Pay as You Earn on Big Law Salary

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09042014
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Pay as You Earn on Big Law Salary

Postby 09042014 » Sat May 11, 2013 8:32 pm

Assume:
260k in debt
Big Law at a the Cravath Lockstep Scale.
The Tax Bomb will be fixed (because it's in the budget proposal)

Unless you make partner you'll stay at below partial financial hardship. So you won't get interest capitalized (though after the first couple years you'll be paying off all the interest anyway).

The way the qualification scheme works you can basically use your AGI from two years before. This means you can severely underpay for a couple years of big law.

Subsidized loans will have their interest paid, which is a minor benefit but it reduces the average effective interest rate for 3 years.

If you average a bit over 200k salary (really AGI, if you maxed out 401k and other reductions you can still make over 200K) over the next 20 years you'll save money over paying it off on the 10 year fixed plan. If you only average 150K, you'll save over 100K over the 20 years.

This method would basically let you save up during your stint in big law. And you end up exiting into a lower paid career trajectory, you'll have all your savings.

The downside would be: You exit into a high paying career 200k+, or make partner or something. Then you'll just end up paying a lot of interest that you could have avoided.

What does everyone think.

If you threw the extra money into a house you could 1) reduce taxes even further with mortgage interest and 2)save money on interest from a mortgage (but mortgage interest is way cheaper than student loans.

If the studnet loan fix reduces rates to an even smaller number, I think then this becomes even more clearly the right choice.

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Elston Gunn
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Re: Pay as You Earn on Big Law Salary

Postby Elston Gunn » Sat May 11, 2013 9:08 pm

Am definitely considering this.

The questions I have, as someone totally financially illiterate: how would it affect your ability to get a good rate on a mortgage? How much would it hurt you if you, say ended up partner at a midsized firm making $400K? It's so hard to know how realistic that kind of result is, but I'm wary of putting myself in a position where I'll feel like an idiot if I get the best outcome...

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Whatisthis
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Re: Pay as You Earn on Big Law Salary

Postby Whatisthis » Sat May 11, 2013 9:18 pm

I thought PAYE was only available to new borrowers (i.e. borrowers without pre Oct 2007 fed loans)? I know there was talk of an expansion, but I didn't think anything was likely to go through anytime soon. If it is a possibility, why the hell wouldn't you? (Unless you're worried about the rug being pulled out from under you). It seems like you'd be damn fool not to. What am I missing? It seems like pride would be the only reason you'd ever pay down your debt if PAYE were available.

Worst case scenario, you'd be making bank (350K+) while making standard payments on principal + 10% capitalized interest.... I would think the money you'd be able to save in the meantime would more than make up for it. Dunno. Curious what other folks think.

09042014
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Re: Pay as You Earn on Big Law Salary

Postby 09042014 » Sat May 11, 2013 9:26 pm

Elston Gunn wrote:Am definitely considering this.

The questions I have, as someone totally financially illiterate: how would it affect your ability to get a good rate on a mortgage? How much would it hurt you if you, say ended up partner at a midsized firm making $400K? It's so hard to know how realistic that kind of result is, but I'm wary of putting myself in a position where I'll feel like an idiot if I get the best outcome...


I think if you try to pull the mortgage when we are making like 200k+ with a large down-payment (which we should easily have), I think it'll be easy to get a decent rate.

If we end up making 400K in midlaw (which I think is a bit on the high side, I think 300k is more realistic), we'd come out worse using PayE. But how much worse? The only real cost is the interest. Which is fairly high after the third year when the subsidies fall. But, you can mitigate a lot by just paying that shit off when you make partner. You don't gotta stick on payE the whole time. You'll die a millionare, what is another 150k in interest.

The problem case might be: you make partner in a small firm /go inhouse for 250K a year. You'll eventually pay off all the loans and get no PAyE write off. But you won't be able to make crazy fast payments to keep interest down.

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Whatisthis
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Re: Pay as You Earn on Big Law Salary

Postby Whatisthis » Sat May 11, 2013 9:33 pm

Wait. You can't pay down more than your minimum payment once you enter PAYE?

09042014
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Re: Pay as You Earn on Big Law Salary

Postby 09042014 » Sat May 11, 2013 9:35 pm

Whatisthis wrote:I thought PAYE was only available to new borrowers (i.e. borrowers without pre Oct 2007 fed loans)? I know there was talk of an expansion, but I didn't think anything was likely to go through anytime soon. If it is a possibility, why the hell wouldn't you? (Unless you're worried about the rug being pulled out from under you). It seems like you'd be damn fool not to. What am I missing? It seems like pride would be the only reason you'd ever pay down your debt if PAYE were available.

Worst case scenario, you'd be making bank (350K+) while making standard payments on principal + 10% capitalized interest.... I would think the money you'd be able to save in the meantime would more than make up for it. Dunno. Curious what other folks think.


A bill that expands it pre2007 based the house committee and has bipartisan support. I don't wanna jinx it. Also there is a hurry to get it passed before student loan rates jump big time July 1.

I agree that if you make a ton of money, it's not a big deal. But if you make an average of 250k over the next 20 years, you'll probably pay almost all of it off. But you'll be paying it off with a lot 2025-2035 money, which is worth a lot less today. I don't know how to correctly deal with the TVM issues at play here.

For example: I figure if I paid off the loans over 5 years my 260k loans would cost 311k. 250k on PayE is 454k. That's an extra 143k. But it's spread over 15 years extra. I don't know how to value that correctly.

09042014
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Re: Pay as You Earn on Big Law Salary

Postby 09042014 » Sat May 11, 2013 9:36 pm

Whatisthis wrote:Wait. You can't pay down more than your minimum payment once you enter PAYE?


No you can. But you don't really want to unless you are sure you won't get it written off at the end.

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Elston Gunn
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Re: Pay as You Earn on Big Law Salary

Postby Elston Gunn » Sat May 11, 2013 9:36 pm

Whatisthis wrote:Wait. You can't pay down more than your minimum payment once you enter PAYE?

You can pay as much as you want. What I think DF is saying is that if you hit year 7 and are making $250K, you've missed out on a lot of years when you could have been making really fast payments, and now have a lot more interest accrued than was necessary.

09042014
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Re: Pay as You Earn on Big Law Salary

Postby 09042014 » Sat May 11, 2013 9:37 pm

Elston Gunn wrote:
Whatisthis wrote:Wait. You can't pay down more than your minimum payment once you enter PAYE?

You can pay as much as you want. What I think DF is saying is that if you hit year 7 and are making $250K, you've missed out on a lot of years when you could have been making really fast payments, and now have a lot more interest accrued than was necessary.


Yes, worded perfectly, thanks.

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Whatisthis
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Re: Pay as You Earn on Big Law Salary

Postby Whatisthis » Sat May 11, 2013 9:46 pm

Elston Gunn wrote:
Whatisthis wrote:Wait. You can't pay down more than your minimum payment once you enter PAYE?

You can pay as much as you want. What I think DF is saying is that if you hit year 7 and are making $250K, you've missed out on a lot of years when you could have been making really fast payments, and now have a lot more interest accrued than was necessary.


All right. I suppose that's true. However, with the money you'd be able to save as well as inflation/TVM, the downside risks seem pretty minimal.

Anyways, sure hope this expansion goes through. It'd be great to have the option! In the meantime, I think prospective biglaw attorneys should probably keep any plans to take advantage of PAYE to themselves.... probably not the most comforting image for most folks. :wink:
Last edited by Whatisthis on Sun May 12, 2013 11:23 am, edited 1 time in total.

09042014
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Re: Pay as You Earn on Big Law Salary

Postby 09042014 » Sun May 12, 2013 1:27 am

I ran some numbers.

The interest difference for doing PayE for 5 years compared to:

5 year repayment plan = 33k
10 year repayment plan AT the 5 year mark: 8k

Of course, for the 5 year repayment schedule the numbers quickly start diverging. If you keep making a lot of money but don't pay the debt down, the difference will grow pretty fast. Probably 12-15k a year depending on the variables.

I think this may lead to a strategy of, amass a large liquid(ish) savings. If you flame out of big law into a low paying exit option, well then you have a couple thousand grand, and you can let PayE take your loans for you. If you exit to something well paying, I'd say 150k or higher. You empty the liquid savings right into your student loans.

You'll pay about 33k as insurance.

If you max out your 401k each year, you could have 85k in savings that wasn't taxed at your big law tax rate. That's 28k right there. And if you use your first two years savings to put 20% down on a house, you'll save some rent money (by converting it equity) and get a mortgage interest deduction.

Or if you hate your life after two years, you can lateral to PI or government. Take your 120-150 fuck you money, and use that you pay your meager payE contributions for 10 years.

Mal Reynolds
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Re: Pay as You Earn on Big Law Salary

Postby Mal Reynolds » Sun May 12, 2013 2:33 am

So interest doesn't capitalize and you can manipulate your AGI through 401k contributions? Are they any drawbacks to this? Will this impact your credit? If they remove the tax bomb it's almost too good to be true.

09042014
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Re: Pay as You Earn on Big Law Salary

Postby 09042014 » Sun May 12, 2013 3:09 am

Mal Reynolds wrote:So interest doesn't capitalize and you can manipulate your AGI through 401k contributions? Are they any drawbacks to this? Will this impact your credit? If they remove the tax bomb it's almost too good to be true.


Interest will capitalize up to 10% of your initial, if you are over the "partial finanical hardship" limit. Which is basically when your PayE payment hits the level of your 10 year straight replayment. Or like 400K for someone with 260k of debt.

It'll impact your debt to income ratio, but your accounts are considered up to date, not late or default or anything.

Another downside is you either have to include your spouses income in your AGI, or file separately which can fuck some deductions.

It is almost too good to be true. The plan is designed for undergrads with 60k in debt not big law associates with 260k.

The calculator online says that the NPV flips to the 10 year plan being better if you start at 200k in income.

Mal Reynolds
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Re: Pay as You Earn on Big Law Salary

Postby Mal Reynolds » Sun May 12, 2013 3:13 am

Even if your interest does capitalize at that point, you're making enough to afford it. If you don't make that much, you've hedged your risk against interest accrual. Sounds good to me.

I've got like one pesky loan from 2007 UG. It would be awesome if they push the new deal through.

09042014
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Re: Pay as You Earn on Big Law Salary

Postby 09042014 » Sun May 12, 2013 3:23 am

http://www.finaid.org/calculators/scripts/ibr.cgi

Here is a calculator I found that includes Net Present Value. It seems like almost no matter what I plug in for salary, the payE is either just about as good as 10 year or WAY better.

God I hope they expand to us. I think I'm convinced I'll just cop the 20 year plan and ride it forever.

NYstate
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Re: Pay as You Earn on Big Law Salary

Postby NYstate » Sun May 12, 2013 5:44 am

If this goes through and law students embrace it, there will be no pressure to reform any school.

I wonder if the "abuse" of bankruptcy provisions by some students using bankruptcy to discharge student loans that they could pay was the end of student loan bankruptcy protection.

I liked that NY times article I posted in the boomer hate thread. We've now embarked on an unplanned and unprecedented social experiment of a generation saddled with student loan debt and massive negative net worth. I'm not sure how this will end except I can see people no longer worrying about debt.

I think your assumption of earnings may be high. I don't know how much mid law partners make. I don't think all big law first years are going to earn that much.

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Tiago Splitter
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Re: Pay as You Earn on Big Law Salary

Postby Tiago Splitter » Sun May 12, 2013 8:39 am

It seems like the whole concept is predicated on the idea that the tax bomb will just go away, which seems unlikely. I could see them changing it slightly, maybe making it like a flat 15% tax on forgiven student loan debt rather than having it taxed as ordinary income. Either way, if you are paying off interest every year the tax hit on 260K 20 years from now shouldn't be a deal-breaker.

And before anyone thinks this is a sweetheart deal for the rich, people making BigLaw salaries will pay a lot more than the initial principal over the course of 20 years plus whatever taxes get assessed on the forgiven debt. PAYE essentially just brings down the interest rate.

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Re: Pay as You Earn on Big Law Salary

Postby alphabro001 » Sun May 12, 2013 8:58 am

Can someone explain this whole PAYE thing to people who know nothing about finance? Everyone keeps talking about how awesome it is, but I'd like to actually understand it (really understand it, not just read a basic summary on a website ).

Also, I've heard that it would be awesome for some people, but stupid for others (based on debt), so what level of debt makes PAYE tcr?

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Tiago Splitter
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Re: Pay as You Earn on Big Law Salary

Postby Tiago Splitter » Sun May 12, 2013 9:05 am

alphabro001 wrote:Can someone explain this whole PAYE thing to people who know nothing about finance? Everyone keeps talking about how awesome it is, but I'd like to actually understand it (really understand it, not just read a basic summary on a website ).

Also, I've heard that it would be awesome for some people, but stupid for others (based on debt), so what level of debt makes PAYE tcr?

You can get on PAYE if your payment under PAYE is less than you'd pay if you were under a standard ten year plan. The PAYE payment is ten percent of your AGI minus the poverty level, so let's say you make 200K and the poverty level is 20K for your family then you'd have to pay 10% of (200-20) so 18K a year, or $1500 a month. This number gets adjusted every year but from what I understand once you get on PAYE they won't ever kick you off.

If at some point the amount you owe is more than what you'd owe under the ten year plan the interest gets capitalized, meaning it gets added to your original principal balance, but this is capped at 10% of your principal.

At the end of 20 years the government forgives all the remaining debt. As of right now all of this (meaning all of the principal and ALL of the interest, not just 10% of the principal) would be taxed as ordinary income.

I don't think there is a level that doesn't make PAYE tcr coming out of school unless you land some non legal job paying 400K a year. If you are eligible, just do PAYE and if you want to pay more you always can. DF's plan, which I agree with, is to make the PAYE minimum payments and then save aggressively into retirement and non-retirement vehicles. Then if you exit biglaw into something lower paying you will have a lot of savings built up, and if your salary remains high several years after law school you can either just pay off the debt or use the savings to buy a house. Of course, this strategy only works if you have the discipline to save your excess cash so maxing out the 401k, where the funds are more difficult to access, is credited.

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Re: Pay as You Earn on Big Law Salary

Postby NYstate » Sun May 12, 2013 9:31 am

Tiago Splitter wrote:
alphabro001 wrote:Can someone explain this whole PAYE thing to people who know nothing about finance? Everyone keeps talking about how awesome it is, but I'd like to actually understand it (really understand it, not just read a basic summary on a website ).

Also, I've heard that it would be awesome for some people, but stupid for others (based on debt), so what level of debt makes PAYE tcr?

You can get on PAYE if your payment under PAYE is less than you'd pay if you were under a standard ten year plan. The PAYE payment is ten percent of your AGI minus the poverty level, so let's say you make 200K and the poverty level is 20K for your family then you'd have to pay 10% of (200-20) so 18K a year, or $1500 a month. This number gets adjusted every year but from what I understand once you get on PAYE they won't ever kick you off.

If at some point the amount you owe is more than what you'd owe under the ten year plan the interest gets capitalized, meaning it gets added to your original principal balance, but this is capped at 10% of your principal.

At the end of 20 years the government forgives all the remaining debt. As of right now all of this (meaning all of the principal and ALL of the interest, not just 10% of the principal) would be taxed as ordinary income.

I don't think there is a level that doesn't make PAYE tcr coming out of school unless you land some non legal job paying 400K a year. If you are eligible, just do PAYE and if you want to pay more you always can. DF's plan, which I agree with, is to make the PAYE minimum payments and then save aggressively into retirement and non-retirement vehicles. Then if you exit biglaw into something lower paying you will have a lot of savings built up, and if your salary remains high several years after law school you can either just pay off the debt or use the savings to buy a house. Of course, this strategy only works if you have the discipline to save your excess cash so maxing out the 401k, where the funds are more difficult to access, is credited.


How do they determine if you owe more than you would have owed on the 10 year plan? Is this a month to month thing or yearly?
Can someone maybe do a yearly payment schedule with numbers so we can see what it looks like? I don't understand it well enough to do it.

Stinson
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Re: Pay as You Earn on Big Law Salary

Postby Stinson » Sun May 12, 2013 10:09 am

May I suggest there is a strategic risk to using PAYE in Biglaw because "Biglaw attorneys are using PAYE!" sounds like something an angry Republican senator is going to be shouting at a committee meeting in the mid 2020s? :D

hunter.d
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Re: Pay as You Earn on Big Law Salary

Postby hunter.d » Sun May 12, 2013 10:12 am

Is there a definitive answer on how savings affects your eligibility or minimum payments?

It would seem that they're not going to let you have six figure savings but only pay on a favorable AGI. Are savings completely immune from being considered?

NYstate
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Re: Pay as You Earn on Big Law Salary

Postby NYstate » Sun May 12, 2013 10:19 am

I thought the tax bomb was going away? :?

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Greeno
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Re: Pay as You Earn on Big Law Salary

Postby Greeno » Sun May 12, 2013 10:40 am

hunter.d wrote:Is there a definitive answer on how savings affects your eligibility or minimum payments?

It would seem that they're not going to let you have six figure savings but only pay on a favorable AGI. Are savings completely immune from being considered?


I think they are right now, but this is the right question to be asking. Once the gov learns that grad students are using PAYE to pay 2k per month into their student loans, despite having a 200k+ salary and 500k+ in savings and investments, this trick seems as likely (if not more likely) to be addressed in future bills than the tax bomb.

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ReelectClayDavis
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Re: Pay as You Earn on Big Law Salary

Postby ReelectClayDavis » Sun May 12, 2013 10:47 am

hunter.d wrote:Is there a definitive answer on how savings affects your eligibility or minimum payments?

It would seem that they're not going to let you have six figure savings but only pay on a favorable AGI. Are savings completely immune from being considered?


I did as much research as I could before deciding to do public service with PAY-E/PSLF, and I found nothing about consideration of assets. Seems to be AGI only.

However, it doesn't take much imagination to believe that this would be one of the first things the powers that be would consider changing. Not considering income at all creates the perverse incentive not to minimize your borrowing up-front, and just seems inequitable.

For those considering PAY-E/IBR, I would caution that no one in Congress, even those on the relevant committees, yet seems to appreciate the distorting effects of PAY-E. See, e.g. --LinkRemoved-- ("I'm still trying to get my head around some concepts that I heard today," said Rep. Raul Grijalva (D-Ariz.), a member of the House Workforce and Education Committee, "that irrespective of the amount of money you borrow or the interest rate, that you'll still end up paying the same amount." "Wow, somehow that doesn't seem possible," said Republican Rep. John Kline of Minnesota, the committee chairman.").

One of the presenters to the committee, John Delisle, director of the Federal Education Budget Project at the New America Foundation, seems to have made it his personal mission to reform IBR/PAY-E. He has proposed things like removing the monthly cap on IBR payments (which are currently limited to a maximum of the Standard Repayment plan), which would destroy the plan outlined in the first post of this thread. See, e.g. http://edmoney.newamerica.net/blogposts ... udent_loan

I for one am willing to take the initial risk of IBR/PAY-E for a few years because my law school will make all of my PAY-E payments during that time until I place out due to income growth. At that point I plan to test the political winds before continuing towards the 10 year forgiveness. I made sure to have a scholarship and not max out Grad-Plus too, to protect against the risk that this program is altered.

That said, If I was doing biglaw, I would probably just pay the loans down now, and not take the risk that as Congress learns more, they reverse course when they hear more from folks like Delisle.




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