Student Loan Debt

[dragonwalker]

My spouse makes about $275K annually W2 however she has student loans from college and graduate school of about $330K with an average rate of about 6.25%. She is on a special loan program (REAPYE, an income driven loan repayment program) which forgives all debt after 25 years of payment regardless of what remains.
She was making minimal payments towards interest from 2016-2020. The Pandemic paused her payments and accrual of interest however the time still counted toward the 25 years of loan forgiveness. This time amounts to about 2-3 years.  Her loan payments are scheduled to continue for 18 more years based on household income at which time our understanding is that any remaining balances are forgiven but she will receive a 1098 for the amount cancelled.

She believes it is best to allow the loan to come to term in 18 years and be forgiven the remaining balance. I am not so sure those terms can be relied upon to be true in 18 years. However, if it were true, it appears that it could amount to tens of thousands of dollars of principal and interest not paid. I’m not sure what the best course of action to be taken here. The loan servicers are not helpful and challenging to get information as guidance and rules changes by administration and also because the plan and loan servicers have changed.
My spouse has some other high expenses like a mortgage and car payment. She also is considering working 32 hours and we are looking at having children so we are trying to save money where we can.

On the other hand, my income is much more modest and the only debt I have is a condo with a very reasonable monthly payment which I might be fully renting out soon. We agreed before our marriage to separate our debts and assets we each brought before our marriage so her debt especially the school loans are managed by her. It doesn’t mean I won’t help in some way if we can determine that a paydown makes more financial sense. 

She does have about 100K in IRA and some savings in cash. We are both 36 and despite me making a fraction of her earnings my net worth is over $1M while her net worth is negative mostly due to the home mortgage. She also does not feel comfortable investing in the market and will likely only be saving money for retirement in cash or real estate (another topic I’m going to ask about).
Can someone advise on things to consider especially about either riding the student debt out or trying to pay it off? Do these income based repayment plans work as I’ve described?     

[Archipelago]

If she doesn’t believe in investing in the stock market, she’s not left with many other options for retirement savings. In that case, she can just pay off her loans early for the 6.25% return.


Another option is to work for a nonprofit or a government position that qualifies for PSLF. That’s a program for forgiveness after 120 minimum payments (10 years). It’s a lot faster forgiveness schedule, but you make less money working a public sector job. However, this kind of job may be more compatible with having kids. Something to consider.

Otherwise, I don’t see why she wouldn’t just stick to paying off debt highest to lowest in interest.

[GilesMM]

I would work to get the loans paid off ASAP and move on.

[reeshau]

...her net worth is negative mostly due to the home mortgage.

Why does a mortgage make her net worth negative?  Is it underwater?

The mortgage may be the biggest negative item in her list of assets, but it should always be paired with her home's value, when considering the impact.  What is her net housing worth?

Of course we all know that investing in the stock market gives the best returns over long periods of time.   But forcing someone who is nervous about stocks into the market isn't necessarily a good idea.  If they get scared out of the market at the next decline, they will do more harm than good.  If anything, I would review with her how to picture the compounding of wealth over a working career.  There are lots of articles and videos that do this.  Here's one:

https://www.fidelity.com/learning-center/personal-finance/retirement/continuous-contributions-compounding

Basically, the longer she waits, the harder it becomes.  Starting young, even starting now, means that most of her wealth at retirement will come from returns, not from saved dollars.  Eventually, though, that runs out.  It also is not true if the rate of return is low enough.

[mistymoney]

I really hesitate with any advise for her because she isn't asking for any, and seems your agreement is each have their own finances?

She is making 275k a year, so clearly no slacker I wouldn't think an inome based payment would be so low with 275k income. The interest on the loans is only 7.5% of her income (a little over 20k) so as long as she is paying more than interest it isn't snowballing and the principal is at least is being eroded by inflation.

given income and student loan debt, I am thinking she is a physician. That makes part time work arrangements easier to find than other professions, and easy to opt back up to FT too.

I guess my advice for you is to balance out the risk by going 100% stocks if she is doing cash

[roomtempmayo]

She believes it is best to allow the loan to come to term in 18 years and be forgiven the remaining balance. I am not so sure those terms can be relied upon to be true in 18 years. However, if it were true, it appears that it could amount to tens of thousands of dollars of principal and interest not paid. I’m not sure what the best course of action to be taken here. The loan servicers are not helpful and challenging to get information as guidance and rules changes by administration and also because the plan and loan servicers have changed. 

If she's employed by a nonprofit or government entity (e.g. county hospital), she is eligible for Public Service Loan Forgiveness, which is only 10 years of payments.  The program was created in 2007 by federal statute, so it's on pretty firm legal footing, even if administration has been very uneven.  She would have to stay full time to qualify.

I'm probably with you on the 20 year option.  That's a long time to live in uncertainty for a modest payoff.  You may also want to look into the legal basis for REPAYE.  I think it was created through the rulemaking process, which means it can be undone through the same rulemaking process, and without any act of Congress.  Personally, I wouldn't put my eggs in that basket.

[Malum Prohibitum]

My spouse has some other high expenses like a mortgage and car payment.     

It's too bad about this agreement to separate everything and live your lives on two separate financial tracks.

She could pay off that loan in two or maybe three years, but, well, she likes debt and living in a high expense house and driving an expensive car, neither of which she can actually afford (or she would not have debt payments).   And you have no say because you agreed to living separately in many ways.   Is she willing to talk with you about getting together on financial goals as one family unit?

So what is your question for us?  Whether to pay it off or ride it out?  Pay it off, and now. <---   But it is not like she cares what I think, and maybe she does not care what you think.

You are a millionaire and she makes car payments.   If that is not enough to connect in her mind decisions with consequences, then the input of a bunch of strangers on the Mr. Money Mustache forum is unlikely to be of any value to her.

I wish you luck, but I really don't see the point of this thread. 

[simonsez]

Anecdata alert

I went to grad school at out of state rates.  Combined with portions of my undergraduate education and what I had agreed to pay back my parents for their PLUS loans (grew up in a household with very little financial literacy, $0 for my college), this was around 120k in total.

I mention grad school because I have a friend who I met at grad school.  She had partial undergrad scholarships and was able to qualify for in-state tuition for grad school.  After her Master's she had about 40-50k in student loans.  She also came from a family that did not have anything saved for their children's tertiary education.

This friend and I are about the same age and work at the same government agency.  I never thought I would qualify for any type of forgiveness and went about balancing living the life and career I wanted with paying down those loans.  I didn't want to feel stuck in a job or in any type of situation because I was beholden to terms and conditions of possible loan forgiveness.  I paid what I could, including increments as low as $25 additional payments.  While loans hanging over your head in an omnipresent fashion was stressful at times, it was such a motivator to see a payment processed indicating the amount of principal that came off.  I'd gleefully update my spreadsheet and feel good.  Meanwhile, my friend is thinking she will be forgiven after 10 years and after reading fine print at that time (early 2010s), I wasn't actually sure that she would qualify even if she made 10 years of payments based on her repayment plan (payments did not cover the interest and was capitalizing).  Things change, pandemics happen, forgiveness rules get tweaked, blah blah.

Anyway, I became incredibly lucky and fortunate with timing and actually did qualify for forgiveness.  I had paid my parents back and was down to about 10k when the forgiveness occurred a few years ago.  My friend also received forgiveness, to the tune of about 75k (UP from 40-50k at time of graduation).

I don't have a fool-proof way to know this (as this is essentially another flavor of nature vs nurture), but I really feel the hard lessons I learned from scrounging for years to make payments and the discipline and ability to stick to plans has really paid off.  Not just in my financial journey but also in non-pecuniary ways and how I live my life.  It forced me to grow up.  Meanwhile, my friend does not have anywhere close to the same level of discipline and carries credit card debt month to month along with many choices I just think are a bit silly.  I love her to pieces and I could talk much more at length about her attitude toward the loans and what she felt the government "owed" her but even though the amount she had forgiven was greater (and I guess I could've paid the minimum as well and saved/spent money elsewhere), I don't think she's better off.  And if I had not prioritized paying down the loans all those years in my 20s and 30s and had a higher amount forgiven, I'm not convinced I'd be better off today.

Is there a way to maximize forgiveness and also become a whiz at personal finance and discipline?  I'm not sure but I don't regret "paying more than I had to" after eventually receiving forgiveness and think it has been a boon to me in myriad ways.  YMMV

As for your spouse who doesn't want to invest in markets, what is the IRA invested in?  Just cash?