Anonymous User wrote:
boredtodeath wrote:Debt: About $290k at average rate of 6.94% (mixture of small amount of UG loans + all of LS financed)
Income: Starting as first-year biglaw associate next fall. $160k.
Plan: Undecided, leaning towards PAYE/IBR
Monthly Payment: On standard 10 yr: ~$3,200/month. On PAYE/IBR: starting ~$1,100/month. I don't have an accurate figure of what it will grow to.
I'm wondering if there is any reason not to choose PAYE/IBR as my repayment plan when I graduate (aside from refinancing with a private lender which I am going to look into)? Why not give myself the safety net of lower monthly payments while still having the option of paying the loans down just as fast as the standard 10 year repayment plan? Am I missing something?
My only real goal outside of paying my debt down as fast as possible is contributing the max towards my 401k/IRA each year. I don't know if that is realistic, at least in the first few years, with this debt load, but it's something I'd like to work towards.
I normally would say max out 401k, but 300k debt load is insanely high - the amount you would have to be forgiven on PAYE after 20 years or whatever would be insane (and the tax bomb would be at least a couple hundred thousand). If you don't pay down your debt beyond minimum, your balance will increase a ton and you'd be relying on investments in the stock market for gains (and who knows what will happen in the next 20 years). So yeah, put some in your 401k but focus on paying down debt.
I disagree about his balance getting out of control.
AGI (Max 401k): $142,000 (not eligible for most other deductions)
Estimated REPAYE Payment: $1037.50 ($12,450 for the year)
Yearly Interest on $294k Loan at 6.94%: $20,126
Subtract payments made towards loan ($12,450): $7,676 interest accrued
Government subsidizes 50% of unpaid interest (REPAYE): $3,838
So his loan only goes up $3,838 that year. His payments will increase in future years meaning that the amount growing on the loan is less and less.
As to whether to do standard ten year repayment or PAYE/invest:
If he pays it off in ten years he will pay $411,000 towards the loan.
If he does REPAYE and averages paying $15,000/year towards the loan he will pay $375,000 plus tax bomb. And if he averages that yearly amount his loan will have gone up about $62,500 ($2,500 per year times 25). Add that to the current principal and that's $356,500 for the tax. Call it 38% tax bracket so $135,000 tax.
$135,000 + $375,000 = $510,000, so $100k more but with 15 extra years.
Those payments obviously are purely hypothetical, but the more he pays, the lower the tax bomb and vice versa. So I think the total paid towards those loans is somewhere in the $500-550 ballpark if he rides the REPAYE train all the way through.
Now, I'm not recommending anything because this calculation (especially average paid towards loan/year) is exploding with hypothetical numbers that we just don't know. That said, you might want to think about enrolling in PAYE, max 401k, then maybe pay as much as possible towards highest interest rate loans. Just a thought.
So TL;DR to OP: PAYE might make sense, paying them off might too. But don't think you have to put all your eggs in one basket and pick one hardcore approach (minimize AGI and loan payments) or the other (slave to your loans). There's a middle ground that probably makes personal, emotional, and financial sense. That's for you to decide.