Author Topic: Pay off $300k student loans or stay on Income-based repayment plan  (Read 16575 times)

DA

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Hi everyone,

I racked up about $220k in debt from law school (I know, not very Mustachian). I had a relatively low paying job for the past few years, and I therefore have been on the Income-based repayment plan ("IBR"), which has caused the balance of the loans to rise to $300k. In case you're not familiar, IBR limits your loans payments to 15% of your AGI (from your federal tax return), and forgives the balance of the loan after 20 years. As a reminder, 401(k) and IRA contributions are not counted in AGI.

Well, I recently found a high-paying job ($155k a year). My salary will keep increasing by 8% - 10% a year so long as I stay with the firm. Law firms are notorious, however, for chewing up and spitting out associates, so I don't think it's prudent to assume I'll be there in 10 years, even if I want to be.

So now my question is:  do I hunker down and try to pay off these loans (which are accruing interest at 6.8% or 8.5%), or just run out the IBR and have the amounts forgiven (I will be about 50 years old at that time)? My instincts tell me to stay on IBR, go big on 401(k) contributions, and save/invest as large of a proportion of my income as possible.

What would you do in my situation?

iwasjustwondering

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #1 on: March 04, 2015, 04:30:47 PM »
How long have you been on the IBR plan? 

abhe8

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #2 on: March 04, 2015, 04:37:34 PM »
Ibr is 25 years. It's only 20 if your loans are 2014 or after. And I think you pay taxes on the forgiven amount. I would just past them off asap. Re fi to a lower interest rate and try for 2 or 3 years

SaintM

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #3 on: March 04, 2015, 04:41:51 PM »
High tuition fueled by unlimited nondischargeable federal student debt and shitty job prospects are the reason I steer everyone I talk to about it away from law school.

aschmidt2930

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #4 on: March 04, 2015, 04:49:22 PM »
IMO, if you're making that kind of money, you should just pay what you owe.

DA

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #5 on: March 04, 2015, 04:54:33 PM »
I've been on IBR for 3 years.

@abhe8
It is my understanding that amounts forgiven under IBR would not be taxable. Are you sure?

@SaintMichael
Agreed, I always attempt to dissuade people from law school. There are still some good practice opportunities in government, and one can open one's own practice after putting in some time at a firm. But all of that is far too tentative to justify the cost.

DA

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #6 on: March 04, 2015, 04:59:46 PM »
@aschmidt2930

My worry is that I bust my ass at this job for 3 or 4 years (60 - 80 hours of work per week), pay off my loans, and then get burned out and quit. Sure, I'd be debt-free then (besides my modest home mortgage), but I would not be able to save/invest much of anything during this time.

In other words, is all the hard work worth it when the loans will just be forgiven anyway? Wouldn't I be better off building up my assets during these IBR years, and then watching my balance sheet "flip" in a major way when the loans are forgiven?

TN_Steve

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #7 on: March 04, 2015, 05:12:41 PM »
I've been on IBR for 3 years.

@abhe8
It is my understanding that amounts forgiven under IBR would not be taxable. Are you sure?

...

From a helpful, but non-authoritative site, it appears that IBR forgiveness is treated the same as any other forgiven loan (Other than PSLF):

Quote
Will forgiven loan amounts be taxed as income?
The U.S. Department of the Treasury determined that debt forgiven through PSLF is not considered taxable income under current law. That means that when you qualify for PSLF, you won't get slapped with a huge tax bill.

Unfortunately, the same good news doesn't extend to debt forgiven through IBR. Responsible borrowers with modest incomes shouldn't have to pay potentially crippling taxes on forgiven student loans. We are hopeful that this issue will be resolved before any borrowers qualify for forgiveness through IBR. We'll continue to work on this issue and keep you informed.

http://www.ibrinfo.org/faq.vp.html#_Will_forgiven_loan

DA

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #8 on: March 04, 2015, 05:17:07 PM »
Thanks abhe8 and TN_Steve for the info re: IBR.

Perhaps I need to project what the balance will be when it's forgiven, make my best guess about tax rates at that time, and compare that to expected payments under IBR.

OneCoolCat

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #9 on: March 04, 2015, 05:21:54 PM »
Tagging.  As a young lawyer I've thought about this scenario and am glad someone brought it up.

My thoughts are that if you are going to pay off your loans within 25 years anyways, you might as well refinance and pay it off with a lower interest rate.  You understandably don't know whether you will pay it off due to the nature of your work so I would probably stay on IBR for the time being and reassess how you feel about your job in about 6 months.

Congrats on the sweet gig!

dunhamjr

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #10 on: March 04, 2015, 05:24:23 PM »
yeah i was gonna say, you really need to run the math.

need to be sure that the IBR plan stretched out to 25 years will be worth it. 
would suck to end up having paid $450k in loans when you might have come out paying less just killing the loan in 5 yrs or so.

assuming $155k/yr +8%YoY, it shouldn't be too out of reach really to kill those loans in 5 years as long as other expenses allow you to pay in $60k+ on the loans.

also be 100% certain that you will be able to meet whatever the IBR loan forgiveness requirements are.  would hate to see you get 20-25 yrs and $225k down the line and not get the loan forgiven.

TN_Steve

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #11 on: March 04, 2015, 05:25:34 PM »
...

Congrats on the sweet gig!

Second this, particularly impressive to have done it via transitioning from a low paying gig (unless the former was a clerkship, of course!)

DA

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #12 on: March 04, 2015, 05:41:22 PM »
Thanks for the congrats! Now the pressure is on me to justify this ridiculous salary!

TXScout2

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #13 on: March 04, 2015, 05:45:09 PM »
It will be pretty hard to project the balance when the loan is forgiven, so it's a tough call.  I would lean towards "betting on yourself" and pay it off as fast as possible.  If you do decide to try to pay it off, you should seriously consider refinancing.

This thread has a lot of pretty detailed analysis of the pros and cons of IBR; it's worth a read:

http://forum.mrmoneymustache.com/ask-a-mustachian/in-$150-000-of-student-loan-debt-and-need-some-adviceencouragement/

Ynari

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #14 on: March 04, 2015, 06:16:26 PM »
http://www.finaid.org/calculators/ibr.phtml#help3 I looked around for calculators, and this one actually seems to be pretty able to handle your situation.  It even calculates the net present value of your two options (IBR vs fixed payment). 

It looks like, with IBR, you stand to pay a marginal amount more if you keep up increasing the $$$$ (since the amount you pay is capped), but you would pay a significant amount less if you end up burning out and taking a lower paying job.

rpr

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #15 on: March 04, 2015, 06:40:36 PM »
I'm not in your  situation but if you really, really were to hunker down and payoff a total of 60-65K per year towards this debt, you might be able to complete the payoff in 6-7 years. I estimate you will still have about 60K/year for all of your other expenses after taxes. Yes, at the end of those six or seven years, you may not have much in savings. But your mustachian muscles would be so strong by that time, that you can bank those huge $  that you were paying off towards debt into sprucing up your savings.

If the interest rates were lower, say around 3% or so, then my advice would be to do the IBR. At almost 7.5%, dragging it seems to be not worth it.

Wishing you good luck.

DA

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #16 on: March 04, 2015, 09:21:00 PM »
Thanks for the replies everyone.

@freznow
That was my intuition:  if I only stay at the law firm for a limited time, and then take a lower paying job, IBR could work out well.

Given the realities of law firms these days, it is very difficult to make partner. I would estimate my probability of making partner at ~10%, and that is with full effort for 7-10 years. Were I to make partner, IBR would almost certainly be worse for me (but at that point, I'd be making serious money, so it would be more of an annoyance than a true problem).

The more likely scenario is that I stay with the firm for 3-7 years, and then, after being asked to leave the firm since I won't make partner, I either (1) find a lower paying legal job; or (2) do something more mustachian. Both choices result in lower income, probably much lower income, and therefore lower IBR payments. It seems like staying on IBR makes more sense for this scenario. But given the chorus of "pay it off" in this thread so far, perhaps I'm deluding myself.

rpr

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #17 on: March 04, 2015, 10:27:41 PM »
DA -- given this information, I can see your point of view.

Go the IBR way till things get settled. Make sure that you stockpile savings both taxable and tax deferred. If you are fortunate to make partner, then you will be able to pay it off faster. As you said it would be more of an annoyance. The only thing I don't really like is the high interest rate :(


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YTProphet

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #18 on: March 05, 2015, 06:33:15 AM »
Not to rub salt in a wound, but why in the world did you need to take out $220K in loans to go to law school? I graduated fairly recently from a expensive/fancy school and took out loans for the full tuition amount, and I left with $135K 3yrs x $45k) in debt. What the heck did you buy with that $220k?

ReadySetMillionaire

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #19 on: March 05, 2015, 07:46:04 AM »
DA: you should read this thread I made from last week: http://forum.mrmoneymustache.com/ask-a-mustachian/in-$150-000-of-student-loan-debt-and-need-some-adviceencouragement/

OneCoolCat

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #20 on: March 05, 2015, 08:16:33 AM »
Not to rub salt in a wound, but why in the world did you need to take out $220K in loans to go to law school? I graduated fairly recently from a expensive/fancy school and took out loans for the full tuition amount, and I left with $135K 3yrs x $45k) in debt. What the heck did you buy with that $220k?

220k is not unheard of. 45k tuition is on the lower end of fancy school tuition and on top of that you have living expenses.  There are many law grads that pay 45-50k tuition and 20-30k living expenses each year.  I just read that Columbia just raised their tuition to over 60k!  Can you imagine that along with COL?

Avidconsumer

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #21 on: March 05, 2015, 08:21:39 AM »
How much are you paying towards the debt right now, because you're accruing 2k a month in interest right now? If you pay in say 500 a month then you will have contributed 120k towards the debt in 20 years, but the loan amount will be near to 1.1mio. I think you need to refinance first before you do anything.

YTProphet

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #22 on: March 05, 2015, 08:22:15 AM »
Not to rub salt in a wound, but why in the world did you need to take out $220K in loans to go to law school? I graduated fairly recently from a expensive/fancy school and took out loans for the full tuition amount, and I left with $135K 3yrs x $45k) in debt. What the heck did you buy with that $220k?

220k is not unheard of. 45k tuition is on the lower end of fancy school tuition and on top of that you have living expenses.  There are many law grads that pay 45-50k tuition and 20-30k living expenses each year.  I just read that Columbia just raised their tuition to over 60k!  Can you imagine that along with COL?

The crazy thing is, Columbia Law may still be worth it. You'll leave making $160k/yr (more like $170k counting bonus) and that'll go up a fair bit every year. Then again, if you're smart enough to get into Columbia Law, you're probably smart enough to do just about anything else, including getting a boring engineering degree and going to San Fran/NYC/Boston and making $100k a year off the bat without that kind of debt.

Bob W

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #23 on: March 05, 2015, 08:24:48 AM »
In your case the prudent thing is to stay with the program and rack up the cash as much as you can.   

Open a separate taxable investment account and label it Student Loan Account.   Fill it up as soon as you can.  So yeah,  live on rice and beans until you have a positive net worth including the loans of 300K.  If you want to retire early you can live off your 600K investments with little or no interest and little or no SL repayment.

This program is a huge gift to you for earlier retirement.   You messed up taking the loans.  Don't mess up paying them if you don't have to.

OneCoolCat

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #24 on: March 05, 2015, 10:25:17 AM »
Not to rub salt in a wound, but why in the world did you need to take out $220K in loans to go to law school? I graduated fairly recently from a expensive/fancy school and took out loans for the full tuition amount, and I left with $135K 3yrs x $45k) in debt. What the heck did you buy with that $220k?

220k is not unheard of. 45k tuition is on the lower end of fancy school tuition and on top of that you have living expenses.  There are many law grads that pay 45-50k tuition and 20-30k living expenses each year.  I just read that Columbia just raised their tuition to over 60k!  Can you imagine that along with COL?

The crazy thing is, Columbia Law may still be worth it. You'll leave making $160k/yr (more like $170k counting bonus) and that'll go up a fair bit every year. Then again, if you're smart enough to get into Columbia Law, you're probably smart enough to do just about anything else, including getting a boring engineering degree and going to San Fran/NYC/Boston and making $100k a year off the bat without that kind of debt.

Coming out of Columbia Law School is still no guarantee at biglaw. 

Numbers Man

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #25 on: March 05, 2015, 10:42:28 AM »
You took out the loan because you thought you would make a shitload of money. So now you're making a shitload of money so pay off the loan. Work on paying it off in about 10 years. You can still save for retirement as well and still have a life.

bugbaby

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #26 on: March 05, 2015, 10:54:23 AM »
I'll join the bandwagon of pay it off. Even after max 401k & IRA you should easily come out with 90-100k post tax. If you live on 30k, save 10k after tax; you still put 50-60k to debt, and you can still save all raises and bonuses toward say a home or just an extra cushion.

I'm about done paying off 260k in 5 years on 200+ salary but also cash-flowed a house and saved a cushion, coz I live on 25-30k a year very comfortably, including 2-6k/yr on travel.  It feels great!

RexualChocolate

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #27 on: March 05, 2015, 11:14:41 AM »
Only reason to go to law school is if you're on scholarship, have a guaranteed equity stake job at a family firm, or really love the profession.

If compensation is the end goal and you're a top tier applicant, investment banking absolutely destroys the compensation especially now since MBA requirement for associates completely waived. No tuition cost + no 3 year opportunity cost.

On topic, if IBR is 15% of his AGI, isn't it going to soak him while he makes money? He will be paying ~20k a year anyway, might as well prepay at that point

OneCoolCat

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #28 on: March 05, 2015, 11:25:11 AM »
Only reason to go to law school is if you're on scholarship, have a guaranteed equity stake job at a family firm, or really love the profession.

If compensation is the end goal and you're a top tier applicant, investment banking absolutely destroys the compensation especially now since MBA requirement for associates completely waived. No tuition cost + no 3 year opportunity cost.

On topic, if IBR is 15% of his AGI, isn't it going to soak him while he makes money? He will be paying ~20k a year anyway, might as well prepay at that point

I agree with the first part.  I'm one of the lucky ones who went to a school with instate tuition and even that carried a big debt load and it has its drawbacks because my salary isn't up to par with many of my peers.  My debt was under 50k upon graduation last May but if I wouldn't have gone to to law school I wouldn't have any debt and would have saved a bit.  In the long run it may not have been the worse decision as I was only making 35k when I went into law school and am making double that now.  I'm still envious of my peers that are making 6 figures so early into their careers though.  Maybe one day.

SpendyMcSpend

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #29 on: March 05, 2015, 11:25:24 AM »
The idea of the balance continuing to increase if you pay less than the interest owed every month is problematic to me.  I would take this year and save up as much cash as possible while doing IBR then reassess after you know what the firm is like.  You can always make some big payments later.

RexualChocolate

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #30 on: March 05, 2015, 11:43:38 AM »
I agree with the first part.  I'm one of the lucky ones who went to a school with instate tuition and even that carried a big debt load and it has its drawbacks because my salary isn't up to par with many of my peers.  My debt was under 50k upon graduation last May but if I wouldn't have gone to to law school I wouldn't have any debt and would have saved a bit.  In the long run it may not have been the worse decision as I was only making 35k when I went into law school and am making double that now.  I'm still envious of my peers that are making 6 figures so early into their careers though.  Maybe one day.

Exactly. The opportunity cost is going to be different from person to person. It's all about payback period. For a 100% salary increase, I'd say it's pretty short and worthwhile.

SantaFeSteve

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #31 on: March 05, 2015, 12:11:23 PM »
I will weigh in and say why not change your repayment to the Extended Fixed payment, which does not allow for negative amortization and is a 25 year term.  Work to pay those loans off in as short a time as possible.

IF, you 'burn out' at your job and switch to a significantly lower paying position then just change your repayment program back to IBR at that time.

Why anyone would choose to pay 6.5 and 8% interest for another 20+years is beyond me, but hey, different strokes. 

ReadySetMillionaire

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #32 on: March 05, 2015, 01:08:06 PM »
In your case the prudent thing is to stay with the program and rack up the cash as much as you can.   

Open a separate taxable investment account and label it Student Loan Account.   Fill it up as soon as you can.  So yeah,  live on rice and beans until you have a positive net worth including the loans of 300K.  If you want to retire early you can live off your 600K investments with little or no interest and little or no SL repayment.

This program is a huge gift to you for earlier retirement.   You messed up taking the loans.  Don't mess up paying them if you don't have to.

When the borrower is making this much income, I totally disagree. Let's say OP goes on IBR or PAYE averages an $800 payment over the life of the loan by strategically reducing his AGI:

Principal Paid: $192,000
Deductions Lost (Due to Filing Separately): approximately $75-100,000
Taxable Amount: $223,440 ($300k principal + $1200 monthly interest accruing x 20 years = $588k x .38 tax bracket).
Capital Gains (Need to take out 1.16x taxable amount to cover capital gains tax): $35,750
TOTAL: $551,190.40.

Sure, if he put $50,000 away for 20 years and got 7% interest, he'd have almost $2.2M. But what if the market takes a hit that year and he also has to pull $260k to cover his tax liability? All that work and he will have lost a fortune.

Importantly, I think OP can pay these off in 6-7 years. My math says that if he can pay $5,500 per month towards his loans ($66k per year), he will pay $362k over the life of the loan and be done with it after 5.5 years.

Then after that, if he stays at a similar compensation level, he will be able to throw way more than $50,000 a year towards his loans for 15 years while not basing every financial decision on his student loans/tax liability.

In short, OP will get a short term break by going on IBR. But he will have to dance around the tax code for 20 years and pay (with lost deductions) over $550k towards his loans. Conversely, if he just deals with his loans, he will pay $362k towards his loans ($200k less than IBR) and then have incredible financial freedom after he's done paying off his loans.
« Last Edit: March 05, 2015, 01:09:41 PM by ReadySetMillionaire »

Blonde Lawyer

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #33 on: March 05, 2015, 02:52:08 PM »
My advice is to refi and pay off.  That was the advice I gave ReadySetMillionaire too.  The biggest reason is that loan is just going to keep growing since you will not even be paying interest in full each month.  When it is eventually forgiven, your tax bill alone could be greater than what you would have paid if you had just paid it off.  See my signature re: what I did to refinance.

DeltaBond

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #34 on: March 05, 2015, 02:58:20 PM »
I mostly skimmed the thread, but I didn't see anyone ask - how much will you have paid by the end of the 20/25 loan term?  I didn't see you mention monthly payments, and not to pry, but will the amount be well over the amount owed??

Bicycle_B

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #35 on: March 05, 2015, 04:12:01 PM »
How about investing the max, keeping the IBR...and if you reach the point where you can pull the money out of your investment accounts, pay it off then?

In the event that the loan is payable in full, you lose little compared to paying it directly (10% or so; compounding is working in your favor).  In the event IBR is needed, you preserve the option to use it, and you get tax advantages through your investment accounts.  Best of both worlds, eh?

Blonde Lawyer

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #36 on: March 05, 2015, 04:46:39 PM »
How about investing the max, keeping the IBR...and if you reach the point where you can pull the money out of your investment accounts, pay it off then?

In the event that the loan is payable in full, you lose little compared to paying it directly (10% or so; compounding is working in your favor).  In the event IBR is needed, you preserve the option to use it, and you get tax advantages through your investment accounts.  Best of both worlds, eh?

But his loan balance is going to keep growing in the meantime.  It is a moving target. 

DA

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #37 on: March 05, 2015, 05:07:06 PM »
Quote
Principal Paid: $192,000
Deductions Lost (Due to Filing Separately): approximately $75-100,000
Taxable Amount: $223,440 ($300k principal + $1200 monthly interest accruing x 20 years = $588k x .38 tax bracket).
Capital Gains (Need to take out 1.16x taxable amount to cover capital gains tax): $35,750
TOTAL: $551,190.40.

My spouse doesn't work, so no need to file separately and lose deductions. Not saying that flips it in favor of IBR, but it's worth mentioning. Of course she may decide one day to return to work. In all likelihood, that wouldn''t happen for 8-10 years.

Ynari

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #38 on: March 05, 2015, 06:14:51 PM »
The payments under IBR are capped at the standard payment amount, so your potential downsize risk is capped.  I really think you only stand to lose up to $20,000 present value by doing IBR (if you do, infact, make partner, at which point the extra money will not be a big issue), but stand to gain up to $200,000 present value in the scenario where you don't make partner. (Though, those are extreme scenarios. More likely, you'd overpay by under $10k or underpay by under $100k).  The 100k-200k you'd have to pay taxes on at the end of the 25 years.

To me, that's pretty clear-cut. IBR is a way of cutting your losses in an otherwise negative situation. You may pay a marginal amount more in a positive situation, when that money isn't as significant.

Related question: what amounts are in the 8.5% loan and 6.8% loan?  Both are high interest rates, but is it possible to use a different repayment plan for each, or put extra money towards one loan in particular? (i.e. pay off the 8.5% ASAP, and do IBR for the 6.8%?) Hard to say if that would end up any better, but it might be something to calculate, as well, just in case avoiding the 8.5% rate decreases your tax liability at time of forgiveness.

DA

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #39 on: March 05, 2015, 08:36:44 PM »
Quote
Related question: what amounts are in the 8.5% loan and 6.8% loan?  Both are high interest rates, but is it possible to use a different repayment plan for each, or put extra money towards one loan in particular? (i.e. pay off the 8.5% ASAP, and do IBR for the 6.8%?) Hard to say if that would end up any better, but it might be something to calculate, as well, just in case avoiding the 8.5% rate decreases your tax liability at time of forgiveness.

Unfortunately most of the balance is in GradPLUS loans, which are at 8.5%. The Staffords are at 6.8%. Not sure of the exact distribution off the top of my head, but I would guess 2/3 @ 8.5% and 1/3 @ 6.8%. But good point about knocking out a particular loan (I've thought about that), that may be worth pursuing even if I stay with IBR.

GetItRight

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #40 on: March 06, 2015, 04:39:01 AM »
Refinance that high interest debt then pay it off ASAP. You now have the income that someone should offer you a better rate. Even maxing pretax accounts you'll be paying $1700/mo if payments are 15%. I pay a lot more than that per month of way less student loan debt on half your income. No excuses, get it done in a few years rather than be a slave for the next 20+. Remember IBR is a government thing, from the same people charging you extortionate interest rates and who will not let you discharge that debt in bankruptcy. They can change the deal or eliminate it at any time for any reason. Don't let them bait and switch you while your loan balance grows.

Your take home at 155k should be over $8000/mo? You can afford to pay at least $5k/mo and still have a pretty luxurious life. Suck it up and start digging. Once you're done with it you won't be tied to a $155k+ job so you only need to make it work until the loans are done.

Blonde Lawyer

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #41 on: March 06, 2015, 08:06:43 AM »
GetitRight makes a good point about the program changing.  That could cut both ways.  Maybe in the future you won't have to pay taxes on the forgiven debt but I'm not sure I would want to bank on that. 

I know SoFi will let you refinance as few of your loans as you want.  That may let you refi the highest interest rate ones and continue with IBR on the others.  I don't know if IBR has any prohibition against that though. 

TrulyStashin

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #42 on: March 06, 2015, 08:20:55 AM »
In your case the prudent thing is to stay with the program and rack up the cash as much as you can.   

Open a separate taxable investment account and label it Student Loan Account.   Fill it up as soon as you can.  So yeah,  live on rice and beans until you have a positive net worth including the loans of 300K.  If you want to retire early you can live off your 600K investments with little or no interest and little or no SL repayment.

This program is a huge gift to you for earlier retirement.   You messed up taking the loans.  Don't mess up paying them if you don't have to.

When the borrower is making this much income, I totally disagree. Let's say OP goes on IBR or PAYE averages an $800 payment over the life of the loan by strategically reducing his AGI:

Principal Paid: $192,000
Deductions Lost (Due to Filing Separately): approximately $75-100,000
Taxable Amount: $223,440 ($300k principal + $1200 monthly interest accruing x 20 years = $588k x .38 tax bracket).
Capital Gains (Need to take out 1.16x taxable amount to cover capital gains tax): $35,750
TOTAL: $551,190.40.

Sure, if he put $50,000 away for 20 years and got 7% interest, he'd have almost $2.2M. But what if the market takes a hit that year and he also has to pull $260k to cover his tax liability? All that work and he will have lost a fortune.

Importantly, I think OP can pay these off in 6-7 years. My math says that if he can pay $5,500 per month towards his loans ($66k per year), he will pay $362k over the life of the loan and be done with it after 5.5 years.

Then after that, if he stays at a similar compensation level, he will be able to throw way more than $50,000 a year towards his loans for 15 years while not basing every financial decision on his student loans/tax liability.

In short, OP will get a short term break by going on IBR. But he will have to dance around the tax code for 20 years and pay (with lost deductions) over $550k towards his loans. Conversely, if he just deals with his loans, he will pay $362k towards his loans ($200k less than IBR) and then have incredible financial freedom after he's done paying off his loans.

Totally agree with this.

And I'll add this.... if you don't pay these off, then your children will.  IBR for 20 years followed by forgiveness is merely shifting the burden of paying for your school onto your children's generation.   

I have SL's too -- $152k from law school so I feel your pain.  But we took the loans knowing we'd have to pay them back.  So pay them back.

abhe8

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #43 on: March 06, 2015, 08:41:26 AM »
Pay them off. I don't trust the gov one bit. Who is to say they won't eliminate the program in 15 or 19 or 22 years, it has NO contract, and then you are stuck praying all that additional interest.

genselecus

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #44 on: March 06, 2015, 09:01:23 AM »
I'll preface this by saying that I know very very little about IBR and I didn't graduate with a mountain of debt.

I think you should consider a few high level questions about the situation and your beliefs before you make the decision (and maybe/hopefully you already have):
1. Could you lose the IBR situation (this has already been brought up as, what happens if the gov decides to change the program)?
2. Is there a scenario where the IBR stops to be applicable? You talk about changing careers as a fear for wanting to stick with IBR, does this have an impact on whether you can still qualify for the IBR?
3. How long do you want to continue working? The real issue I see with the IBR, is that it probably locks you into working for the next 22 years (and I assume a higher probability if you leave the law gig after 7-10 years and are still sitting on this debt). I'm sure it is possible to save money to FIRE while paying the minimum, but I think this will become harder if your income suddenly decreases (as you fear it could in 7-10 years). This just seems like something that effectively precludes you from FIREing for the next 22 years. I don't want to work for the next 22 years, so I would try to pay off the loans completely and push to FIRE in 15-18 years. And if you can stick with the law career for 10 years, you probably could FIRE even faster.

Field123

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #45 on: March 06, 2015, 09:36:50 AM »
In your case the prudent thing is to stay with the program and rack up the cash as much as you can.   

Open a separate taxable investment account and label it Student Loan Account.   Fill it up as soon as you can.  So yeah,  live on rice and beans until you have a positive net worth including the loans of 300K.  If you want to retire early you can live off your 600K investments with little or no interest and little or no SL repayment.

This program is a huge gift to you for earlier retirement.   You messed up taking the loans.  Don't mess up paying them if you don't have to.

I totally agree with Bob's advice here. I think I am the most pro-IBR poster on these forums and you can see my arguments outlined in the other thread that was linked by Readysetmillionaire.

Basically, it depends on your goals, but if early retirement is the goal, then IBR is a godsend and you should go with it all the way because soon you'll be retired with no taxable income and no student loan payments.

Even if early retirement is not the goal, you should still stick with IBR. Even though it is totally possible (maybe even likely) that you may end up paying more money over 25 years + tax on the forgiven amount, that isn't a sure thing and it relies on assumptions that you will maintain the high income throughout the entire period. If you do, and you do end up paying more than you would have, well you've still made a shit ton of money over that time and you'll be fine. However, if you pay off the $300k and then wind up leaving the high paying job (by choice or not), then that's $300k that isn't in your investment account. The choice is really either you can have two good outcomes or one good and one bad, it's a no-brainer.

The answer here is to stay in IBR and otherwise be as mustachian as possible by loading up on investments. Most people who have analyzed IBR agree that congress will likely make the forgiven amounts tax exempt (bills have already been introduced to this effect and just think how popular it will be in 15 years when all these millions of non-mustachians who didn't prepare for the tax hit are on the verge of bankruptcy). Even if it does end up being taxable, the net present value of the income tax 20 years from now is relatively low... if you stick with IBR and continue to invest over 50% of your income, you can afford the tax hit just fine.

Income based repayment programs are the best think that has ever happened to aspiring early retirees. When repayment is tied to income, law school (or other professional programs) become amazing investments in one self. Even if you sacrifice 10 cents on every dollar you earn, you're coming out way ahead assuming you have a better income as a result of grad school. I'm really shocked that the majority of this forum doesn't realize this.

Field123

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #46 on: March 06, 2015, 09:43:51 AM »
Quote
When the borrower is making this much income, I totally disagree. Let's say OP goes on IBR or PAYE averages an $800 payment over the life of the loan by strategically reducing his AGI:

Principal Paid: $192,000
Deductions Lost (Due to Filing Separately): approximately $75-100,000
Taxable Amount: $223,440 ($300k principal + $1200 monthly interest accruing x 20 years = $588k x .38 tax bracket).
Capital Gains (Need to take out 1.16x taxable amount to cover capital gains tax): $35,750
TOTAL: $551,190.40.

Sure, if he put $50,000 away for 20 years and got 7% interest, he'd have almost $2.2M. But what if the market takes a hit that year and he also has to pull $260k to cover his tax liability? All that work and he will have lost a fortune.

Importantly, I think OP can pay these off in 6-7 years. My math says that if he can pay $5,500 per month towards his loans ($66k per year), he will pay $362k over the life of the loan and be done with it after 5.5 years.

Then after that, if he stays at a similar compensation level, he will be able to throw way more than $50,000 a year towards his loans for 15 years while not basing every financial decision on his student loans/tax liability.

In short, OP will get a short term break by going on IBR. But he will have to dance around the tax code for 20 years and pay (with lost deductions) over $550k towards his loans. Conversely, if he just deals with his loans, he will pay $362k towards his loans ($200k less than IBR) and then have incredible financial freedom after he's done paying off his loans.
[/quote]
Quote

Completely disagree with this analysis.

1) If he puts the $5500/month x 5.5 years into a brokerage account and let's it ride for 15 years, the outcome is vastly better for OPs net worth than paying off the loans.

2) There's at least 50% chance that the ~ $250,000 you have associated with taxes will not materialize.

3) It's impossible to quantify the loss (if any -- big if) from filing separately. Who knows what the OPs marriage situation or his wife's income will be.
« Last Edit: March 06, 2015, 09:55:43 AM by Tank_Esq »

OneCoolCat

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #47 on: March 06, 2015, 09:56:49 AM »
OP doesn't appear to be very optimistic that he will be making this kind of money for 6-7 years though.  My concern is that if he refinances now and ends up leaving his job for something that pays 50-80k a year he will be on the hook for a huge student loan payment.  He will effectively be stuck at his job to make ends meet.  Personally, I would stick through with it, but OP has a reason to be cautious about this.  That's why I proposed he hold off for a few months before pulling the trigger and refinancing.

Field123

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #48 on: March 06, 2015, 10:05:21 AM »
Quote
Principal Paid: $192,000
Deductions Lost (Due to Filing Separately): approximately $75-100,000
Taxable Amount: $223,440 ($300k principal + $1200 monthly interest accruing x 20 years = $588k x .38 tax bracket).
Capital Gains (Need to take out 1.16x taxable amount to cover capital gains tax): $35,750
TOTAL: $551,190.40.

My spouse doesn't work, so no need to file separately and lose deductions. Not saying that flips it in favor of IBR, but it's worth mentioning. Of course she may decide one day to return to work. In all likelihood, that wouldn''t happen for 8-10 years.

Just saw this part. So actually the OP still gets ALL the advantages of filing jointly PLUS a reduction in his IBR payments for carrying a dependent. Another strong factor in favor of IBR.

Field123

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Re: Pay off $300k student loans or stay on Income-based repayment plan
« Reply #49 on: March 06, 2015, 10:14:06 AM »
In your case the prudent thing is to stay with the program and rack up the cash as much as you can.   

Open a separate taxable investment account and label it Student Loan Account.   Fill it up as soon as you can.  So yeah,  live on rice and beans until you have a positive net worth including the loans of 300K.  If you want to retire early you can live off your 600K investments with little or no interest and little or no SL repayment.

This program is a huge gift to you for earlier retirement.   You messed up taking the loans.  Don't mess up paying them if you don't have to.

When the borrower is making this much income, I totally disagree. Let's say OP goes on IBR or PAYE averages an $800 payment over the life of the loan by strategically reducing his AGI:

Principal Paid: $192,000
Deductions Lost (Due to Filing Separately): approximately $75-100,000
Taxable Amount: $223,440 ($300k principal + $1200 monthly interest accruing x 20 years = $588k x .38 tax bracket).
Capital Gains (Need to take out 1.16x taxable amount to cover capital gains tax): $35,750
TOTAL: $551,190.40.

Sure, if he put $50,000 away for 20 years and got 7% interest, he'd have almost $2.2M. But what if the market takes a hit that year and he also has to pull $260k to cover his tax liability? All that work and he will have lost a fortune.

Importantly, I think OP can pay these off in 6-7 years. My math says that if he can pay $5,500 per month towards his loans ($66k per year), he will pay $362k over the life of the loan and be done with it after 5.5 years.

Then after that, if he stays at a similar compensation level, he will be able to throw way more than $50,000 a year towards his loans for 15 years while not basing every financial decision on his student loans/tax liability.

In short, OP will get a short term break by going on IBR. But he will have to dance around the tax code for 20 years and pay (with lost deductions) over $550k towards his loans. Conversely, if he just deals with his loans, he will pay $362k towards his loans ($200k less than IBR) and then have incredible financial freedom after he's done paying off his loans.

Totally agree with this.

And I'll add this.... if you don't pay these off, then your children will.  IBR for 20 years followed by forgiveness is merely shifting the burden of paying for your school onto your children's generation.   

I have SL's too -- $152k from law school so I feel your pain.  But we took the loans knowing we'd have to pay them back.  So pay them back.

Responding to the children paying it back...

That's such a narrow-minded way of looking at IBR or other income based repayment programs. Who knows what the OP would be doing or how much he'd be making if he didn't go to law school, but I think it's safe to assume it would be a lot less than he is making now. It's true that he may be taking advantage of an opportunity to save on student loans, but don't forget all the income tax he's paying on his high income over the next 20 years. All the money goes to the same place, and I am quite positive that the government will have made much more money off the OP as a result of his going to law school than it would otherwise.