Switch Student Loan to Income-Based Repayment?

[AzaleaE]

So I've got about $7800 in student loan debt after paying off the higher interest segments of the loan and then being on the standard 10-year repayment plan for the remainder for a couple years.

3 loan segments remaining, each between $2500 and $3000.
Interest rates are at 3.15%, 3.51%, and 3.61%

I pay $118 per month, about $24 of which is interest.

On the current schedule, two of my loans will be paid off in 6 years, and the third in 8 years.

I am self-employed, the owner of a small publishing company that currently doesn't net very much money at all, but which I love and am not interested in abandoning unless I can't afford to continue. Income has increased every year, and should continue to do so over time as my catalogue increases. However, any increase in income is unpredictable and not something I can be sure of. I could stagnate, have a doubling of income, or be caught in an economic crash and fail entirely.

Realistically, I expect to net $3k-$5k more every year, with slight fluctuations.

I live in a LCOL area, share major (housing, food, etc) expenses with my partner, and am very frugal. I wouldn't be able to be self-employed if I weren't so frugal, and my current savings rate is basically non-existant, though I do have about $15k between taxable and nontaxable accounts.

The Question:

Does it make sense for me to switch my student loan to Income-Based Repayment?

At my current income, required payments would likely be $0, or close to it. This coming year, payments would likely increase, but would still be below $50 per month.

Unless I'm in absolutely dire straits (which I'm not) I would never pay less than the interest amount, and have no reason to believe I would have any of this student loan debt forgiven after 20-25 years. That's not my goal.

Undoubtedly, income-based repayment would have me paying more to the loan over its life, but would give me leeway to pay more or less depending on my situation. With the interest rates as low as they are, I'd like to have the option to put, say, $50 a month toward retirement savings instead of the loan.

I'd previously avoided changing to IBR because I figured the payment wasn't that large anyway, and I look forward to being debt-free in the next 6-8 years.

However, it seems like the numbers support IBR instead.


If we take the average of my loan segments, $7800 at 3.5% over 74 months ...

I pay $883 in interest for a total of $8683.

Over 74 months, I put $0 extra into investments. $0 return.

Over 120 months (full $118 going to investments after loan paid off), I put $5428 into investments and get $790 in earned interest.

Over 150 months, I put $8968 into investments and get $2269 in earned interest.


If I paid that instead over 120 months, ($77 monthly payment) hypothetically,

I'd pay $1455 in interest (an extra $572), for a total of $9255.

$41/month extra into investments, $4920 in deposits, $2135 in earned interest, for a total of $7055.

I'd be coming out $773 ahead.


150 months ($64 monthly payment) is

$1841 in interest (an extra $958), for a total of $9641.

$54/month extra into investments, $8100 in deposits, $4683 in earned interest, for a total of $12783.

I'd be coming out $1456 ahead.


The "worst" case scenario is that I earn enough that I need to return to the equivalent of a 10-year repayment plan. There's also some (mostly negligible) tax advantage to consider, I believe, as well as the consideration that with inflation, payments made later in life are worth less than payments I make today.

The thing to watch out for is deciding to spend any freed up money rather than save it. I get more pleasure out of saving money than spending it anyway, so that really shouldn't be an issue, though it's something to be aware of.

Do any of you have thoughts on this one way or another? Should I stick with the 10-year repayment plan, or switch to IBR? If I switch to IBR, should I pay as little as possible (while still covering interest) or just do a lower monthly payment that I set myself?

[marty998]

We can't really answer unless you tell us your actual income. You say you'll expect to have earnings increases of $3k-$5k a year, which is pretty good in this low growth environment.

But I ask are you really going to notice (a hypothetical) $1400 comprising investments, payments and tax over 12 years?

Look, I know people on this board tend to obsess over the maths and seek to optimise everything. This would make a bit more sense to do if you have $178,000 of loans, not $7,800.

I vote pay off the loans ASAP and move on with your life. If your worried about not being able to afford the repayments, the best thing is not to have repayments at all.

[SwordGuy]

I think it's great that you're doing what you want to.

I'm going to give you a different perspective.

You're having to put a lot of thought into how to optimize a $7,800 debt repayment over 10 years.

My suggestion is that the correct way to fix this problem is to increase your income in order to pay it off.  Not by $3K a year, but by more than that.   Your real financial problem is that you don't have enough income.

Find an additional source of income.  Get a part time job.   That may mean you only grow your business by $1k a year but gain another $10K in income.    Hey, presto!   Problem solved in a year.   Now you have lower expenses.   Lather, rinse, and repeat for 2-5 more years.   You'll have a much larger nest egg which might just keep you from completely failing when times get bad.

I'm assuming you've already cut your expenses to the bone until that debt is gone.   Because if it's going to take this much work to pay off that small a debt, your debt is a hair-on-fire emergency.  Treat it like one.