What would you do? Saving for $300k student loan forgiveness

[MrsGoldenPiggy]

My husband and I are both PAs and met in PA school. We were debt free until grad school, which was about $62k/year for three years. This left us with $185k taken out in student loans, at an interest rate averaging 7.5%. With the snowball effect of this interest rate, we're now both at around $250k in student loans 4 years later. Our initial payments would have been about $2300/month each and we could not afford that for 10 years (plus it didn't make financial sense), so we went on Income Based Repayment which is approximately $600/month for 15-20 years depending on the loan. After this the balance will be forgiven and the forgiven amount will be counted as taxable income for us that year. I am anticipating we will have a balance around $300k each as newer programs under Obama have stopped interest accumulation on some loans. It's quite a hole and we would've done it differently if we'd realized, but there's no help in coulda-shoulda-woulda! IBR has been amazing because it's allowed us things we otherwise couldn't have afforded, like a house, a 401k, and a family sometime soon.

Ok here are my financial details:
-Savings rate: about $20k/year including retirement accounts
-Building our first house this year, planning for kids next year
-$40k in 401k
-$11k in Roth IRA
-$8k in taxable brokerage
-HSA option in 2017
-Husband's details are similar, he's saved about $10k more

So! We are saving/investing for our "tax bomb" now, which I estimate will be around $85k because we are taxed at about 35%. The forgiveness will be spread over 3 years because the loans were issued over 3 years.

-What type of accounts would you put this money in? Are there any more tax efficient accounts than a regular brokerage that I could put it in?
-If I purchased a rental property and put the savings towards that property, could I then take out a loan against the property to pay for the tax bomb?
-If I stick with an investment account, what would your choices of investment be? I'm thinking of going with the basics- index funds, maybe an REIT, stuff that is somewhat predictable but will also give me some growth.

[specialkayme]

I ran the numbers on a significantly similar situation I'm in, and here's what I determined.

1. Keep in mind that inflation is working for you. Your loan forgiveness may result in $85,000 of taxes, but that's in 15 years. That's equal to ~$55k in today's dollars (assuming 3% inflation). In the meantime your income increases. So if you are being paid $80k per year now, and your income adjusts only for inflation, you should be making $112k in 15 years. Makes things much more manageable.

2. If you get pushed against the wall, you can always do an installment payment on the taxes you owe to the IRS (and state). You can typically stretch them out over 5 years. You'll pay interest on it, but right now it's 4%. Not ideal, but better than losing sleep.

3. You can purchase real estate now, let the increase in the value over the next 15 years grow, then take an equity loan out to pay off your taxes. You won't pay taxes on the equity loan proceeds. Although you will pay taxes whenever you sell the home. That's probably the best situation, assuming you are comfortable with the risk that the home may decrease in value moving forward.

4. Second best option, and probably a good back up option, is to plan on having enough in a betterment account in 15 years to pay it off.

5. Third, you could continue to contribute to a Roth IRA, then take out the principal (tax free) when you need to pay your taxes.

6. Fourth, and probably the worst of the three but still a possible option, would be to take a loan out on your 401(k) or an early distribution to pay your taxes.

[NoStacheOhio]

Could you go work for a non-profit health system? PSLF is 15 years and non-taxable.

[Northwestie]

Is there a possibility to work in an underserved area in the US for some loan forgiveness, similar to rural doctors program?

[specialkayme]

Could you go work for a non-profit health system?

Typically the reduction in pay associated with such a move doesn't justify it.

For example, for me (attorney) private sector average income in my area is $120k per year. Non-profit average income is $59k. Those are averages, but you get the idea. The difference over a 15 year time period would be $915k. More than pays for the taxes.

PA work may not have as much of a difference though.

[NoStacheOhio]

Could you go work for a non-profit health system?

Typically the reduction in pay associated with such a move doesn't justify it.

For example, for me (attorney) private sector average income in my area is $120k per year. Non-profit average income is $59k. Those are averages, but you get the idea. The difference over a 15 year time period would be $915k. More than pays for the taxes.

PA work may not have as much of a difference though.

I work at a non-profit health system with an $8b endowment and over 40k employees. Healthcare is different.

[MrsGoldenPiggy]

Is there a possibility to work in an underserved area in the US for some loan forgiveness, similar to rural doctors program?

I ran the numbers and it doesn't work without a huge sacrifice. I've worked in an underserved clinic and it was torture to be honest, the pay was $30k less, and often those opportunities are in rural areas. I love my job currently and to be honest it wouldn't make financial sense to pursue PSLF.

[MrsGoldenPiggy]

I ran the numbers on a significantly similar situation I'm in, and here's what I determined.

1. Keep in mind that inflation is working for you. Your loan forgiveness may result in $85,000 of taxes, but that's in 15 years. That's equal to ~$55k in today's dollars (assuming 3% inflation). In the meantime your income increases. So if you are being paid $80k per year now, and your income adjusts only for inflation, you should be making $112k in 15 years. Makes things much more manageable.

2. If you get pushed against the wall, you can always do an installment payment on the taxes you owe to the IRS (and state). You can typically stretch them out over 5 years. You'll pay interest on it, but right now it's 4%. Not ideal, but better than losing sleep.

3. You can purchase real estate now, let the increase in the value over the next 15 years grow, then take an equity loan out to pay off your taxes. You won't pay taxes on the equity loan proceeds. Although you will pay taxes whenever you sell the home. That's probably the best situation, assuming you are comfortable with the risk that the home may decrease in value moving forward.

4. Second best option, and probably a good back up option, is to plan on having enough in a betterment account in 15 years to pay it off.

5. Third, you could continue to contribute to a Roth IRA, then take out the principal (tax free) when you need to pay your taxes.

6. Fourth, and probably the worst of the three but still a possible option, would be to take a loan out on your 401(k) or an early distribution to pay your taxes.

What are your thoughts about a taxable brokerage account for investing the money versus real estate? Agree on inflation, that coupled with the power of compounding money we get to save now really sold me on IBR. I won't ever see the money from those loan payments again, might as well!

[Iplawyer]

First - if you have an income tax rate of 35% per year - I cannot understand why you'd be on IBR.  Second - if your income does go up that so much that you will be there - so will your payments and so your total to be forgiven won't be so big.  Third - well - I guess as a humongous tax payer I won't even go there except to say when loans are forgiven the US tax payer pays for it.  They don't just vanish.

[NoStacheOhio]

First - if you have an income tax rate of 35% per year - I cannot understand why you'd be on IBR.  Second - if your income does go up that so much that you will be there - so will your payments and so your total to be forgiven won't be so big.  Third - well - I guess as a humongous tax payer I won't even go there except to say when loans are forgiven the US tax payer pays for it.  They don't just vanish.

Direct Loans are net positive according to the GAO.

[specialkayme]

What are your thoughts about a taxable brokerage account for investing the money versus real estate?

It depends on the level of risk you're willing to take. To me, I decided to do a combination of the two. I estimated how much in taxes I'd have to pay when the loans are forgiven, and then worked backwards to determine how much money I'd need today if I got an annual return of 8% (market average). To me, it didn't end up being as much money as I thought it would be, so I saved until I had it and put it into a taxable brokerage account. It doubles as my "emergency" funds. I'll have to pay LTCG on it when I take it out to pay the taxes, but I've added a little bit of "fluff" to the numbers to account for it.

My plan is to now combined pay down on my mortgage and save for a rental property. I plan on having enough equity in the rental property to take out an equity loan to pay the taxes. If not, I'll take out an equity loan on my home (assuming interest rates don't go through the roof by then). If not, I'll pay it from the "emergency" fund and take the LTGC hit.

Both are risky, and neither guarantees that you'll have the money in the future to pay the taxes, as it's from investments, but diversifying between RE and the market is safer than doing one.

You also may want to look more into the Roth IRA option, as you can take out the principal tax free. I file taxes MFS, to keep my IBR payments down, so Roth IRAs aren't an option for me. YMMV.

First - if you have an income tax rate of 35% per year - I cannot understand why you'd be on IBR. 

With all due respect, you don't understand how IBR works.

[Iplawyer]

With all due respect - I do.  I just helped a teacher set this up. You have to have over $413K of taxable income to be in the 35% rate.  150% of the poverty level for a family of 2 is about $24K  413-24 is $389K of income at the capped rate of 15% - or $58K of payments a year.  So they aren't at a 35% tax rate if their payments are a total of $1.2K per month or $14.4K per year. I can calculate their taxable income at about $120K-  per year and that is going to give a max tax rate of 25% per year.  If their tax rate goes up to 35% per year - their annual payments will as well - as I've already pointed out  - at $58K per year. So if they do get to the 35% tax rate - they will be making much larger payments on their loans and may pay them off before the forgiveness period.

[therethere]

My husband and I started with more loans than you before student loan forgiveness even existed. No we are not doctors, lawyers, or any of the very high paying professions. Why not just pay the damn things off... I mean you can obviously afford to (judging by tax bracket) but are trying to use the rules to your advantage. Sorry I just don't get the warm and fuzzies with people who actually have the income to pay off the loans. The original agreement of a LOAN is that you will pay it back. These programs are intended for individuals who cannot. You say you cannot but really you are just prioritizing other stuff in your life so you can have everything before you even fully check off the first thing you wanted (a degree).

Sorry not sorry. Student loan forgiveness for people who actually earn the salaries to pay off the loans is just poor taste in my opinion. Yes you technically you are allowed but is it truly the right answer? You have to deal with this hanging on you for 10-20  years. Pay off the damn things. What if in 5 years you want them off your neck but you can't because of the "sunk costs" of not paying them down early and the balance has skyrocketed. It just seems short sighted.

[Iplawyer]

My husband and I started with more loans than you before student loan forgiveness even existed. No we are not doctors, lawyers, or any of the very high paying professions. Why not just pay the damn things off... I mean you can obviously afford to (judging by tax bracket) but are trying to use the rules to your advantage. Sorry I just don't get the warm and fuzzies with people who actually have the income to pay off the loans. The original agreement of a LOAN is that you will pay it back. These programs are intended for individuals who cannot. You say you cannot but really you are just prioritizing other stuff in your life so you can have everything before you even fully check off the first thing you wanted (a degree).

Sorry not sorry. Student loan forgiveness for people who actually earn the salaries to pay off the loans is just poor taste in my opinion. Yes you technically you are allowed but is it truly the right answer? You have to deal with this hanging on you for 10-20  years. Pay off the damn things. What if in 5 years you want them off your neck but you can't because of the "sunk costs" of not paying them down early and the balance has skyrocketed. It just seems short sighted.

Exactly.  Except their taxable income is not in the 35% tax range or they would not even have qualified for IBR in the first place since their standard yearly payments  would have been less than 15% of their income over 150% of he poverty level for a family of 2.  And other things are going on here - you can't even borrow $185K in Federal loans:
https://www.edvisors.com/college-loans/terms/loan-limits/

[specialkayme]

MrsGoldenPiggy - I'm so sorry this thread has degraded to the point of individuals expressing their moral and political views on you and judging you in the process, rather than trying to help you answer the questions you asked.

So if they do get to the 35% tax rate - they will be making much larger payments on their loans and may pay them off before the forgiveness period.

Except your loan repayment structure is capped at the original 10 year repayment note. It usually takes most professionals more than 15 years to make it to the 35% tax bracket. Which means no, they will not pay them off before the forgiveness period.

Why not just pay the damn things off... I mean you can obviously afford to (judging by tax bracket) but are trying to use the rules to your advantage. Sorry I just don't get the warm and fuzzies with people who actually have the income to pay off the loans.

And do you get mad at people that take tax deductions for interest payments on 2nd mortgages? How about those that take advantage of government grants or subsidies?

If you don't like IBR, tell your senator. Don't belittle the people that participate in the program because it's there.

[Proud Foot]

Are you sure all of your loans are eligible for loan forgiveness? I don't know the requirements on the non-federal loans but as ddmesser pointed out, the limit for federal loans are a lot lower than your total loan amounts.  Also, have you actually run the numbers on your loans?  How much will you end up paying in payments & tax for the loans to be forgiven when compared to if you were to pay at the original rate? I'm not sure where you live but from your posts in this thread I would assume it is not a rural area and you should be able to get market rate.  For reference, the national median is around $100k for a PA.

Also, what PA school did you go to that it cost that much?  My wife is going to be applying to PA school this coming summer and the most expensive one we have seen was around $100k for the full program.

[NoStacheOhio]

Are you sure all of your loans are eligible for loan forgiveness? I don't know the requirements on the non-federal loans but as ddmesser pointed out, the limit for federal loans are a lot lower than your total loan amounts.  Also, have you actually run the numbers on your loans?  How much will you end up paying in payments & tax for the loans to be forgiven when compared to if you were to pay at the original rate? I'm not sure where you live but from your posts in this thread I would assume it is not a rural area and you should be able to get market rate.  For reference, the national median is around $100k for a PA.

Also, what PA school did you go to that it cost that much?  My wife is going to be applying to PA school this coming summer and the most expensive one we have seen was around $100k for the full program.

Those limits don't apply to post-baccalaureate schooling.

[MrsGoldenPiggy]

You have to have over $413K of taxable income to be in the 35% rate.

It's 35% combined federal and state. I pay 28% federal tax rate and I'd have to make triple my current salary to no longer qualify for IBR, which won't happen as a PA. By the way, I will have more than paid my original debt by the time I reach forgiveness.

[Proud Foot]

Are you sure all of your loans are eligible for loan forgiveness? I don't know the requirements on the non-federal loans but as ddmesser pointed out, the limit for federal loans are a lot lower than your total loan amounts.  Also, have you actually run the numbers on your loans?  How much will you end up paying in payments & tax for the loans to be forgiven when compared to if you were to pay at the original rate? I'm not sure where you live but from your posts in this thread I would assume it is not a rural area and you should be able to get market rate.  For reference, the national median is around $100k for a PA.

Also, what PA school did you go to that it cost that much?  My wife is going to be applying to PA school this coming summer and the most expensive one we have seen was around $100k for the full program.

Those limits don't apply to post-baccalaureate schooling.

True,  I was not looking at the PLUS loans when making my post.  The Direct Loans do have a limit.

[MrsGoldenPiggy]

Well this devolved a bit! It's ok, it's hard to judge without all the information. I make $100k per year, just to make things easier on everyone wondering what my salary is. My federal tax rate is 28% and my state tax rate is 6%. If I had originally paid my loans on the 10 year plan I would have taken home an after tax salary of $26,000 per year which is pretty tight for 10 years. I finished school in my late 20s and wanted to start a family, buy a house, and save for retirement so I chose IBR. Once I complete IBR, I will have completely repaid the amount of my initial loans and then some (around $260k on initial loans of $185k). If I chose to switch to the 10 year plan now, my payments would be over $4000, which means I'd be left with $600/month. Just not possible. I get it, I made a bad choice in school. I got a great education and met my husband but I will be the first to tell anyone not to spend so much.

So! I appreciate the comments about what my options are. Please post if you have any suggestions that haven't been mentioned!

[therethere]

Okay I came off as a downer. But I don't want to encourage people to take loan forgiveness if they don't have to. Its just a poor precedent to start.

Your best bet is to:
(1) max out 401k's, HSA's, and any tax advantaged accounts to lower your AGI as much as possible. This also reduces your payments.
(2) Refinance your loans at a lower rate with companies that would still allow older payments to count towards forgiveness payments.
(3) Add the remainder to a brokerage account preferably the remainder of what would be the due payment exempting IBR.
(4) Live like you still owe full payments on the loans (not just IBR payments) so there is no more lifestyle inflation.

ReadySetMillionaire is living this strategy now. So his older posts would be good to refer to. He's done a very good job on the math also. If you are trying to use student loan forgiveness to your advantage you really need some year by year spreadsheets to prove the advantage in my opinion, including any changes in status such as married filing joint and raises year by year.

For the record, I'm not a very moral person. But after 10 years of having huge student debt hanging over my shoulders I certainly understand the weight that's there. While it sounds like I'm trying to be morally perfect it is more of an emotional argument. It is pretty stressful to know that there is a weight holding you back forever reminding you of costly agreement you made years back. There are a crap ton of things that can happen in 10-20 years that can derail whatever perfect plan you come up with.

[KittyFooFoo]