edit, ended up quite long... TL;DR would be: it is better not to pay your loans beyond the tiny minimum PAYE payment rather than try to pay your loans yourself. Just let the government take care of it.
quakeroats wrote: Desert Fox wrote:
kalvano wrote:So really, this plan is protection for people who took out $150K+ in loans and end up with a $55K - $70K a year job.
It's really for anyone with a high debt to income level. 250K of debt probably makes sense even if you are making big law lockstep.
The old IBR isn't so beneficial. It really blows I can't do the new one.
From the borrowers prospective, there isn't a maximum on how much you should borrow. In fact, the rational thing to do is borrow as much as you possibly can. Your payment can't exceed 10% of your income whether you borrow $10 or $10 million. Save whatever you don't need and at worst suffer a penalty on a small fraction of it in 20 years.
JFC... this plan is so retardedly good... is America really going to keep bailing out everyone making horrible investments for the next 20 years... i mean just how long can we keep raising taxes to pay for constantly ballooning debt??
If I have access to 150k if I need it (not liquid, but I can get easy enough,) it's enough to make my (sticker) graduation bill from a top school very
manageable... BUT I would be BEYOND PISSED if I paid off my tuition when I could have just made shitty little payments for the next 20 years and get it forgiven... i mean WTF
sure of liquidating assets and avoiding loans, because my assets can definitely not match the ~8.5% ROI on avoiding loans. BUT given this PAYE shit, consider this:
Using the following assumptions:
-typical sticker debt level, determined by me for a particular T14 school, to be $277,804.54 ($66,817.25 stafford, $210,987.25 gradPLUS)
-poverty level doesn't increase (Very conservative, it has risen approx. 4% annually since its creation)
-marginal income tax rate remain the same, NYC state income tax (8,97% over 400k, and 3.876% local tax) - (again conservative for paying off loan early, because living in NJ would eliminate NYC tax and make tax bomb smaller.
-175k salary avg for first 4 years, then 100k for the next 21 years (reasonable conservative estimate based upon this site's groupthink including bonuses and raises)
-35k COL (again very generous)
-60% take home salary
-the above two figures give you disposable income of $70,000
for 4 years, and $25,000
-btw, YES, you are eligible for both IBR and PAYE under these circumstances
-all leftover money over COL and student loan payments is invested at 5% annual ROI (you can easily and safely guarantee yourself better than 5% annual ROI long term with smart index funds/other smart funds -- this also generous because it takes a crazy person to invest every leftover $ into long-term investments)
-money is invested all at the beginning of the year, not totally accurate but good enoughin short, EVERY estimated constant gives the advantage to paying off loans earlyWealth after 25 years given info above:
1) 25 year extended payment plan, you pay $2078.24 per month for 25 years. Your net worth at the end of 25 years: $615,494.83
2) 10 year fixed repayment is not even possible, and I'm not going to figure out 10 year graduated, but it result in somewhere between 1 and 3...
3) paying off as fast as possible -- you would be paid down to ~$64k after 4 years in biglaw, and balance zeros out around month 78, net worth after 25 years: $766,761.78
4) IBR - $1,984/mo. for 4 years, then $1,041/mo. for the next 21 years - $1,097,707.01 in assets, with loan balance of $717,147.66 (loan was down to $275,362.48 after BigLaw), therefore a tax bomb of $436,817.83. Leaves a net balance of $660,889.18
5) PAYE - $1,194/mo. for 4 years, then $694/mo. Assets worth $1,375,531.17 after year 25. Then, regardless of loan balance ($786,021.37), you are taxed on $305,585.00 of earned income at year 20. This leaves you with net assets of $1,069,946.17. WTF IS THIS SHIT
. Sounds like free money from the government rewarding you for not paying your loan.
Now consider my personal situation, where I potentially have chunk of $ to potentially avoid taking loans:Wealth after 25 years given info above: plus a starting nest egg of $150,000 either put towards loans or invested
1) take out full loans, 25 year extended payment plan, you pay $2078.24 per month for 25 years. Your net worth at the end of 25 years: $1,123,448.07
2) take out full loans then pay off as fast as possible without using nest egg -- you would be paid down to ~$64k after 4 years in biglaw, and balance zeros out around month 78, net worth after 25 years: $1,274,715.02
3) put all $$$ down to minimize loans and pay off asap- 150k down means loans start during 4th semester, for a debt of $99,928.18 at graduation. Then, you can have your loans paid off after month 18 of BigLaw. Thereafter all extra $ goes to investments. After 25 years, balance is $1,468,873.19
. As expected up until this point...
4) IBR - Same as before, just with the savings being invested the whole time. After 25 years, balance of $1,168,842.42
5) PAYE - Same as before, just with the savings being invested the whole time. After 25 years, balance is a massive $1,577,899.41
What. The. Hell. Using an absolute lower bound, with every constant being a disadvantage for PAYE, it is mathematically better to take loans out and let the government take care of it under PAYE than to use your own money to pay for school. $109,026.22 better to use PAYE, even when making 6 figures your entire career. And that's not even taking into account that if we keep getting people like Obama in office, we probably wont even have to pay the tax bomb!! If it was up to current administration, there would probably be IBR/PAYE tax-bomb bailouts, which would make this freaking ridiculously lopsided in favor of NOT paying down your loans.
Something is seriously screwed up with this... The largest risk of relying on PAYE for the best possible outcome, would be if Americans finally come to their senses and slash taxes and government spending...but honestly, what are the chances of that? The only other risk would be that you end up making a very high salary, in which case you made a slightly worse investment since even under PAYE you would pay off your entire loan yourself. We're talking 500k+ salary here though.disclaimer: Sorry, 0L here, but very relevant to me; non-trad with exp in finance and need to make huge decision in a couple months whether or not to pre-pay my sticker tuition by liquidating assets or not...