Hi everyone. I just blew through all the MMM blog posts over the past week and have been reading the forums and such. Amazing stuff that has put into words what my wife and I have both been thinking for the past few years but haven't been able to implement.
So, the situation:
Ages: 30 (me) and 29 (wife) (soon to be 31 and 30 respectively)
Bad–Massive student loan emergency. Mine: $151K, all federal/direct/Grad PLUS, whathaveyou. My wife's: ~$23K. Same. No private loans (yay?)
Good–No other debt, or at least there won't be any within the next couple of months.
No CC debt, but just over $10K available through various cards and Paypal Credit between the two of us.
Will be selling my car to pay off the loan on wife's car, a 2002 Malibu. Nice car, less than 90K miles, great condition. Bought in October so my wife could practice to get her license. She's a permanent resident working on citizenship and never needed to learn to drive before in her home country (China).
The Future Looks Bright! Why? Because my wife and I have recently accepted our dream jobs! And these jobs are hopefully long-term careers that will benefit both of us as well as our son (4 at the moment). We'll be teaching in a small town (village, really) in New England, living on campus. We are super amped.
Combined annual salary before taxes and 401(k) contributions: $47K-$52K. My wife is starting out part time Chinese teacher and the number of classes she'll teach hasn't been finalized. We're hopeful that she'll become full time after a few years as the program grows.
Here's how our projected long-term monthly budget works out, hopefully for at least the next 15-20 years or so (until our son graduates from high school):
(everything per month)
Rent: $0
Utilities/Internet: $0
Groceries+restaurants: $150. Food for all 3 of us is provided at the dining hall, which is surprisingly pretty yummy. The budget amount is averaged out for the months when the dining hall is closed, and occasional groceries for home/dining out when we want to have family meals instead of eating with the entire student body.
Gas: Unlikely to exceed $20/month averaged throughout the year as our commute involves walking a few hundred feet and the town (village, really) is very small and walkable/bikeable.
Car Insurance: Likely very low since it's an old car that will be used sparingly. I can't imagine it would be more than $50/month. Maybe lower.
Phones: $0. My dad pays for our family plan, though we may switch to Republic or similar depending on the coverage, which would be $50/month since we need data for navigation. Rural New England may be a bit spotty coverage-wise.
Misc (toys, clothes, etc.): Let's say $100/month.
Loan Payments: Increasing over time from $0 to ~$550 at the end. I'm going to leave this out of the budget for now as I am hopeful that earnings from investments will be able to cover this and won't be part of our budget as it directly relates to job income.
There may be some initial expenses getting winter weather stuff, but I haven't bought new clothes voluntarily in years (get gifted underwear, socks, and the occasional shirt in an odd family tradition each year, while my wife forces me to get shoes and pants every 12-18 months). I have a significant amount of very nice "work" clothes inherited from my dad when he retired, so I won't need to spend much on fancy clothes or ties or anything along those lines. My wife is not a clothes person, though she does enjoy being fashionable. The kid will, as he has been his entire life, enjoy mostly hand-me-downs and consignment store clothes and toys.
So, total expenses each month (on average) should end up being around $320. I'll toss in $180 for unforeseen issues and bring that up to $500 as we adjust to our new and very different living situation. We will probably also be paying between $300-600 a month for pre-school the first year, but after that public school starts!
So let's say total budget per year (not including 1 year cost for pre-school) is $6K. This is a pretty fucking amazing position to be in, and we are fully aware of our good fortune and very thankful for it.
Hopefully that was enough/not too much info to contextualize our situation and my question, which is this:
Based on the studentloans.gov repayment calculator, among other things I've researched, the various income based repayment options (IBR, PAYE, etc) start us out with very low payments. If I make maximum 401(k) contributions, that number drops to $0 beginning payments and only jumps up to ~$250-~$550 (depending on the plan) for final amounts. I'm pretty sure we'll need to do the classic IBR plan, which offers student loan forgiveness after 25 years.
So it appears to me that we have a few options.
Option 1: Pay off loans as aggressively as possible. This would mean not taking advantage of 401(k) (or employer matching, which is 6%). We could probably, between the two of us, use every penny we don't spend to pay the loans off in 6-7 years, but would have nothing to show for it other than a lack of debt. We would be unable to travel, see family (scattered around the US and China...which is super pricey to get to for 3 people), save money, or have any kind of emergency fund. While this is our dream job/situation, things can change. There is no guarantee that we will be able to stay at these jobs for 15-20 years, no matter how much we want to. Not saying this is likely, but something we are keeping in mind.
Option 2: Pay the standard combined payments of ~2000/month. This would get those bastards paid off in 10 years or so, but would limit our ability to contribute to 401(k) and other savings/investments. Total amount paid between the two of us would be in excess of $250K after interest. Total savings would be far lower, though still better than nothing. Definitely not an amount that would allow us FI or the ability to retire before 50.
Option 3: This is where the question lies (sorry it took so long to get there. I'm a writer, so I tend to be...long winded in written form). Thanks to loan forgiveness, it's entirely possible we'd be able to make payments using the income based plans for 20-25 years. The studentloans.gov scenario for this is that we'd end up paying just under $70K over 25 years and then ~$320K would be "forgiven." As this would be taxable, we would end up having to pay a large lump sum 25 years down the road (possibly upwards of $100K depending on our other income).
If we chose this option, I would make max contributions into my 401(k) and do whatever else I could to keep my AGI down other than decline raises (suggestions are welcome!). This would keep our loan monthly payments very low, though rising over time. The money we save short term would be generally put into other investments. Roth IRAs and Vanguard and such. More as I learn probably, but the MMM method seems like a good bet...so to speak.
Assuming (dangerous!) this works out over 15 years (when my son will graduate and my wife and I hope to retire), this is how the most basic calculations I've done seem to work out assuming the 7% return and maximum contributions.
401(k): ~$523K (I imagine this would continue to grow if we leave it alone until 60)
Roth IRAs for each of us: ~$148K x 2. So ~$296K
Wife's 401(k) will hopefully be added assuming she is needed full time within a couple/few years but not depending on that at the moment.
Other Investments: ~$150K
How I got these fun and optimistic numbers: Assuming max contributions to both 401(k) and Roth IRAs, this leaves us with ~$16K in disposable income (after health insurance is taken out of paycheck for wife and kid). Subtracting our predicted budget per year (~$6K) leaves us with ~$10K. We'll probably use some of this for travel (plane tickets are pricey) but hopefully will be able to use CC points/miles to help offset the cost a bit. We also probably wouldn't travel internationally every year, and there is a strong possibility that the school will end up paying for many trips and experiences for us as chaperones/group leaders. So let's say that travel takes an average of ~$4K out of the leftover cash.
The remaining $5K-$6K would be put into other investments, such as index funds mentioned by MMM and other blogs, as well as other opportunities as we learn more about finance and such. We are beginners! (We also have some investments in China...shhh)
The only problem with that in our situation is that it could result in higher income, which would increase our student loan payments. We're interested in purchasing a house and renting it out (the area has a lot of tourists during all seasons and rentals are common) but wouldn't be able to do that for awhile. But the tax breaks on mortgage interest probably wouldn't hurt. Both of our parents may also be able to help out with down payment/mortgage payments.
These numbers are also assuming only the regular increase in income, but I imagine raises would quickly exceed inflation based on what I know about private schools. While this will be helpful financially, it would also increase the repayment rates for student loans, though they can never exceed the standard combined payment of ~$2000/month for both of us mentioned earlier. This would not be the worst problem for us to have and it would come after we already had squirreled away quite a bit in savings/investments. Also, loan interest tax issues would help a bit.
So, all this being said (again, apologies for long windedness), does option 3 seem feasible? I understand and sympathize with those of you who feel it's morally wrong to avoid student loan payment in full, and in anticipation of that issue, I offer the following MMM inspired thoughts for your consideration.
I believe we will be able to benefit far more people by being FI than we would by paying off the loans aggressively.
We would be fulfilling our obligations as set by the government and servicing partners.
When the loans are forgiven, our tax bill will not be small. While it won't be the total amount owed, the principle will be pretty much paid off in full after 20-25 years, between payments to the loan servicer and then the IRS after forgiveness.
While you are obviously free to disagree, this is our stance on it :)
So, what do you all think? We're obviously leaning towards option 3, but as I mentioned, we are both beginners when it comes to finances and investing, so it's pretty likely I am missing something or have made some major errors. All thoughts/suggestions are welcome!
Thanks!