The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: garbageman on January 08, 2016, 04:42:02 PM
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Hello!
I discovered this site a few months ago and have been lurking ever since. I enjoy learning about new ways to be frugal and have admired the diversity of the community and its financial know-how. So I thought this might be a good place to discuss a dilemma I've been thinking about for some time.
I am fortunate to have no student loans or any debt of any kind. But my fiancee, who completed a law degree several years ago from a good university, has six figures worth of Student Loan debt (with 3.5% interest). She is on a 30-year income based repayment plan which, over the past couple of years, has resulted in her paying $0 towards that debt per month. She has her own law practice, and although she is very smart and hard-working, her practice has not been profitable to this point due to her area of law and the type of cases she has been taking on.
Apparently, if the two of us are married, the student loans will include my income as part of the plan, meaning we will have to start paying towards it each month. Since she is insistent on the two of us contributing equally to monthly bills, and she worries that she doesn't have enough to cover her half in the event that the IBR goes up post-marriage, she is suggesting we possibly avoid being officially, legally married so I don't end up saddled with that student loan debt as well.
I know the attitude about debt on MMM: treat it like a raging dumpster fire and eliminate the problem as fast as possible. I've assured her that I'd like to help her pay off that debt, but she's still uncertain about it.
Part of her reasoning is that her understanding of IBR is that in thirty years, the entire student loan debt will be forgiven, providing she sticks to that plan and makes little enough to qualify for IBR over the course of that period. We'll have to discuss whether or not this is actually how such a plan works with the loan officer, but the idea of gambling on thirty years worth of poor salary to someday be rid of the rapidly piling debt is a scary notion to me.
I acknowledge that she doesn't sound like the most mustachian of people, but she is actually pretty frugal and fiscally conservative in many respects. She has agreed to start working long-term with another lawyer in the building on some other sort of legal work that she hopes will provide a more consistent paycheck, but it remains to be seen when this will materialize and how much of a financial boost it will be.
I'm open to any advice (other than "ditch her," of course, which I'm not doing since she is my companion and best friend), as I don't have much experience with Student Loan financing or debt in general. I'm looking to put together a long-term plan for how we're going to deal with this; I don't want to have any regrets years from now.
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So her plan is to basically work for free, or worse pay for a job (if there are losses) for 30 years? If my student debt was high enough for me to consider that, I'd probably just flee to the Amazon to live with the Rubber Tree People.
What would the payments be if you got married and had to pay on the regular schedule? I'm assuming you would be okay cash flow wise?
My situation was somewhat similar 4 years ago: engaged, wife had 6-figures of student debt. Not in IBR though.
My outsider perspective is this: It sounds like she is considering spending the next 30 years building a shitty law practice (i.e. one that doesn't make any money), just to skip out on her student loans. Disregarding any ethical concerns, the money angle just doesn't pencil out for me on that.
Also, does your state have common-law marriage?
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What other payment options are there? Is the interest fixed or variable? Is the entire loan at 3.5% (rare) or are there blocks at rates both below and above that?
If it's all 3.5% fixed for 30 years, I'd figure out the correct amount to pay to fully amortize it and just mentally treat it like a mortgage payment. It's a fixed dollar amount that only gets cheaper over time thanks to inflation. Keep it as a hedge just like people would tell you about a mortgage.
If it's variable, though, I'd be considerably more aggressive as rates will inevitably rise and you want the balance to be smaller by the time the rate gets considerably higher.
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The loan is forgiven after 300 "qualifying" payments (25 years) under IBR. $0 payments due to no discressionary income (income below 150% poverty level) do count as "qualifying" payments; however, the forgiven loan balence is taxable income in the year the loan is forgiven - 25% of a six figure income is a heafty bill for someone who has never made more than 150% the poverty level.
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If it's variable, though, I'd be considerably more aggressive as rates will inevitably rise and you want the balance to be smaller by the time the rate gets considerably higher.
I don't think any of the programs that have IBR options have any variable rate loans.
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So her plan is to basically work for free, or worse pay for a job (if there are losses) for 30 years?
Like I said, she hopes to eventually be earning more income by working with the other lawyer in her building in a different area of law. Which left me to wonder if this would cause her to fall off of the IBR and end up not having any of the loan forgiven down the road.
I'm assuming you would be okay cash flow wise?
I'm thinking so. I don't make a ton (no, I'm not really a garbage man, but I make something close to the median U.S. salary in a state that is middle-of-the-road cost of living), but I figure if I'm going to start helping her with this debt, I'd rather start sooner than later before the thing balloons way out of our control.
Also, does your state have common-law marriage?
It does not.
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If it's variable, though, I'd be considerably more aggressive as rates will inevitably rise and you want the balance to be smaller by the time the rate gets considerably higher.
Based on robartsd's post, it sounds like it is probably fixed, but a good question for us to ask her loan officer and good advice.
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The loan is forgiven after 300 "qualifying" payments (25 years) under IBR. $0 payments due to no discressionary income (income below 150% poverty level) do count as "qualifying" payments; however, the forgiven loan balence is taxable income in the year the loan is forgiven - 25% of a six figure income is a heafty bill for someone who has never made more than 150% the poverty level.
If, hypothetically speaking, 20 years into the IBR plan, she starts making decent enough money that she no longer qualifies, does that mean that nothing from the loan will ultimately be forgiven? Or is the loan gradually being forgiven year-to-year?
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My understanding of IBR programs is that once you've signed up, you are never 'disqualified' due to an increase in income. As your income increases, so does your payment, because it is a fixed percentage of your 'discretionary' income. I would try to get the nitty gritty details of exactly what program she is in, and then start doing some math.
I found a site that goes over the differences in the different plans: https://studentaid.ed.gov/sa/repay-loans/understand/plans
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How much are we talking here? $100k? I paid of 120k in 5 years making average of 55k a year. Do the math and see if you ultimately end up paying more if you are on IBR. It sounds like your fiance is smart but not savvy. There are some good lawyer threads on here that talk about how to work being self-employed.
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Your girlfriend's plan doesn't sound very wise to me -- hold herself back for 30 years simply to have her loans forgiven?! Wouldn't she rather have the satisfaction and sense of accomplishment from prospering over the years? She should just start paying them back and progress until they're gone. How many years ago did she graduate from law school?
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The problem here isn't the student loan amount, it's that your girlfriend is several years out of law school and has zero income!
There are only a few ways I can see this happenibg:
- does she only take contingency cases that offer a good payout but take years to litigate? If so, she needs a side legal hustle to bring in some cash in the meantime.
-are her office expenses way out of line with her income? If so she may need to move to a cheaper office and cut back on staff until she is making a profit.
-is she only taking poor clients with little ability to pay? If she is working for free basically, she could take a low pay salary job with a nonprofit and still come out ahead.
I think the big issue here is not the amount of the student loan, but your GFs (possibly) poor business sense.
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IBR payments can shoot up from year to year, which can make long term budgeting tricky. You fill out your tax return, send it to them, and they recalculate each year. You're supposed to actually tell them if you have a rise in income before taxes are done - so they can raise your payment too.
Also - you may or may not have to pay taxes on the forgiven part - it depends on the situation:
https://www.irs.gov/publications/p970/ch05.html#en_US_2014_publink1000178306
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If you are staying with and planning on marrying her, I would just plan on the debt becoming part of a monthly bill to pay---just as if paying a mortgage. Run the debt amount through an amortization calculator for 30 years at 3.5% and you will see the monthly amount to pay.
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If your girlfriend is not making any money running her own 'business' then she needs to get a real job. Make some money first and then figure out the best way to approach a loan. I have a lot of student debt. I have no ethical problem with however you want to discharge the debt. Not making money to avoid payment is not a wise approach.
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I am an attorney. I run my own solo practice. I have so many things to say about running a profitable solo law practice. I have out-earned even my big law classmates by a lot while running my own solo shop. Still, I see other solo attorneys who simply don't understand how to make a business out of the law and they struggle. In this situation, the best thing I can say is that foregoing a rewarding and profitable legal career because of even $100,000 in student debt is a bad idea. Please begin discussing how to earn more money with her. There is one book she must read, just to get started:
http://www.amazon.com/Practice-Career-Series-American-Association/dp/1590312473
What is her main reason for focusing on an area of law you claim is not profitable?
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I am an attorney. I run my own solo practice. I have so many things to say about running a profitable solo law practice. I have out-earned even my big law classmates by a lot while running my own solo shop. Still, I see other solo attorneys who simply don't understand how to make a business out of the law and they struggle. In this situation, the best thing I can say is that foregoing a rewarding and profitable legal career because of even $100,000 in student debt is a bad idea. Please begin discussing how to earn more money with her. There is one book she must read, just to get started:
http://www.amazon.com/Practice-Career-Series-American-Association/dp/1590312473
What is her main reason for focusing on an area of law you claim is not profitable?
As another attorney here, I agree that OP's SO needs to increase income.
With that said, both of you need to do your homework on IBR/PAYE/REPAYE. Read these threads in their entirety to understand how income driven repayment plans can fit into your FIRE plans and then come back with questions:
http://forum.mrmoneymustache.com/ask-a-mustachian/psa-to-those-with-high-student-loans-repaye-(new-repayment-plan)-starts-today/
http://forum.mrmoneymustache.com/ask-a-mustachian/gaming-repaye-and-the-student-loan-system-($148-000-debt)-to-achieve-fire-at-45/
(Can't get that second link to work. Just copy paste the entire thing in the browser).
Ignore the folks who cry fowl about the "ethics" of the situation, as they really don't know what they're talking about with these student loan programs.
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Garbageman, you have lured me out of long-time lurker status, as this is an area I am very passionate about. Mr. Energy and I are both attorneys with a mortgage worth of debt between us, and have many friends who are similarly situated. It saddens me to see how this affects people's life choices--when/whether to get married, have children, buy a house, the jobs they take, etc.
My understanding is that your fiancee can avoid having your income attributed to her after you are married if you file your taxes as married-filing-separately. I know one lawyer couple that is doing this, because her income is much higher than his and he works in the public sector (they also have a mortgage worth of debt between them). This should avoid her payments going up after you get married. You would of course need to consider whether the change in her student loan payments if your income is attributed to her outweighs the tax benefits associated with filing jointly. A pretty helpful article discussing this issue can be found here: http://educatedrisk.org/analysis/filing-jointly-or-separately-ibr-plans.
One thing I would note is that, as robartsd mentioned, any federal student loans forgiven under IBR are considered taxable cancellation of debt income. This is sometimes referred to as the "Student Loan Forgiveness Tax Bomb," because it means that you may have a pretty hefty tax bill waiting for you at the end of those 25 payments (the size of the bomb, of course, being tied to the size of your student loans). This can be further exacerbated by the fact that the loans accrue interest the whole time, even if the debtor is not required to pay the loans because they are on IBR. You can see how for folks in the situation of Mr. Energy and I, the resulting tax burden would be substantial. If your fiancee has a substantial amount of student loans and she decides to stick with the loan avoidance strategy, you should consider how much y'all will need to have set aside to pay this tax obligation. Some good resources discussing this issue can be found here: https://lawyerist.com/83690/defusing-student-loan-interest-tax-bomb/ and here: http://www.finaid.org/loans/forgivenesstaxability.phtml
Finally, as to your question of whether your fiancee will be ineligible for IBR if she earns too much money, I am pretty sure the answer is yes--there is an income at which she would be ineligible for IBR. I don't know what happens if she then dips back to an income that is eligible (i.e., whether she would be ineligible for discharge because she earned too much for a little while). If I were your fiancee, I would do some research on this point, speak to her student loan officer (if she has one), and, if those do not yield an answer, speak to her school's financial aid office to see if they can answer her questions or refer her to resources to answer her question.
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Your fiancee could look into public-sector jobs that might fall under a different IBR payback plan with fewer required payments depending upon the work. But generally, working for the state could qualify since these positions tend to pay lower than private sector jobs. A good IBR plan doesn't have to mean making "no" money, but do what you can to keep down her Adjusted Gross Income since that's what the IBR rate is based upon. Lowering the AGI can be done by maxing out employer retirement plans and Health Savings Accounts, for example. Anything that can be pulled out of the paycheck and invested doesn't get counted. A good tax professional and the student loan administrator ought to be able to help you figure this out.
Good luck!
NDQ
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I would also add that there are other things to consider besides the math of student loans. Debt is a very emotional road and can be a crazy burden. I am a teacher and graduated with about $50k in debt (car plus SL) and I paid them down aggressively until the point they could be forgiven. At that point I saved the forgivable amount in case something went wrong. After 5 very long years the remainder of my loans were forgiven and I put the money I had saved onto my husbands loans (we got married just after the five year forgiveness point). Debt caused me huge anxiety and my quality of life has improved so much since killing our combined student loans. I would discuss this with her as a part of your decision making process.
Getting out of debt was so important to me that my boyfriend and I cohabitation before marriage. I am a somewhat conservative person and never would have thought that I would live with someone before we were married, but when he got a job in my town (after job hunting 3+ hours away for a year and a half) and the cost of an apartment was more than a third of what he was making, I just couldn't justify him spending that much on rent when he could be putting it towards SL's. I don't know that I would recommend this to anyone, but it worked out great for us. We saved for a wedding and paid off all of the student loans and are now beginning saving. I would highly recommend taking some kind of financial class with the your GF to really make sure you are on the same page. I had listened to Dave Ramsy for ages and taking his class together was very helpful. I believe his class/books are good even if you are not Christian . You just have to know that he is. But if that isn't your thing, maybe read MMM together and talk about it. Whatever you do make sure you are on the same page mathematically and emotionally.
Also, have you talked about if kids are in the picture would you both continue working? This is another big thing to think about before committing to a 30 year repayment plan.