Author Topic: To pay off student loans?  (Read 6838 times)

GettingBackOnTrack

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To pay off student loans?
« on: May 01, 2016, 06:48:04 PM »
I've tried looking this up on the forums, but I'm still unsure about what to do in my situation.  I have students loans at 6% and 7.9%.  I'm in the government program to pay according to my income.  My question is whether I should pay off my hair-on-fire debt emergency, or just pay the minimum for 25 years, and let the government forgive the rest?  And then I could save and invest my money instead?  I know investing pays at best 7%, so it would make sense to pay off the higher debt.  But then, why would I pay 1 penny more to the government if they're going to forgive it anyway?  This situation almost seems too good to be true.  That I could make small monthly payments for 25 years, and then be done with it.  But I know several people who are planning on this.

AND, if I should be working to pay off my loans, can I make larger payments without my monthly payment being raised?  Is there a way to select to just pay the principal?

Thanks in advance for any help!

kpd905

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Re: To pay off student loans?
« Reply #1 on: May 01, 2016, 07:49:17 PM »
What is the total amount of your loans?  And what is your income?  Those are both really high interest rates on the loans.  I had loans at the same rates and attacked them as soon as I graduated, paying them off in under 3 years.  There is no way I would have wanted to worry about them for 25 years.

I know investing pays at best 7%, so it would make sense to pay off the higher debt. 

This is untrue, investing can pay much more than 7%.  But your loans are guaranteed returns of 6.8% and 7.9%, so that can be considered better than a possible return in the market.


Laserjet3051

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Re: To pay off student loans?
« Reply #2 on: May 02, 2016, 08:56:24 AM »
When your income goes up so will your loan payments. You need to calculate what those higher monthly payments will be. Income-weighted monthly payments provide a perverse incentive to keep ones income low for the life of the loan to ensure low monthly payments. Moustachians on the other hand, seek to increase their income.

Aside from this, there is always the possibility that the foregiveness program will be withdrawn or they will change the rules, or that your life may change and may make you ineligible, perhaps at year 24?

My opinion on many of these income sensitive loan programs is that they will cause many loans to balloon over time, and only those folks who fully qualify for loan foregiveness will be off the hook. How certain are you that in 25 years (or whenever) you will be foregiven. Tax implications of the foregiveness event must be considered as well.

For am inority of borrowers who truly will never make enough money to pay the loan and will be employed for life at depressed wages, then yes, for these folks, the strategy of income -based payments coupled with foregiveness may make sense.  But I think a lot of folks who signed up for these programs are in for a very rude awakening down the line.


SimplyMarvie

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Re: To pay off student loans?
« Reply #3 on: May 02, 2016, 01:46:13 PM »
I'm fighting this as well, but I have much higher balances (Law School. *sigh*) and much lower interest rates.

I also work for the U.S. Government and am 4.5 years into the 10 year loan forgiveness plan. I am literally biting my nails and figuratively holding my breath that the rules for IBR and public interest loan forgiveness don't change before I hit that ten year mark (or if they do, there's a grandfathering clause) Because it's a total of ten years rather than 25, and my income will remain relatively stable over the remaining time-period, I'm going to wait it out on IBR. But if it were 20 years or 25, I don't think I would. The ballooning principal is a serious issue, and once you're in the program and out of the 3 year grace period where interest isn't recapitalized into the loan you've basically got golden shackles on to stay in it and are gaming the system that loan forgiveness becomes a sort of third rail of U.S. domestic policy. I think it WILL, but I don't know that I'd be willing to bet my financial future on it.

You could switch to the Income Contingent Repayment program, I believe that has a standard forgiveness period of 20 years rather than 25, and may come with lower payments as a percentage of your AGI too. But ultimately it's your decision to make.

randymarsh

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Re: To pay off student loans?
« Reply #4 on: May 02, 2016, 03:52:38 PM »
Assuming your income grows over time (like it does for most people) and your loan amount isn't insane (like 300K or something), I think you're going to find that you pay just as much as you would have if you did a standard 10 year or quicker plan. At least once you factor in the income tax at forgiveness.

These plans are more of a way to keep heavy borrowers with low incomes out of poverty and prevent defaults than a great financial strategy. The plans are full of gotchas that can quickly change the "is this repayment plan worth it?" decision. Get married? Now your spouse's income counts unless you file taxes separately. But doing that means you can't take advantage of certain tax credits/deductions. Have a kid? Payment goes down. Career takes off? Payment goes up.
« Last Edit: May 02, 2016, 04:05:46 PM by thefinancialstudent »

randymarsh

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Re: To pay off student loans?
« Reply #5 on: May 02, 2016, 03:56:24 PM »
AND, if I should be working to pay off my loans, can I make larger payments without my monthly payment being raised?  Is there a way to select to just pay the principal?

Of course you can pay more. But you can't really "just" pay principal. Student loans accrue interest every day. If you have a $100,000 loan at 6%, it is accruing $16.43 in interest daily. This must be paid before principal is reduced. If you make a $200 payment when your principal balance is $100,000 but accrued interest is $100, then your balance is going to be $99,900 after the payment posts.

SimplyMarvie

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Re: To pay off student loans?
« Reply #6 on: May 03, 2016, 12:19:30 PM »
These plans are more of a way to keep heavy borrowers with low incomes out of poverty and prevent defaults than a great financial strategy. The plans are full of gotchas that can quickly change the "is this repayment plan worth it?" decision. Get married? Now your spouse's income counts unless you file taxes separately. But doing that means you can't take advantage of certain tax credits/deductions. Have a kid? Payment goes down. Career takes off? Payment goes up.

This is true, except that in the majority of the income-related repayment conditions (IBR and ICR, not PAYE, but I think revised PAYE) your payments cap out at whatever your initial 10 year repayment amount would have been at the start of your initial repayment period. So in my case, even if I quit and go into investment banking and make many times my poor government salary, I will be paying over the longer term (because of the capitalized interest) but never more than the initial 10 year repayment amount.

Also, with the new changes to the regulations, if you and your spouse both have loans for IBR and ICR you pay 15% of your income together and it gets pro-rated for the two loan amounts. So it's not 15% for me, and 15% for my spouse, it's 15% total, and my servicer gets about 3/4 of that because my loans are enormous and his gets the rest. We will pay off his loans early, and count the months until forgiveness day for mine. So far, so good.


charis

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Re: To pay off student loans?
« Reply #7 on: May 03, 2016, 01:05:34 PM »
These plans are more of a way to keep heavy borrowers with low incomes out of poverty and prevent defaults than a great financial strategy. The plans are full of gotchas that can quickly change the "is this repayment plan worth it?" decision. Get married? Now your spouse's income counts unless you file taxes separately. But doing that means you can't take advantage of certain tax credits/deductions. Have a kid? Payment goes down. Career takes off? Payment goes up.

It is quite easy to keep your payments down if you work in public service and max your tax-advantage accounts.  We file jointly, and our gross income is the highest it has ever been, but our payments just went down.

Also, with the new changes to the regulations, if you and your spouse both have loans for IBR and ICR you pay 15% of your income together and it gets pro-rated for the two loan amounts. So it's not 15% for me, and 15% for my spouse, it's 15% total, and my servicer gets about 3/4 of that because my loans are enormous and his gets the rest. We will pay off his loans early, and count the months until forgiveness day for mine. So far, so good.

Does this apply to the REPAYE?  We are doing the same thing - combo of paying down (H's loans) and forgiveness (mine hopefully).  Five years into PSLF.


Kaspian

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Re: To pay off student loans?
« Reply #8 on: May 04, 2016, 09:53:19 AM »
Because living a life with an anvil hanging over your head on a bit of rope sucks--even if you know someday someone will take it away for you. 

SimplyMarvie

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Re: To pay off student loans?
« Reply #9 on: May 04, 2016, 10:39:25 AM »
Does this apply to the REPAYE?  We are doing the same thing - combo of paying down (H's loans) and forgiveness (mine hopefully).  Five years into PSLF.

Should do. It's new as of December 17th (happy birthday to me?) and it looks like it uses combined income even if married filing separately, so it should help reduce your overall payments.

Also, yay. It looks like we're almost
Because living a life with an anvil hanging over your head on a bit of rope sucks--even if you know someday someone will take it away for you. 

P
Because living a life with an anvil hanging over your head on a bit of rope sucks--even if you know someday someone will take it away for you. 

This is true. But there are also many, many other things I can do with that money over the next five years that move me closer to FIRE than paying off my law school loans. If I'm gonna work anyway, I might as well take the benefits my job offers.


charis

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Re: To pay off student loans?
« Reply #10 on: May 04, 2016, 11:03:39 AM »
Does this apply to the REPAYE?  We are doing the same thing - combo of paying down (H's loans) and forgiveness (mine hopefully).  Five years into PSLF.

Should do. It's new as of December 17th (happy birthday to me?) and it looks like it uses combined income even if married filing separately, so it should help reduce your overall payments.

Also, yay. It looks like we're almost

This would make sense - our new payments under the REPAYE are lower than I anticipated, which was a nice surprise.  We have made a good dent in H's loans over the last year, but once Jan 1 hit, they were backdoored strategically so we max our IRAs/403b as fast as possible.  So even though we are paying those off early, that's why it's nice to have a low monthly payment.