Student loan, AGI optimization, IBR, and 403(b) question.

[hoodedfalcon]

Folks, I am a tad bit overwhelmed with trying to figure out the best thing to do with my debt payments, while still investing, and also trying to figure out how to allocate new dollars from an unexpected raise (4K) a few months ago and another unexpected raise (3K) that will take effect in January.

My current take home is $3400, which already takes into account the $300/month I contribute to my 403(b). This is slightly above the employer match ($250/month).

I pay $1100/month on student loans. $395 on IBR for federal loans (amount tied to AGI from 2012). I hope to have the balance (90K) forgiven using Public Service Loan Forgiveness in 7 years. Therefore, it makes sense to pay as little as possible towards my federal debt, which means lowering my AGI.

The rest of that payment goes towards private student loans, of which I have two.

Loan 1: $51,448 (3.17%) - $258/month
Bar Loan: $6956 (3.92%) - $46/month
Total: $58,404 - $304 minimum monthly payment
Extra payments - $400/month
Total payment - $704/month

With my raises, my AGI is going to be going up. I don't want it to (but I DO), because for every extra dollar I make, there will be a ~.15 increase in my federal loan payment. So, with a 7K raise, roughly $88/month extra for a loan I will likely never repay in full.

I am guessing my January raise will bring my monthly take home pay in the $3550 range (if I don't change my 403(b) contributions). I want to concentrate on my private student loans, because the rate is variable and there is no forgiveness for those. In January, I plan to increase my private loan payment by at least $200/month for a total of $904. Once I build up my emergency fund (mid-2014), I will throw at least another $200/month towards my private loans.

So:
1. Do I increase my 403(b) contributions so as to a) build my stache and b) reduce my AGI to keep it where it is currently but c) leave me less to throw at private loans?
2. Do I lower my 403(b) contributions just to the point where I get the match, and just suck it up when my fed. student loan payment goes up, and throw all I can towards my private loans?
3. Some version of increasing 403(b) contributions slightly and having an increased fed. loan payment but not a huge increase in private student loan payment.

My monthly budget is about $2000. My austerity budget is around $1700. I am working up an emergency fund which is where my surplus is currently going. I have no other debt other than a 55K mortgage at 3.25%.

Thanks so much for reading this novel of a post. Sorry about that.

So, what would you do?

[Mazzinator]

Although our numbers are different, we are in the same situation. I think it would benefit you to pay the least possible to the $90k (the forgiven loan)

The other 2 private loans interest isn't crazy high, both under 4%. There could even be an arguement to not pay these off immediately because you 'could' make more with investing. I know past returns blah blah blah. But most people calculate and 'think' the market will most likely return at a rate around 8%.

What we did was pay as much (max out) our tsp (similar to 401k, or 403b in your case) and we maxed out 2 tIRAs. This lowered/will lower our AGI enough that on $56k loans the min payment will be about $50.

Also, when you increase your 403b and or tIRA you pay less in taxes so you can adjust your withholdings at work so your paycheck doesnt go down quite as much.

http://apps.irs.gov/app/withholdingcalculator/

Hope this helps!!! I will also try to find my post if you want to read it???

[hoodedfalcon]

Thanks for responding! I had almost lost hope!

Since posting, I pretty much decided to increase my 403b contributions gradually over the next two or three years until I max it out. Part of the reason for increasing it incrementally over a period of years is the one year delay in adjustment for my fed loans, since I submit my yearly documentation to my loan company about 9 months into the next tax year. If I jumped right to fully funding the 403b, I would really struggle with meeting my loan obligations. I guess I need to crunch the numbers to see how it would look.

I have mixed feelings about decreasing my payments on the private loans, both for the psychological benefit of having them be gone and because they are variable. I am not worried about rates for the next year or two, but after that....who knows? You are right though...the current rate is low and I could have a greater return if the money was invested..

I will see if I can find your blog post, or if you want to link to it, that would be awesome as well. Thank you so much!!

[Fuzz]

If you work for the government or a nonprofit, they may offer a 457 plan, which is another way of lowering your AGI.

[Mazzinator]

Ok, i see..i missed the part about the private being variable (although i should've know, because it's the same with us)

And i also get the part about increasing investing due to the struggle. We were similar, but bit the bullet and started paying mins to our loans in order to max out tsp and ira. Is was a choice and we couldn't do both. But "now" (actually once we file our income tax them submit paperwork to SLs) so hoping by April-ish the payment should drop down enough to tackle our private loans. To make up for the 'loss' of making extra payments this year.

How much more is your agi for 2013 going to be compared to 2012?? Then it looks like 2014 will be $7k more than 2012??? Not sure your exact numbers.

Maybe increase your contribution to 403b by the $7k..or at least the $3k amount? That way your bring home pay won't change from what it is now.. (Or you get the idea)

Or, like us, temporarily slow down on the private loans for a year or two until you can get your 403b up..

How much of the $395 ibr payment is interest? You know they 'forgive' the excess interest for the first 3 years..after that it is added onto the amount owed..

https://forum.mrmoneymustache.com/ask-a-mustachian/should-we-change-sl-repayment-plans/msg138447/#msg138447

Here's my link.. Also, wanted to add, it says my new payment will be $120. We had a roth ira funded that we 'recharacterized' into a traditional ira so that helped to now lower it to an estimated $50. Plus we moved to hawaii which helps lower the payment too.

Also, here's a link which shows our taxes.. (Geez, i'm just puttin it all out there!!)

https://forum.mrmoneymustache.com/welcome-to-the-forum/optimize-your-taxable-income/msg162587/#msg162587

Anyways, hope this helps!!

[hoodedfalcon]

Mazzinator! So helpful! Thank you!

The variable part of the private loan is something I definitely think about but I am still a few years away from worrying. Ideally, I would pay the loan off before the interest rate crept above 5%, but you never know when that will happen.

My AGI for 2014 will be about 10K higher than 2012, the number currently used to determine my IBR payment. I like your idea of increasing the contribution to at least match that number. That will serve the dual purpose of 1. increasing my stash, and 2. not making me feel like I am throwing extra money down the drain when I pay on my fedloans. Starting in January, I am going to increase my monthly contribution to 403b to $600/month, which will equal $7200. I want to see how that goes for a few months. Hopefully I won't feel it at all. I shouldn't feel it, but I am paying much more on my private loans now than I was in 2012, so I just have to see how it all factors in. That will be $600 to 403b and $1100 to student loans....a pretty decent chunk of my take home.

As far as the $395 IBR payment, it is all interest. Most of it ($360) is the amount that accrues monthly, and the rest is paying off the interest of the unsubsidized loans I deferred for far too long...(I have about 2K in backlogged interest before I begin to touch principal payments). SIGH. The really sad part is I graduated over 6 years ago and I have made ridiculously little progress. If only I'd found MMM sooner...

I feel good with this plan. I feel like I could probably do more, but I don't want to cut so close every month that life becomes stressful. I have a 100+ year old house, and aging cat, and a large dog to care for and there will always be something to deal with. Luckily I have a naturally underdeveloped consumerist side, so that helps.

Thank you SO much for your help. It's been great to think this through and have someone to bounce ideas off of.

[hoodedfalcon]

If you work for the government or a nonprofit, they may offer a 457 plan, which is another way of lowering your AGI.

I do work for a non-profit, but we do not have a 457 plan. I could do a traditional IRA to reduce some more...maybe in a few years...