Student Loan Forgiveness. Fairly Unique Situation?

[Mustafa413]

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!

[justajane]

25 years is a long time. A lot can happen in your life and in Congress regarding IBR in that time period.

You are perfectly positioned to pay them off fairly aggressively, since you don't have many bills.

From my perspective, choosing either 1 or 2 is a no brainer.

I also don't understand why, with your expenses that low, you can't prepay your loans and travel to see your family and throw some cash in your 401K. You're creating these dramatic scenarios that don't seem to exist based on what you lay out. You have twice as much money than MMM spends a year to work with. Why can't you live on half or less and throw the rest at the loans and your retirement? This would become even more the reality if your wife started working full time in the future.

[miss snow]

HI Mustafa! Congrats on the job and low expenses....that's pretty incredible! I'm in a similar situation (less debt but higher expenses) and have gone back and forth on IBR vs. aggressive pay down and have decided that there are just way too many variables (future raises, rate of return, tax liability) to make a decision purely based on math. For our family, we have chosen to go with IBR and continue aggressively contributing to investments. While I hate that debt sitting there, I've decided that I hate not seeing my retirement grow more. I think it's about what your comfort level with the debt is. As long as you are aggressively saving and investing, the tax issue shouldn't be a huge deal for you. Besides, maybe all of us IBR folks will get lucky and have the taxation laws changed down the road (I just won't be banking on that). Good luck with your decision!

[Rein1987]

For option 3, did you consider the situation that your income increases dramatically in the future? You might end up paying much more than 70k.

I'd prefer the 10 year standard plan as long as you can afford the payment.

[MrMoneyBeardstache]

Is the teaching job a public job?

If so you should look into Public Service Loan Forgiveness program. 

I am a highschool teacher and that is the route I am taking to pay my loans over.  Instead of 25 years it is only 10 years. 

[Mustafa413]

25 years is a long time. A lot can happen in your life and in Congress regarding IBR in that time period.

You are perfectly positioned to pay them off fairly aggressively, since you don't have many bills.

From my perspective, choosing either 1 or 2 is a no brainer.

I also don't understand why, with your expenses that low, you can't prepay your loans and travel to see your family and throw some cash in your 401K. You're creating these dramatic scenarios that don't seem to exist based on what you lay out. You have twice as much money than MMM spends a year to work with. Why can't you live on half or less and throw the rest at the loans and your retirement? This would become even more the reality if your wife started working full time in the future.

Hi Justajane,

Thanks for the reply. My math might not work the way I think it does, but like Miss Snow said below, if we aggressively pay back the loan then any chance we have of saving a significant amount of money will be very small. I would rather have to pay the minimum for 25 years and pay a large lump sum at the end after saving the numbers I mentioned in my post. It seems like that would give us much more flexibility and lessen the financial pressure.

[charis]

I was going to say the same thing  about the public service program- are you eligible for the PSLF?  I am currently almost 6 years into the 10 years.

Also, there are several teacher loan forgiveness programs, which probably won't make a dent in your case, but it's worth looking into.

[Mustafa413]

For option 3, did you consider the situation that your income increases dramatically in the future? You might end up paying much more than 70k.

I'd prefer the 10 year standard plan as long as you can afford the payment.

Yeah, we've considered that for sure. But ICB can't go above the monthly standard payment, so if our income DOES go up enough to reach that point, it wouldn't be the worst problem to have. At the moment we could afford the standard repayment, but at the expense of our savings. ~$2000/month = $24,000/year (I can do arithmetic kinda). At ~$45,000 (after insurance is taken out) that's more than half our income. Then $6000/year for living leaves us with $15K to invest for retirement/life. Assuming no other expenses and travel. Seems like that $240K (over 10 years) would be more useful long term elsewhere?

[Mustafa413]

Is the teaching job a public job?

If so you should look into Public Service Loan Forgiveness program. 

I am a highschool teacher and that is the route I am taking to pay my loans over.  Instead of 25 years it is only 10 years. 

I was going to say the same thing  about the public service program- are you eligible for the PSLF?  I am currently almost 6 years into the 10 years.

Also, there are several teacher loan forgiveness programs, which probably won't make a dent in your case, but it's worth looking into.

No, it's a private school. We will definitely talk to them (and a friend of a relative who is a fancy financial advisor) to see if there is any kind of help, but from what I have read private school teachers don't qualify for PSLF.

[Mustafa413]

HI Mustafa! Congrats on the job and low expenses....that's pretty incredible! I'm in a similar situation (less debt but higher expenses) and have gone back and forth on IBR vs. aggressive pay down and have decided that there are just way too many variables (future raises, rate of return, tax liability) to make a decision purely based on math. For our family, we have chosen to go with IBR and continue aggressively contributing to investments. While I hate that debt sitting there, I've decided that I hate not seeing my retirement grow more. I think it's about what your comfort level with the debt is. As long as you are aggressively saving and investing, the tax issue shouldn't be a huge deal for you. Besides, maybe all of us IBR folks will get lucky and have the taxation laws changed down the road (I just won't be banking on that). Good luck with your decision!

Thanks! Glad to see someone else in the same situation. I mean, not really since that means you have massive student loan debt, but you know...misery loves company and all that.

I am also hopeful for some kind of student loan reform. Not even necessarily for us personally, but because it seems that it is going to probably be the end of us all and kill all the bees.

[neil]

I would not challenge you for using the forgiveness program, but the main reason taking that approach works out on paper is because the variables are sustained.  Your job, your expenses, the tax rules and the return.  The average looks nice but there is some impact by sequence of returns and variance.

For kicks I used cfiresim to model an accumulation scenario only going 25 years out and $30K/year savings.  (I used 80/20 stock/bond)

Average   $1,682,602.12
Median   $1,656,048.71
St. Dev.   $577,220.67   
Highest   $3,465,835.08
Lowest   $668,022.17   

In this scenario you have some 100K tax bill to look forward to.

Versus $10K savings for 25 years and $25K extra savings for 15 years (after loan payoff)
Average   $1,153,969.92
Median   $1,114,480.02
St. Dev.   $356,184.98   
Highest   $2,209,650.44
Lowest   $509,109.52   

Both scenarios might be FI for you but in the second one your loan is paid off properly and your final balance has lower variance.  I don't know if I estimated the savings numbers right, I eyeballed it from your info.

The timeline is probably long enough that the first scenario always wins.  This makes sense because you are effectively using very low cost leverage (your interest rate plus only being responsible for ~40% of the balance after the 25 year term) but your returns won't necessarily look like any of these.  They will be whatever how you invest returns, and there is a possibility that is very different than the historical data in the tool.  Unlikely, but possible.

This is why, for most people, the right approach is to pay off the loan.  The loan characteristics are predictable.

I would certainly not give up the 401K match you mentioned so I assumed you would still be able to put 10K into the 401K.

[Numbers Man]

It sounds like you have plenty of disposable income to pay the $2,000 every month. You can probably also get a side gig and make at least another $10k per year. Take advantage of your minimal expenses and pay off your debt obligations. Because once you fall into that rabbit hole of avoiding paying off your debt you can probably never climb back up. Also, look to re-fi those 7% loans.

[Thegoblinchief]

I'm a big believer in paying your debt obligations and, as an American taxpayer, you owe ME (albeit indirectly). No one put a gun to your head and asked you to borrow $150K. Looks like you could invest a lot and STILL pay your loans rather quickly.

But I've gotten in rather heated arguments with others about this, and often feel my position is the minority around here. For example, we've got retired folks with net worths well over a million who use their low paper income to let loans sit on IBR until forgiveness. Sigh.

If you choose to do the right thing and not hide behind IBR, look at refinancing anything over 4.5 interest with SoFi ($10k minimum). It's no fee. I went with a variable rate as we should have it knocked out in a few years, but with your situation I would do the fixed rate.

PM if you go this route and (shameless plug) I will give you my referral code.

[Mustafa413]

Thanks for all the thoughts, folks. Really helpful!

It sounds like you have plenty of disposable income to pay the $2,000 every month. You can probably also get a side gig and make at least another $10k per year. Take advantage of your minimal expenses and pay off your debt obligations. Because once you fall into that rabbit hole of avoiding paying off your debt you can probably never climb back up. Also, look to re-fi those 7% loans.

Definitely going to look into refinancing. Should have mentioned that in my post. It's unlikely that I'd be able to get a side gig as the job requires quite a bit of out-of-the-classroom work as a dorm parent. That being said, I'm hoping to get back into welding and such so who knows what the future holds. Also might be able to do some summer program work for extra cash, so there's that.

Thanks again, everyone. Much appreciated!

[kpd905]

+1 to refinancing, and I would not give up an employer match to put more toward loans.  A 50% or 100% employer match is always going to be better than a 6-8% loan in terms of return on your money.

[historienne]

Is the teaching job a public job?

If so you should look into Public Service Loan Forgiveness program. 

I am a highschool teacher and that is the route I am taking to pay my loans over.  Instead of 25 years it is only 10 years. 

I was going to say the same thing  about the public service program- are you eligible for the PSLF?  I am currently almost 6 years into the 10 years.

Also, there are several teacher loan forgiveness programs, which probably won't make a dent in your case, but it's worth looking into.

No, it's a private school. We will definitely talk to them (and a friend of a relative who is a fancy financial advisor) to see if there is any kind of help, but from what I have read private school teachers don't qualify for PSLF.

I'm 90% sure you are wrong about this.  You wouldn't qualify for the special loan forgiveness programs for teachers, but PSLF is generally open to anyone working at a non-profit.  Unless your school is for-profit, you should be eligible.  See Q33 here: https://studentaid.ed.gov/sites/default/files/public-service-loan-forgiveness-common-questions.pdf

[Catbert]

Is it possible that any of the freebies from your job (i.e., rent and meals) will show up as income on your W2 or a 1099?  If so that might make IBR less profitable for you. 

Philosophically I'm with the goblinchief, you borrowed the money and have a means to pay it back so you should.  I also agree with others who pointed out that 25 years is a long time to count on nothing changing in your personal financial life or in the tax and SL laws.

[Mustafa413]

Is the teaching job a public job?

If so you should look into Public Service Loan Forgiveness program. 

I am a highschool teacher and that is the route I am taking to pay my loans over.  Instead of 25 years it is only 10 years. 

I was going to say the same thing  about the public service program- are you eligible for the PSLF?  I am currently almost 6 years into the 10 years.

Also, there are several teacher loan forgiveness programs, which probably won't make a dent in your case, but it's worth looking into.

No, it's a private school. We will definitely talk to them (and a friend of a relative who is a fancy financial advisor) to see if there is any kind of help, but from what I have read private school teachers don't qualify for PSLF.

I'm 90% sure you are wrong about this.  You wouldn't qualify for the special loan forgiveness programs for teachers, but PSLF is generally open to anyone working at a non-profit.  Unless your school is for-profit, you should be eligible.  See Q33 here: https://studentaid.ed.gov/sites/default/files/public-service-loan-forgiveness-common-questions.pdf

You just blew my mind. Thank you. I did a bit of research on PSLF but did not connect the idea of non-profits to private schools. Dumb. Changes so much. Much thanks, again.

[Mustafa413]

Is it possible that any of the freebies from your job (i.e., rent and meals) will show up as income on your W2 or a 1099?  If so that might make IBR less profitable for you. 

As far as I know housing does not count as income since it is on campus (owned by the school) and living on campus is required as part of the job.

Not sure about meals, but I doubt it.

[Dee18]

Sounds like you have a fabulous situation, especially with the public service 10 year forgiveness plan combined with income based repayment. Congratulations! But keep in mind that many small liberal arts colleges are financially insecure right now. Sweetbriar is not the only one closing and rural colleges are most at risk. (You can check out a college's bond rating at Standard & Poor or its rating at Forbes to get one clue.)   While this should not impact you in the short term, it might affect some longer term considerations.  Most importantly,  to the extent possible, keep your c.v. filled with what would get you your next job.  Carefully check the school's finances before purchasing a home there.  If the college is the main business of the town, any failure of the college will cause real estate prices to plummet. 

Sweetbriar stories currently in the news are a warning to all of us at small, private colleges.  Some of the Sweetbriar faculty have spouses also working at the college and own homes, but not the underlying real estate, on the campus.  And as one professor was quoted, he is a "teacher-scholar" without enough publications to get a job at a major university because he has spent most of his time teaching. 

[Mustafa413]

Sounds like you have a fabulous situation, especially with the public service 10 year forgiveness plan combined with income based repayment. Congratulations! But keep in mind that many small liberal arts colleges are financially insecure right now.

Thanks! It's a high school that is mostly boarding students. Still good advice all around, though.