From your response it sounds like she entered the loan contract with the explicit intention of never paying back the full value of the loan.
Sigh. No. She entered the loan contract with the understanding that there would be safeties in place if she entered the workforce with a 3:1 debt:income ratio or worse.
And. We will be repaying more than the full value of the loan under either scenario--standard repayment or PAYE. Approximately $235-240k in either case, but over different time periods with different payment distributions. But, the differences may massively affect our personal finances.
The question of what happens if her income spikes or all program conditions are suddenly revoked is a more interesting one--and I think I have a good answer. Just want to obsess over Excel a bit more; updates tomorrow.
ok - said my piece about legality/morality, so i won't bring it up again.
I couldn't sleep last night and for some reason your case study intrigued me, so i ran a couple of scenarios. For me there's inherent risk with PAYE because you will go through at least 3 presidental cycles before you zero out that debt... anything could happen.
Also, you calculated you'd still pay around $235k. And with your assets you can certainly do better.
Here's an alternative plan using your numbers where you can reach FI, shed the debt, fund your son's college fund, etc. All using the numbers you listed. To me it eliminates the uncertainty of relying on a government program.
by your numbers you can put $2000/mo to put into savings, plus an estimated $12,000/yr in bonuses (may be slightly higher or lower). you are also planning on contributing the max to your wife's 401(k) but nothing to the husbands, and $3600/year to your son's 529.
year 1:
put $10,000 of your emergency fund towards the loan
reduce wife's 401(k) to $10,000 for this one year- just go with me here...
divert everything you would put in the 529 towards the loan for year one - again, just go with me...
put the $2000/mo savings plus estimated bonuses of ~$12000 towards the loan ($3925/month with diversions from 40(k) and 529).
Summary: $57,100 towards loan, of which $10,000 will be interest. Loan balance $120k
Wife's 401(k) grows by $10k (+/- % market change)
Year 2:
Fund the 529
Increase wife's 401(k) to $11,500
Pay $3500/month to loan ($2000/mo from savings, plus bonuses, plus $500 diverted from wife's 401(k)
Summary: $42,000 goes towards loan, of which $7,800 will be interest. Loan balance $85,800.
Year 3:
Fund the 529
Max out wife's 401(k) (17.5k)
Pay $3000 to loan/mo
Summary: $36,000 goes towards loan, of which $5,175 will be interest. Loan balance $54,975
Year 4:
exactly like year 3
Summary: $36,000 goes towards loan, of which $2880 will be interest. Loan balance: $21,855
Wife's 401(k) contributes 17.5k
Year 5: exactly like years 3 & 4.
summary: loan paid down before the 8th month. $560 interest paid. Loan balance: $0.
Divert remaining 4 months into savings (another $12,000)
wife's 401(k) contributes 17.5k
Summary of 5 year plan: Loan paid off, with $26,415 going towards interest. Total paid: $196,415. Wife's 401(k) contributions over the 5 year period = $74,000. 529 contributions = $14,400
years 6, 7, 8, 9, 10 & 11
use the $3,000/mo you aren't spending on loans to save. Take better advantage of taxable accounts - you CAN access them before 59.5
Continue making out wife's 401(k)
continue contribution to 529, but consider putting the brakes on once you have "enough" (see estimates below)
presumably you will also be saving $1200/month from not paying child care, but i'm not factoring this in to the scenarios. That could mostly fund husband's 401(k) or taxable savings.
At end of year 11, assuming 7% growths and above contributions:
wife's retirement account: 251,131
other savings (starting in year 6): 257,000
529 savings 49,800
his 401(k) - left untouched: 49,200
FSAs - 157,800
total (excluding 529) = 715,665
You could reach your 'bare-bones' FI about one year later than originally planned, but without the 20 yr loan.
threeadvantages i see on this path:
1) it doesn't hinge on a plan that could be changed by multiple different administrations, especially given that it's 7+%
2) it provides work flexibility. wife would be free to take a raise or change. IMO it seems highly unlikely that another offer won't come along in 11+ years.
3) you ultimately pay far, far less in interest than using PAYE
The downside obviously is that it would add 1 year to your FI plan, albeit with no loan.
Finally there are a few ways you could get to FI even faster; selling one car (and biking to work) will give you several thousand and save you a thousand or more per year., axing the crossfit membership could free up another $3k/year. Changing cell phone contracts should free up another $1k/yr, and your food budget could be trimmed by about $1k/yr as well. The hair/nails could be cut in half (another $1k). Taking those steps you wouldn't need to reduce the 401(k) contributions at all, and you are back at 11 years to minimum FI. Increase wife's salary by $10k-15k and it's an even better picture.
I guess what's interesting about all of this to me is that I've seen other people shed as much debt with fewer resources and reach FI in a decade.
as a final disclaimer there are certainly ways you can 'tweak' the plan above. I played around with using some of the existing ROTH to pay down expenses, while using both more or less of your emergency stash to make that first dent in the principle. Eliminating the 7.8% loan by year 2 will make the plan even more rosy. There's also a lot that can be done with tax-optimization.
And as always... your preferences may vary.
I hope this is at least helpful to you as a thought exercise.
your preferences may vary.
