Author Topic: LARGE student loan  (Read 14524 times)

Ddalz

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LARGE student loan
« on: December 21, 2015, 10:34:39 AM »
Dear MMM and his readers,

I found your awesome site about 3 weeks ago and I haven't been able to stop reading since then. I have truly been inspired by your outlook on spending, knowledge of finances and your great ability to write about these things in an entertaining way.

My goal is Financial Independence in 15 years.

I'm going to be 31 years old when I graduate with a Doctorate and my student loan debt will be ~$260,000 ( I know, that is a pretty large number). I am hoping to refinance all of my loans and get an interest rate of at least 4% (fingers crossed). Starting pay will be ~$100k/year (larger than most, but look at that debt!) and within 5 years I'm hoping to be making closer to $150k/year and inching closer to $200k within 10 years.

With all of that debt I would like to get in to the housing market as soon as I can. The kicker is I will be living in Silicon Valley (can't move due to where my job is located) and anything half decent (2 or 3 bedroom condo or house) is in the range of $400k-$600k. As you know I will have to save up at least  20% for a down payment (minimum $80k).

I would also like to be adding as much into my 401k and Roth IRA as I can but I need to save for that down payment..

I will be living with my parents (bless their hearts) for at least the first year and maybe 2 years if I really have to, but that is something I would like to avoid. Rent around the area is very expensive though (I'd say minimum $800/month). While living at home I think I could get by on $7k-$8k per year.

My biggest question is: where should I put all of the extra money?
   - Pay off loan as soon as possible and then think about getting into housing market?
   - Save up all extra cash for down payment on house while paying minimum on loan?
      - Put down payment savings in savings account or Vanguard index fund or                       
                  something else?
   - Save some while putting some into 401k and Roth? (How much?)

Housing in silicone valley seems to appreciate at a very high rate (27% in 4 years for my brother's $550k house); hence the reason I would like to get into it sooner than later.

I own a car that is fully paid off, but it only gets about 20 miles/gallon (this obviously could be improved). I am also currently single.

I need help in deciding where to put my money to work so that I can become FI as soon as I can. Is 15 years possible or is it too ambitious? I wouldn't fully quit my job because I enjoy it but I would only work part time.

Any advice would be greatly appreciated. Let me know if any other information is needed.  Thank you!

- Micro MM




Kris

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Re: LARGE student loan
« Reply #1 on: December 21, 2015, 10:38:50 AM »
Good Christ. That debt.

Live with your parents for at least two years, preferably three, and put every cent possible into paying off your studen loan. This is a huge hair on fire emergency. Right now nothing else matters.

Frugalman19

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Re: LARGE student loan
« Reply #2 on: December 21, 2015, 10:43:13 AM »
People on this forum usually don't see your home as a good investment. Your home could also drop significantly in value, plus it's so expensive to maintain. You are better off living at home for 2-3 years, max retirement, save emergency fund and pay off your student debt. If you can pay it off in 3 years you will be able to save your down payment in no time. Your situation is a classic example of when not to buy a house.

Take full advantage of living with your parents as long as you can until the debt is gone, that's the uncomfortable but financial gold mine.

matchewed

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Re: LARGE student loan
« Reply #3 on: December 21, 2015, 10:46:04 AM »
One way to ensure that you don't succeed in your goals is by pursuing too many at the same time. Prioritize your goals and accomplish them by priority. Then as you complete one goal the resources spent on accomplishing that goal can go into the other goals. As you get better at doing this or the number of goals gets smaller you can distribute those resources to more goals.

robartsd

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Re: LARGE student loan
« Reply #4 on: December 21, 2015, 11:20:32 AM »
First I'd get all of your 401k match (if any) and maximize your tax defferred retirement savings; then I'd attack that loan balance. Be patient on getting into real estate - 27% growth rate is not sustainable, so don't decided that you can't afford to wait based on that short term look at the market (what's the 10 year average growth rate?). Sure, living with parents is not ideal, but the longer you can make that work, the better for you financially.

Ddalz

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Re: LARGE student loan
« Reply #5 on: December 21, 2015, 12:26:30 PM »
Thank you all for your advice. Sounds like the consensus is to stay with mom and pops for as long as possible while paying off my loan as quickly as possible.

So you say that housing isn't a good place to invest in to but is Silicone Valley maybe different than most places in the country? Tech industries are booming over here (google, Facebook, Apple, yahoo) just to name a few, and as they boom the housing continues to boom. The only way I see the housing market come down (pop) is if the tech industry pops. I understand I am in huge (emergency) debt but I'm scared that if I wait 3-5 years to buy a house it will go from 400-600k for a 2-3 bedroom place to 600-800k. Not sure if that is a reasonable worry for my current debt situation. But I do know that housing in Silicon Valley is insane and different than almost any other place in the country.

andy85

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Re: LARGE student loan
« Reply #6 on: December 21, 2015, 12:37:53 PM »
Here is what i would do:

1) Contribute minimum to 401(k) up to the match (assuming you get a match)
2) Build small cash fund (emergency fund)
3) Kill the debt

You wont like it, but i say if you really really want to set yourself up for success then live with your parents for 4 years.

Some quick napkin math:
Gross 100k - 6k into 401k - net 70k - living expenses 12k (u said less, but 1k/month is what i went with) - that leaves 58k

Year 1: 10k into emergency fund - 48k to student loans
Years 2-4: all 58k into student loans

after 4 years, you'll have 10k in cash, 24k + returns in 401k, and will have paid 222k in student loans. Leave your pride at the door if you really want to achieve your goals. that amount of debt will take yearssssss to pay off if you dont do it right and i would in no way advise in taking on a mortgage at this point if you are truly shooting for FI.

The point is, make defined goals and stick to them, regardless of what they are. the above was just an example. Maybe you'd like to save a little less cash but save it every year. or maybe youd like to put every dime towards loans for 2 years, knocking off 100k, then start saving for a house. The only thing that isnt going to get you anywhere is paying minimums on top of buying a house. You can't crush debt+save for a house+contribute larges amounts to 401k/ira all at the same time. One bite at at time here...

matchewed

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Re: LARGE student loan
« Reply #7 on: December 21, 2015, 12:39:39 PM »
I don't know, that debt looks scary but there is no information on interest rate.

TrulyStashin

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Re: LARGE student loan
« Reply #8 on: December 21, 2015, 12:41:19 PM »
Here is what i would do:

1) Contribute minimum to 401(k) up to the match (assuming you get a match)
2) Build small cash fund (emergency fund)
3) Kill the debt

You wont like it, but i say if you really really want to set yourself up for success then live with your parents for 4 years.

Some quick napkin math:
Gross 100k - 6k into 401k - net 70k - living expenses 12k (u said less, but 1k/month is what i went with) - that leaves 58k

Year 1: 10k into emergency fund - 48k to student loans
Years 2-4: all 58k into student loans

after 4 years, you'll have 10k in cash, 24k + returns in 401k, and will have paid 222k in student loans. Leave your pride at the door if you really want to achieve your goals. that amount of debt will take yearssssss to pay off if you dont do it right and i would in no way advise in taking on a mortgage at this point if you are truly shooting for FI.

The point is, make defined goals and stick to them, regardless of what they are. the above was just an example. Maybe you'd like to save a little less cash but save it every year. or maybe youd like to put every dime towards loans for 2 years, knocking off 100k, then start saving for a house. The only thing that isnt going to get you anywhere is paying minimums on top of buying a house. You can't crush debt+save for a house+contribute larges amounts to 401k/ira all at the same time. One bite at at time here...

This, exactly.

It likely took you longer than 4 years to earn your doctorate.  Just think of this an extension of your schooling.  You'll "graduate" when your debt is paid off.

I'm a red panda

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Re: LARGE student loan
« Reply #9 on: December 21, 2015, 01:00:37 PM »
Thank you all for your advice. Sounds like the consensus is to stay with mom and pops for as long as possible while paying off my loan as quickly as possible.

So you say that housing isn't a good place to invest in to but is Silicone Valley maybe different than most places in the country? Tech industries are booming over here (google, Facebook, Apple, yahoo) just to name a few, and as they boom the housing continues to boom. The only way I see the housing market come down (pop) is if the tech industry pops. I understand I am in huge (emergency) debt but I'm scared that if I wait 3-5 years to buy a house it will go from 400-600k for a 2-3 bedroom place to 600-800k. Not sure if that is a reasonable worry for my current debt situation. But I do know that housing in Silicon Valley is insane and different than almost any other place in the country.

You remember the dot com bubble? Most people in that didn't think it was possible for it to pop...

Personally, I'd take the chance on buying the 800k house years in the future and get the massive debt paid off before taking on 400-600k more debt. 

ReadySetMillionaire

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Re: LARGE student loan
« Reply #10 on: December 21, 2015, 02:04:26 PM »
Assuming you have federal loans, I would enroll in REPAYE, maximize all retirement accounts, save for emergency fund, and then go about paying down your loans.

Good discussion here: http://forum.mrmoneymustache.com/ask-a-mustachian/psa-to-those-with-high-student-loans-repaye-(new-repayment-plan)-starts-today/

Mr. Green

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Re: LARGE student loan
« Reply #11 on: December 21, 2015, 03:08:44 PM »
I would simply add that the increase in home prices in your area is literally impossible to sustain long term. Either a bubble will pop, or things will slow down and all the sudden "getting in now" will no longer be an urgent thing.

PensacolaStache

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Re: LARGE student loan
« Reply #12 on: December 21, 2015, 03:17:22 PM »
Thank you all for your advice. Sounds like the consensus is to stay with mom and pops for as long as possible while paying off my loan as quickly as possible.

So you say that housing isn't a good place to invest in to but is Silicone Valley maybe different than most places in the country? Tech industries are booming over here (google, Facebook, Apple, yahoo) just to name a few, and as they boom the housing continues to boom. The only way I see the housing market come down (pop) is if the tech industry pops. I understand I am in huge (emergency) debt but I'm scared that if I wait 3-5 years to buy a house it will go from 400-600k for a 2-3 bedroom place to 600-800k. Not sure if that is a reasonable worry for my current debt situation. But I do know that housing in Silicon Valley is insane and different than almost any other place in the country.

You remember the dot com bubble? Most people in that didn't think it was possible for it to pop...



And then what happened?  POP!  Like a balloon filled with sadness.  ALL OVER THE PLACE! :)

Student loan stomper

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Re: LARGE student loan
« Reply #13 on: December 21, 2015, 06:12:55 PM »
Welcome! 

First congratulate yourself on realizing your debt is serious.  I know some people who have much less debt and don't take it seriously...

 I graduated 5.5 years ago with $50k in debt (student loans + car) and I told myself I would live like a college kid until it was paid off.  This was really helpful especially the first year when I was paying a ton in rent.  I had to make a few adjustments for my sanity, but all of my friends still coment on my frugality.  This summer I got married, my husband graduated 3 years ago (also with about $50k in student loans).  It took him about a year and a half to find a job.  Our wedding cost us about $10k( all costs from engagement to honeymoon).  Long story short, we have paid off / cash flowed $110,000 in 5.5 years making $37k- ~$75k while paying rent and most other expense ( parents paid husband's phone plan until we were married and are paying his car insurance until next month). 

I tell you my story because I hope that it will encourage you to stick to your goals!

You are very lucky to have the option of staying with your parents.  I would take advantage of it for at least 2 years or until your debt is below an agreeable amount (say $70k).  Then if you want to move out, get a cheap place with a roommate.  Keep reminding yourself that you are still a "poor college student"  because you are still paying for college.  Also, keep reading blogs of people who have done it and find a friend (IRL or online) who can be your budget buddy or who also has FI/debt free goals.

I would also say an emergency fund is very important, I left mine at $1500 for a long time.  After I paid off my car I increased it, but I would say yours should be either a month or two of living expenses or that much pulse rent in case you just can't stand living with your parents a a point.

Work hard and kill those loans!!!

robartsd

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Re: LARGE student loan
« Reply #14 on: December 22, 2015, 09:15:49 AM »
Your brother was lucky enough to buy a house after a crash. Remember that people were saying the same thing about getting in while they can in 2007; one of them may have lost a fortune giving your brother a great opportunity. Those who have been able to keep the house they could barely afford in 2007 still might not be able to sell it today for as much as they paid. Nearly always, the worst time to buy is when you're worried that the price will go up so much that you can't afford it in the future.

honeybbq

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Re: LARGE student loan
« Reply #15 on: December 22, 2015, 09:23:14 AM »



With all of that debt I would like to get in to the housing market as soon as I can.
   

I don't understand this statement at all.

little_brown_dog

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Re: LARGE student loan
« Reply #16 on: December 22, 2015, 09:33:40 AM »
Not sure how refinancing will work in your situation Ive heard places like sofi (where I refinanced my grad debt) are rather risk averse and tend to get squeamish about particularly high debt loads unless your income is extremely generous. We only got a 5% interest rate on 30k of student debt when I refinanced even though our household income was over 100k. This could be because my personal income was low, but even with my husband as a cosigner, we still only got a fixed 5% (variable would have been 2.8-3%). Think carefully about refinancing unless you can get a much lower rate since you will lose federal loan benefits like income based repayment, etc.

andy85

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Re: LARGE student loan
« Reply #17 on: December 22, 2015, 09:35:13 AM »



With all of that debt I would like to get in to the housing market as soon as I can.
   

I don't understand this statement at all.

yea...seems counter intuitive. "will all of that debt I would like to take out a huge loan to go gamble in vegas"
(obviously that is extreme...but makes the point good enough)

Fishindude

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Re: LARGE student loan
« Reply #18 on: December 22, 2015, 09:38:09 AM »
I don't recommend planning on living with the parents as suggested by others.   It's time to get out and do your own thing.
Get a roommate or two, share a place and you can still live pretty economically.

maizeman

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Re: LARGE student loan
« Reply #19 on: December 22, 2015, 10:05:57 AM »
So you say that housing isn't a good place to invest in to but is Silicone Valley maybe different than most places in the country? Tech industries are booming over here (google, Facebook, Apple, yahoo) just to name a few, and as they boom the housing continues to boom. The only way I see the housing market come down (pop) is if the tech industry pops. I understand I am in huge (emergency) debt but I'm scared that if I wait 3-5 years to buy a house it will go from 400-600k for a 2-3 bedroom place to 600-800k. Not sure if that is a reasonable worry for my current debt situation. But I do know that housing in Silicon Valley is insane and different than almost any other place in the country.

The very fact that pretty much everyone agrees that tech is currently in a bubble is not a good sign for the longevity of the bubble. In addition to that, the real estate prices all along the west coast are currently being further inflated by lots of buyers from China looking to shelter wealth overseas, so problems with China's economy could cause major problems for housing prices in your market even if the tech bubble keeps inflating for a while.

I don't have any of my own graphs for this situation, but I'll just leave this one here:



You're getting a lot of very good advice on this thread. But if you don't take anything else away from it, please, please don't buy a house in the bay area until you're financially prepared to weather a dip in housing prices like what was seen in 2008. I was living across the bay -- thankfully renting not owning -- during that dip.

The real estate market in the bay area really is insane. But not in a good way.

All that said, congratulations on finishing up your doctorate and already having a job lined up after graduation! While, for me the high cost of living just wasn't compatible with my own FIRE plans, the bay area really is a fascinating place to live.

robartsd

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Re: LARGE student loan
« Reply #20 on: December 22, 2015, 10:09:19 AM »
I don't recommend planning on living with the parents as suggested by others.   It's time to get out and do your own thing.
Get a roommate or two, share a place and you can still live pretty economically.
I certainly see renting with roommates as a likely situation you will want to be in before it is time to buy your own home. Certainly has a much different social connotation that living with parents. I'd likely take up the offer to live with parents while transitioning to the first postgraduate job and searching for the right roommate situation - socially you may be able to "stay with parents" while looking for a living situation that suits you for several months to a year after graduation before suffering the negative social connotations of "living with parents".

ash7962

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Re: LARGE student loan
« Reply #21 on: December 22, 2015, 10:23:31 AM »
Thank you all for your advice. Sounds like the consensus is to stay with mom and pops for as long as possible while paying off my loan as quickly as possible.

So you say that housing isn't a good place to invest in to but is Silicone Valley maybe different than most places in the country? Tech industries are booming over here (google, Facebook, Apple, yahoo) just to name a few, and as they boom the housing continues to boom. The only way I see the housing market come down (pop) is if the tech industry pops. I understand I am in huge (emergency) debt but I'm scared that if I wait 3-5 years to buy a house it will go from 400-600k for a 2-3 bedroom place to 600-800k. Not sure if that is a reasonable worry for my current debt situation. But I do know that housing in Silicon Valley is insane and different than almost any other place in the country.

You remember the dot com bubble? Most people in that didn't think it was possible for it to pop...

Personally, I'd take the chance on buying the 800k house years in the future and get the massive debt paid off before taking on 400-600k more debt.

Agreed, I just looked/found a job in the tech industry, and I saw that some companies/startups are opting to have their offices outside silicon valley.  Just one data point and it probably doesn't say a whole lot about silicon valley, but I think eventually companies will opt for cheaper places.  Also, I think taking on mortgage debt is a huge risk when the student loans are that high (regardless of anything else).

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Re: LARGE student loan
« Reply #22 on: December 22, 2015, 12:00:56 PM »
If you can't stomach staying with your parents after 2 years of hair on fire emergency, consider renting. If you can't, or its a horrible market, then make sure you fill your condo or house with 1 or more tenants per bedroom while you live in a den or basement or closet.

What does this $800 you speak of get you? It would get me a basement room, sharing the bathroom with a middle aged man who only wants to rent to women, strict curfews, and no second exit in case of fire*.

I'm firmly convinced that the housing bubble in my city will pop and I will be scooping up condos for cheap.

* I decided to put my stuff in storage and live with my parents in an above ground room instead

Ddalz

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Re: LARGE student loan
« Reply #23 on: December 22, 2015, 02:48:23 PM »
Thanks everybody for the great advice. Looks like I'm going to hold off on thinking about buying a house for a while and concentrate on chewing away at that student loan. I'll keep my fingers crossed that the housing market comes back down to earth over the next few years.

Now I just need to figure out if refinancing is my best option and see what kind of interest rate I can get. I was hoping for something around 4% but the more I hear from people and read about it seems like that might not be realistic. 
« Last Edit: December 22, 2015, 02:53:36 PM by Ddalz »

Murse

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Re: LARGE student loan
« Reply #24 on: December 22, 2015, 02:50:24 PM »
Step 1 live with parents as long as possible
Step 2 max out pretax retirement vehicles (especially with Cali taxes)
Step 3 crush loans

Your hair is on fire, you spent over the last 10 years getting educated off borrowed money, time to pay it back. Seriously, think about it, you have the opportunity to pay for all of your education in just a few years.

Frankies Girl

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Re: LARGE student loan
« Reply #25 on: December 22, 2015, 02:59:15 PM »
I don't recommend planning on living with the parents as suggested by others.   It's time to get out and do your own thing.
Get a roommate or two, share a place and you can still live pretty economically.

I do think living with the parents is a viable path. And I've seen it recommended often on here in similar situations (high amount of debt, parents okay with it).

There is absolutely nothing wrong with living with parents if you have a good relationship with them, help out around the house (either by paying a form of rent or doing actual chores in addition to your own area/things are taken care of). This is a room mates situation anyway, and if both the parents and the adult child are okay with it, it can work out extremely well for all involved.

It can be a very smart option to pay down debt if one can get over the stigma some people attach to living with your parents after high school. As long as neither group feels like they are being taken advantage of, why have an issue with it? I personally think it's a good sign of decision-making and maturity to forgo running out to "be on your own" when you have insane amounts of debt. Living with your parents might not be as glamorous as getting your own place, but it is a wiser decision in some cases.




therethere

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Re: LARGE student loan
« Reply #26 on: December 22, 2015, 03:10:24 PM »
What I would do now that I am 9 years into repayment (started with 240k combined student loans with DH).

- If you get along well with your parents stay home and pay them nominal room and board as long as you can stand it. Don't feel guilty if you choose not to for your own sanity and/or maintaining a good relationship.
- Invest the minimum in tax advantaged retirement accounts to gain employer match.
- Open a Roth IRA (should you need to take advantage of it there is a 5 year waiting period to use gains in the account for a house purchase. Might as well get the clock started now. Try to do this before April so the account is dated 2015.
- Refinance to lock in lower rates. If any debt is above 5% pay it down.
- Max out all tax-advantaged retirement and HSA accounts.
- Only then... Pay down loans (if they are an emotional or cash flow drain)  OR save aggressive extra payments in an after-tax brokerage account specifically earmarked for debt payoff.
- Do not sign onto a mortgage in Silicon Valley with those loans. You already have one big shackle forcing you into slavery. You don't need another right now. Even if you love the area and your work right now, do you love it enough to commit that large of a monthly burden? Probably not.



Ddalz

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Re: LARGE student loan
« Reply #27 on: December 22, 2015, 04:16:06 PM »

- Only then... Pay down loans (if they are an emotional or cash flow drain)  OR save aggressive extra payments in an after-tax brokerage account specifically earmarked for debt payoff.


What do you mean by this? Put extra money into aggressive strategy stocks? I'm not very knowledgeable in investing money but I am trying to learn.

Should I got for a 10 year or 20 year loan payment option?

Why do you think it's best to max-out tax advantaged retirement accounts over paying off loans?

matchewed

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Re: LARGE student loan
« Reply #28 on: December 22, 2015, 04:29:31 PM »

- Only then... Pay down loans (if they are an emotional or cash flow drain)  OR save aggressive extra payments in an after-tax brokerage account specifically earmarked for debt payoff.


What do you mean by this? Put extra money into aggressive strategy stocks? I'm not very knowledgeable in investing money but I am trying to learn.

Should I got for a 10 year or 20 year loan payment option?

Why do you think it's best to max-out tax advantaged retirement accounts over paying off loans?

If your interest rates on the loans are greater than the anticipated return from an investment you should pay them off ASAP, not 10, not 20, ASAP. If they are less than anticipated returns from an investment you're better of (optimally speaking) investing and making minimum payments.

dandarc

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Re: LARGE student loan
« Reply #29 on: December 22, 2015, 04:31:25 PM »

- Only then... Pay down loans (if they are an emotional or cash flow drain)  OR save aggressive extra payments in an after-tax brokerage account specifically earmarked for debt payoff.


What do you mean by this? Put extra money into aggressive strategy stocks? I'm not very knowledgeable in investing money but I am trying to learn.

Should I got for a 10 year or 20 year loan payment option?

Why do you think it's best to max-out tax advantaged retirement accounts over paying off loans?
Because that's what the math says to do.  Get into investments that you could reasonably expect to yield 7%+ when borrowing at 4%.  Add on that you can save a bundle on current year taxes - you're making a high income in a high income tax state.  And that your student loan interest is likely tax deductible, so that 4% isn't quite 4% as well.

You're likely better off keeping low-interest rate debt as long as you can, if (and this is a BIG IF) you actually invest the difference.  Keeping the student loans around so you can spend more on hookers & blow = bad move.  Keeping the student loans around so you can invest much much more money, while saving taxes which lets you invest even more money = good move.

As far as getting comfortable with investing in stocks - reading the stock series at jlcollinsnh should do the job.

http://jlcollinsnh.com/stock-series/

It is long but worth it.

dandarc

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Re: LARGE student loan
« Reply #30 on: December 22, 2015, 04:34:21 PM »
Also - since you seem enamored with real estate.

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Jim writes lots of good stuff.

Frugalman19

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Re: LARGE student loan
« Reply #31 on: December 23, 2015, 08:24:32 AM »
Pay off the student debt ASAP, you're living with your parents not to invest money, you're living with your parents to get in a better place financially. The whole argument that keeping debt and investing is a good argument, but with as much debt as you have and your goals of owning a house, paying the minimum on your loans is not realistic. Your hair is on fire and you need to get out of debt, the only investing you should be doing is maxing retirement, everything else should be going towards that debt! This way when you want to buy a house, you will actually qualify for the loan. No one has mentioned that, but you have zero chance of qualifying for a mortgage with that much debt and your level of income. Unless you find a partner that can make your debt to income ratio look better.


thurston howell iv

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Re: LARGE student loan
« Reply #32 on: December 23, 2015, 08:35:35 AM »
OP:  I wanted to point out a few things that I did not see mentioned and a few flaws in your plan.

1. NO ONE will refi- $260k in debt. (The cap is around $220k) - Ask me how I know?  (Don't believe me? Go check SoFi, Common bond, DRB, etc... We used Common Bond to get the best rate and terms possible)  Here's a link to the post if you're interested : http://forum.mrmoneymustache.com/welcome-to-the-forum/official-common-bond-student-loan-re-fi-referral-thread/msg747401/#msg747401

2. Even with stellar credit, your debt to income ratio will be so skewed to the debt side that your interest rate will not be close to 4%
We did a SL refi with 800+ credit score and much less DTI and the rate is 3.72% BUT it's variable (since I was trying to squeeze the most I could out of it) AND since the Fed just raised rates .25%, I do not anticipate such cheap money 4-5 years from now.

Please be prepared for the reality that your SL payments will be $3k or better per month.
« Last Edit: December 23, 2015, 08:40:05 AM by thurston howell iv »

zephyr911

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Re: LARGE student loan
« Reply #33 on: December 23, 2015, 08:48:54 AM »
I understand I am in huge (emergency) debt but I'm scared that if I wait 3-5 years to buy a house it will go from 400-600k for a 2-3 bedroom place to 600-800k.
False urgency in real estate markets has made beggars of many men.

In the long run, prices will only go up that much if the fundamental economics in the area support it. IOW, if prices do go up that much more, and stay there, it will be because salaries do the same thing. And you'll be there taking advantage of it.

Take a deep breath, and then take several more deep breaths. Tell yourself the skills you've earned are highly valuable, that you will always have options, and that fear of rising prices is *never* a good reason to dive into even more debt. Just chill, and smile. Then set about eating this elephant one bite at a time. The more you pay down, the faster it'll go.

If I were in your shoes, I'd probably try to maximize tax-deferred retirement accounts along the way, because the immediate tax savings could outweigh the longer repayment period on your loans, but crunch the numbers and make sure that makes sense too.

ReadySetMillionaire

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Re: LARGE student loan
« Reply #34 on: December 23, 2015, 11:38:10 AM »
Pay off the student debt ASAP, you're living with your parents not to invest money, you're living with your parents to get in a better place financially. The whole argument that keeping debt and investing is a good argument, but with as much debt as you have and your goals of owning a house, paying the minimum on your loans is not realistic. Your hair is on fire and you need to get out of debt, the only investing you should be doing is maxing retirement, everything else should be going towards that debt! This way when you want to buy a house, you will actually qualify for the loan. No one has mentioned that, but you have zero chance of qualifying for a mortgage with that much debt and your level of income. Unless you find a partner that can make your debt to income ratio look better.

I posted a short comment earlier, but I just want to confirm that I emphatically disagree with this sentiment, most especially the bold (which I'll get to later).

OP: you have an unbelievably high debt. The government has designed several repayment programs (IBR, PAYE, PSLF, REPAYE) that you absolutely 100% have to look into before trying to be a slave to your loans.

I could go on and on about those programs, but the long story short of REPAYE is this: you pay 10% of your discretionary income towards your loans, with discretionary income being defined as Adjusted Gross Income minus 150% of the poverty line. And after you make that payment, the government subsidizes 50% of unpaid interest. So say your loan accrues $20,000 in interest per year, if you pay $5,000 towards your loan, the government subsides 50% of the remaining unpaid interest ($7,500 of free money) and your loan balance only goes up by $7,500 that year. Meanwhile you've contributed the max to your retirement accounts and you're getting started on that front.

If you want to know how this plays out over the long term, I wrote this post on a different forum for someone making a hypothetical starting salary of $160,000 with $294,000 in student loans:

Quote
AGI (Max 401k): $142,000 (not eligible for most other deductions)

Estimated REPAYE Payment: $1037.50 ($12,450 for the year)

Yearly Interest on $294k Loan at 6.94%: $20,126

Subtract payments made towards loan ($12,450): $7,676 interest accrued

Government subsidizes 50% of unpaid interest (REPAYE): $3,838

So the loan only goes up $3,838 that year. The payments will increase in future years meaning that the amount growing on the loan is less and less.


As to whether to do standard ten year repayment or PAYE/invest:

If he pays it off in ten years he will pay $411,000 towards the loan.

If he does REPAYE and averages paying $15,000/year towards the loan he will pay $375,000 plus income tax on the forgiven amount. And if he averages that yearly amount his loan will have gone up about $62,500 ($2,500 per year times 25). Add that to the current principal and that's $356,500 for the tax. Call it 38% tax bracket so $135,000 tax.

$135,000 + $375,000 = $510,000, so $100k more but with 15 extra years.

Those payments obviously are purely hypothetical, but the more he pays, the lower the tax bomb and vice versa. So I think the total paid towards those loans is somewhere in the $500-550 ballpark if he rides the REPAYE train all the way through.

Of course, you might start making enough income that the plan isn't worth it anymore, but in that case, what a great problem to have! Pay down your loans like crazy once you make that income--but for God's sake, use REPAYE as a hedge before you make that income.

Further, REPAYE is exactly why the AWGolfer's post above doesn't make any sense. Yes, if you refinanced, your debt to income ratio would be absurd. But if you do REPAYE, your student loan monthly payment will be low (even if you pay more, the reported payment to credit agencies will be low) and your debt/income ratio will be just fine.

Take it from me: I make $47,500 per year and have $148,000 in student loan debt. I easily qualified for a $121,000 mortgage this past October, mostly because PAYE (the precursor of REPAYE) kept my student loan payments in check.

And more on me: I was kind of in your boat this time last year. People on here said the same thing they're saying in this thread: "PAY DOWN YOUR LOANS DUMBASS." I did that, but the more I read the more I realized general personal finance advice didn't apply to student loans. I'd be a lot further ahead if I hadn't wasted six months throwing away money at my loans, but I'm glad it only took me that short of time to realize that I was better off in an income driven repayment plan.

Bottom line is this: 98% of posters on here don't know the ins and outs of student loan debt. It's a completely different type of debt that can be managed if you know how the repayment plans work. The generic advice of "OMG HAIR ON FIRE DEBT DEBT DEBT" is almost completely inapplicable. And because of that, you are doing yourself a complete disservice if you don't educate yourself about income driven repayment plans.
« Last Edit: December 23, 2015, 11:40:37 AM by ReadySetMillionaire »

Frugalman19

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Re: LARGE student loan
« Reply #35 on: December 23, 2015, 12:24:21 PM »
Pay off the student debt ASAP, you're living with your parents not to invest money, you're living with your parents to get in a better place financially. The whole argument that keeping debt and investing is a good argument, but with as much debt as you have and your goals of owning a house, paying the minimum on your loans is not realistic. Your hair is on fire and you need to get out of debt, the only investing you should be doing is maxing retirement, everything else should be going towards that debt! This way when you want to buy a house, you will actually qualify for the loan. No one has mentioned that, but you have zero chance of qualifying for a mortgage with that much debt and your level of income. Unless you find a partner that can make your debt to income ratio look better.

I posted a short comment earlier, but I just want to confirm that I emphatically disagree with this sentiment, most especially the bold (which I'll get to later).

OP: you have an unbelievably high debt. The government has designed several repayment programs (IBR, PAYE, PSLF, REPAYE) that you absolutely 100% have to look into before trying to be a slave to your loans.

I could go on and on about those programs, but the long story short of REPAYE is this: you pay 10% of your discretionary income towards your loans, with discretionary income being defined as Adjusted Gross Income minus 150% of the poverty line. And after you make that payment, the government subsidizes 50% of unpaid interest. So say your loan accrues $20,000 in interest per year, if you pay $5,000 towards your loan, the government subsides 50% of the remaining unpaid interest ($7,500 of free money) and your loan balance only goes up by $7,500 that year. Meanwhile you've contributed the max to your retirement accounts and you're getting started on that front.

If you want to know how this plays out over the long term, I wrote this post on a different forum for someone making a hypothetical starting salary of $160,000 with $294,000 in student loans:



OP has the opportunity to pay off his debt for the education he signed up for...some people would rather pay off their loans than get a handout from the federal government. When you sign up for a student loan you are well aware that is has to be paid back. Don't get me started on the ethical side of your statement.

OP said earlier that the houses are $400-600k, I will guarantee he will not qualify for a mortgage loan with $260,000 of debt and only $100,000 income. furthermore, why would he ever want to add more debt to his mountain of debt already.

ReadySetMillionaire

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Re: LARGE student loan
« Reply #36 on: December 23, 2015, 01:01:14 PM »
OP has the opportunity to pay off his debt for the education he signed up for...some people would rather pay off their loans than get a handout from the federal government. When you sign up for a student loan you are well aware that is has to be paid back. Don't get me started on the ethical side of your statement.

OP said earlier that the houses are $400-600k, I will guarantee he will not qualify for a mortgage loan with $260,000 of debt and only $100,000 income. furthermore, why would he ever want to add more debt to his mountain of debt already.
I agree that purchasing a house in that market is probably not the best idea.

But, you didn't address the debt/income ratio part of my post. REPAYE would lower his monthly student loan payment and would thus reduce his debt/income ratio. The REPAYE laws state that the student loan servicers can only report the monthly payment and whether the borrower is current. Lenders would haven no idea whether he had $50,000 or $300,000 in loans, only his monthly payment and whether he was current.

And LOL at the "ethical side" of REPAYE. It's a form of repayment that's part of the loan contract that student borrowers signed. If you had a similar repayment plan on your mortgage or car, you'd probably exercise that repayment amount if you had the option.

But you don't, and you view student loan debt in a negative light, and you therefore go into a bunch of ethical bullshit as to why you are jealous that these forms of repayment exist.

Take the example above ($294k debt with $160k income) as Exhibit A as to why REPAYE is not a "handout" by any stretch of the imagination (which, in case  you don't want to review, the government gets $100,000 more from the borrower than it would if the borrower paid the loan in ten years). The government gets their money no matter what--it's just a matter of stretching out and optimizing your repayment.

If you don't understand that math, that's on you.
« Last Edit: December 23, 2015, 01:03:04 PM by ReadySetMillionaire »

Frugalman19

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Re: LARGE student loan
« Reply #37 on: December 23, 2015, 01:14:13 PM »
I understand how the debt to income ratio works, my point was simply that he shouldn't buy a $500,000 house. With $100k of income he would barely qualify.
Any forgiveness of debt is wrong to some degree, someone is getting shafted for your inability to pay. That's not in question, just because you can do something doesn't mean it's ethical.

ReadySetMillionaire

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Re: LARGE student loan
« Reply #38 on: December 23, 2015, 01:18:31 PM »
I understand how the debt to income ratio works, my point was simply that he shouldn't buy a $500,000 house. With $100k of income he would barely qualify.
Any forgiveness of debt is wrong to some degree, someone is getting shafted for your inability to pay. That's not in question, just because you can do something doesn't mean it's ethical.
The problem is that you have a negative view of the word "forgiven" and don't understand its context within the scope of REPAYE. "Forgiven" debt is taxed as income AFTER 25 years of repayment. The borrower pays more on the loan given this longer term and tax liability (in much the same way a person paying a 30 year mortgage pays more than a person paying a 15 year mortgage). Nothing is forgiven. Nothing is a burden on the taxpayer. Stop with the nonsense.
« Last Edit: December 23, 2015, 01:21:05 PM by ReadySetMillionaire »

therethere

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Re: LARGE student loan
« Reply #39 on: December 23, 2015, 01:25:56 PM »
**Modified*** Trying to talk sense to someone who believes they are 100% right all the time is worthless....
« Last Edit: December 24, 2015, 10:44:53 AM by therethere »

Frugalman19

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Re: LARGE student loan
« Reply #40 on: December 23, 2015, 01:28:41 PM »
I understand how the debt to income ratio works, my point was simply that he shouldn't buy a $500,000 house. With $100k of income he would barely qualify.
Any forgiveness of debt is wrong to some degree, someone is getting shafted for your inability to pay. That's not in question, just because you can do something doesn't mean it's ethical.
The problem is that you have a negative view of the word "forgiven" and don't understand its context within the scope of REPAYE. "Forgiven" debt is taxed as income AFTER 25 years of repayment. The borrower pays more on the loan given this longer term and tax liability (in much the same way a person paying a 30 year mortgage pays more than a person paying a 15 year mortgage). Nothing is forgiven. Nothing is a burden on the taxpayer. Stop with the nonsense.

You may be right, I don't understand the program. I won't argue with you on that, but the program has nothing to do with him qualifying for a $500k mortgage with his current income and debt. So what his minimum payment is less, with 0 minimum payment and his income he would have a hard time qualifying.

Your original reply to me stated that you disagreed that he would be able to qualify for a mortgage. I'm simply stating that with his income he wouldn't qualify for a loan, repay plan thing or not. He shouldn't be taking on more debt.

ReadySetMillionaire

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Re: LARGE student loan
« Reply #41 on: December 23, 2015, 01:41:32 PM »
If your loan has a balance one day and the government clears it the next day without any payment from you. How is that not forgiven??? In addition, the interest on your loan is being highly subsidized. Where is that coming from??? Do you think because its just a number on a screen it doesn't really exist or isn't being accounted for in other balance books somewhere?

I understand you are a big advocate of REPAYE. But some of your posts regarding it scream of entitlement... Its one thing to advocate for it for the right reasons to allow you to not be drowning in debt. Which you can easily do. But don't go around acting like its the best idea for everyone because its not. You're going to have to face the consequences of your loan at one time or another. Even if you seemingly have it all right now.
Because it would have taken 25 years of payments to get to that point, and then the forgiven amount is taxed. Go ahead and throw almost any income and debt level at me and I'll show you that the borrower will pay more on the loan if he does REPAYE than if he paid it in ten years.

And I disagree about being entitled. I'm just stating the facts. Nine out of ten high debt borrowers should be enrolled in REPAYE for at least the first 3-4 years of their repayment in much the same way nine out of ten people should enroll in their company's 401k. The math really is that clear.

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Re: LARGE student loan
« Reply #42 on: December 23, 2015, 02:02:41 PM »
Pretty much everyone here agrees:
  • Maximize tax advantaged savings and 401k match
  • Dont buy into real estate at this point
Fiscally, the big choice is taxable investment vs. student loan pay off. That really is a tough call. I certainly agree that getting onto an income based repayment program such as REPAYE will give the OP as much flexibility as possible and I would probably do that even if I planned to put as much toward the student loan as possible right now. I agree that loan forgiveness programs present a moral hazard to young adults and it in unethical to take out student loans that you don't intent to pay in full - so deciding to invest because unpaid student loan will be forgiven in 25 years would be wrong, but deciding to invest because you expect the investments better returns than loan payoff may not be wrong. One has to choose an expected return of the investments, factor in taxes for student loan interest and investment gains, then determine if they feel the increased risk is worth the expected increase in gains - each of these steps includes a lot of assumptions.

Personally, I had student loans arround 6% that I chose to pay off. But I am paying off student loans below 3% as slowly as possible. (I didn't have any loans between 3% and 5.5% that would have made choosing a cutoff point difficult.) My loan balances were too low to think that I might be able to make minimal income based repayments and not pay of the loans before a forgivness date - but I think anyone making this assesment of risk and reward should consider any external risk as their own. I also think that the REPAYE program is too soft - I like that the payment is based on AGI - 150% FPL; however, I think 10% is low - especially for higher income individuals - pehaps it should be progressive (similar to marginal tax rates).

ReadySetMillionaire

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Re: LARGE student loan
« Reply #43 on: December 23, 2015, 02:21:03 PM »
Pretty much everyone here agrees:
  • Maximize tax advantaged savings and 401k match
  • Dont buy into real estate at this point
Fiscally, the big choice is taxable investment vs. student loan pay off. That really is a tough call. I certainly agree that getting onto an income based repayment program such as REPAYE will give the OP as much flexibility as possible and I would probably do that even if I planned to put as much toward the student loan as possible right now. I agree that loan forgiveness programs present a moral hazard to young adults and it in unethical to take out student loans that you don't intent to pay in full - so deciding to invest because unpaid student loan will be forgiven in 25 years would be wrong, but deciding to invest because you expect the investments better returns than loan payoff may not be wrong. One has to choose an expected return of the investments, factor in taxes for student loan interest and investment gains, then determine if they feel the increased risk is worth the expected increase in gains - each of these steps includes a lot of assumptions.

Personally, I had student loans arround 6% that I chose to pay off. But I am paying off student loans below 3% as slowly as possible. (I didn't have any loans between 3% and 5.5% that would have made choosing a cutoff point difficult.) My loan balances were too low to think that I might be able to make minimal income based repayments and not pay of the loans before a forgivness date - but I think anyone making this assesment of risk and reward should consider any external risk as their own. I also think that the REPAYE program is too soft - I like that the payment is based on AGI - 150% FPL; however, I think 10% is low - especially for higher income individuals - pehaps it should be progressive (similar to marginal tax rates).

This is BS. If you go through REPAYE for the full term then you will more than pay the entire loan. It's just a different type of repayment in the same way a 5 year, 10 year, or 30 year term is different as well.

robartsd

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Re: LARGE student loan
« Reply #44 on: December 23, 2015, 03:48:18 PM »
This is BS. If you go through REPAYE for the full term then you will more than pay the entire loan. It's just a different type of repayment in the same way a 5 year, 10 year, or 30 year term is different as well.
It is possible (though unlikely) that payments under REPAYE never add up to original loan principal. Certainly REPAYE allows one to lower the effective interest rate of the loan. I did take advantage of subsidized Stafford loans myself - so I have allowed the government to pay some of my interest too; but I still view that as quite different from someone expecting to have a balance forgiven.

ShoulderThingThatGoesUp

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Re: LARGE student loan
« Reply #45 on: December 24, 2015, 03:27:46 AM »
OP, what are the current rates in your loans? Are they variable or fixed?

TheDudeReturns

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Re: LARGE student loan
« Reply #46 on: December 24, 2015, 04:19:40 AM »
Pretty much everyone here agrees:
  • Maximize tax advantaged savings and 401k match
  • Dont buy into real estate at this point
Fiscally, the big choice is taxable investment vs. student loan pay off. That really is a tough call. I certainly agree that getting onto an income based repayment program such as REPAYE will give the OP as much flexibility as possible and I would probably do that even if I planned to put as much toward the student loan as possible right now. I agree that loan forgiveness programs present a moral hazard to young adults and it in unethical to take out student loans that you don't intent to pay in full - so deciding to invest because unpaid student loan will be forgiven in 25 years would be wrong, but deciding to invest because you expect the investments better returns than loan payoff may not be wrong. One has to choose an expected return of the investments, factor in taxes for student loan interest and investment gains, then determine if they feel the increased risk is worth the expected increase in gains - each of these steps includes a lot of assumptions.

Personally, I had student loans arround 6% that I chose to pay off. But I am paying off student loans below 3% as slowly as possible. (I didn't have any loans between 3% and 5.5% that would have made choosing a cutoff point difficult.) My loan balances were too low to think that I might be able to make minimal income based repayments and not pay of the loans before a forgivness date - but I think anyone making this assesment of risk and reward should consider any external risk as their own. I also think that the REPAYE program is too soft - I like that the payment is based on AGI - 150% FPL; however, I think 10% is low - especially for higher income individuals - pehaps it should be progressive (similar to marginal tax rates).

This is BS. If you go through REPAYE for the full term then you will more than pay the entire loan. It's just a different type of repayment in the same way a 5 year, 10 year, or 30 year term is different as well.

ReadySetMillionaire: Keep up the good work! Honestly, I only stick around this forum to see if you'll respond to any of the student loan posts. Mr. Money Mustache seems to attract tons of bored, cubicle-dwelling kool-aid drinkers. Honestly, it's just Bogleheads for younger people, complete with the same brand of very little independent thought. I find it hilarious every time I see people trolling about PAYE/REPAYE not being fair...waaaaaaaaah! It's okay guys, you can just work on your FIRE spreadsheets to calm down.

OP: This dude is providing you good info. You make me LOL that you got $250k in debt with a PhD and are working in Silicon Valley but don't even have the slightest hint as to how these loans work. Really, it would have taken you an afternoon to read up on this stuff. There are even videos if you don't want to read. Are you sure you didn't just graduate high school and not a doctoral program, as this is some elementary level financial stuff? You are lucky ReadySetMillionaire is around to set you straight. Oh, and don't refinance your nice federal loans to private loans to save 0.25% a year on interest. That is just silly. Again, worrying about small percents like that is a token Boglehead sign. Middle class poverty mentality at its finest, just like people moving CDs around now to get an extra 0.1% a year in interest.

seattlecyclone

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Re: LARGE student loan
« Reply #47 on: December 24, 2015, 04:47:22 AM »
What's your doctorate in? If it's computer science or similar you should be pulling in well over $100k to start in Silicon Valley. If it's something else, you should be able to find a job somewhere else that will let you save more even if the salary is a bit lower. You wouldn't be able to live with your parents in a different location, but you might not need to either.

How long until you graduate? Is there anything you can do to reduce your expenses now so that you can graduate with a slightly smaller student loan balance than you're expecting?

Frugalman19

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Re: LARGE student loan
« Reply #48 on: December 24, 2015, 09:29:37 AM »
Pretty much everyone here agrees:
  • Maximize tax advantaged savings and 401k match
  • Dont buy into real estate at this point
Fiscally, the big choice is taxable investment vs. student loan pay off. That really is a tough call. I certainly agree that getting onto an income based repayment program such as REPAYE will give the OP as much flexibility as possible and I would probably do that even if I planned to put as much toward the student loan as possible right now. I agree that loan forgiveness programs present a moral hazard to young adults and it in unethical to take out student loans that you don't intent to pay in full - so deciding to invest because unpaid student loan will be forgiven in 25 years would be wrong, but deciding to invest because you expect the investments better returns than loan payoff may not be wrong. One has to choose an expected return of the investments, factor in taxes for student loan interest and investment gains, then determine if they feel the increased risk is worth the expected increase in gains - each of these steps includes a lot of assumptions.

Personally, I had student loans arround 6% that I chose to pay off. But I am paying off student loans below 3% as slowly as possible. (I didn't have any loans between 3% and 5.5% that would have made choosing a cutoff point difficult.) My loan balances were too low to think that I might be able to make minimal income based repayments and not pay of the loans before a forgivness date - but I think anyone making this assesment of risk and reward should consider any external risk as their own. I also think that the REPAYE program is too soft - I like that the payment is based on AGI - 150% FPL; however, I think 10% is low - especially for higher income individuals - pehaps it should be progressive (similar to marginal tax rates).

This is BS. If you go through REPAYE for the full term then you will more than pay the entire loan. It's just a different type of repayment in the same way a 5 year, 10 year, or 30 year term is different as well.

ReadySetMillionaire: Keep up the good work! Honestly, I only stick around this forum to see if you'll respond to any of the student loan posts. Mr. Money Mustache seems to attract tons of bored, cubicle-dwelling kool-aid drinkers. Honestly, it's just Bogleheads for younger people, complete with the same brand of very little independent thought. I find it hilarious every time I see people trolling about PAYE/REPAYE not being fair...waaaaaaaaah! It's okay guys, you can just work on your FIRE spreadsheets to calm down.

OP: This dude is providing you good info. You make me LOL that you got $250k in debt with a PhD and are working in Silicon Valley but don't even have the slightest hint as to how these loans work. Really, it would have taken you an afternoon to read up on this stuff. There are even videos if you don't want to read. Are you sure you didn't just graduate high school and not a doctoral program, as this is some elementary level financial stuff? You are lucky ReadySetMillionaire is around to set you straight. Oh, and don't refinance your nice federal loans to private loans to save 0.25% a year on interest. That is just silly. Again, worrying about small percents like that is a token Boglehead sign. Middle class poverty mentality at its finest, just like people moving CDs around now to get an extra 0.1% a year in interest.

I dont think anyone here is trolling but you. Nobody cares about the REPAYE program here, we are just here giving sound financial advice. ReadySetMillionaire may have been giving good information regarding the OP's loan, but to say that he should try and qualify for a home is ludicrous. No matter what the OP does with his student debt, he should not be taking on more debt.

I said this:
This way when you want to buy a house, you will actually qualify for the loan. No one has mentioned that, but you have zero chance of qualifying for a mortgage with that much debt and your level of income.

Readysetmillionaire said this:
 I just want to confirm that I emphatically disagree with this sentiment, most especially the bold

Go run the numbers on a loan to income calculator and the numbers dont lie. OP wouldnt be able to qualify for a loan, and he shouldn't, how can you emphatically disagree with that? numbers are numbers. He wants $500,000 home and makes $100k. With any debt he shouldn't qualify, so it is wrong of you to say that he should do the REPAYE program to "hide" his debt from the loan company by lowering his monthly minimum payment so he can get more in debt, its simply immoral.

I understand you guys want to help, but just stick with your REPAYE advice, and only that, because you clearly don't understand much else.




ReadySetMillionaire

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Re: LARGE student loan
« Reply #49 on: December 24, 2015, 09:52:41 AM »
It is possible (though unlikely) that payments under REPAYE never add up to original loan principal. Certainly REPAYE allows one to lower the effective interest rate of the loan. I did take advantage of subsidized Stafford loans myself - so I have allowed the government to pay some of my interest too; but I still view that as quite different from someone expecting to have a balance forgiven.

But it's not just the payments. It's payments plus the tax liability. Payments plus tax liability will (significantly) exceed the original principal in 99% of cases.