Author Topic: PSA to Those with High Student Loans: REPAYE (New Repayment Plan) Starts Today  (Read 10321 times)

ReadySetMillionaire

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To anyone on here with significant student loan debt, the Obama administration rolled out a new student loan repayment plan that I think changes the equation for perhaps a majority of student loan borrowers.

The new payment plan came out today and if you have high student loan debt, you might want to look into enrolling.

Summary of Revised PAYE
  • Requires no proof of a partial financial hardship--you can enroll almost no matter what.
  • Adjusts borrowers’ payments to 10% of their disposable income, which is calculated as the difference between their Adjusted Gross Income and 150% of the poverty line. (I'll get to more on this later)
  • Borrowers who sign up for REPAYE and work in a government or nonprofit job for 10 years (and make 120 on-time payments) can have the rest of their loan forgiven.
  • REPAYE will also forgive the remaining balance on loans for other workers who only have debt for undergraduate study, after 20 years of payments.
  • Those who are using the program to repay graduate debt will have their debts forgiven after they have made 25 years’ worth of payments.
  • Loans forgiven under REPAYE, whether it is 20 or 25 years, will continue to be taxed.
  • If the borrowers monthly payment under REPAYE is less than the monthly interest, the excess interest will be reduced by 50%.  This should help people worried about negative amortization.
  • Married persons on REPAYE will have their spouses income count towards their monthly payment, regardless of whether or not the filed their taxes jointly or separately.  This is a change from PAYE and IBR where separate filers income is not included.

Thus, to summarize: the new plan increase eligibility for income driven repayment plans, caps payments based on ten percent of AGI (not total income), and subsidizes 50% of unpaid interest (thus dramatically reducing the actual interest rate on your loans).

Using Me as an Example: Utilizing REPAYE to Achieve and Accelerate FIRE

I previously made what turned out to be a quite controversial post about using income driven repayment plans in the context of FIRE: http://forum.mrmoneymustache.com/ask-a-mustachian/gaming-repaye-and-the-student-loan-system-($148-000-debt)-to-achieve-fire-at-45/

But because the regs are now official and no longer hypothetical (and there's been some slight tweaks), I thought a new post would be helpful to those with high student loan balances.

My Situation

I have approximately $148,000 in federal student loan debt and make $47,500 (cue the snarky crowd). If I enrolled in the traditional 10 year repayment plan, my payments would eat almost 50% of my gross income and not allow me to save at all.

I thus do not plan to pay off this debt via the standard repayment plan and instead plan to enroll in REPAYE. This plan caps payments at 10% of AGI - discretionary income. Two key points: (1) payment is based on AGI, which means I could stuff money into tax-deferred retirement accounts to lower payments and increase my savings rate; and (2) under REPAYE, the government subsidizes 50% of unpaid interest, thus lowering my effective interest rate from 6.7% to 3.3%.

I thus am going to put money away in tax-deferred retirement accounts and plan to retire at 45.

More Detailed Analysis of Traditional Repayment vs. The REPAYE Program

I make $47,500 per year as a lawyer and have $148,000 in student loans averaged at 6.743% interest. I have cut my expenses as much as possible and am technically able to make $1,200 monthly payments towards my loans. At that rate, it would take about 17 years and 7 months and $309,000 to pay off my loans (and I'll be 45 by then). If I chose to pay it off in ten years, that would be about $190,000.

Thus, I am now enrolling in REPAYE (the new PAYE) to pay back my loans. This will allow me to significantly reduce my student loan payments, provide more financial flexibility, begin saving for early retirement, and almost certainly pay less towards my loans (especially considering the time value of money) than if I were to pay them off in full.

Two of the pros of REPAYE are enormously huge in the early retirement context. First, your payment is based on adjusted gross income. That means you can stuff money in tax-deferred retirement accounts to minimize AGI and thus minimize student loan payments.

Second, if your payment does not cover interest, then the government subsidizes 50% of the accruing interest. That effectively lowers my interest rate from 6.7% to 3.3%.

Some Numbers

In 2015, my payment will be calculated as follows:

$47,500 Gross Income - $2,500 student loan interest deduction - $1,300 to HSA - $4,000 to 401k (just recently became eligible) - $1,000 to Traditional IRA = $38,700. Subtract 150% of poverty level for a single guy ($17,665) = $21,035. I now owe 10% of that number over the course of the year: $2,104, divided by 12 and my monthly payment is $175.33.

My loan interest will accrue approximately $10,000 over the year. But I'm paying $2,100 towards it, so make it $7,900. Then government subsidizes the remaining half, so my total loan balance only goes up $3,450 this year. Thus, I will have saved almost $20,000 towards retirement and my loan will only have gone up $3,450. This shows why REPAYE acts a tremendous hedge.

Now let's go to 2017 payments. This upcoming year (2016), I intend to max 401k. That will bring AGI (with deductions) down to $25,700.  Payments will then be a whopping $67.05. That decreases my cost of living and thus means I can begin saving even more (529? Traditional IRA? I'll decide later).

As income increases, my payments won't go up because I will continue to find ways to save and keep my AGI low.  REPAYE will therefore encourage you to have a very high savings rate.

Projected Assets at Age 45
  • My 401k (with employer match): $850,000
  • Her 401k (Again, Hard to Predict): $350,000
  • Paid Off House: somewhere around $150,000-$175,000 value by then
  • Brokerage Account: unknown

TOTAL: $1.3M + brokerage account + HSA + tIRA + 529s

With a paid off house, we then expect to be able to live frugally off less than $60,000 per year (the 4% withdrawal rate).

A Note on Long Term Concerns

A Growing Balance: Again, even while I'm investing early on, the balance should not grow too significantly. The government is subsidizing 50% of unpaid interest, meaning that my loan (after applying payments) should only accrue about $4,000 per year while far more goes into retirement accounts. If I start making substantial enough income that REPAYE isn't worth it, then the loan won't have grown too much and I can just take care of the loan.

Joint Income: My girlfriend makes decent money ($67,500 gross per year) and we plan to get married in the near future, and she is on board with the plan. Thus, even combining our income, we can do all sorts of things to greatly reduce our combined AGI (i.e., save aggressively) and keep payments low.

Tax Liability: My biggest concern is the tax liability. If I wasn't clear on this before, after 25 years, your loans are forgiven. But if your assets exceed the forgiven debt (which would happen since I was stuffing money into accounts to lower my AGI), then the forgiven debt is taxed at year 25.

I calculate that--at worst--my forgiven debt would be around $250,000. I would do everything in my power to make sure that is taxed at the 28% rate (tax brackets are likely going to move due to inflation), meaning I would owe $70,000. But given the time value of money and the legislative pressure I expect to come towards Congress, I can't pass up this opportunity for something 25 years down the line.

High Income: As a young lawyer, I do expect to make more money eventually, whether that means becoming partner at my current firm or moving to a bigger firm in a nearby bigger market. But even if I started making $150,000 per year, I could either pay off the loan or get my AGI down to below $100,000 per year and my payments would be in the $650-$700 range and, more importantly, significantly increase my savings rate.

Early Retirement Context: Of course, what happens when I retire at 45 and still have 7 years of payments to go? Well, my payments will be close to nothing, making this plan all the better.

Conclusion

As you'll see from the other thread, executing this plan is quite controversial. It's definitely not for everyone. But if you ignore the noise on here and think the math checks out, then go for it.  I'll leave this with Fields123's post on the subject:

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In summary, I think your plan is a good one and the numbers check out. It is difficult to project your income for the next 25 years and it is very possible that you will end up paying more money back under REPAYE. However, if you do, that means you made A LOT of money over that time period. That is a good outcome. The goal is not to somehow beat the government into paying less, the goal is FIRE and this is a tool to get you there. If you manage to wind up paying more back under the program you will also have millions of dollars saved, that is a WIN. The program is also a tremendous hedge. If you die or become disabled, your loans are extinguished but your savings and retirement accounts are not. If you become unemployed, your student loans go to $0, while your bank accounts remain intact. Literally the worst thing that can happen to you with this plan is that you make too much money... what a nice problem to have.
« Last Edit: December 16, 2015, 10:06:17 AM by ReadySetMillionaire »

NoStacheOhio

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I'm in a similar situation as you (income/debt numbers are close), and looking at this, it's difficult to see whether it would benefit me or not.

I work at a 501c3, and am about 3 years in on IBR (7 years to forgiveness), and I'm only paying about $200/mo, which (depending on future earnings) would put me paying ~$26k on a $100k loan before it goes away. Also, loans forgiven under PSLF don't count as taxable income, which is different than the 20/25 year forgiveness. I assume switching from IBR to REPAYE would reset the forgiveness clock? Anybody know for sure?

ReadySetMillionaire

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I'm in a similar situation as you (income/debt numbers are close), and looking at this, it's difficult to see whether it would benefit me or not.

I work at a 501c3, and am about 3 years in on IBR (7 years to forgiveness), and I'm only paying about $200/mo, which (depending on future earnings) would put me paying ~$26k on a $100k loan before it goes away. Also, loans forgiven under PSLF don't count as taxable income, which is different than the 20/25 year forgiveness. I assume switching from IBR to REPAYE would reset the forgiveness clock? Anybody know for sure?
Based on what I was told on the phone, your payments would roll over and wouldn't reset the clock.

However, the bigger issue is that REPAYE puts a $57,500 cap on forgiven debt. So you should stay enrolled in IBR, which doesn't have a cap (for now).

NoStacheOhio

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Based on what I was told on the phone, your payments would roll over and wouldn't reset the clock.

However, the bigger issue is that REPAYE puts a $57,500 cap on forgiven debt. So you should stay enrolled in IBR, which doesn't have a cap (for now).

That's a huge catch!

ReadySetMillionaire

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Based on what I was told on the phone, your payments would roll over and wouldn't reset the clock.

However, the bigger issue is that REPAYE puts a $57,500 cap on forgiven debt. So you should stay enrolled in IBR, which doesn't have a cap (for now).

That's a huge catch!
To be clear, the cap I mentioned relates to forgiven debt of public sector employees. So $57,500 gets forgiven but they have to pay income tax on the rest.

As for private sector employees, they have to pay income tax on 100% of forgiven debt.

seattlecyclone

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under REPAYE, the government subsidizes 50% of unpaid interest, thus lowering my effective interest rate from 6.7% to 3.3%.

Not quite. Given your numbers you're actually paying $2,100 in interest (1.4% of your total loan balance) and letting an additional $3,450 accrue to your balance (2.33%). That's a total of more than 3.7%, not 3.3%. Of course you could argue that you only expect to actually pay 28% of this 2.33%, so the real interest rate you're paying is 1.4% + (28% * 2.33%) = 2.05%.

I have no moral opposition to your plan. Seems like a valid option that you're using as intended, given that your income is in the threshold where the program considers the full payments to be a burden.

I do worry that this program gives you (and other similarly situated individuals) some extra incentive to remain at a low income. Since 10 cents out of every additional dollar you earn will go directly to the loans, it acts like an additional 10% tax above and beyond your current marginal tax rate. You're still going to be better off earning more money than less, everything else being equal, but you may have less of an incentive to go out and do some extra work in the evenings or weekends to earn more, compared to someone who could get an extra 10% for their time.

ReadySetMillionaire

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under REPAYE, the government subsidizes 50% of unpaid interest, thus lowering my effective interest rate from 6.7% to 3.3%.

Not quite. Given your numbers you're actually paying $2,100 in interest (1.4% of your total loan balance) and letting an additional $3,450 accrue to your balance (2.33%). That's a total of more than 3.7%, not 3.3%. Of course you could argue that you only expect to actually pay 28% of this 2.33%, so the real interest rate you're paying is 1.4% + (28% * 2.33%) = 2.05%.

I have no moral opposition to your plan. Seems like a valid option that you're using as intended, given that your income is in the threshold where the program considers the full payments to be a burden.

I do worry that this program gives you (and other similarly situated individuals) some extra incentive to remain at a low income. Since 10 cents out of every additional dollar you earn will go directly to the loans, it acts like an additional 10% tax above and beyond your current marginal tax rate. You're still going to be better off earning more money than less, everything else being equal, but you may have less of an incentive to go out and do some extra work in the evenings or weekends to earn more, compared to someone who could get an extra 10% for their time.

I think the bolded ignores two points.

First, my standard ten year repayment would act as a 50% tax of my discretionary income. Paying 10% is a hell of a lot better.

Second, it's not quite 10 cents on every additional dollar I earn--it's 10 cents on just disposable income alone, which is adjusted gross income minus 150% of the applicable poverty level.

Next year, that number is $2,100 for the year, so 4.4% of my actual gross income.

In 2016, that number will be $800 for the year, or 1.6% of my actual gross income.

Things will continue to make that number (the percentage of my total income paid towards my loans) even more palatable. Hypothetically speaking, my family size will increase, thus making 150% of the poverty level higher, thus increasing the amount deducted from my income to calculate my payment. I will begin contributing to other tax deferred accounts as well.

So say in five years I double my income and I'm making $100,000. Also say I'm married to GF (who hypothetically makes $30,000 working part time) and we have two kids.

Total Income: $130,000
Both Max 401k: $36,000
Both Max Traditional IRA: $11,000
Student Loan Interest Deduction: $2,500
HSA: $6,500
Child Tax Credit: $2,000
529: $10,000
Adjusted Gross Income: $62,000

Subtract 150% of poverty level for family of four ($36,400) to calculate my "discretionary income": $25,600

Ten percent of that number: $2,560 (which means monthly payments of $213). That amounts to 1.97% of total gross income. It also means we'd have saved $63,500 that year, or a savings rate of 48.8%.

Thus, if anything, REPAYE encourages you to lower AGI, not income, which means it encourages you to save and increase savings rate.

Mother Fussbudget

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I think you nailed it here:
Quote
Thus, if anything, REPAYE encourages you to lower AGI, not income, which means it encourages you to save and increase savings rate.

In researching the switch from IBR to REPAYE, I find almost nothing.  ALL resources found suggest:  "ask your loan servicer".  But almost all resources agree that it won't reset the clock on 120 on-time payments.

Quote
You just have to make 120 eligible payments (defined as payments made on an eligible plan while working for a non-profit, with eligible plans being IBR, ICR, PAYE, and the 10-year standard repayment). They can be mixed and matched, so REPAYE shouldn't change anything other than it adds one more eligible plan.
http://forums.studentdoctor.net/threads/repaye-a-new-income-drive-repayment-program.1155967/

There's a lot of info on switching from IBR to PAYE.  The note on making an 'accelerated payment' seems daunting, and could be costly if your loan servicer requires that.  Also found this link - http://bostonstudentloanlawyer.com/who-should-switch-to-repaye/
 
So the big trade-off seems to be 10% of COMBINED spousal income, vs 15% of individual income.   Let us know how it turns out.

vivophoenix

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is the unpaid interest amortized. as in its 148000 for the original loan and then 3% additional and then 3% of that additional for 20 years? meaning the debt could be almost $200000 in 20 years if you don't pay the interest?


my only concern would be that idea that you pretty much count on never really getting any large pay increases or promotions for 20 years. you are right you could do many tricks to limit your AGI. but with two earners so early in their career that is a long ways to go and assume you never make that much more than what  2% raises each year for 20 years? and once you are married that means both of you have to count on no major increases in income.

Bucksandreds

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under REPAYE, the government subsidizes 50% of unpaid interest, thus lowering my effective interest rate from 6.7% to 3.3%.

Not quite. Given your numbers you're actually paying $2,100 in interest (1.4% of your total loan balance) and letting an additional $3,450 accrue to your balance (2.33%). That's a total of more than 3.7%, not 3.3%. Of course you could argue that you only expect to actually pay 28% of this 2.33%, so the real interest rate you're paying is 1.4% + (28% * 2.33%) = 2.05%.

I have no moral opposition to your plan. Seems like a valid option that you're using as intended, given that your income is in the threshold where the program considers the full payments to be a burden.

I do worry that this program gives you (and other similarly situated individuals) some extra incentive to remain at a low income. Since 10 cents out of every additional dollar you earn will go directly to the loans, it acts like an additional 10% tax above and beyond your current marginal tax rate. You're still going to be better off earning more money than less, everything else being equal, but you may have less of an incentive to go out and do some extra work in the evenings or weekends to earn more, compared to someone who could get an extra 10% for their time.

I think the bolded ignores two points.

First, my standard ten year repayment would act as a 50% tax of my discretionary income. Paying 10% is a hell of a lot better.

Second, it's not quite 10 cents on every additional dollar I earn--it's 10 cents on just disposable income alone, which is adjusted gross income minus 150% of the applicable poverty level.

Next year, that number is $2,100 for the year, so 4.4% of my actual gross income.

In 2016, that number will be $800 for the year, or 1.6% of my actual gross income.

Things will continue to make that number (the percentage of my total income paid towards my loans) even more palatable. Hypothetically speaking, my family size will increase, thus making 150% of the poverty level higher, thus increasing the amount deducted from my income to calculate my payment. I will begin contributing to other tax deferred accounts as well.

So say in five years I double my income and I'm making $100,000. Also say I'm married to GF (who hypothetically makes $30,000 working part time) and we have two kids.

Total Income: $130,000
Both Max 401k: $36,000
Both Max Traditional IRA: $11,000
Student Loan Interest Deduction: $2,500
HSA: $6,500
Child Tax Credit: $2,000
529: $10,000
Adjusted Gross Income: $62,000

Subtract 150% of poverty level for family of four ($36,400) to calculate my "discretionary income": $25,600

Ten percent of that number: $2,560 (which means monthly payments of $213). That amounts to 1.97% of total gross income. It also means we'd have saved $63,500 that year, or a savings rate of 48.8%.

Thus, if anything, REPAYE encourages you to lower AGI, not income, which means it encourages you to save and increase savings rate.

529 contributions do not change federal adjusted income. Only state income in some states. $10,000 per year in a 529 is also excessive for public state schools, unless it's for 3 or more children and it won't lower your adjusted income for Repaye purposes. I see no problem with your plan but you exuberance needs to be checked in reality.

seattlecyclone

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under REPAYE, the government subsidizes 50% of unpaid interest, thus lowering my effective interest rate from 6.7% to 3.3%.

Not quite. Given your numbers you're actually paying $2,100 in interest (1.4% of your total loan balance) and letting an additional $3,450 accrue to your balance (2.33%). That's a total of more than 3.7%, not 3.3%. Of course you could argue that you only expect to actually pay 28% of this 2.33%, so the real interest rate you're paying is 1.4% + (28% * 2.33%) = 2.05%.

I have no moral opposition to your plan. Seems like a valid option that you're using as intended, given that your income is in the threshold where the program considers the full payments to be a burden.

I do worry that this program gives you (and other similarly situated individuals) some extra incentive to remain at a low income. Since 10 cents out of every additional dollar you earn will go directly to the loans, it acts like an additional 10% tax above and beyond your current marginal tax rate. You're still going to be better off earning more money than less, everything else being equal, but you may have less of an incentive to go out and do some extra work in the evenings or weekends to earn more, compared to someone who could get an extra 10% for their time.

I think the bolded ignores two points.

First, my standard ten year repayment would act as a 50% tax of my discretionary income. Paying 10% is a hell of a lot better.

The standard repayment would eat 50% of your current discretionary income. Any additional after-tax dollars would be 100% yours. That's the difference. This program, once you're past 150% of the poverty level, eats 10% of every additional dollar you earn. I don't disagree that 10% is less than 50%, nor that you likely come out ahead under this plan, however there becomes a point where your payments would become equal under both plans and the REPAYE plan gives you less of an incentive to get there.

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Second, it's not quite 10 cents on every additional dollar I earn--it's 10 cents on just disposable income alone, which is adjusted gross income minus 150% of the applicable poverty level.

Right, but you haven't stated any intention for your AGI to drop below 150% of the poverty level, so it's still 10% of each additional dollar.

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Thus, if anything, REPAYE encourages you to lower AGI, not income, which means it encourages you to save and increase savings rate.

There are only so many things you can do to lower your AGI without lowering your income. Once you have maxed out the retirement accounts and the HSA, you're pretty much stuck paying 10% of every additional dollar to your loans.

ReadySetMillionaire

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under REPAYE, the government subsidizes 50% of unpaid interest, thus lowering my effective interest rate from 6.7% to 3.3%.

Not quite. Given your numbers you're actually paying $2,100 in interest (1.4% of your total loan balance) and letting an additional $3,450 accrue to your balance (2.33%). That's a total of more than 3.7%, not 3.3%. Of course you could argue that you only expect to actually pay 28% of this 2.33%, so the real interest rate you're paying is 1.4% + (28% * 2.33%) = 2.05%.

I have no moral opposition to your plan. Seems like a valid option that you're using as intended, given that your income is in the threshold where the program considers the full payments to be a burden.

I do worry that this program gives you (and other similarly situated individuals) some extra incentive to remain at a low income. Since 10 cents out of every additional dollar you earn will go directly to the loans, it acts like an additional 10% tax above and beyond your current marginal tax rate. You're still going to be better off earning more money than less, everything else being equal, but you may have less of an incentive to go out and do some extra work in the evenings or weekends to earn more, compared to someone who could get an extra 10% for their time.

I think the bolded ignores two points.

First, my standard ten year repayment would act as a 50% tax of my discretionary income. Paying 10% is a hell of a lot better.

The standard repayment would eat 50% of your current discretionary income. Any additional after-tax dollars would be 100% yours. That's the difference. This program, once you're past 150% of the poverty level, eats 10% of every additional dollar you earn. I don't disagree that 10% is less than 50%, nor that you likely come out ahead under this plan, however there becomes a point where your payments would become equal under both plans and the REPAYE plan gives you less of an incentive to get there.

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Second, it's not quite 10 cents on every additional dollar I earn--it's 10 cents on just disposable income alone, which is adjusted gross income minus 150% of the applicable poverty level.

Right, but you haven't stated any intention for your AGI to drop below 150% of the poverty level, so it's still 10% of each additional dollar.

Quote
Thus, if anything, REPAYE encourages you to lower AGI, not income, which means it encourages you to save and increase savings rate.

There are only so many things you can do to lower your AGI without lowering your income. Once you have maxed out the retirement accounts and the HSA, you're pretty much stuck paying 10% of every additional dollar to your loans.

Right, but don't you see how that 10% number would still be less than paying them back through traditional methods, and why REPAYE acts as a tremendous hedge?

I mean, if in two years I get a big firm job in Cleveland and make $160,000 per year, hell ya I'll take that job. And then I'd have enough to pay back my loans. But by then I'll have $40k in savings and the loan would only have gone up about $7,000.

Again, the worst thing that can happen is I start making too much money. What a great problem to have.

ReadySetMillionaire

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529 contributions do not change federal adjusted income. Only state income in some states. $10,000 per year in a 529 is also excessive for public state schools, unless it's for 3 or more children and it won't lower your adjusted income for Repaye purposes. I see no problem with your plan but you exuberance needs to be checked in reality.
Calculation is based on AGI that shows up on my tax returns. So federal and state deductions apply.

johnny847

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529 contributions do not change federal adjusted income. Only state income in some states. $10,000 per year in a 529 is also excessive for public state schools, unless it's for 3 or more children and it won't lower your adjusted income for Repaye purposes. I see no problem with your plan but you exuberance needs to be checked in reality.
Calculation is based on AGI that shows up on my tax returns. So federal and state deductions apply.

Unless the AGI used for this REPAYE program is somehow based on a state tax return AGI (which now that I think of it, should be impossible, because some states don't even have income tax), your 529 contributions are completely IRRELEVANT to this discussion. 529 contributions do not affect your federal AGI in ANY way whatsoever.

seattlecyclone

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Right, but don't you see how that 10% number would still be less than paying them back through traditional methods, and why REPAYE acts as a tremendous hedge?

Yes, if you read my posts you'll see that I have agreed with you twice already on this point. Now I will do so a third time.

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I mean, if in two years I get a big firm job in Cleveland and make $160,000 per year, hell ya I'll take that job. And then I'd have enough to pay back my loans. But by then I'll have $40k in savings and the loan would only have gone up about $7,000.

With the interest rates you're paying, you will likely be better off paying down your loans than investing if you end up getting that $160k job. The REPAYE acts as a nice hedge that protects you if you don't, but let's not pretend that delaying interest payments on loans with 6.75% (sometimes higher) interest rates to invest the money instead is likely to be the optimal plan if you actually expect to repay the full balance eventually.

Quote
Again, the worst thing that can happen is I start making too much money. What a great problem to have.

Indeed. Best of luck to you.

NoStacheOhio

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In researching the switch from IBR to REPAYE, I find almost nothing.  ALL resources found suggest:  "ask your loan servicer".  But almost all resources agree that it won't reset the clock on 120 on-time payments.


This is one of the things that bugs the crap out of me. Loan administration is so inconsistent between servicing companies. To the point where I've been in telephone arguments about federal law with someone who's never filled out any of the forms in question, and doesn't actually know how IBR works. It took more than three years to get my wife's loans into repayment at the correct amount. They just kept coming back with numbers that were conveniently double my payments (counting my income, but not my loans). There was literally nothing we could do about it, other than keep taking forbearances. Meanwhile we're accruing interest. And there's no way to get away from the loan servicing company. Even consolidating isn't a guarantee you'll get assigned to a different company (I did, my wife didn't). Why the feds, who are now directly lending, still allow the middlemen is beyond me.

/endrant

charis

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I'm in a similar situation as you (income/debt numbers are close), and looking at this, it's difficult to see whether it would benefit me or not.

I work at a 501c3, and am about 3 years in on IBR (7 years to forgiveness), and I'm only paying about $200/mo, which (depending on future earnings) would put me paying ~$26k on a $100k loan before it goes away. Also, loans forgiven under PSLF don't count as taxable income, which is different than the 20/25 year forgiveness. I assume switching from IBR to REPAYE would reset the forgiveness clock? Anybody know for sure?
Based on what I was told on the phone, your payments would roll over and wouldn't reset the clock.

However, the bigger issue is that REPAYE puts a $57,500 cap on forgiven debt. So you should stay enrolled in IBR, which doesn't have a cap (for now).

I agree that nothing I've read or been told indicates that switching to the REPAYE would reset the PSLF payment clock.

However, I've seen nothing about the proposed PSLF cap having been implemented.  Do you have a link?

MDM

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529 contributions do not change federal adjusted income. Only state income in some states. $10,000 per year in a 529 is also excessive for public state schools, unless it's for 3 or more children and it won't lower your adjusted income for Repaye purposes. I see no problem with your plan but you exuberance needs to be checked in reality.
Calculation is based on AGI that shows up on my tax returns. So federal and state deductions apply.

With the numbers given, your federal AGI will be $74,000.  Neither the child tax credit (page 2 of form 1040) nor the 529 (nowhere on form 1040) will affect AGI (bottom of page 1 of form 1040).

Awitte58

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I am glad I came back and read this more thoroughly. I stumbled upon this when looking around on Navient to change my monthly payment.

I make 49,000 gross and after the 18000 for 401k deduction and the 6,300 for standard deduction (I am also filing single...that means I can deduct 4,000 for claiming myself?) that would leave my AGI at 24700 (or 20,700 if I can claim myself). I believe the option that came up though was IBR repayment and it said monthly payment was like $80.
I am on track for my gross pay to jump to 58,000 in June 2016 and who knows from there.
Bottom line I am torn between what the best option is for me.
I have 35000 principle + interest at an average interest rate of 6.8%. I went through and got approved on Earnest and Sofi. Earnest offering a fixed 6.59% for 13 years. Sofi was pretty similar. Neither option dropped my interest into the low 6% or high 5%.

I like to know what to expect every month and the end game. The whole "remaining portion is taxed" or whatever concerns me.

Eh now I am just rambling. Good post either way. I never would have known about it otherwise.

MDM

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I make 49,000 gross and after the 18000 for 401k deduction...
Stop there: your AGI would be $31,000.  Get a copy of Form 1040.  The AGI is the number at the bottom of page 1.  Most* deductions and exemptions aren't taken until page 2.

*Don't know the specifics of REPAYE.  If it uses AGI directly then you get to deduct up to $2500 in student loan interest also.

Bucksandreds

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529 contributions do not change federal adjusted income. Only state income in some states. $10,000 per year in a 529 is also excessive for public state schools, unless it's for 3 or more children and it won't lower your adjusted income for Repaye purposes. I see no problem with your plan but you exuberance needs to be checked in reality.
Calculation is based on AGI that shows up on my tax returns. So federal and state deductions apply.

With the numbers given, your federal AGI will be $74,000.  Neither the child tax credit (page 2 of form 1040) nor the 529 (nowhere on form 1040) will affect AGI (bottom of page 1 of form 1040).

OPs goal should be to use Repaye as a hedge against poverty and not a game to pay as little as possible regardless of overall financial position.  He also doesn't understand federal AGI.  OP, do everything to save for retirement but at the same time try to raise income.  You seem to be focused mostly on gaming the system (I have no ethical concern about that) rather than finishing your career in the best financial position possible.  By all means use repaye and save, save, save your money.  Just place your concentration on your overall position and not just on how little of your loans that you can pay back.

Awitte58

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I make 49,000 gross and after the 18000 for 401k deduction...
Stop there: your AGI would be $31,000.  Get a copy of Form 1040.  The AGI is the number at the bottom of page 1.  Most* deductions and exemptions aren't taken until page 2.

*Don't know the specifics of REPAYE.  If it uses AGI directly then you get to deduct up to $2500 in student loan interest also.

I appreciate the insight. I may just refi to the 6.5% and get aggressive at extra payments. I just hoped to get it locked in around 5% so I could focus on extra money going to index funds. At this rate I need to pay them off more.

Sorry to digress the thread.

charis

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OP, or anyone else, have you applied to switch to the REPAYE yet?  My husband and I did it yesterday. I called our loan servicer and they told me that we had to apply on studentloans.gov.   Just the PAYE was listed, which I guess makes sense since it's not really a new plan (?).    The REPAYE application is on there today (we had to submit new ones for the right plan).

I also read an article stating that if you switch to the REPAYE, for one month, you have to make the standard payment.  That was news to me, the standard payment is about twice what I am paying under the IBR currently.  I guess you can apply for a forbearance for that month if necessary, but I don't know the details.

For the record, I am using the IBR/PSLF as a hedge - my husband and I have always filed jointly and I make the same career choices that I would have made regardless. 
« Last Edit: December 17, 2015, 09:26:30 AM by jezebel »

ReadySetMillionaire

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OPs goal should be to use Repaye as a hedge against poverty and not a game to pay as little as possible regardless of overall financial position.  He also doesn't understand federal AGI.  OP, do everything to save for retirement but at the same time try to raise income.  You seem to be focused mostly on gaming the system (I have no ethical concern about that) rather than finishing your career in the best financial position possible.  By all means use repaye and save, save, save your money.  Just place your concentration on your overall position and not just on how little of your loans that you can pay back.

I agree with everything you wrote. I'm never, ever going to pass up increased income in order to reduce student loans. What I will do, though, is try to do everything the tax system allows so I can keep my payments at a minimum. And if income is ever to the point that I can max retirement accounts and pay down my loans, then yes, I'll just pay them off as aggressively as possible. REPAYE is just an awesome hedge until then.

And yes, I do need to do my homework on federal AGI. Luckily my GF's dad is a CPA haha.
« Last Edit: December 17, 2015, 08:32:53 AM by ReadySetMillionaire »

tomorrowsomewherenew

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Do you have a blog or journal? I'm interested in hearing how this works out.

ReadySetMillionaire

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Do you have a blog or journal? I'm interested in hearing how this works out.
I don't have a blog but I'd be happy to keep updating this post semi-annually or something if enough people are interested.

JoDev

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Can anyone confirm this?

Quote
Based on what I was told on the phone, your payments would roll over and wouldn't reset the clock.

However, the bigger issue is that REPAYE puts a $57,500 cap on forgiven debt. So you should stay enrolled in IBR, which doesn't have a cap (for now).

This is a huge deal for me. I currently make $58k/year, but I'm bleeding money while living frugally because of the cost of living where I'm at for the job is sky high. I'm considering a move to somewhere with 1/4 the cost of living - and might not be able to take the job with me. My back up plan was to go into nonprofit/public sector work in the lower cost of living location, take a substantial pay cut, but use the PSLF to wipe out my $130k student loan debt. When I did the math, even with earnings reduced drastically, I would still come out ahead in the long run. But... not if PSLF is capped at $57,500...

charis

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As I posted above, I've heard and read nothing about a cap having been implemented recently.   It would be a huge bait and switch unless the cap was applied to new borrowers.  The first people in the program don't even hit forgiveness until 2017.

ReadySetMillionaire

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As I posted above, I've heard and read nothing about a cap having been implemented recently.   It would be a huge bait and switch unless the cap was applied to new borrowers.  The first people in the program don't even hit forgiveness until 2017.
The cap only applies to REPAYE enrolled, not IBR/PAYE/PSLF borrowers.

Lski'stash

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I'm in a similar situation as you (income/debt numbers are close), and looking at this, it's difficult to see whether it would benefit me or not.

I work at a 501c3, and am about 3 years in on IBR (7 years to forgiveness), and I'm only paying about $200/mo, which (depending on future earnings) would put me paying ~$26k on a $100k loan before it goes away. Also, loans forgiven under PSLF don't count as taxable income, which is different than the 20/25 year forgiveness. I assume switching from IBR to REPAYE would reset the forgiveness clock? Anybody know for sure?

Switching plans should not reset the forgiveness clock for PSLF. However, take into consideration any potential spouses income as well. On IBR, a person can file separately and decrease their income dramatically for repayment purposes this way. REPAYE doesn't give this option, which is why I am not switching plans.


charis

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As I posted above, I've heard and read nothing about a cap having been implemented recently.   It would be a huge bait and switch unless the cap was applied to new borrowers.  The first people in the program don't even hit forgiveness until 2017.
The cap only applies to REPAYE enrolled, not IBR/PAYE/PSLF borrowers.

Can you please post a link to this?  I can't find anything about a cap for REPAYE enrollees already in the PSLF.

Blonde Lawyer

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I'm not expert on the subject but I think the cap is on tax-free forgiveness.  The part over that amount will still be forgiven, you will just be taxed on that forgiven debt as income for that year.

My biggest concern is that nothing is forever with government.  Any change of administration can change these plans, retroactively, and you are then screwed.

Personally, I did the refinance and pay down aggressively route.  But, part of that could be that I psychologically just want to be done with these loans rather than carry them around for 25+ years.  I can see why people with loans far larger than mine would feel differently.  I graduated with over $90k in loans in 2009.  I refinanced in April 2014 w/ $72,000 remaining.  I have just about $40,000 remaining now.  There's more info in my blog post, linked in my sig.

NoStacheOhio

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Switching plans should not reset the forgiveness clock for PSLF. However, take into consideration any potential spouses income as well. On IBR, a person can file separately and decrease their income dramatically for repayment purposes this way. REPAYE doesn't give this option, which is why I am not switching plans.

Because we both have student loans, we're better off filing together. We can repay separately under IBR, while taking dual incomes/debts into account. This was the big problem we had with Sallie Mae/Navient; they were taking my income into account, but not my loans.

boarder42

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just a random question but who is footing the bill for all of you who racked up huge student debt that is now going to be forgiven b/c you dont make nearly enough to cover it?

look i'm all for using a system, i do it with taxes, we all do here.  But where the hell is this money coming from in a country with piles of debt.

and where does this stop.  are we going to forgive mortgages in the future for people who got too much house. 

Racking up student loan debt is a cognitive choice you made, I just think you should completely pay your dues, and just hold a job for 10 years and making minimum payments doesnt cut it IMO. 
« Last Edit: December 22, 2015, 06:55:33 AM by boarder42 »

Jack

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just a random question but who is footing the bill for all of you who racked up huge student debt that is now going to be forgiven b/c you dont make nearly enough to cover it?

look i'm all for using a system, i do it with taxes, we all do here.  But where the hell is this money coming from in a country with piles of debt.

and where does this stop.  are we going to forgive mortgages in the future for people who got too much house. 

Racking up student loan debt is a cognitive choice you made, I just think you should completely pay your dues, and just hold a job for 10 years and making minimum payments doesnt cut it IMO.

That's not a random question, that's a "derail the thread" question. IMO, you should start a new thread in Off-Topic if you want to discuss the macroeconomic implications of this.

charis

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just a random question but who is footing the bill for all of you who racked up huge student debt that is now going to be forgiven b/c you dont make nearly enough to cover it?

look i'm all for using a system, i do it with taxes, we all do here.  But where the hell is this money coming from in a country with piles of debt.

and where does this stop.  are we going to forgive mortgages in the future for people who got too much house. 

Racking up student loan debt is a cognitive choice you made, I just think you should completely pay your dues, and just hold a job for 10 years and making minimum payments doesnt cut it IMO.

Not to continue the derail, but.  First, this is money that was already paid out by the federal government, so, at least at this point, the money is not coming from anywhere.  Second, the feds made a $41.3 billion profit on student loans in 2013.  Third, only a small percentage of people will ever qualify for actual forgiveness after 20 or 25 years.  Fourth, there is a cost-benefit analysis to the PSLF that keeps valuable people providing professional services to indigent populations at a very low salary for their field. 

TheOldestYoungMan

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OP, this was an excellent post.  I can't imagine how the burden of that much debt would feel.  I had slightly less total debt just from my first house and it was too much, I sold it, downsized, and paid mostly cash for the next house.   ...Try to make more money though, it's pretty great.

Access to credit is an invaluable tool, but the true value I'll derive from this post is the cautionary tale for any college-bound I know.

If you don't control your costs and pay attention to your finances, you'll be relying on massive government assistance, and even with that assistance, you'll still have a huge burden.

This guy is going to live the mustachian-saver lifestyle for 20-25 years and still have to work that whole time.  Anyone else with that level of income/savings would be looking at 10 years to FIRE.  And would be on the way to managing a savings rate closer to 7 or 8 years to FIRE.  You can't really claim the debt isn't a burden.  He's got to work an extra 12-18 YEARS and pay income tax on those working years to do this.  Comparing the two possible lives side by side, the gov't is going to get just as much revenue from him either way.

I think the way we can think about this from the outside looking in, is that it sort of establishes two types of higher education.

The first is what many do, pay your own way, work, private loans, etc.  The second is the feds pay for it.  In the first group, you get out and you're done.  In the second group, you are subject to an extra tax, and a 20 or 25 year balloon payment if you never made enough to justify the cost of your education.

I'm suspicious this works out fine for the gov't balance sheet.  $148k is a bit of an outlier, so much so that you can't be too judge-y because there has to be a story of woe in there.  Most people owe a lot less that still ends up being a huge payment under the old rules.  Under this new plan they'd be able to meet their obligation over a longer time period and without threat of it pilling on if income drops to zero.

I'd have to run a couple hundred scenarios to be sure.

If you think it'd be a good idea to have the fed gov't just pay for higher education and raise taxes to do it, that world now exists for you.  If you don't think that world should exist, you can just opt out by paying your own way.

Just to throw out there, I think the best option if you have $148k in student loan debt and make $45k/yr is liquidate everything and move to a non-extraditing country.

^that's what avoiding your obligation looks like^

charis

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Realistically, the OP will use this as a hedge for a few years and then pay off his loans and probably still retire early if he wants.  That's about the size of it, as far as I can tell.   $148K is not uncommon for law school. 

...If you think it'd be a good idea to have the fed gov't just pay for higher education and raise taxes to do it, that world now exists for you...


In no way is the fed just paying for higher education, at this point.