close to $1M in that time frame and the debt forgiveness is an instant jump in net worth. Depending on what your expenses are excluding the loan payments you could be at FI with that figure (~$40k a year).  To summarize: get married, switch jobs, have kids, be happy.

[JohnGalt]

Hey Op, I don’t think you are in that bad of a situation. You state that your future wife will soon be making $170k a year and that when you switch jobs you will be in the $40k – $100k range. Right now you have enough cash to cover the $270k debt your gf is in should she decide to get a job at a private company. However, your gf needs just 6 more years of public service/non-profit full time work and her debt will be forgiven! So, my suggestion to you is to plan your finances around paying as little to the student loans as possible. Sounds like that will be married filing separately and you will want to move as soon as possible. You will also need to figure out how maternity leave will affect that repayment plan. My understanding is that you have to average 30-hours a week over a year for that year of service to count towards the forgiveness plan; I am not sure how they account for maternity leave through the plan. If you are able to keep your expenses down and get the remaining debt forgiven in 6 years you should be pretty close to FI! By my conservative calculations you should be able to grow your stache to close to $1M in that time frame and the debt forgiveness is an instant jump in net worth. Depending on what your expenses are excluding the loan payments you could be at FI with that figure (~$40k a year).  To summarize: get married, switch jobs, have kids, be happy.

+1

Also - you might consider moving to a non-community property state. 

[FockerCRNA]

As far as not getting married at all until the debt is repaid and waiting to file papers until afterward, that would make future joint purchases like a house in two years more complicated.  It also makes it more difficult for me to switch to potentially more fun and lucrative freelance work because I wouldn't be able to be on her (much better) insurance.

Are you sure you wouldn't be able to get on her insurance? A lot of workplaces nowadays allow a "partner" to be covered under workplace insurance. The catch to doing this if you are unmarried is that for tax purposes, that coverage can be considered income for the person being covered, in this case, you. Even then, that might be more financially advantageous considering the other factors you mentioned. 

I have been researching the advantages & disadvantages of legal marriage for a few weeks and it is hard to get it all straight, and scary to do it differently than most people. I am in a fairly rare position where my fiance and I will both make over 100k, so we fall in to the "marriage penalty" side of the equation (as far as income taxes). You and your wife may fall into the "marriage bonus" because you have disparate incomes, but they are both still high (if you make closer to 100k) so you would have to run the numbers. Here are links to sources I have found helpful:

http://www.gao.gov/products/OGC-97-16 (summary of DOMA, what laws are affected by marriage status)
http://www.gao.gov/products/GAO-04-353R (2004 update to above summary)
http://www.gao.gov/products/GGD-96-175 (tax treatment of married and single individuals)

[EMP]

Before she pursues PSLF she needs to make sure all her loans are Direct loans. If half of her loans are FFELP, they won't qualify for forgiveness.

Also I believe she should be able to qualify on her own income even if you file jointly, as long as she uses the alternate documentation of income form for IBR.

Just make sure she's guaranteed to qualify for IBR, because is she doesn't one year that accelerated payback is a B.