Author Topic: PSLF program - Repay $134k student loan debt or save for a home  (Read 4200 times)

bokonon

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PSLF program - Repay $134k student loan debt or save for a home
« on: December 01, 2012, 07:43:02 AM »
Hello Mustachians!

I am very excited to have discovered this blog a few weeks ago.  I started at the first post and finally caught up to present this week.  I love it and am sharing the info and the blog with everyone I know (people are shockingly unaccepting but I'll keep educating them :).

I am newly married and we have some options with our finances, so I am looking for some intelligent advice… what better place than MMM forums?  I am married and we make a fair income - $120k pre tax, each earning $60k.  I have $59k in student loans at 5.0% fixed, my wife has $75k in student loans at 6.8% fixed.  We currently rent an apartment but we would prefer a house sometime in the next 1-3 years (not necessary but it is such a good time to buy right now due to historically low interest rates and good prices).

I currently have $25k in a Roth IRA (I worked before I went back to grad school), she has $5k in a Roth IRA.  We are funding our 403(b) employer sponsored retirement plans (equivalent to 401k but for non-profit) to maximize employer match.

We both work for non-profit institutions and will qualify for the public service loan forgiveness program as we are on the income based repayment plan.  Currently her loan payment is $608 per month, mine is $483 per month.   If:
   -We remain on this repayment schedule, and
   -We remain employed at our non-profit institutions for 9.5 more years, or if we change jobs remain at a nonprofit, and
   -The government does not change the laws,
Then our remaining student loan balance will be forgiven with no taxes under the public service student loan forgiveness program in 9.5 years.

Total loan repayment under this scenario, if our income does not change significantly (which would change our payments): 
Wife: $69312
Me: $53124

Our careers are such that we cannot expect any large raises year to year, only 2-4% annual raises so I don’t think the payment will go up much, but you never know.

The alternative is maxing out our loan payments over the next 4 years to pay off our student loans.  I believe our total repayments would be roughly around:
Wife’s student loans (we’d pay first due to higher interest):   $80,000
My student loans:  $64,000

Here are my questions. 
-Should we save 20% in the next year and then purchase a home and shoot for the loan forgiveness (keep paying loan minimums)?         
-Should we direct all our cash at our student loans and pay them off in 4-5 years before buying a house?   
-Or split the difference, pay off her loans only then maybe save for a house and hope for forgiveness on my loans (this is my current plan)
-If repaying her loans, Should I take all the money out of the Roth IRAs and put toward her loans?  Should I stop contributing to the Roth IRAs to accelerate loan repayment?

What would you do Mustachians?  Am I missing anything?

Thanks for reading! Your time and your feedback are greatly appreciated!

marty998

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Re: PSLF program - Repay $134k student loan debt or save for a home
« Reply #1 on: December 01, 2012, 02:16:49 PM »
Can you predict what will happen in 10 years time? Governments (even those desperate for cash) are loathe to change laws retrospectively but it can and does happen occasionally. Also in this day and age it's a very rare person who can say "I will be in the same job/industry in 10 years time".

I think it will be possible for you to do both. On your combined incomes you should be able to try to pay off both the loans in 5 years AND save for and buy a house. Why not give it a shot? Even if you don't quite get there you'll get much further than you otherwise would.

good luck

Captain and Mrs Slow

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Re: PSLF program - Repay $134k student loan debt or save for a home
« Reply #2 on: December 01, 2012, 03:26:35 PM »
Since your income and situation is is somewhat simular to No More Harvard Debt I'd suggust reading his blog, he paid off a 100 grand of debt in 7 months while earning a bit less tha you guys.

It would certainly be interesting if you could replicate his feat getting rid of all that debt in 1 year.

Do keep us posted.

grantmeaname

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Re: PSLF program - Repay $134k student loan debt or save for a home
« Reply #3 on: December 02, 2012, 02:01:23 PM »
Great Suggestion, Capt/Mrs. Slow.

OP, have you seen the site?

Captain and Mrs Slow

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Re: PSLF program - Repay $134k student loan debt or save for a home
« Reply #4 on: December 02, 2012, 02:16:15 PM »
Funny even though his site is no longer active it still makes great reading, just start right from the beginning. What I really appreciated is the fact that frugality didn't come natural to him, it was a great struggle at times.

he also has a book which I bought but haven't gotten around to reading yet.

bokonon

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Re: PSLF program - Repay $134k student loan debt or save for a home
« Reply #5 on: December 02, 2012, 04:24:16 PM »
Thanks guys.  I read MMM's post on NMHD and watched the short movie, but didn't check out his site.  Now that I"m all caught up on MMM I'll be glad to have something else to read!

I think I"m going to try to pay off all the debt then buy a house even though it might cost a little more.  To many "ifs" for the loan forgiveness.

Thanks again!

trammatic

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Re: PSLF program - Repay $134k student loan debt or save for a home
« Reply #6 on: December 03, 2012, 12:09:57 PM »
Agree with the pay off debt plan.  You'd save something like 20k by hoping for the forgiveness program.  That's 2 grand/year for an absolute lack of flexibility...if you hate the job after 7 years, you still have to plug through 3 more or else you'd feel doubly screwed.

I also don't see a huge spike in housing prices and/or interest rates in the next few years, primarily because they move opposite each other.  At 3.5%, a 200,000 30 year mortgage would run 898 P+I monthly.  If that rate went up to 7%, the same mortgage would cost 1330, or a 430/month increase.  Likewise, 898 would get you only a 135,000 30 year mortgage.  To attract the same type of buyer to a 240,000 house today, it would have to go for 160,000 at 7%.  So if/when interest rates go back up, I think housing will start falling again.

bokonon

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Re: PSLF program - Repay $134k student loan debt or save for a home
« Reply #7 on: December 03, 2012, 04:29:19 PM »
Okay so follow up question... or maybe I should start a new topic.

While attacking my 134k in student debt, should I keep contributing to my Roth IRA?  If your answer is no, then should I pull the cash already in my Roth IRA out and put it toward the student loans?

Obviously I'm going to keep contributing to the 403b to get the employer match.  I think my plan right now is to stop contributing to Roth but not take any money out of it, that way the Roth acts as a sort of E-fund and possibly to be used as a home downpayment once the loans are paid off.

You guys rock!


destron

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Re: PSLF program - Repay $134k student loan debt or save for a home
« Reply #8 on: December 03, 2012, 07:19:14 PM »
While attacking my 134k in student debt, should I keep contributing to my Roth IRA?  If your answer is no, then should I pull the cash already in my Roth IRA out and put it toward the student loans?

I'm not sure that you actually can pull money out for student loans -- I do know you can pull out the principal for a downpayment on a house. Please forgive my ignorance.

That being said, you should DEFINITELY start by paying off your wife's 6.8% loan. There is nothing in this world you can invest in that will guarantee you those kind of rates over the short term. Stop contributing to the Roth and cut away at the expensive loan first. 5.0% is also fairly high, I would be tempted to get rid of both before saving.