Prioritizing savings over student loan repayment

[tacticalteam4]

Topic Title: Forgetting about student loan debt to save for retirement

Life Situation: 30M, 32F MFJ. No kids (yet). One year out of professional school(s). MCOL area in a non-income tax state.

Gross Salary/Wages: $120k him, $80k her

Retirement accounts: Total~$100k

We really try to max out tax advantaged accounts to hide our income from the income based student loan payments we will have to start paying on next year.

Her:

457: 16,000 large cap index funds, zero expense
Defined benefit plan: $3,000...75% large cap index, 5% small cap index, 20% global index, all low expense
403b $6,000 VTI Mostly
tIRA $30,000 VTI mostly
      She has access to 457, 403b which we will max for $39,000 pre tax savings. The defined benefit plan had an option to automatically deduct 15% of her income, but we missed the window to set it there and have defaulted to the standard 5%, unfortunately. This was a very costly mistake, because I think at 15% contribution, we would end up within tIRA income deduction territory. According to the handbook, there is no way to change this contribution amount unless you change employers.

His

tIRA: $11,000 VTI mostly
Roth IRA: $5,000  VTI mostly
HSA: $6,000 large cap index, low expense
401k: $17.5 VIIIX

Other assets:
~$12,000 in cash, small physical amount, the rest in a crappy savings at BoA. Not an emergency fund necessarily, will probably end up in Roth IRAs at the end of the year or sooner if stocks dip again.

2 paid off cars, ‘05 Tacoma and ‘13 accord.

The Baggage

Her: $70k private student loan 4.75%
       $85k fed loans avg 5.9%
Him: $107k fed loans 7%

We have made OK progress here considering most of our savings went into retirement accounts in the last year. Her private loan was 9% and $93k when we started working last June. We refinanced it and made a ~23k dent in balance. We recently refinanced again to lower the monthly payments which will allow us to continue focusing on tax advantaged savings first. Every extra dollar we pay on the private loan is a dollar we could have sheltered in a tax advantaged Account, which is a dollar more that factors into our income based repayment.

Both of us are eligible for the public service loan forgiveness (PSLF) program after 10 years of payments. She is about a quarter of the way there from working while going to school. Our FI(RE?) goal date is based around this date, some time in roughly ~9.5 years. We are both under the REPAYE plan which caps our payments at 10% of whatever we make over 150% of the poverty level. If for some reason PSLF isn’t an option down the road, any balance left over after 25 years (for graduate school loans) is forgiven. Under this plan, spousal income AND federal loan debt is considered, so although our income is fairly high, our high combined loan balances make for affordable monthly payments.

It is an option, ethics of it aside, to FIRE with a federal student loan balance. If income is at or near 150% of the poverty line, monthly payments would be $0 until the remained is discharged at the 25 year mark (though there will be a large tax bill for the discharged amount). I first read this strategy on this forum and would love to hear if anybody has done it or knows anybody who has, just for curiosity’s sake. Feel free to PM if you want to avoid any possible drama.

Other Debt:
Mortgage $300k. Bought our house with VA loan and no money down in Jan of this year. $300k is the near the median house cost here. Hoping this wasn’t a mistake, but the rent v own calculators showed even if the house appreciates at a fraction of what it did in recent times, it will be a good financial decision if we are here for a few years. We are hoping to stay for 10. Not sure I would do this over again. Turns out there are a lot more expenses that go into ownership than we had planned.

Monthly expenses and savings rate
We’ve been tracking our expenses with YNAB since we started working (almost one year). I know there is a lot of fat left to be trimmed, and we will get there I hope.

We spend about $4,500 a month for all of our expenses EXCEPT student loan payments. Our biggest expenses are $1600 for housing and an astronomical amount on groceries. Trying a new strategy of one grocery trip per week, and largely avoiding Costco (except for rotisserie chickens) which seems to help. Our monthly expenses were $3500 last month, largely because of spending less on groceries.

As far as student loan payments, our monthly payment is $0 for the fed loans based on last year’s income. Our new monthly payment for the private loan is $450, down from $1100 we have been paying for the last year. Our AGI was ~100K for 2019, so we will start making payments with that as our reported income when we recertify in December.

I have just started tracking our contributions to our retirement accounts as of Jan. For the first quarter of 2020, we saved $26,790 in retirement accounts including tIRA contributions for 2019. Ill do a better job of tracking this going forward and separating it from debt payment.

The Plan
Our FIRE timeline is based more on the pursuit of PSLF than it is any specific number. Until then, the rough yearly plan is to maximize tax advantaged account contributions (457, 403b, 401k, HSA, defined benefit plan) ~$68,000 this year. $12,000 into Roths. Use the rest of our savings to pay down the private student loan debt. Assuming current income and expenses, we should be able to pay off the $70k private loan within a few years.


We are fairly new to this lifestyle and neither of us are good at crunching numbers or planning too far beyond the next year. With that said, at some point when the private loan is paid off, we are going to have a good chunk of change to invest into a brokerage account. The problem is, we need to figure out eventually how much our income will grow from those investments because of the second order issue of paying more in student loan payments. I don’t think it’s too much of a stretch to predict some kind of student loan reform given all the attention the issue has been getting recently. A plan like Biden’s would completely rearrange our priorities in this regard. If anybody has any thoughts or a crystal ball and would like to share what they see coming in this domain, please do!

     

[AardvarkPuppies]

It's a catch 22 these days it seems like.  You make an excellent salary, but you have a massive student loan balance hanging over your head.

Here are some thoughts in no specific order:

1.  Make damn sure you cross your Ts and dot your i's with the PSLF program.  I graduated with a paltry student loan debt of $35k.  I have been a government employee for the last decade.  Several years of my payments did not count toward PSLF program because I did not realize that the repayment plan I was signed up for did not count towards PSLF.  Fuck FedLoan.  But with a balance as high as yours, I would try to jump through allllll of their hoops.   

2.  You're doing the right thing by maxing all your tax advantaged accounts to maximize your PSLF forgiveness.  Keep doing that.

Outside of that, it appears that you are doing everything right.   You mentioned that you think your spending is a bit high, but you do not detail what that is, so we cannot help you there unless you detail out your monthly spending.  Painting with a very broad brush, I believe people with high incomes tend to have a bit more "slop" with their spending just because their cash flow allows them to.  If early FIRE is your goal, I recommend taking a very strong look at that because that can make a huge difference in how you retire.

Keep up the good work.

[fell-like-rain]

If you’re looking for grocery advice, there’s always the classic “below $200/month for family of four” pinned post in Share your Badassity. Even if you don’t hit that $50 per person level, it sounds like you’re spending 5 or 10 times that now, so any improvements would help.

[ebella]

I don't think you will get PSLF; the majority of people have not and what if govt slashes jobs?  It's too much of a gamble. 
I would definitely refinance.  I had lower overall loans, a better paying job than her, lower monthly expense, and 3 years of public service but was not making a dent in principal with those rates and then FedLoan was just shady AF.  I was able to get my interest from 6% to 1.5% (variable) on a 5 year repayment term with Earnest after researching all the major refi lenders.  Now I work in private sector, make $115,000, my household income is lower than yours and our retirement amounts less than yours (due to employers with no retirement plans). With that rate there is no rush repay before the 5 year term.  And I can max out tax advantaged retirement accounts and earn more in a low yield savings account.  Your interest rates are way too high.  You need to take advantage of lower interest rates and give up on PSLF. 
If you want you can use my referral link:  https://www.earnest.com/invite/emma579

[duck-duck]

I don't think you will get PSLF; the majority of people have not and what if govt slashes jobs?  It's too much of a gamble. 
I would definitely refinance.  I had lower overall loans, a better paying job than her, lower monthly expense, and 3 years of public service but was not making a dent in principal with those rates and then FedLoan was just shady AF.  I was able to get my interest from 6% to 1.5% (variable) on a 5 year repayment term with Earnest after researching all the major refi lenders.  Now I work in private sector, make $115,000, my household income is lower than yours and our retirement amounts less than yours (due to employers with no retirement plans). With that rate there is no rush repay before the 5 year term.  And I can max out tax advantaged retirement accounts and earn more in a low yield savings account.  Your interest rates are way too high.  You need to take advantage of lower interest rates and give up on PSLF. 
If you want you can use my referral link:  https://www.earnest.com/invite/emma579

How recently did you refinance your loans? I have excellent credit and have looked into refinancing several times, but never been quoted less than 3.5%. Maybe it’s time for me to look into it again.

[Peachtea]

I don't think you will get PSLF; the majority of people have not and what if govt slashes jobs?  It's too much of a gamble. 
I would definitely refinance.  I had lower overall loans, a better paying job than her, lower monthly expense, and 3 years of public service but was not making a dent in principal with those rates and then FedLoan was just shady AF.  I was able to get my interest from 6% to 1.5% (variable) on a 5 year repayment term with Earnest after researching all the major refi lenders.  Now I work in private sector, make $115,000, my household income is lower than yours and our retirement amounts less than yours (due to employers with no retirement plans). With that rate there is no rush repay before the 5 year term.  And I can max out tax advantaged retirement accounts and earn more in a low yield savings account.  Your interest rates are way too high.  You need to take advantage of lower interest rates and give up on PSLF. 
If you want you can use my referral link:  https://www.earnest.com/invite/emma579

I disagree with this. Especially right now when all federal loans are set to 0% interest and payments are suspended. You can’t get lower than 0% and $0. Even if the maths and circumstances should lead OP to refinance later, they’d be better off just making extra payments on the fed loans until September and then refinance.

Of course there’s no dent in the balance with PSLF...that’s kind of the point. If you’re making a dent while on an IBR plan, you probably shouldn’t be doing PSLF or IBR in the first place. To fully take advantage of PSLF, the goal is to get your payments as low as possible so you pay the least until it’s all forgiven. The interest rate and balance don’t matter on PSLF. This can work great with FIRE goals too, because that frees up more money to invest now rather than later and it incentivizes retirement savings, because putting money in a traditional 401k, IRA, or 457/403 further lowers your payments. OP even managed to get their payment to $0 last year. They’re correctly maximizing the program.

Most people haven’t gotten PSLF because most people who applied were mistaken in their eligibility in the first place. Totally understandable with the lack of info there was on the program requirements in the early years. That’s not the case now. Both spouses in OP are part of the group who graduated with clear rules and only have to deal with one loan servicer. You can’t credibly predict that OP won’t get PSLF because the first cohort who entered or *thought* they entered into program in the early days of no or misinformation are struggling to get theirs forgiven now.

That said, OP does need to make sure they cross all their t’s and follow the rules carefully. It’s a best practice to submit an employer certification form annually and to double check that fedloan calculates their number of eligible payments correctly each year. They also, depending on their career, need to think hard about whether they really are going to stay in an eligible job for 10 years. There’s some careers that are easy to know...like teachers or those in the medical field. It’s very easy to stay in an eligible job in those careers without making pay or other career sacrifices compared to the private sector equivalent. It’s a much different scenario when you have an eligible job, but are in a career field where most jobs and the best pay/advancement opportunities are in the private sector. (I.e. an accountant working at a university or a gov lawyer.) Then, yeah, it’s a risk that you will become unsatisfied with your job, but can’t move on to another one because they’re mostly in the private sector and you’re now too far into PSLF to walk away.

I also think it’s a good idea to do the comparison of how much will you likely pay over the 10 years versus how much would you pay if you refinanced for a shorter term at a lower interest rate and paid if off ASAP. If it’s cheaper to pay it off...why you would ever jump through PSLF hoop? Even if paying it off cost like $20k more over 10 years, I’d still probably pay if off to avoid the hoops. Probably not the case for OP with $177k in fed loans, but it’s always worth doing the maths to see and get a true sense of is this really worth it?

[charis]

I don't think you will get PSLF; the majority of people have not and what if govt slashes jobs?  It's too much of a gamble. 
I would definitely refinance.  I had lower overall loans, a better paying job than her, lower monthly expense, and 3 years of public service but was not making a dent in principal with those rates and then FedLoan was just shady AF.  I was able to get my interest from 6% to 1.5% (variable) on a 5 year repayment term with Earnest after researching all the major refi lenders.  Now I work in private sector, make $115,000, my household income is lower than yours and our retirement amounts less than yours (due to employers with no retirement plans). With that rate there is no rush repay before the 5 year term.  And I can max out tax advantaged retirement accounts and earn more in a low yield savings account.  Your interest rates are way too high.  You need to take advantage of lower interest rates and give up on PSLF. 
If you want you can use my referral link:  https://www.earnest.com/invite/emma579

Not good advice on the PSLF.  Especially now.  The suspension of federal loan payments (that still count toward the pslf), changing the pslf rules so more people qualify,  borrowers winning lawsuits against the doe?  The tide is rapidly turning on fedloan.  Look at the data from the past year, forgiveness is going up quickly.  The first few years had low numbers bc people didn't know about the plan at first or received bad info. It's quite a different scene now.

Max out all your tax advantaged accounts and keep your agi low, regardless. 

[ebella]

They should still refi their $70k in private loans.  No reason to be paying that kind of interest on a loan that cannot be forgiven.  That's a huge savings right there.
I still have doubts about PSLF.  The latest count is only 2200 approved applications of over 150,000 submitted.  https://studentaid.gov/data-center/student/loan-forgiveness/pslf-data.  That's about 2%.