Student loan payments: Actual numbers

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Anonymous User
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Re: Student loan payments: Actual numbers

Postby Anonymous User » Mon Feb 29, 2016 5:04 pm

Really appreciate all the helpful tips in this thread. Anyone have advice/things I could do better on my financial situation?

income: 160k biglaw (started in august)
debt: 65k (refinanced with SOFI - 5-year 3.1% variable rate; monthly payment around $1200)

-contribute 12% of each paycheck to 401k (firm does not match) in order to reach the max amount of ~$18k over the course of the year
-put $5500 into roth ira for prior tax year
-rent: $2200 for a 1br in DC

trying to limit other expenses and save so not dependent on big law as soon as possible. thanks for any help

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Tiago Splitter
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Re: Student loan payments: Actual numbers

Postby Tiago Splitter » Mon Feb 29, 2016 5:09 pm

Anonymous User wrote:Really appreciate all the helpful tips in this thread. Anyone have advice/things I could do better on my financial situation?

income: 160k biglaw (started in august)
debt: 65k (refinanced with SOFI - 5-year 3.1% variable rate; monthly payment around $1200)

-contribute 12% of each paycheck to 401k (firm does not match) in order to reach the max amount of ~$18k over the course of the year
-put $5500 into roth ira for prior tax year
-rent: $2200 for a 1br in DC

trying to limit other expenses and save so not dependent on big law as soon as possible. thanks for any help

Assuming you don't have any other pre-tax IRA money, I would put $5500 into an IRA for 2016 and convert to a Roth.

Anonymous User
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Re: Student loan payments: Actual numbers

Postby Anonymous User » Mon Feb 29, 2016 6:03 pm

...
Last edited by Anonymous User on Mon Mar 07, 2016 3:49 pm, edited 1 time in total.

Anonymous User
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Joined: Tue Aug 11, 2009 9:32 am

Re: Student loan payments: Actual numbers

Postby Anonymous User » Mon Feb 29, 2016 7:10 pm

Tiago Splitter wrote:
Anonymous User wrote:Really appreciate all the helpful tips in this thread. Anyone have advice/things I could do better on my financial situation?

income: 160k biglaw (started in august)
debt: 65k (refinanced with SOFI - 5-year 3.1% variable rate; monthly payment around $1200)

-contribute 12% of each paycheck to 401k (firm does not match) in order to reach the max amount of ~$18k over the course of the year
-put $5500 into roth ira for prior tax year
-rent: $2200 for a 1br in DC

trying to limit other expenses and save so not dependent on big law as soon as possible. thanks for any help

Assuming you don't have any other pre-tax IRA money, I would put $5500 into an IRA for 2016 and convert to a Roth.


Yea. And kudos -- you're in a pretty darn good financial position.

If you're not saving for an emergency fund, I'd do that (go for 3-6 months living expenses) before maxing out my 401/roth IRA.

Also, once you have an emergency fund locked down (keep it in cash, a high-yield savings account, or low-risk mutual funds), I'd work on setting some money aside for a home down payment. Personally, I'd probably do that before maxing out my retirement also, but how you want to prioritize these two is up to you. Your debt, emergency fund, and home savings are going to have a much bigger impact on your ability to leave biglaw in a couple of years should you want to than your retirement. Don't get me wrong, it's great for you to pump as much into your retirement now as you can, but you should also be saving for the short term (via your emergency fund) and medium term (via home savings and debt payments). If you can afford to do all three simultaneously, awesome. If you can't, I would try to do a balance rather than just maxing out your retirement.

hoorahray
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Re: Student loan payments: Actual numbers

Postby hoorahray » Wed Mar 02, 2016 10:58 am

I'd appreciate some advice on loan repayment for my husband and I

Our finances:
Income: I make $160k. His income is hard to pin down because he works for a small firm and only makes what he earns in a month. There's no base salary at his firm; just eat what you kill. He has only been there for 2 months, so we dont yet have a solid picture of what a typical month will be. His boss told him to guesstimate around $40k for the year.

Loans: I owe $217k and change. He owes $205k and change.

Where does the money go:
We have been living off my salary alone since he just got this job and his first 2 months of pay were small due to ramp up time.

-Rent: $2270
-Utilities: Generally around $110/month
-Food: We budget $400/month and are usually right around that
-Emergency fund: We have both a short term emergency fund and a long term emergency fund. The short term fund is $5k and that's done. The long term fund I'd like to get to $30k. Right now it's at $13k.
-Retirement: I'm doing a hair over company match (firm matches 6%, I'm doing 8%). He is opening a solo 401k this month and will put aside 15% to that.
-Tax liability: Husband is a 1099 contractor, so 1/3 of his check gets put into a separate savings account to make quarterly tax payments
-Loan payments: his min payment on IBR right now is $0. My loans are on the 10 year plan (I've applied for repaye but they haven't approved it yet). I pay $2549 minimum, and generally I'm able to throw another $500 on top of that.

So here's the big question. I want to pay off my loans ASAP because I've got the income to do it. Once the emergency fund it done, I'll be paying an extra $2500 minimum to my loans per month. That means I'll be done in 5 years if I can keep it up (basically, if I'm still in biglaw). Husband's loan situation is harder. In our current living situation with me covering the household expenses and him putting away 45% of every check to taxes or retirement, he'll have maybe $20k per year to pay on loans. He thinks it would be best to pay down my loans ASAP, but only make minimum payments on his for the IBR period and just save for the tax bomb. This makes me nervous because of the possibility that Congress either removes IBR forgiveness or increases the penalty or fucks people over in some other way. But, even I have to admit, saving $100k for a tax bomb would be really achievable for us right now, and we can just throw it into index funds and grow it.

So, is our plan of paying off mine ASAP but letting his languish until the tax bomb viable?

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pigzorz
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Re: Student loan payments: Actual numbers

Postby pigzorz » Wed Mar 02, 2016 11:13 am

hoorahray wrote:I'd appreciate some advice on loan repayment for my husband and I

Our finances:
Income: I make $160k. His income is hard to pin down because he works for a small firm and only makes what he earns in a month. There's no base salary at his firm; just eat what you kill. He has only been there for 2 months, so we dont yet have a solid picture of what a typical month will be. His boss told him to guesstimate around $40k for the year.

Loans: I owe $217k and change. He owes $205k and change.

Where does the money go:
We have been living off my salary alone since he just got this job and his first 2 months of pay were small due to ramp up time.

-Rent: $2270
-Utilities: Generally around $110/month
-Food: We budget $400/month and are usually right around that
-Emergency fund: We have both a short term emergency fund and a long term emergency fund. The short term fund is $5k and that's done. The long term fund I'd like to get to $30k. Right now it's at $13k.
-Retirement: I'm doing a hair over company match (firm matches 6%, I'm doing 8%). He is opening a solo 401k this month and will put aside 15% to that.
-Tax liability: Husband is a 1099 contractor, so 1/3 of his check gets put into a separate savings account to make quarterly tax payments
-Loan payments: his min payment on IBR right now is $0. My loans are on the 10 year plan (I've applied for repaye but they haven't approved it yet). I pay $2549 minimum, and generally I'm able to throw another $500 on top of that.

So here's the big question. I want to pay off my loans ASAP because I've got the income to do it. Once the emergency fund it done, I'll be paying an extra $2500 minimum to my loans per month. That means I'll be done in 5 years if I can keep it up (basically, if I'm still in biglaw). Husband's loan situation is harder. In our current living situation with me covering the household expenses and him putting away 45% of every check to taxes or retirement, he'll have maybe $20k per year to pay on loans. He thinks it would be best to pay down my loans ASAP, but only make minimum payments on his for the IBR period and just save for the tax bomb. This makes me nervous because of the possibility that Congress either removes IBR forgiveness or increases the penalty or fucks people over in some other way. But, even I have to admit, saving $100k for a tax bomb would be really achievable for us right now, and we can just throw it into index funds and grow it.

So, is our plan of paying off mine ASAP but letting his languish until the tax bomb viable?


How will you be filing taxes? If you file jointly, I believe your income will count as part of his for IBR purposes. Obviously, you can file separately, but there are tax consequences to that too. Your husband can probably get away with paying very very little, considering his discretionary income will take into account a family size of 2 (or more, if you have kids later) even if you file separately. But you need to run the numbers. Also consider the chance that if his income changes dramatically, he could be paying a lot more and 20 years is a long time. That said, 205k is a lot of debt for 40k/year (actually less because of 1099 issue), so IBR might make good sense.

If you're pretty sure you'll be staying in big law for a few years, it probably makes sense to refinance your loans (while keeping your husband's federal). 6.5% average is brutal on $215k of debt.

Anonymous User
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Re: Student loan payments: Actual numbers

Postby Anonymous User » Wed Mar 02, 2016 11:53 am

pigzorz wrote:
hoorahray wrote:I'd appreciate some advice on loan repayment for my husband and I

Our finances:
Income: I make $160k. His income is hard to pin down because he works for a small firm and only makes what he earns in a month. There's no base salary at his firm; just eat what you kill. He has only been there for 2 months, so we dont yet have a solid picture of what a typical month will be. His boss told him to guesstimate around $40k for the year.

Loans: I owe $217k and change. He owes $205k and change.

Where does the money go:
We have been living off my salary alone since he just got this job and his first 2 months of pay were small due to ramp up time.

-Rent: $2270
-Utilities: Generally around $110/month
-Food: We budget $400/month and are usually right around that
-Emergency fund: We have both a short term emergency fund and a long term emergency fund. The short term fund is $5k and that's done. The long term fund I'd like to get to $30k. Right now it's at $13k.
-Retirement: I'm doing a hair over company match (firm matches 6%, I'm doing 8%). He is opening a solo 401k this month and will put aside 15% to that.
-Tax liability: Husband is a 1099 contractor, so 1/3 of his check gets put into a separate savings account to make quarterly tax payments
-Loan payments: his min payment on IBR right now is $0. My loans are on the 10 year plan (I've applied for repaye but they haven't approved it yet). I pay $2549 minimum, and generally I'm able to throw another $500 on top of that.

So here's the big question. I want to pay off my loans ASAP because I've got the income to do it. Once the emergency fund it done, I'll be paying an extra $2500 minimum to my loans per month. That means I'll be done in 5 years if I can keep it up (basically, if I'm still in biglaw). Husband's loan situation is harder. In our current living situation with me covering the household expenses and him putting away 45% of every check to taxes or retirement, he'll have maybe $20k per year to pay on loans. He thinks it would be best to pay down my loans ASAP, but only make minimum payments on his for the IBR period and just save for the tax bomb. This makes me nervous because of the possibility that Congress either removes IBR forgiveness or increases the penalty or fucks people over in some other way. But, even I have to admit, saving $100k for a tax bomb would be really achievable for us right now, and we can just throw it into index funds and grow it.

So, is our plan of paying off mine ASAP but letting his languish until the tax bomb viable?


How will you be filing taxes? If you file jointly, I believe your income will count as part of his for IBR purposes. Obviously, you can file separately, but there are tax consequences to that too. Your husband can probably get away with paying very very little, considering his discretionary income will take into account a family size of 2 (or more, if you have kids later) even if you file separately. But you need to run the numbers. Also consider the chance that if his income changes dramatically, he could be paying a lot more and 20 years is a long time. That said, 205k is a lot of debt for 40k/year (actually less because of 1099 issue), so IBR might make good sense.

If you're pretty sure you'll be staying in big law for a few years, it probably makes sense to refinance your loans (while keeping your husband's federal). 6.5% average is brutal on $215k of debt.


Thanks for the reply.

I am looking into refinancing at least my highest rate loans. I'm a bit nervous about losing the federal protection, but I have one at 7.65% (by far the highest) that I for sure want to refi.

We filed jointly this year and probably will continue. We know that means my income will count for him too, but we have run the numbers and his payments will still be very manageable even with that. If they ever became unmanageable, it wouldn't be a huge problem for us at this point to file separately as we have no kids and I'll soon be phased out of the student loan interest deduction anyway. We also know that his income is very questionable for the future (both long and short term). I don't plan on staying in big law after my debts are paid. In fact, I'd like to exit on the day I make my last payments if such a feat were possible.

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skers
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Re: Student loan payments: Actual numbers

Postby skers » Wed Mar 02, 2016 7:59 pm

Income: $160k
Debt: $127k
Monthly min payment: $700 something
Monthly elective payment: $3k

I've paid down about $10 grand on my initial balance. Pay around $1800 a month for a pretty sweet apartment and have plenty of cash right now for recreation spending.

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JenDarby
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Re: Student loan payments: Actual numbers

Postby JenDarby » Wed Mar 02, 2016 10:10 pm

skers wrote:Income: $160k
Debt: $127k
Monthly min payment: $700 something
Monthly elective payment: $3k

I've paid down about $10 grand on my initial balance. Pay around $1800 a month for a pretty sweet apartment and have plenty of cash right now for recreation spending.

I thought you refi'd pre name change? If you haven't, I would just refi at this point. You would pay around $1400 in lower interest payments on a 10yr plan that could leave you in about the same spot at the end, or keep making high payments knowing unless everything goes terribly wrong you're paying off all that debt.

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JohannDeMann
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Re: Student loan payments: Actual numbers

Postby JohannDeMann » Thu Mar 03, 2016 12:03 am

Anonymous User wrote:
pigzorz wrote:
hoorahray wrote:I'd appreciate some advice on loan repayment for my husband and I

Our finances:
Income: I make $160k. His income is hard to pin down because he works for a small firm and only makes what he earns in a month. There's no base salary at his firm; just eat what you kill. He has only been there for 2 months, so we dont yet have a solid picture of what a typical month will be. His boss told him to guesstimate around $40k for the year.

Loans: I owe $217k and change. He owes $205k and change.

Where does the money go:
We have been living off my salary alone since he just got this job and his first 2 months of pay were small due to ramp up time.

-Rent: $2270
-Utilities: Generally around $110/month
-Food: We budget $400/month and are usually right around that
-Emergency fund: We have both a short term emergency fund and a long term emergency fund. The short term fund is $5k and that's done. The long term fund I'd like to get to $30k. Right now it's at $13k.
-Retirement: I'm doing a hair over company match (firm matches 6%, I'm doing 8%). He is opening a solo 401k this month and will put aside 15% to that.
-Tax liability: Husband is a 1099 contractor, so 1/3 of his check gets put into a separate savings account to make quarterly tax payments
-Loan payments: his min payment on IBR right now is $0. My loans are on the 10 year plan (I've applied for repaye but they haven't approved it yet). I pay $2549 minimum, and generally I'm able to throw another $500 on top of that.

So here's the big question. I want to pay off my loans ASAP because I've got the income to do it. Once the emergency fund it done, I'll be paying an extra $2500 minimum to my loans per month. That means I'll be done in 5 years if I can keep it up (basically, if I'm still in biglaw). Husband's loan situation is harder. In our current living situation with me covering the household expenses and him putting away 45% of every check to taxes or retirement, he'll have maybe $20k per year to pay on loans. He thinks it would be best to pay down my loans ASAP, but only make minimum payments on his for the IBR period and just save for the tax bomb. This makes me nervous because of the possibility that Congress either removes IBR forgiveness or increases the penalty or fucks people over in some other way. But, even I have to admit, saving $100k for a tax bomb would be really achievable for us right now, and we can just throw it into index funds and grow it.

So, is our plan of paying off mine ASAP but letting his languish until the tax bomb viable?


How will you be filing taxes? If you file jointly, I believe your income will count as part of his for IBR purposes. Obviously, you can file separately, but there are tax consequences to that too. Your husband can probably get away with paying very very little, considering his discretionary income will take into account a family size of 2 (or more, if you have kids later) even if you file separately. But you need to run the numbers. Also consider the chance that if his income changes dramatically, he could be paying a lot more and 20 years is a long time. That said, 205k is a lot of debt for 40k/year (actually less because of 1099 issue), so IBR might make good sense.

If you're pretty sure you'll be staying in big law for a few years, it probably makes sense to refinance your loans (while keeping your husband's federal). 6.5% average is brutal on $215k of debt.


Thanks for the reply.

I am looking into refinancing at least my highest rate loans. I'm a bit nervous about losing the federal protection, but I have one at 7.65% (by far the highest) that I for sure want to refi.

We filed jointly this year and probably will continue. We know that means my income will count for him too, but we have run the numbers and his payments will still be very manageable even with that. If they ever became unmanageable, it wouldn't be a huge problem for us at this point to file separately as we have no kids and I'll soon be phased out of the student loan interest deduction anyway. We also know that his income is very questionable for the future (both long and short term). I don't plan on staying in big law after my debts are paid. In fact, I'd like to exit on the day I make my last payments if such a feat were possible.


yeah youre going to be filing jointly and recertifying your payments based on married income. with that debt load exceeding 400k between the 2 of you id do REPAYE or PAYE between the 2 of you and just save money for the tax bomb. i dont think aggressively paying that down given your high debt load is worth it until you have like 150k saved up. im too lazy to type it all out, but theres other examples in this thread of very high debt loads where i show theres basically no penalty for PAYEing.

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skers
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Re: Student loan payments: Actual numbers

Postby skers » Thu Mar 03, 2016 11:57 am

JenDarby wrote:
skers wrote:Income: $160k
Debt: $127k
Monthly min payment: $700 something
Monthly elective payment: $3k

I've paid down about $10 grand on my initial balance. Pay around $1800 a month for a pretty sweet apartment and have plenty of cash right now for recreation spending.

I thought you refi'd pre name change? If you haven't, I would just refi at this point. You would pay around $1400 in lower interest payments on a 10yr plan that could leave you in about the same spot at the end, or keep making high payments knowing unless everything goes terribly wrong you're paying off all that debt.


Nah, haven't refi'd yet. Deciding whether to go PAYE or SOFI depending on how much I hate big law.

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JohannDeMann
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Re: Student loan payments: Actual numbers

Postby JohannDeMann » Sat Mar 05, 2016 2:06 am

skers wrote:
JenDarby wrote:
skers wrote:Income: $160k
Debt: $127k
Monthly min payment: $700 something
Monthly elective payment: $3k

I've paid down about $10 grand on my initial balance. Pay around $1800 a month for a pretty sweet apartment and have plenty of cash right now for recreation spending.

I thought you refi'd pre name change? If you haven't, I would just refi at this point. You would pay around $1400 in lower interest payments on a 10yr plan that could leave you in about the same spot at the end, or keep making high payments knowing unless everything goes terribly wrong you're paying off all that debt.


Nah, haven't refi'd yet. Deciding whether to go PAYE or SOFI depending on how much I hate big law.


youre gonna pay back 127k no matter what regardless of biglaw or not. id refi.

Anonymous User
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Re: Student loan payments: Actual numbers

Postby Anonymous User » Mon Mar 07, 2016 3:48 pm

Any advice appreciated:

I will finish clerking this fall. My situation as of ~August will be:

Salary: $170k biglaw. Wife is ~$60k. Texas, so relatively low COL.
Bonus: clerkship bonus of $70k.
Debt: $200k (6.8% or so) (currently on PAYE). All mine. Wife is debt free.
Emergency Fund: $25k
Liquid assets: $25k
Retirement: $0
Would like to buy a house in the relatively near future (~3 years), but does not need to be in the immediate future.

Tentative plan: throw ~$75k at loans soon after starting with the firm. Refi the remaining ~$125k. Likely at 10 years to keep monthly payments low. Max out both 401(k)s. Throw remaining cash (after expenses) in combination of repaying loans, savings, and down payment fund.

Also, if I do the above plan, it makes most sense to make the large payment right before going off PAYE, or right after?

hoorahray
Posts: 34
Joined: Wed Jul 02, 2014 11:05 am

Re: Student loan payments: Actual numbers

Postby hoorahray » Tue Mar 08, 2016 11:45 am

Anonymous User wrote:Any advice appreciated:

I will finish clerking this fall. My situation as of ~August will be:

Salary: $170k biglaw. Wife is ~$60k. Texas, so relatively low COL.
Bonus: clerkship bonus of $70k.
Debt: $200k (6.8% or so) (currently on PAYE). All mine. Wife is debt free.
Emergency Fund: $25k
Liquid assets: $25k
Retirement: $0
Would like to buy a house in the relatively near future (~3 years), but does not need to be in the immediate future.

Tentative plan: throw ~$75k at loans soon after starting with the firm. Refi the remaining ~$125k. Likely at 10 years to keep monthly payments low. Max out both 401(k)s. Throw remaining cash (after expenses) in combination of repaying loans, savings, and down payment fund.

Also, if I do the above plan, it makes most sense to make the large payment right before going off PAYE, or right after?


That is exactly what I would do. I just refinanced (PM me if you want a SoFi referral code; using a code gives you $100) and it was a really good decision for my loans in the 6.8%-7.96% window. Assuming that emergency fund balance is what you're happy with, I'd take the clerk bonus and throw it all to loans. If you don't need $25k liquid, I'd throw in another $10-15k on top of the bonus (you're about to have great cash flow). Refinance what's left (you should be able to get somewhere in the low 4's assuming your credit is good).

Once all that is done, max your 401k and your wife's. Opening an IRA on that amount of money doesn't make sense before paying your loans due to the deduction limits for your income on a traditional IRA, and you're not eligible for Roth. So I'd probably open a brokerage account and throw some money into some low risk index funds, since you want to buy a house in 3 years.

Anonymous User
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Re: Student loan payments: Actual numbers

Postby Anonymous User » Tue Mar 08, 2016 11:55 am

Looking for some advice. Getting married. Me: big law, debt almost paid off. Spouse: $150k in debt, $60k income in PSLF eligible employment. The right move is file taxes separately, spouse does IBR/PAYE based on the separate income for several years until PSLF forgiveness, right? Am I missing anything?

hoorahray
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Re: Student loan payments: Actual numbers

Postby hoorahray » Tue Mar 08, 2016 12:06 pm

Anonymous User wrote:Looking for some advice. Getting married. Me: big law, debt almost paid off. Spouse: $150k in debt, $60k income in PSLF eligible employment. The right move is file taxes separately, spouse does IBR/PAYE based on the separate income for several years until PSLF forgiveness, right? Am I missing anything?


Run the numbers. Figure out your income tax liability for joint versus separate, then calculate what her IBR/PAYE payments would be under both scenarios. Do the math to figure out what saves you more money over the 10 year stretch. Also, make sure she is on the repayment plan with the lowest possible payment while she does PSLF.

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El Pollito
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Re: Student loan payments: Actual numbers

Postby El Pollito » Tue Mar 08, 2016 12:11 pm

fed loan put L0LOL in one of my transaction IDs

savage

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JenDarby
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Re: Student loan payments: Actual numbers

Postby JenDarby » Tue Mar 08, 2016 12:53 pm

El Pollito wrote:fed loan put L0LOL in one of my transaction IDs

savage

:lol: that's awesome

admittedlawgirl16
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Re: Student loan payments: Actual numbers

Postby admittedlawgirl16 » Sat Mar 12, 2016 11:55 am

Total Litigator wrote:
Bronx Bum wrote:
Total Litigator wrote:
Bronx Bum wrote:Debt: $190k

Income: $68k

Plan: Don't even know, just deferred another year.

Life: Ruined

Height: 5'9


...Why are you deferring instead of getting on IBR or PAYE?


Not eligible for PAYE. What's the point of IBR at this point? So I can get tax bombed in 25 years? Don't want to consolidate anyway.I'm just throwing money at it trying to keep it at $190k (jfc it increases like $80 a day lol) until my salary increase to $68k once I'm admitted then do all I can do to pay it down.

IBR is really the worst option you can have. It's 25 years at 15% and you are going to get MURDERED by the tax bomb at the end. In 25 years the total will be like $500k if I IBR. Also, once you get married it's 15% of both salaries. Might as well hit the bottle for a while, keep it at bay, then man up and pay it.



Meh, I had the same thought process as you... but IBR is really the way to go.

I have about as much debt as you do, and a similar salary. If I suddenly win a proverbial / actual lottery, sure I will pay off my loans. But intending to repay the $190k later, while $10K+ in interest stacks up per year is not really a constructive plan.

Also, your first year IBR payments should be based on your 3L earnings, so you will likely knock off 1 year off of the 25 years without having paid anything anyways.

Furthermore, at around $190K per year, under the 25 year straight payment plan, that is about $1,500 a year for 25 years anyways (thank interest for that).

Also, if you want to overpay, IBR allows you to focus your payments on the high interest loans after you make your IBR payment, so it will actually save you money as long as your basic plan is to pay back your loans one way or another.

Finally, with regards to the tax bomb, putting money saved via IBR in a 'tax bomb preparation' account is more effective than putting that money towards your loans if you are not able to reduce the principle. Also, remember than the principle does not capitalize on IBR. Your ultimate loan forgivement amount, assuming Congress doesn't void the tax bomb in the next 25 years, will be taxed at about 33%. Therefore (for example) if you put $100K in a 'tax bomb preparation account' for an ultimate loan forgiveness amount of $300K, you will still spent less money than you would have paying it back in full. (I haven't done the actual math here, but it'd be tough to beat having to pay back 'only' 33% of the final unpaid amount versus having paid it back on a 25 year payment plan with interest stacking but no capitalizing priniciple).




Can someone explain the "tax bomb?"

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Calvin Murphy
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Re: Student loan payments: Actual numbers

Postby Calvin Murphy » Sat Mar 12, 2016 12:58 pm

admittedlawgirl16 wrote:
Total Litigator wrote:
Bronx Bum wrote:
Total Litigator wrote:
Bronx Bum wrote:Debt: $190k

Income: $68k

Plan: Don't even know, just deferred another year.

Life: Ruined

Height: 5'9


...Why are you deferring instead of getting on IBR or PAYE?


Not eligible for PAYE. What's the point of IBR at this point? So I can get tax bombed in 25 years? Don't want to consolidate anyway.I'm just throwing money at it trying to keep it at $190k (jfc it increases like $80 a day lol) until my salary increase to $68k once I'm admitted then do all I can do to pay it down.

IBR is really the worst option you can have. It's 25 years at 15% and you are going to get MURDERED by the tax bomb at the end. In 25 years the total will be like $500k if I IBR. Also, once you get married it's 15% of both salaries. Might as well hit the bottle for a while, keep it at bay, then man up and pay it.



Meh, I had the same thought process as you... but IBR is really the way to go.

I have about as much debt as you do, and a similar salary. If I suddenly win a proverbial / actual lottery, sure I will pay off my loans. But intending to repay the $190k later, while $10K+ in interest stacks up per year is not really a constructive plan.

Also, your first year IBR payments should be based on your 3L earnings, so you will likely knock off 1 year off of the 25 years without having paid anything anyways.

Furthermore, at around $190K per year, under the 25 year straight payment plan, that is about $1,500 a year for 25 years anyways (thank interest for that).

Also, if you want to overpay, IBR allows you to focus your payments on the high interest loans after you make your IBR payment, so it will actually save you money as long as your basic plan is to pay back your loans one way or another.

Finally, with regards to the tax bomb, putting money saved via IBR in a 'tax bomb preparation' account is more effective than putting that money towards your loans if you are not able to reduce the principle. Also, remember than the principle does not capitalize on IBR. Your ultimate loan forgivement amount, assuming Congress doesn't void the tax bomb in the next 25 years, will be taxed at about 33%. Therefore (for example) if you put $100K in a 'tax bomb preparation account' for an ultimate loan forgiveness amount of $300K, you will still spent less money than you would have paying it back in full. (I haven't done the actual math here, but it'd be tough to beat having to pay back 'only' 33% of the final unpaid amount versus having paid it back on a 25 year payment plan with interest stacking but no capitalizing priniciple).




Can someone explain the "tax bomb?"


When a bank writes off a loan...or in this case when the government forgives the remaining balance after 20 or 25 years (depending on the repayment program), the forgiven amount is considered income by the IRS. This means that, for a person making $50,000/year who has $200,000 forgiven in loans, they will have to pay taxes on $250,000 in income for the year that their loans are forgiven.

For many people, saving up and investing over the course of the 20-25 years is sufficient to cover the extra taxes in the year of forgiveness (the "tax bomb"), and they still come out ahead of where they would have been if they paid off all of their loans.

The 10-year PSLF program does not count the forgiven amount as income, so there is no tax bomb for those individuals.

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zot1
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Re: Student loan payments: Actual numbers

Postby zot1 » Sat Mar 12, 2016 9:51 pm

When y'all talk about refinancing, you're talking about private loans, right?

rustyyoda
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Re: Student loan payments: Actual numbers

Postby rustyyoda » Sun Mar 13, 2016 5:24 pm

zot1 wrote:When y'all talk about refinancing, you're talking about private loans, right?


Nope. Refi'd my federal loans at SoFi. It's a great decision if you plan to pay them off ASAP on a big law salary anyway.

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zot1
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Re: Student loan payments: Actual numbers

Postby zot1 » Sun Mar 13, 2016 6:16 pm

rustyyoda wrote:
zot1 wrote:When y'all talk about refinancing, you're talking about private loans, right?


Nope. Refi'd my federal loans at SoFi. It's a great decision if you plan to pay them off ASAP on a big law salary anyway.


I see, thanks.

Not planning to pay ASAP and I think I have to stay with government loans for forgiveness.

gabewatch
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Re: Student loan payments: Actual numbers

Postby gabewatch » Sun Mar 13, 2016 6:20 pm

rustyyoda wrote:
zot1 wrote:When y'all talk about refinancing, you're talking about private loans, right?


Nope. Refi'd my federal loans at SoFi. It's a great decision if you plan to pay them off ASAP on a big law salary anyway.


I'm not sure I'd agree. If you plan to pay your loans off ASAP (like in 1-3 years) refinancing will probably end up saving you only a modest sum - but if your plan to pay off ASAP doesn't work out for whatever reason, then you lose federal loan protection options.

dixiecupdrinking
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Re: Student loan payments: Actual numbers

Postby dixiecupdrinking » Sun Mar 13, 2016 7:58 pm

gabewatch wrote:
rustyyoda wrote:
zot1 wrote:When y'all talk about refinancing, you're talking about private loans, right?


Nope. Refi'd my federal loans at SoFi. It's a great decision if you plan to pay them off ASAP on a big law salary anyway.


I'm not sure I'd agree. If you plan to pay your loans off ASAP (like in 1-3 years) refinancing will probably end up saving you only a modest sum - but if your plan to pay off ASAP doesn't work out for whatever reason, then you lose federal loan protection options.

Eh, the difference between a grad plus interest rate and a sofi interest rate can save you thousands of dollars a year.




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