Anonymous User wrote:Haha this forum is hilarious. I was the dude who did the refi. The biglaw world is a small one once you are in it. When you start at a good firm, moving to another firm after 2-3 years is not uncommon. At the firm I am at - I haven't heard of anyone being "fired" because of poor work product. I have heard of them moving to different firms in town because their work product was not all that great. In any case, It is highly unlikely I ever make little enough to gain any subsidy on my loans (though I haven't fully looked into this PAYE thing?). In any case, the longest repayment plan I was going to do was 10 years with my federal - and yes, I am saving lots of dollars by doing this refi - not just an insignificant amount. This was not a spur of the moment decision - I spoke with many attorneys around the firm including a couple senior associates I was close with over the summer. While this forum is hating hard, it wasn't "idiotic" by any means
But see viewtopic.php?f=10&t=257218
Plus it's pretty obvious that you don't know how PAYE works. The money you're theoretically saving in interest is a mathematical straw man used to rationalize what is almost certainly a mathematically poor decision.
What JDM is basically referring to is called the "Doctor's Loophole" (http://whitecoatinvestor.com/the-doctor ... -and-pslf/
)--these programs were designed to assist people taking public sector jobs, but they disproportionately benefit high income earners with graduate degrees. You can and should take advantage of that.
Just to illustrate this and play out JDM and my logic (in case those new to the thread are curious for a stupidly long read)...
You said your debt is $211k at 4.5% interest for 7 years. That means you'll pay $247,000 towards your loans in seven years. That's basically $35,000 post-tax income per year, which is at least a third (and probably closer to 38-40%) of your take home pay.
You've presumably refinanced from federal loans at a standard ten year repayment with 6.8(ish)% interest. If you'd have done that you would have paid $294,000 towards your loans. That's $47,000 more than if you refinanced (or $4,700 per year), thus theoretically saving you $47,000. But this plan had benefits...your payment would have been lower, freeing up cash flow (about $500 per month) that you could have done anything with. And most importantly you would have had the security net that federal loans provide.
But there's a third option. You could have paid as little on your loans as possible (basically zero in your stub year), maxed all available retirement accounts, and managed the student loan balance by enrolling in PAYE and taking advantage of deductions and subsidies.
Your savings could go something like this:
-Max 401k ($18,000)
-Max Roth IRA ($5,500; not tax deductible but a great investment vehicle);
-Max HSA (around $3,000 or $6,000 if you have a spouse);
-Contribute to 529 plans (basically save for kid's school and let the market compound over time).
In your stub year you would have a payment of close to zero and would increase cash flow by $3,000 per month (Ally account? Money market account? Do what you want).
After stub year, and assuming you get your AGI down to $135,000 (I bet you could get it lower), your payment would be around $900/month. Your loan accrues $14,000 in interest per year, you pay $11,000, and government subsidizes remaining half of unpaid interest. So your loan balance is going up about $1,500 per year while you sock away $23,500 in retirement accounts, $3,250 in HSA, and maybe some in 529s. And on top of that, you've increase cash flow by $2,000 per month. Let's assume you are conservative so you just throw half of that in an Ally account and spend the rest (so $12,000 per year saved).
By the end of 7 years, assuming 7% returns in all your accounts (minus the Ally 1% savings account), you have
-Paid $75,600 towards your loans
-Loan balance has increased to $221,000
-$195,000 in your 401k
-$60,000 in your Roth IRA
-$35,000 in your HSA
-$91,000 in Ally account ($1,500 x 12 for stub year and $12,000/year in other years + 1% interest).
So your net worth after all this $381,000. And this is a conservative estimate because I bet you could get more creative with AGI and pay even less towards your loans and free up even more cash flow. More importantly, you're never going to get these contribution years back. You should be maxing them while you can and letting compound interest work for you.
I get that you could theoretically still save for retirement and pay down your loans at the same time, but that's walking a tightrope. PAYE provides a great opportunity for you to start building your net worth while your student loans don't get out of control.
The worst case scenario is that you start making too much money and thus have to pay back your loans. But by that point you'd have built up a substantial net worth and it wouldn't be an issue.
And I haven't even got to the security that federal loans provide. You could be laid off, you could get sick, something might happen...all of that is taken care of if you're on federal loans.
JenDarby likely has a solid counterargument to all the nonsense I just wrote. But at worst you should probably do PAYE in your stub year, save up like $50,000, let the gov't subsidize the growing interest (thus reducing your interest rate on federal loans in half), and then
have at it if you want to pay back your loans. Refinancing out the gate is just generally not wise in what I'd say is 90% of circumstances.