Private Student Loans vs PSLF/ Investing?

[bluetick]

Hello Mustachtians,

Since discovering this community In the last few months, my perspective has on finances totally change. I feel more empowered and in control than I ever thought I could be. SO thanks!  I apologize in advance for the formatting, I'm have some trouble copying from excel/google sheets.


Big questions first then I’ll get into the details:   I’ve got $44k in federal student loans in the Public Service Loan Forgiveness Program and $33k in private loan about ready to consolidate. What’s the best strategy to the highest net worth and hopefully FI in 115 months when my federal loans are forgiven?   Slow pay and invest OR payoff ASAP then invest? Also I’ve got short term goals of building an emergency fund and housing fund.


Details:

I’m 34. I spent my 20’s pursuing a career in commercial photography and living on less than $20k/year. Around  age 30, I decided to finish my undergrad and changed to a career in Environmental Science.  I’ve just landed a “real” job with a public agency where I’m starting out at $75k, full benefits, CalPERS Pension and a 457b.  I figure if I can keep my lifestyle inflation in check I can make up some serious lost time in saving for the FI.  I live in the insanely expensive Bay Area, but have a few months of work trade rent living with family while I get on my feet.  I have a commute 54 mile round trip commute, but with my carpool I’m driving 9 days a month.  Interestingly, since landing my new job and finding this community, my frugality has only increased. 




Specific Question(s):
I'm really close to consolidating my private student loans ($33000). There are two options that I'm considering at SOFI. A five-year consolidation 3.8%and a 10-year consolidation have 4.5%. 5 year has a minimum payment hope $600 and a 10-year has a minimum payment of $340. Most of what I've read on the internet says that if my interest rate is low enough I should take a longer loan and invest the difference. I’d start by maxing out my 457b which would lower my AGI and thus reduce my Federal loan payments. My brother  helped  me figure out that might be better to take a shorter loan, pay it off faster and then started investing. Especially with a small extra ($10/month) payment that would very easily be ahead in tens with the 10 year loan. 

I've attached my MMM cash flow and student loan repayment model spreadsheets here as the formatting is getting freaked out when I try to copy it here. I've also edited the MMM cash flow statement​, because  it keeps overshooting my actual take home pay.

https://drive.google.com/file/d/0BzRkTSRxGdWjUGJlelJyTHNpN00/view?usp=drivesdk

https://drive.google.com/file/d/0BzRkTSRxGdWjVGN3TzlRRml0T1lhY0tfdW9tSGxodExiUTVr/view?usp=drivesdk


Category
Monthly
Comments
Salary/Wages for earner #1
$6,299








Pretax Health Ins.
$52




 


Healthcare Flex Savings Acct. (FSA)
$42


FICA base salary/wages
$6,257.27








Traditional IRA
$0.00
Debt First?
457 plans   
$83.00
Room to increase?
Employer Match
$83.33
$83
Income subject to IRS tax
$6,174




 


Pension contribution
$392


Paycheck income before tax
$5,782








Schedule C net profit
$250
Photography side gigs








 


Social Security Income
$0
CalPERs instead
Social Security Taxable Income
$0
0%






Federal Total Income
$6,424.27




 


Federal tax
$1,034
2017 rates, S, stand. ded., 1 exempt.
State/City tax
$144
Guess, using 0.00% * (AGI - Exempt'n)
Soc. Sec.
$41.81
Assumes 1 earner paying
Medicare
$90.73


Self-employment Tax
$0
Very low
Total income taxes
$1,311




 


FSA
$42


Untaxed Income
 


Income before other expenses 
$4,250.00
$2,125.00
Monthly Average Expenses:




Rent
$0
living w/ family next 6months
Car Insurance
$94


Car Maintenance, Registration, etc.
$33


Clothing/Shoes
$33


Dining (Lunch/Dinner/Etc.)
$25


Gifts (not charitable contributions)
 


Emergency Fund
$500
Plan to get to $6k
Entertainment
 


Financial Fees
$10


Fuel/Public Transport
$217


Gas/Oil for heating
 


Groceries
$400


Hair Care
 


Home Alarm System
 


Household; Maintenance
 


Internet
$0


Medicine (OTC + Prescription)
$20


Miscellaneous
$25


Parking/Tolls
 


Pets
$100
 Beloved Hound in Golden Years
Phone (cell)
$45


Recycling/Trash
 


School Tutition/Books/Etc.
 


Sports/Recreation
$25


Subscriptions (paper/magazines/etc.)
 


Fed Student Loans
$0
 IBR and PSLF,  $0 due to 2016 low income
Private Student Loand
300
Current
Credit card Balance Transfer
$347
0% till 12/17
Non-mortgage total
$1,878








Other tax-advantaged investments:




Roth IRA
 
Room to increase?
Roth 401k/403b
 
Not Avail
529 plan/ other college
 








Total Expense
$2,178




 


Total to invest
$2,072


Additional Mortgage Principal
 


Additional Loan payments
 


Available for taxable investment:
$2,072




 


Summary:
 


"Gross" income
$6,600.93


Income taxes
$1,311


After-tax income
$5,290








IRA+401k/403b/TSP/457
$83


HSA
$0


ESPP+529/other
$0


Living expenses
$2,322


Non-mortgage loans
$300








After-tax investable
$2,585









Summary of Student Loan Repayment Model



By doing the 5 year loan and paying 10 additional dollars, you will save 5601.11 in 10 years compared to doing the 10 year loan


Invest Interest Rate
7%








Total In Investment account
Cost of Loan




Total from 10 year
 $44,825.43
 $(41,041.20)




Total From 5 year
 $45,257.34
 $(35,872.00)










 $(431.91)
 $(5,169.20)
 $(5,601.11)

[4n6]

Hi Bluetick,

I have a question for you. Why are you banking on PSLF? I just put your numbers in a calculator and the truth is your payments under a standard payment plan would be just a tad more than income based repayment. In fact, your forgiveness is probably no more than a couple thousand dollars if that. If I were you I would just buckle down and pay the loans off. Your private loans aren't used to calculate PSLF so it really doesn't profit you to keep them around. Now if you have a spouse with student loans or those loans were 144k instead of 44k then you have a claim at PSLF.

Can you clear that up a bit.

[bluetick]

Hello and  thanks for the reply. Sorry for the confusion.

The info I posted above is for this year, which is going to be a weird one. Since I was in school last year and had very little income, my current fed payment is $0 for the next year because its based on my 2016 taxes. Due to my new job, Ill have significantly higher income in 2017 and will have a payment of around $300 going forward in REPAY. I'm hoping to save as much as possible into my 457b and IRA trying to play catch up from getting such a late start. If I can save as much as I hope to my AGI will probably be around $55k, at which point the totally amount paid under PSLF becomes around $36,000 after forgiveness in 115 months.  At my current level of expenses, I don't think that I'll be able to max out my tax deferred and aggressively pay down my private loans, thus my AGI is higher than it would be otherwise.   What I'm struggling with is calculating the optimal amounts to pay on the private, federal and into the tax deferred accounts to come out of all this in the best place .     


to try and simplify:

Higher private loan payment = lower tax-deferred savings = higher AGI = higher Fed loan payment  under REPAY= less PSLF

The inverse is also true:

Lower private loan payment = higher tax-deferred savings = lower AGI= lower Fed loan payment under REPAY = MORE PSLF


This is a classic "Do I pay down debt VS invest"  problem, but with the added complication of PSLF.  I understood the conventional wisdom around MMM fourmland to be that if debt is low interest, then investing the surplus would but me ahead.  I'm pretty much planning on doing that for the federal loans, unless I start making too much money to qualify, then I'll reevaluate. But when my brother ran the numbers on what to do with my private loans ( 10 years at 4.5% and $340/month VS 5 years at 3.8% and $600/month) it seems like a wash, see link to student loan model:


https://drive.google.com/file/d/0BzRkTSRxGdWjVGN3TzlRRml0T1lhY0tfdW9tSGxodExiUTVr/view?usp=drivesdk

Does that make sense?

[moonpalace]

I would be very careful about counting on PSLF continuing to exist under the current administration. And so I would encourage you to not have "amount of PSLF" as the end result of your equations. Or at least don't assume that the likelihood of "$36k goes poof" is 100%. And try like heck never to defer paying down your loans and let the balance grow.

There are any number of things this administration could do to make PSLF go away entirely, go away for some classes of borrowers, or be less comprehensive or useful in some other way(e.g. decide that the forgiven amounts are taxable income). And I have no confidence that Trump/Devos wouldn't do those things.

Just my 2 pessimistic cents!

On the bright side, your loan amounts aren't crazy, and you could pay them off in ten years yourself without too much pain.

[bluetick]

Ive decided to take the 10 year loan to have a bit more flexibly in my cash flow. I still don't know what my long term housing cost will be.  I did set up auto payments of 600, which will pay it off in 5 years or faster.  Even though it will cost around 2000 over course of the loan, with my situation right now I feel more comfortable.  Good news is I can refi at anytime with SOFI if my situation changes or if a better interest rate becomes available.


Thanks