Would using PAYE like this make sense?

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slawww
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Would using PAYE like this make sense?

Postby slawww » Mon Apr 22, 2013 11:58 am

So this is my plan if I end up getting a low-ish paying job relative to debt. Also, maybe people with money in the bank could utilize something like this.

I'm very lucky in that my parents will be helping me out significantly, and by the time i graduate from law school my parents will have a law-school fund of 100k. This was my dad's idea of how to use PAYE. Assuming I have a low salary relative to debt, under PAYE I'd end up paying like 6k or so yearly. The plan is to have the 100k in an investment fund, and assuming it makes 6% per year (which I think is pretty conservative) use that to pay down the debt, and after 20 years and the remaining debt is forgiven I'll still have the orginal 100k & can give it back to my parents. I have some personal savings, so the first year's payments would be made solely by me as the fund makes money.

Has anyone tried anything like this?

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Elston Gunn
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Re: Would using PAYE like this make sense?

Postby Elston Gunn » Mon Apr 22, 2013 12:00 pm

slawww wrote:So this is my plan if I end up getting a low-ish paying job relative to debt. Also, maybe people with money in the bank could utilize something like this.

I'm very lucky in that my parents will be helping me out significantly, and by the time i graduate from law school my parents will have a law-school fund of 100k. This was my dad's idea of how to use PAYE. Assuming I have a low salary relative to debt, under PAYE I'd end up paying like 6k or so yearly. The plan is to have the 100k in an investment fund, and assuming it makes 6% per year (which I think is pretty conservative) use that to pay down the debt, and after 20 years and the remaining debt is forgiven I'll still have the orginal 100k & can give it back to my parents. I have some personal savings, so the first year's payments would be made solely by me as the fund makes money.

Has anyone tried anything like this?

Surely PAYE doesn't allow you have $100K in assets lying around...

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slawww
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Re: Would using PAYE like this make sense?

Postby slawww » Mon Apr 22, 2013 12:06 pm

Elston Gunn wrote:
slawww wrote:So this is my plan if I end up getting a low-ish paying job relative to debt. Also, maybe people with money in the bank could utilize something like this.

I'm very lucky in that my parents will be helping me out significantly, and by the time i graduate from law school my parents will have a law-school fund of 100k. This was my dad's idea of how to use PAYE. Assuming I have a low salary relative to debt, under PAYE I'd end up paying like 6k or so yearly. The plan is to have the 100k in an investment fund, and assuming it makes 6% per year (which I think is pretty conservative) use that to pay down the debt, and after 20 years and the remaining debt is forgiven I'll still have the orginal 100k & can give it back to my parents. I have some personal savings, so the first year's payments would be made solely by me as the fund makes money.

Has anyone tried anything like this?

Surely PAYE doesn't allow you have $100K in assets lying around...


I guess the fund would still stay in my dad's name and he'd give me a check or cash every month.

hds2388
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Re: Would using PAYE like this make sense?

Postby hds2388 » Mon Apr 22, 2013 12:16 pm

I mean, it seems reasonable. The only issues I see with it are as follows:

(1) taxes: you might make 6%, but remember he (your dad) has to pay income tax on that. So, it will be (depending on his other income) less that 6%, depending on whether its capital gains and all.
(2) taxes: make sure it's a gift (and it likely will be, because its your dad -- just a thought).
(3) taxes: you likely will see your debt grow over that time; meaning you'll owe in excess of the amount you owe when you graduate when your debt is forgiven. The tax-bomb for PAYE has yet to be resolved. Obama has recently proposed eliminating it; just depends on what happens going forward.

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Bronx Bum
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Re: Would using PAYE like this make sense?

Postby Bronx Bum » Mon Apr 22, 2013 12:21 pm

hds2388 wrote:I mean, it seems reasonable. The only issues I see with it are as follows:

(1) taxes: you might make 6%, but remember he (your dad) has to pay income tax on that. So, it will be (depending on his other income) less that 6%, depending on whether its capital gains and all.
(2) taxes: make sure it's a gift (and it likely will be, because its your dad -- just a thought).
(3) taxes: you likely will see your debt grow over that time; meaning you'll owe in excess of the amount you owe when you graduate when your debt is forgiven. The tax-bomb for PAYE has yet to be resolved. Obama has recently proposed eliminating it; just depends on what happens going forward.


OBAMA is already working on removing the tax liability.

http://bucks.blogs.nytimes.com/2013/04/ ... dent-debt/

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Bronx Bum
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Re: Would using PAYE like this make sense?

Postby Bronx Bum » Mon Apr 22, 2013 12:24 pm

Bronx Bum wrote:
hds2388 wrote:I mean, it seems reasonable. The only issues I see with it are as follows:

(1) taxes: you might make 6%, but remember he (your dad) has to pay income tax on that. So, it will be (depending on his other income) less that 6%, depending on whether its capital gains and all.
(2) taxes: make sure it's a gift (and it likely will be, because its your dad -- just a thought).
(3) taxes: you likely will see your debt grow over that time; meaning you'll owe in excess of the amount you owe when you graduate when your debt is forgiven. The tax-bomb for PAYE has yet to be resolved. Obama has recently proposed eliminating it; just depends on what happens going forward.


OBAMA is already working on removing the tax liability.

http://bucks.blogs.nytimes.com/2013/04/ ... dent-debt/


Sorry, didn't see you mention it at first. Here's the link anyway.

Big Dog
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Re: Would using PAYE like this make sense?

Postby Big Dog » Mon Apr 22, 2013 12:32 pm

the bigger issue is that the debt will be compounding for 20 years, which will then affect your ability to buy a house and car. In other words, it will hang over you (and your spouse?) for two decades.

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Elston Gunn
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Re: Would using PAYE like this make sense?

Postby Elston Gunn » Mon Apr 22, 2013 1:02 pm

Bronx Bum wrote:
Bronx Bum wrote:
hds2388 wrote:I mean, it seems reasonable. The only issues I see with it are as follows:

(1) taxes: you might make 6%, but remember he (your dad) has to pay income tax on that. So, it will be (depending on his other income) less that 6%, depending on whether its capital gains and all.
(2) taxes: make sure it's a gift (and it likely will be, because its your dad -- just a thought).
(3) taxes: you likely will see your debt grow over that time; meaning you'll owe in excess of the amount you owe when you graduate when your debt is forgiven. The tax-bomb for PAYE has yet to be resolved. Obama has recently proposed eliminating it; just depends on what happens going forward.


OBAMA is already working on removing the tax liability.

http://bucks.blogs.nytimes.com/2013/04/ ... dent-debt/


Sorry, didn't see you mention it at first. Here's the link anyway.

If they got rid of the tax bomb, PAYE would become almost too good to be true. Any LS person with near sticker debt would be better off using it unless they were Biglaw partners. They could just raise the eligibility requirements or make it so you only pay tax on the original principal though.

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slawww
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Re: Would using PAYE like this make sense?

Postby slawww » Mon Apr 22, 2013 1:05 pm

hds2388 wrote:I mean, it seems reasonable. The only issues I see with it are as follows:

(1) taxes: you might make 6%, but remember he (your dad) has to pay income tax on that. So, it will be (depending on his other income) less that 6%, depending on whether its capital gains and all.


That's true, I overlooked that. Hopefully the 6% estimate is a conservative one.

Bronx Bum wrote:
OBAMA is already working on removing the tax liability.

http://bucks.blogs.nytimes.com/2013/04/ ... dent-debt/


That would be amazing.

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Rahviveh
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Re: Would using PAYE like this make sense?

Postby Rahviveh » Mon Apr 22, 2013 1:40 pm

This assumes PAYE is around by the time you graduate. The more you people keep yapping about how great a deal it is, the more likely they are going to restrict it. This program wasn't meant for shithead lawyers.

Cellar-door
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Re: Would using PAYE like this make sense?

Postby Cellar-door » Mon Apr 22, 2013 1:41 pm

slawww wrote:
Elston Gunn wrote:
slawww wrote:So this is my plan if I end up getting a low-ish paying job relative to debt. Also, maybe people with money in the bank could utilize something like this.

I'm very lucky in that my parents will be helping me out significantly, and by the time i graduate from law school my parents will have a law-school fund of 100k. This was my dad's idea of how to use PAYE. Assuming I have a low salary relative to debt, under PAYE I'd end up paying like 6k or so yearly. The plan is to have the 100k in an investment fund, and assuming it makes 6% per year (which I think is pretty conservative) use that to pay down the debt, and after 20 years and the remaining debt is forgiven I'll still have the orginal 100k & can give it back to my parents. I have some personal savings, so the first year's payments would be made solely by me as the fund makes money.

Has anyone tried anything like this?

Surely PAYE doesn't allow you have $100K in assets lying around...


I guess the fund would still stay in my dad's name and he'd give me a check or cash every month.


If he paid you every month you wouldn't qualify for PAYE the next year.

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bearsfan23
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Re: Would using PAYE like this make sense?

Postby bearsfan23 » Mon Apr 22, 2013 1:44 pm

Big Dog wrote:the bigger issue is that the debt will be compounding for 20 years, which will then affect your ability to buy a house and car. In other words, it will hang over you (and your spouse?) for two decades.


Just wanted to point out that this is 100% false. The interest does not just compound under PAYE like it would for a normal loan, it is capped.

Here is the wording from the Dept of Ed: Limitation on the capitalization of interest—While you have a partial financial hardship, interest that accrues but is not covered by your loan payments will not be capitalized, even if interest accrues during a deferment or forbearance. Unpaid interest capitalizes if you are determined to no longer have a partial financial hardship, but the total amount of interest that capitalizes while you are repaying your loans under the Pay As You Earn plan is limited to 10% of your original principal balance when you begin paying under Pay As You Earn.


Also, as long as you make the payment, PAYE DOES NOT have a negative effect on your credit rating. Actually by making the payments, it has a positive effect. The way loan payments and credit scores work, as long as you are making the appropriate payments, there is no negative effect. Hth

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Rahviveh
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Re: Would using PAYE like this make sense?

Postby Rahviveh » Mon Apr 22, 2013 1:44 pm

Cellar-door wrote:
slawww wrote:
Elston Gunn wrote:
slawww wrote:So this is my plan if I end up getting a low-ish paying job relative to debt. Also, maybe people with money in the bank could utilize something like this.

I'm very lucky in that my parents will be helping me out significantly, and by the time i graduate from law school my parents will have a law-school fund of 100k. This was my dad's idea of how to use PAYE. Assuming I have a low salary relative to debt, under PAYE I'd end up paying like 6k or so yearly. The plan is to have the 100k in an investment fund, and assuming it makes 6% per year (which I think is pretty conservative) use that to pay down the debt, and after 20 years and the remaining debt is forgiven I'll still have the orginal 100k & can give it back to my parents. I have some personal savings, so the first year's payments would be made solely by me as the fund makes money.

Has anyone tried anything like this?

Surely PAYE doesn't allow you have $100K in assets lying around...


I guess the fund would still stay in my dad's name and he'd give me a check or cash every month.


If he paid you every month you wouldn't qualify for PAYE the next year.


Once you qualify for PAYE you never lose eligiblity.

Cellar-door
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Re: Would using PAYE like this make sense?

Postby Cellar-door » Mon Apr 22, 2013 1:47 pm

ChampagnePapi wrote:
Cellar-door wrote:
slawww wrote:
Elston Gunn wrote:Surely PAYE doesn't allow you have $100K in assets lying around...


I guess the fund would still stay in my dad's name and he'd give me a check or cash every month.


If he paid you every month you wouldn't qualify for PAYE the next year.


Once you qualify for PAYE you never lose eligiblity.

http://studentaid.ed.gov/sites/default/ ... u-earn.pdf
Page 2. You need to submit documentation every year, if your family size or income changes so do your payments.

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Rahviveh
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Re: Would using PAYE like this make sense?

Postby Rahviveh » Mon Apr 22, 2013 1:49 pm

Cellar-door wrote:http://studentaid.ed.gov/sites/default/ ... u-earn.pdf
Page 2. You need to submit documentation every year, if your family size or income changes so do your payments.


Your payments may change (go up) but they will never exceed 10% of your AGI AND they are capped by whatever your 10-year payment would have been once you entered the program. You never actually get kicked out PAYE.

Cellar-door
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Re: Would using PAYE like this make sense?

Postby Cellar-door » Mon Apr 22, 2013 1:51 pm

ChampagnePapi wrote:
Cellar-door wrote:http://studentaid.ed.gov/sites/default/ ... u-earn.pdf
Page 2. You need to submit documentation every year, if your family size or income changes so do your payments.


Your payments may change (go up) but they will never exceed 10% of your AGI AND they are capped by whatever your 10-year payment would have been once you entered the program. You never actually get kicked out PAYE.


Yeah, I didn't mean he would actually get kicked out, just that his payments would go back up to the normal amount and all the maneuvering wouldn't save him much if any money.

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slawww
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Re: Would using PAYE like this make sense?

Postby slawww » Mon Apr 22, 2013 1:58 pm

Does a gift count as income?

tigyrgrl
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Re: Would using PAYE like this make sense?

Postby tigyrgrl » Mon Apr 22, 2013 7:43 pm

slawww wrote:Does a gift count as income?


Short answer is yes.

Long answer is it depends on the timing, amount, and ability of gift to be tracked.

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bk1
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Re: Would using PAYE like this make sense?

Postby bk1 » Mon Apr 22, 2013 8:38 pm

ChampagnePapi wrote:
Cellar-door wrote:http://studentaid.ed.gov/sites/default/ ... u-earn.pdf
Page 2. You need to submit documentation every year, if your family size or income changes so do your payments.


Your payments may change (go up) but they will never exceed 10% of your AGI AND they are capped by whatever your 10-year payment would have been once you entered the program. You never actually get kicked out PAYE.

I'm fairly sure if your income goes up enough you do get disqualified for PAYE because you no longer have a partial financial hardship. At that point all unpaid interest gets capitalized, but that amount is limited to 10% of your original principal. That said, it's pretty hard to get disqualified assuming you start at sticker or close to it debt since your loan balance is not decreasing. You would essentially have to make biglaw partner or close to it for your income to get so high that you would no longer have a partial financial hardship (think making around half a million for someone with sticker debt).

Corrected.

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Rahviveh
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Re: Would using PAYE like this make sense?

Postby Rahviveh » Mon Apr 22, 2013 8:48 pm

bk1 wrote:
ChampagnePapi wrote:
Cellar-door wrote:http://studentaid.ed.gov/sites/default/ ... u-earn.pdf
Page 2. You need to submit documentation every year, if your family size or income changes so do your payments.


Your payments may change (go up) but they will never exceed 10% of your AGI AND they are capped by whatever your 10-year payment would have been once you entered the program. You never actually get kicked out PAYE.

I'm fairly sure if your income goes up enough you do get disqualified for PAYE because you no longer have a partial financial hardship. At that point all unpaid interest gets capitalized, but that amount is limited to 10% of your original principal. That said, it's pretty hard to get disqualified assuming you start at sticker or close to it debt since your loan balance is not decreasing. You would essentially have to make biglaw partner or close to it for your income to get so high that you would no longer have a partial financial hardship (think making around half a million for someone with sticker debt).

From the official site:

Your payment amount may increase or decrease each year based on your income and family size. Once you’ve initially qualified for Pay As You Earn, you may continue to make payments under the plan even if you no longer have a partial financial hardship. Find out whether you’re eligible for Pay As You Earn.


Your payment is capped at whatever it would have been under the 10-year plan. At sticker debt that's around $3k. You would need to make close to $400k a year to hit that point.

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bk1
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Re: Would using PAYE like this make sense?

Postby bk1 » Mon Apr 22, 2013 8:50 pm

ChampagnePapi wrote:From the official site:

Your payment amount may increase or decrease each year based on your income and family size. Once you’ve initially qualified for Pay As You Earn, you may continue to make payments under the plan even if you no longer have a partial financial hardship. Find out whether you’re eligible for Pay As You Earn.


Your payment is capped at whatever it would have been under the 10-year plan. At sticker debt that's around $3k. You would need to make close to $400k a year to hit that point.

Ah, I didn't see that part. Thanks.

09042014
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Re: Would using PAYE like this make sense?

Postby 09042014 » Mon Apr 22, 2013 8:51 pm

I think there is one downside when you no longer have a hardship, I think the accrued interest gets capitalized.

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bk1
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Re: Would using PAYE like this make sense?

Postby bk1 » Mon Apr 22, 2013 8:53 pm

Desert Fox wrote:I think there is one downside when you no longer have a hardship, I think the accrued interest gets capitalized.

It does, but the total amount that capitalizes is limited to 10% of your original principal.

So even if you no longer qualify for partial financial hardship you will still get forgiveness after 20 years? How is this not worth it for everyone who has sticker debt except the few that make partner?

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Tiago Splitter
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Re: Would using PAYE like this make sense?

Postby Tiago Splitter » Mon Apr 22, 2013 10:30 pm

tigyrgrl wrote:
slawww wrote:Does a gift count as income?


Short answer is yes.

Long answer is it depends on the timing, amount, and ability of gift to be tracked.

Gifts don't count towards your AGI, which is all that seems to matter for PAYE.

Big Dog
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Re: Would using PAYE like this make sense?

Postby Big Dog » Tue Apr 23, 2013 12:40 am

Assuming I have a low salary relative to debt, under PAYE I'd end up paying like 6k or so yearly.


Since the interest rate is 6.8%, you will be paying interest only for 20 years. And, after paying $120k in interest, you will still have $100k in principal left on your loan. Assume another 10% for capitalized interest, to total $110k. (too lazy to do the exact math, but it doesn't matter for the example.) All of that debt forgiveness is taxable 20 years hence, so another 35%-50% goes to taxes (depending on your state of residence).

So you total payments are $120k+~$40k = $160k to the feds. Not a great deal to plan on, IMO.

On top of that, your debt payments will count against you when you try to get a mortgage.




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