Author Topic: Student Loan Forgiveness  (Read 1959 times)

imctkh

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Student Loan Forgiveness
« on: October 28, 2020, 04:03:23 PM »
I apologize if this is covered in another thread or this is the wrong place to post it, but I have seen very little posted about student loan forgiveness either in the forum or the blog.

Judging mainly by reading every one of MMM's blog posts a few years ago, the prevailing wisdom is that one should pay off student loans as early as possible as it is "hair on fire" debt. I would like to propose an alternative option.

Starting with some background information, I discovered MMM in March of 2017 and have spent the last ~3.5 years working toward FIRE. I'm on track to retire in roughly 5 more years. I have been paying the minimum amount on my student loans since I left school in 2012. They have an interest rate of 4.5%, and I believe it is a more financially sound decision to invest the money than it is to pay the loans off. I was on the "Graduated" repayment plan, and every year or two when the payment went up I would switch repayment plans and then go back to the graduated plan. This obviously has been extending the term of the loans, and the principal amount has barely decreased over the last 8 years (~44k down to 42k). I have been hoping for someone to forgive them at some point lol.

I recently looked into the Income-Driven repayment (IDR) options, and I'm now very disappointed that I didn't make the switch sooner, so I thought I would post this in case there are others in similar situations.

I switched to the IDR option a couple weeks ago, specifically on the REPAYE plan. This results in a monthly payment of 10% of your "discretionary income." Discretionary income is AGI - (US Poverty Level * 150%). Note that my AGI is probably relatively low compared to most people on this site (~54k in 2019). This results in a monthly payment of $232 on my 42k in student loans compared to my payment on the graduated plan of $188/month. At face value, it looks like I have failed in maintaining the lowest possible payment on my student loans.

However, I can also further reduce my AGI. I have now increased my 401k contributions to the maximum, and switched my IRA contributions from ROTH to Traditional (I had legitimate reasons for not doing this before). Once these changes to my income are factored into the REPAYE payment amount, my monthly payment will be reduced significantly as these contributions are subtracted from AGI.

In addition, after I retire my income will barely be above 150% of the poverty line (should actually be below). Based on my projected income after FIRE, this results in a monthly student loan payment of somewhere around $0.

The best part of all of this is that after 20 years on the REPAYE plan, the remaining balance of my student loans will be forgiven. The only caveat is that I will have to pay income tax on the balance that is forgiven. This will not be significantly higher than the current balance because any interest amount above my monthly payment is partially subsidized. So I’m thinking I will pay around 5k in taxes on the balance that is forgiven in 20 years.

All in all, I wish I had switched to the REPAYE plan 3.5 years ago when I started my FIRE journey. I would now only have 16.5 years of “repayment” left.
« Last Edit: October 29, 2020, 12:12:50 PM by imctkh »

ditheca

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Re: Student Loan Forgiveness
« Reply #1 on: October 28, 2020, 09:34:29 PM »
That makes a lot of sense, if your only concern is numbers on a spreadsheet.

I value repaying my debts, so I did that instead.

Car Jack

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Re: Student Loan Forgiveness
« Reply #2 on: October 29, 2020, 07:13:14 AM »
It's pretty widely believed that if Biden wins, there's likely to be a $10k student loan forgiveness coming.  My son graduated in May and with Covid, all of his loans are frozen, with zero interest.  He's very good at saving and has been working since July, putting money into his Roth, paying monthly on a car loan and putting a token amount into his 401k (Merrill Lynch) to get his company profit sharing.  He'll soon hit his Roth max and has asked me where to put his extra money next.  He reminded me that it's likely that $10k of his student loan might be forgiven.  With this in mind, I recommended that he pay extra on the car loan.

I have no idea about these 10 or 20 year forgiveness plans beyond last year's news when the first forgiveness candidates came in and only 1% of applications were actually forgiven.

Spoonsor

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Re: Student Loan Forgiveness
« Reply #3 on: October 29, 2020, 08:59:10 AM »
It's a great plan! As they say, though, the best laid plans of mice and men often go awry.

Just ask the folks who applied for the Public Service Loan Forgiveness program.

https://www.npr.org/2019/07/11/739860400/broken-promises-teachers-sue-u-s-over-student-loans-that-werent-forgiven

You'd better be sure you did all the legwork up front correctly. Even so, there is a chance the loan servicer will make a mistake which could prevent you from getting forgiveness (as happened with PSLF with some folks).

Maybe run the scenario where you follow through with the plan, and then get rejected for the forgiveness at the last minute. You could then compare total costs for:

1) Paying off ASAP
2) Waiting, and having loan forgiven
3) Waiting, having forgiveness rejected

charis

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Re: Student Loan Forgiveness
« Reply #4 on: October 29, 2020, 09:57:04 AM »
Lots of folks getting pslf and tepslf forgiveness lately in our field - typically coming after 12ish years of repayment due to borrower error/misinformation (wrong plan, consolidation) in the first couple of years and forbearances. The 1% rate of forgiveness is outdated.

The pslf was expanded two years ago and now federal loans are on hold and that may be extended even if Biden loses. The wind is blowing toward expanded forgiveness or discharge. So I don't recommend making a move on fed loans until at least the end of suspension.

therethere

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Re: Student Loan Forgiveness
« Reply #5 on: October 29, 2020, 10:06:34 AM »
The primary issue with REPAYE is that you're betting on your income to not increase drastically over the 20-25 year repayment. Sure you're making 60k now, but in 10 years who knows what you could be banking. It does really allow you to get a nice nest egg in your retirement accounts to start off with. Which would be super useful, even if you go off REPAYE eventually and decide to pay off your loans.

ReadySetMillionaire had a pretty detailed and lengthy thread a few years ago called something like "Gaming Student Loans with REPAYE". There's a lot of arguing back and forth about paying your debts. But also a lot of discussion of the sound principles and math behind his decision making. I believe the strategy he went with (combined with his neverending admirable hustling) set him up on great footing for the rest of his life. Definitely look up that thread if it is the way you'd like to go.

trygeek

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Re: Student Loan Forgiveness
« Reply #6 on: December 26, 2020, 01:10:24 PM »
I seems like people expend all this effort in not paying off their loans when they can easily pay them off. We are talking about 42000 dollars not 100000.

Fishindude

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Re: Student Loan Forgiveness
« Reply #7 on: December 26, 2020, 01:39:57 PM »
I seems like people expend all this effort in not paying off their loans when they can easily pay them off. We are talking about 42000 dollars not 100000.

Agreed !
If OP would put anywhere near the same amount of effort into; working more, increasing income and paying off debt as they did into developing this cheapskate debt avoidance strategy they would already be free and clear.   Doesn't sound like the planned retirement in five years is going to be much fun either on such a low budget.

charis

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Re: Student Loan Forgiveness
« Reply #8 on: December 26, 2020, 01:46:21 PM »
Loan forgiveness is not really worth pursuing at a moderate balance unless you qualify for the 10 year, tax free forgiveness under the PSLF.  It's not more time than a few minutes of effort once or twice year.  Even I, who had a few headaches over the years about it, am glad I did it, but my balance is much higher.

spaniard999

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Re: Student Loan Forgiveness
« Reply #9 on: January 05, 2021, 09:08:01 AM »
This is something I had to deal with personally. My SO has a very big loan (doctor) and she was on the same forgiveness path as the OP.
After some calculations, considering the monthly payment is so low, you will see that the loan ppal just keeps increasing and after 20/30 years it is very very high.

Then pay taxes on that amount....it was 300K more or less.

Long story short, it is worth paying as much as you can as fast as you can.

Just my 2 cents

charis

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Re: Student Loan Forgiveness
« Reply #10 on: January 05, 2021, 09:45:05 AM »
This is something I had to deal with personally. My SO has a very big loan (doctor) and she was on the same forgiveness path as the OP.
After some calculations, considering the monthly payment is so low, you will see that the loan ppal just keeps increasing and after 20/30 years it is very very high.

Then pay taxes on that amount....it was 300K more or less.

Long story short, it is worth paying as much as you can as fast as you can.

Just my 2 cents

Many doctors qualify for PSLF, if you haven't already looked into it. Although many also have private loans that do not qualify.

Log

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Re: Student Loan Forgiveness
« Reply #11 on: January 06, 2021, 10:56:28 AM »
One great thing about making extra payments is you can target them towards your highest interest loans. This doesn't work if you refinanced, but over the course of my two degrees, my interest rates have varied from 3.76% (ha!) to 6.08% (ach!). If you use income-based repayment to reduce your mandatory payments, you can still make extra payments, and just knock out the higher interest loans even faster.

If I pay off my higher interest loans early, then my monthly payments and my amount of money wasted on interest are both dramatically reduced. With lower monthly payments, I'll be able to put more of my savings towards investments, which will outpace the low interest of my remaining loans. If these loans get forgiven before I pay them off, that's just a bonus windfall, not something I'm going to count on.