Loan and Savings - How to

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
mmmd
Posts: 9
Joined: Mon Apr 26, 2010 3:11 pm

Loan and Savings - How to

Postby mmmd » Mon Apr 26, 2010 3:13 pm

I've recently heard that I should take the full amount of loans and not use my savings to cover any of the cost for law school.

So, if I have 20,000 saved, rather than using it and taking out a loan of 40,000, I should instead still take the full 60,000.

Does that make any sense?

03121202698008
Posts: 3002
Joined: Fri Jul 17, 2009 2:07 am

Re: Loan and Savings - How to

Postby 03121202698008 » Mon Apr 26, 2010 3:15 pm

mmmd wrote:I've recently heard that I should take the full amount of loans and not use my savings to cover any of the cost for law school.

So, if I have 20,000 saved, rather than using it and taking out a loan of 40,000, I should instead still take the full 60,000.

Does that make any sense?

I'm not sure why you would want to do that. You're going to be accruing interest on all of that money not to mention paying an origination fee. I'd keep some as an emergency fund and apply the rest to your first years tuition.

mmmd
Posts: 9
Joined: Mon Apr 26, 2010 3:11 pm

Re: Loan and Savings - How to

Postby mmmd » Mon Apr 26, 2010 3:19 pm

what was said to me,

"Loan repayment covers everything. Essentially, if you work federal/state/local government and/or public interest for ten years, you make really small payments for that period of time and your loans are wiped completely clean after ten years. Under income-based repayment, if you work any job that pays less than $80,000 per year, all of your loan repayment is completely tax-deductible. A school like Emory should have both of these programs available to you.

If you hit the jackpot and notch an income above $120k (do not count on this given the economy which is not guaranteed to recover in time for your graduation), you have enough to live a nice lifestyle and make the monthly payments necessary to knock out your loans on the 20-year plan. Take into account the time-value of money, low rates on your loans (I got 7%), and investment at the market trough in time for economic recovery... everything incentivizes taking out the maximum on loans and taking as long as possible to pay them back, regardless of how much money you're making. Plus it's great for your credit to keep your student loans hanging around for awhile."

03121202698008
Posts: 3002
Joined: Fri Jul 17, 2009 2:07 am

Re: Loan and Savings - How to

Postby 03121202698008 » Mon Apr 26, 2010 3:30 pm

mmmd wrote:what was said to me,

"Loan repayment covers everything. Essentially, if you work federal/state/local government and/or public interest for ten years, you make really small payments for that period of time and your loans are wiped completely clean after ten years. Under income-based repayment, if you work any job that pays less than $80,000 per year, all of your loan repayment is completely tax-deductible. A school like Emory should have both of these programs available to you.

If you hit the jackpot and notch an income above $120k (do not count on this given the economy which is not guaranteed to recover in time for your graduation), you have enough to live a nice lifestyle and make the monthly payments necessary to knock out your loans on the 20-year plan. Take into account the time-value of money, low rates on your loans (I got 7%), and investment at the market trough in time for economic recovery... everything incentivizes taking out the maximum on loans and taking as long as possible to pay them back, regardless of how much money you're making. Plus it's great for your credit to keep your student loans hanging around for awhile."


I don't know...maybe. I'm not banking on IBR. Isnt the final payment taxed as income? That's a whole lot of taxable income that last year.

User avatar
Bert
Posts: 458
Joined: Mon Mar 22, 2010 12:37 pm

Re: Loan and Savings - How to

Postby Bert » Mon Apr 26, 2010 3:45 pm

blhoward2 wrote:Isnt the final payment taxed as income? That's a whole lot of taxable income that last year.


I heard a similar thing -- that the "written off" debt under IBR is taxed similarly to "bad debt" on credit cards in that you need to add the amount of "written off" debt onto your taxable income for the year.

mmmd
Posts: 9
Joined: Mon Apr 26, 2010 3:11 pm

Re: Loan and Savings - How to

Postby mmmd » Mon Apr 26, 2010 4:23 pm

without getting bogged down in the semantics of that part, how does the rest of it sound?

User avatar
ladysixmonkey
Posts: 56
Joined: Fri Apr 02, 2010 2:23 pm

Re: Loan and Savings - How to

Postby ladysixmonkey » Mon Apr 26, 2010 6:26 pm

Bert wrote:
blhoward2 wrote:Isnt the final payment taxed as income? That's a whole lot of taxable income that last year.


I heard a similar thing -- that the "written off" debt under IBR is taxed similarly to "bad debt" on credit cards in that you need to add the amount of "written off" debt onto your taxable income for the year.



Yep.

From the gov site:

"Loan Forgiveness

"The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. But the savings can be significant for students who wish to pursue careers in public service. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small."

http://www.finaid.org/loans/ibr.phtml

Besides, the low pay on the govt job will make life very hard if you are living anywhere but the Midwest, Southern states, some areas in the American Southwest or elsewhere most coastal folks don't appreciate. Don't go that govt. job/ loan forgiveness route unless you can't find anything else. It's a good emergency plan Z, but otherwise a bad move. Unless you are one of those "must be a hero/make a difference/save people" types AND you are expecting to inherit a trust fund or marry someone rich after the pay off, then go right ahead. The promise of paying off the debt in 25 years won't really matter when you have to support a family member (e. g. elderly parents, kids, a sick sibling) or pay the light bill and the loan payments are only eating up enough of your money to make life unbearable but not enough to qualify you for a hardship deferral. Sorry to sound negative, just trying to be real here.

Just try to pay as much as can while you attend school. Interest rates are going to increase as the govt eventually gets its financial house in order, which means buh bye incredibly low interest rates on school loans.
Last edited by ladysixmonkey on Mon Apr 26, 2010 6:35 pm, edited 2 times in total.

User avatar
Bert
Posts: 458
Joined: Mon Mar 22, 2010 12:37 pm

Re: Loan and Savings - How to

Postby Bert » Mon Apr 26, 2010 6:30 pm

Thanks for posting that. I don't know why I couldn't find it on the website.

mmmd
Posts: 9
Joined: Mon Apr 26, 2010 3:11 pm

Re: Loan and Savings - How to

Postby mmmd » Mon Apr 26, 2010 7:58 pm

ladysixmonkey wrote:
Bert wrote:
blhoward2 wrote:Isnt the final payment taxed as income? That's a whole lot of taxable income that last year.


I heard a similar thing -- that the "written off" debt under IBR is taxed similarly to "bad debt" on credit cards in that you need to add the amount of "written off" debt onto your taxable income for the year.



Yep.

From the gov site:

"Loan Forgiveness

"The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. But the savings can be significant for students who wish to pursue careers in public service. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small."

http://www.finaid.org/loans/ibr.phtml

Besides, the low pay on the govt job will make life very hard if you are living anywhere but the Midwest, Southern states, some areas in the American Southwest or elsewhere most coastal folks don't appreciate. Don't go that govt. job/ loan forgiveness route unless you can't find anything else. It's a good emergency plan Z, but otherwise a bad move. Unless you are one of those "must be a hero/make a difference/save people" types AND you are expecting to inherit a trust fund or marry someone rich after the pay off, then go right ahead. The promise of paying off the debt in 25 years won't really matter when you have to support a family member (e. g. elderly parents, kids, a sick sibling) or pay the light bill and the loan payments are only eating up enough of your money to make life unbearable but not enough to qualify you for a hardship deferral. Sorry to sound negative, just trying to be real here.

Just try to pay as much as can while you attend school. Interest rates are going to increase as the govt eventually gets its financial house in order, which means buh bye incredibly low interest rates on school loans.


thank you for that. i have a friend that seems to overstate many things... just making sure.

User avatar
ladysixmonkey
Posts: 56
Joined: Fri Apr 02, 2010 2:23 pm

Re: Loan and Savings - How to

Postby ladysixmonkey » Tue Apr 27, 2010 10:02 am

Glad to be helpful.

The other thing to keep in mind is that the typical repayment schedule is *ten years,* not 25, so you are really looking at payments of at least $1000/month on a $100,000 loan and $2000/month on a $200,000 loan. If you take 60k/yr for 3 years, then you are looking at some very painful payments regardless. Let's say you can only land a govt job @ 60k/yr, then you would get a hardship deferral payment equal to 10% of your salary. This will still make life very painful, especially if you are making a lot of first time purchases (e. g. car, appliances, various insurance policies, deposits, media/communications costs if govt doesn't cover it, suits & professional apparel, etc.) and you live somewhere with an insane COL and punishing state, county and city tax rates (ahem, NY). If you are single, you really won't have much in the way of disposable income after all that, even if you are a frugal person.


If you have a kid, special needs sibling you care for or an elderly parent, forget about the govt. job. It will seem like you have all the free time in the world and can't really get fired for slacking, but you won't have the money it takes to pay for the care while you are at work. The govt job gives you sick time, comp time, fmla time, flex scheduling, a pension and benefits like that, but free time won't pay those bills. I suppose you could get another job on your days off (which some govt people have been known to do), but with a job as an atty, I just don't know that you'll ever really be able to take those days off.

Good luck with the money situation. I hope you find a solution that works for you. :)

User avatar
Holly Golightly
Posts: 4618
Joined: Wed Jan 13, 2010 10:30 am

Re: Loan and Savings - How to

Postby Holly Golightly » Tue Apr 27, 2010 10:11 am

lol @ this thread

Geist13
Posts: 739
Joined: Sat Oct 10, 2009 3:21 pm

Re: Loan and Savings - How to

Postby Geist13 » Tue Apr 27, 2010 10:12 am

ladysixmonkey wrote:
Bert wrote:
blhoward2 wrote:Isnt the final payment taxed as income? That's a whole lot of taxable income that last year.


I heard a similar thing -- that the "written off" debt under IBR is taxed similarly to "bad debt" on credit cards in that you need to add the amount of "written off" debt onto your taxable income for the year.



Yep.

From the gov site:

"Loan Forgiveness

"The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. But the savings can be significant for students who wish to pursue careers in public service. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small."

http://www.finaid.org/loans/ibr.phtml

Besides, the low pay on the govt job will make life very hard if you are living anywhere but the Midwest, Southern states, some areas in the American Southwest or elsewhere most coastal folks don't appreciate. Don't go that govt. job/ loan forgiveness route unless you can't find anything else. It's a good emergency plan Z, but otherwise a bad move. Unless you are one of those "must be a hero/make a difference/save people" types AND you are expecting to inherit a trust fund or marry someone rich after the pay off, then go right ahead. The promise of paying off the debt in 25 years won't really matter when you have to support a family member (e. g. elderly parents, kids, a sick sibling) or pay the light bill and the loan payments are only eating up enough of your money to make life unbearable but not enough to qualify you for a hardship deferral. Sorry to sound negative, just trying to be real here.

Just try to pay as much as can while you attend school. Interest rates are going to increase as the govt eventually gets its financial house in order, which means buh bye incredibly low interest rates on school loans.


No. If you have a gov't or PI job, the amount forgiven is non-taxable. It only counts as taxable income if you use IBR when your job does not qualify under the CCRAA, which both government and 501(c)(3) PI jobs do.

User avatar
vanwinkle
Posts: 9740
Joined: Sun Dec 21, 2008 3:02 am

Re: Loan and Savings - How to

Postby vanwinkle » Tue Apr 27, 2010 10:25 am

mmmd wrote:I've recently heard that I should take the full amount of loans and not use my savings to cover any of the cost for law school.

So, if I have 20,000 saved, rather than using it and taking out a loan of 40,000, I should instead still take the full 60,000.

Does that make any sense?

Having savings is a valuable thing. I'd pay the interest for 3 years just for the sake of having an extra $20K in emergency funds, especially in case I didn't find work immediately after I graduated. That's a lot of money to have on hand as a backup (and to use to pay summer living expenses since your first and probably second summer will involve unpaid work ITE).

User avatar
Kiersten1985
Posts: 784
Joined: Fri Jul 31, 2009 3:36 pm

Re: Loan and Savings - How to

Postby Kiersten1985 » Tue Apr 27, 2010 10:25 am

You have to also remember that $20k in loans is going to be much more expensive in the end with all of that interest. You can calculate it at http://www.finaid.org. You might be able to comfortably make the payments, but it will still cost more by the time you finish paying the loan off.

+1 to keeping enough around for an emergency fund though.

User avatar
John J. Rambo, Esq.
Posts: 241
Joined: Thu Nov 12, 2009 1:04 am

Re: Loan and Savings - How to

Postby John J. Rambo, Esq. » Tue Apr 27, 2010 10:29 am

Geist13 wrote:
ladysixmonkey wrote:
Bert wrote:
blhoward2 wrote:Isnt the final payment taxed as income? That's a whole lot of taxable income that last year.


I heard a similar thing -- that the "written off" debt under IBR is taxed similarly to "bad debt" on credit cards in that you need to add the amount of "written off" debt onto your taxable income for the year.



Yep.

From the gov site:

"Loan Forgiveness

"The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. But the savings can be significant for students who wish to pursue careers in public service. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small."

http://www.finaid.org/loans/ibr.phtml

Besides, the low pay on the govt job will make life very hard if you are living anywhere but the Midwest, Southern states, some areas in the American Southwest or elsewhere most coastal folks don't appreciate. Don't go that govt. job/ loan forgiveness route unless you can't find anything else. It's a good emergency plan Z, but otherwise a bad move. Unless you are one of those "must be a hero/make a difference/save people" types AND you are expecting to inherit a trust fund or marry someone rich after the pay off, then go right ahead. The promise of paying off the debt in 25 years won't really matter when you have to support a family member (e. g. elderly parents, kids, a sick sibling) or pay the light bill and the loan payments are only eating up enough of your money to make life unbearable but not enough to qualify you for a hardship deferral. Sorry to sound negative, just trying to be real here.

Just try to pay as much as can while you attend school. Interest rates are going to increase as the govt eventually gets its financial house in order, which means buh bye incredibly low interest rates on school loans.


No. If you have a gov't or PI job, the amount forgiven is non-taxable. It only counts as taxable income if you use IBR when your job does not qualify under the CCRAA, which both government and 501(c)(3) PI jobs do.


+1 From ibrinfo.org:

The U.S. Department of the Treasury determined that debt forgiven through PSLF is not considered taxable income under current law. That means that when you qualify for PSLF, you won't get slapped with a huge tax bill.

Unfortunately, the same good news doesn't extend to debt forgiven through IBR. In response, Congressman Sandy Levin (D-MI) is leading a bipartisan effort to ensure that borrowers who qualify for loan forgiveness through IBR (and Income Contingent Repayment) get the same treatment. Responsible borrowers with modest incomes shouldn't have to pay potentially crippling taxes on forgiven student loans. We are hopeful that this issue will be resolved before any borrowers qualify for forgiveness through IBR. We'll continue to work on this issue and keep you informed. Urge your representatives to support H.R. 2492. Learn more about the bill.

User avatar
as stars burn
Posts: 525
Joined: Fri Mar 06, 2009 9:04 pm

Re: Loan and Savings - How to

Postby as stars burn » Tue Apr 27, 2010 11:00 am

I definitely don't agree with taking out more loan money than you need. I was always told--only borrow what you need. It's honestly better to use savings (obviously save a couple $1,000 for an emergency fund) than take out loans that accrue interest and that you'll have to pay back + interest in a few years. It just doesn't make sense. I'm engaged to be married in February 2011 so I'm not alone as far as paying for school, but I highly consider using some of your savings. You can always re-evaluate year-to-year as well. Law school is a risk and an investment. I worked hard to save about $15k for law school and intend to use it to make the loans a little more manageable.

mmmd
Posts: 9
Joined: Mon Apr 26, 2010 3:11 pm

Re: Loan and Savings - How to

Postby mmmd » Tue Apr 27, 2010 11:03 am

much obliged to all who helped.

i found what he said to be shocking (at best...) and just wanted to verify.

User avatar
vanwinkle
Posts: 9740
Joined: Sun Dec 21, 2008 3:02 am

Re: Loan and Savings - How to

Postby vanwinkle » Tue Apr 27, 2010 11:22 am

mmmd wrote:much obliged to all who helped.

i found what he said to be shocking (at best...) and just wanted to verify.

It's really a question of risk. If you're comfortable not having a significant amount of savings on hand, you can save a good bit of money by paying part of your expenses in cash instead of borrowing. However, keep in mind that student loans do have a (slightly) lower interest rate than unsecured loans, and you have to go through the process of getting those loans if something comes up.

You can always keep the money for 3 years and then use it to pay off a chunk of your loans when you graduate and know you have employment. That's probably the safe trade-off; you have the money around as a safety net while you're a poor college student and then you obliterate a chunk of debt right away when you don't need it anymore.

User avatar
as stars burn
Posts: 525
Joined: Fri Mar 06, 2009 9:04 pm

Re: Loan and Savings - How to

Postby as stars burn » Tue Apr 27, 2010 11:41 am

mmmd wrote:
You can always keep the money for 3 years and then use it to pay off a chunk of your loans when you graduate and know you have employment. That's probably the safe trade-off; you have the money around as a safety net while you're a poor college student and then you obliterate a chunk of debt right away when you don't need it anymore.


That's not a bad idea either. I'm still using my savings before taking out loans...I just can't justify it.

User avatar
Bert
Posts: 458
Joined: Mon Mar 22, 2010 12:37 pm

Re: Loan and Savings - How to

Postby Bert » Tue Apr 27, 2010 11:47 am

as stars burn wrote:
mmmd wrote:
You can always keep the money for 3 years and then use it to pay off a chunk of your loans when you graduate and know you have employment. That's probably the safe trade-off; you have the money around as a safety net while you're a poor college student and then you obliterate a chunk of debt right away when you don't need it anymore.


That's not a bad idea either. I'm still using my savings before taking out loans...I just can't justify it.



+1 on that. I am using every bit of savings I have before touching the gradPLUS loans.

User avatar
sanpiero
Posts: 574
Joined: Sat Feb 14, 2009 8:09 am

Re: Loan and Savings - How to

Postby sanpiero » Tue Apr 27, 2010 12:07 pm

I would use my savings to offset any GradPlus loan I had to take out @ 8.5%. You should be getting up to $20,500 in Stafford loans @ 6.8%. If so, I'd borrow the max Stafford amount and use $15k of the $20k in savings to offset any GradPlus loans I had to take out.

The idea is that you should borrow, instead of using savings, when the interest rate is lower than you can earn after-tax in the market. So, since Stafford is 6.8%, you would have to earn ~8+% (depending on your tax bracket) on your savings to justify borrowing at 6.8%. The GradPlus loan, OTOH, is likely borrowed at a rate higher than any after-tax return you'd be able to generate in the market. So, it's almost always best to use savings to offset GradPlus loans. Stafford loans are a closer call; I decided to use them because they will give me a tax deduction now and in the future and because they carry a low rate. hth

EDIT: this doesn't take into account the negative effect of interest that accrues during LS. Such interest makes using savings instead of loans even more interest-minimizing. For the simplicity's sake, this also doesn't take into account the tax benefit of incremental federal student loans (interest deduction).

User avatar
Stringer Bell
Posts: 1920
Joined: Wed Oct 21, 2009 9:43 pm

Re: Loan and Savings - How to

Postby Stringer Bell » Tue Apr 27, 2010 12:21 pm

Regarding the loan amount discharged being taxed, I'm pretty sure that only applies to the 25 year private sector plan. If you do the 10 year public service route (DA, PD, Teacher, Mailman), it is completely forgiven with no tax liability.

If someone has a pretty solid amount saved, they may not want to use any of it for tuition the first year. You could see if 1.) you have the grades for biglaw and 2.) if you want to go that route. If the answer to both questions is yes, then you can start using savings for 2L. If you decide you want to use public service IBR because you want to work in a PD or DA office, or if you decide you might wind up as a mailman and discharge your debt because you don't have the grades for a good legal job then you can continue taking out loans for all of your expenses since it will be forgiven anyways and you will still have savings.

Cashflow is another consideration. If you decide you want to (or have to) go solo practice, you may need some start up money.
Last edited by Stringer Bell on Tue Apr 27, 2010 12:39 pm, edited 3 times in total.

mmmd
Posts: 9
Joined: Mon Apr 26, 2010 3:11 pm

Re: Loan and Savings - How to

Postby mmmd » Tue Apr 27, 2010 12:23 pm

so you're the mf'er who took the name stringer bell on these forums.

User avatar
ladysixmonkey
Posts: 56
Joined: Fri Apr 02, 2010 2:23 pm

Re: Loan and Savings - How to

Postby ladysixmonkey » Tue Apr 27, 2010 5:19 pm

You have to work in a qualified public servant position and meet *all* of the conditions in the PSFLP to have the loans forgiven. How likely is it that you would work full-time in a qualified organization in a qualified position at least ten years *and* have made all 120 payments while employed in that capacity? You would have to get into that position before the first payment is due and then make all remaining payments on time for the following ten years to qualify, as ten years is typical for student loan amortization schedules. If you are on an IBR plan, however, then you could more easily accomplish making at least 120 payments while employed in a qualified organization.

IBR forgiveness is taxable. PSLF is not, as long as you work for a qualified non-profit & etc. Not all government or non-profit jobs qualify. Just sayin'...

See the entry. "The letter specifies that the following types of student loan forgiveness are not taxable:

* Public Service Loan Forgiveness (Section 455(m)(2) of the Higher Education Act of 1965)
* Teacher Loan Forgiveness (Sections 460 and 428J of the Higher Education Act of 1965)

On the other hand, the letter also specifies that the following other types of student loan discharges do represent taxable income:

* Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965)
* Closed School, False Certification and Unpaid Refund Discharge (Section 437(c) of the Higher Education Act of 1965)
* Closed School Discharge (Section 464(g) of the Higher Education Act of 1965)
* Income-Contingent Repayment (Section 455(e) of the Higher Education Act of 1965)
* Income-Based Repayment (Section 493C(b)(7) of the Higher Education Act of 1965) "

Here's the entry on forgiveness:

"The borrower must have made 120 separate monthly payments beginning after October 1, 2007 on the Direct Loan
Program loans for which forgiveness is requested. Earlier payments do not count toward meeting this requirement.
Each of the 120 monthly payments must be made for the full scheduled installment amount within 15 days of the due date"

Stringer's on point about the cash flow and student loans being cheap for start up capital.

edited to say: Oh, yeah, didn't want to misrepresent the letter. It also said qualified public service combined with IBR would result in nontaxable status of the forgiven balance. :)
Last edited by ladysixmonkey on Wed Apr 28, 2010 7:45 pm, edited 1 time in total.

User avatar
im_blue
Posts: 3276
Joined: Sun Apr 12, 2009 3:53 am

Re: Loan and Savings - How to

Postby im_blue » Tue Apr 27, 2010 7:10 pm

as stars burn wrote:I definitely don't agree with taking out more loan money than you need. I was always told--only borrow what you need. It's honestly better to use savings (obviously save a couple $1,000 for an emergency fund) than take out loans that accrue interest and that you'll have to pay back + interest in a few years. It just doesn't make sense. I'm engaged to be married in February 2011 so I'm not alone as far as paying for school, but I highly consider using some of your savings. You can always re-evaluate year-to-year as well. Law school is a risk and an investment. I worked hard to save about $15k for law school and intend to use it to make the loans a little more manageable.

A couple thousand for emergency funds? If you somehow get screwed out of a job after graduation (not unlikely ITE), you're going to need at least 10-20k to tide you over.




Return to “Financial Aid”

Who is online

Users browsing this forum: No registered users and 2 guests