PSA: You should think about PAYE, even if you're in BigLaw Forum

[A. Nony Mouse]

One important thing to add that I wasn't factoring in earlier: if things continue on their current trajectory, I'll hopefully be married within the next 2-3 years. My girlfriend makes a pretty decent living and, from what I understand, PAYE adjusts your payments based on your joint adjusted gross income.

And if that happens, my repayment estimator shows extremely high loan payments and absolutely no loan forgiveness.

So, if I plan on getting married within 2-3 years, is there any point to doing PAYE?

Read what nony posted above. TLDR: it depends on whether you file separately or jointly, what state you are in, and whether Congress decides to change things up.

Filing separately really fucks your taxes though, so there's also that to consider.

Depends on your situation. With no house/no kids/no education credits, there's not that much difference. If you have any/all of those, it's probably more complicated.

[AVBucks4239]

I can say with almost 100% certainty that we'll get married. We've been dating a while, she's hinted at me proposing a few times, and I definitely enjoy dating her. (*Gets off soap box*).

As of right now, if I tighten things up, I can afford standard repayment, but barely. If I did that, I would throw any and all bonuses and raises into saving for a house.

However, if I did PAYE, the Repayment Estimator shows that I would be paying about $30,000 more in interest and for about three more years. In other words, the period before I would be married would simply delay making standard payments and then I would just be paying more over a bit longer of a period.

TL;DR: figuring out that I'm boned live on TLS. Oh well.

Just bringing this to the top of this page, since it seems like it applies to more than just me...

Maybe use PAYE solely for the purpose of saving for a house for 2-3 years, then file jointly, and by that time, I should be able to afford standard repayment?

My brain hurts.

[Elston Gunn]

I can say with almost 100% certainty that we'll get married. We've been dating a while, she's hinted at me proposing a few times, and I definitely enjoy dating her. (*Gets off soap box*).

As of right now, if I tighten things up, I can afford standard repayment, but barely. If I did that, I would throw any and all bonuses and raises into saving for a house.

However, if I did PAYE, the Repayment Estimator shows that I would be paying about $30,000 more in interest and for about three more years. In other words, the period before I would be married would simply delay making standard payments and then I would just be paying more over a bit longer of a period.

TL;DR: figuring out that I'm boned live on TLS. Oh well.

Just bringing this to the top of this page, since it seems like it applies to more than just me...

Maybe use PAYE solely for the purpose of saving for a house for 2-3 years, then file jointly, and by that time, I should be able to afford standard repayment?

My brain hurts.

PAYE, but make more than the minimums/less than the standard repayment?

[AVBucks4239]

PAYE, but make more than the minimums/less than the standard repayment?

Seems reasonable. After all my bills (except student loans) and taxes, plus $200 of bullshit money/month, I have about $1600 left over.

My PAYE minimum is $250.

I'd like to throw $500/month towards a house for four years (GF = same, meaning $48,000 saved, which is plenty in our market for a 20% down payment, and then some). This means I could still pay somewhere around $1100 towards loans.

Question is will I be able to afford a mortgage + student loan payment with her adjusted gross income factored in. My guess would be that the student loan payment would be about $1,600 and mortgage payment would be $1500 (total).

Sigh.

[BuckinghamB]

Also, I really miss not living in a community property state, where I could file singly and not have my husband's income count. Sigh. (Mostly because he hasn't been working steadily so the income we'll have when we file doesn't really reflect our financial situation very well.)

Question on this topic. My fiancee and I will be married when she begins her residency. Will my salary prevent her from going on IBR for her med school loans? If so, would it help to file taxes separately? I'm willing to pay more in taxes if it means we'll get more liquidity from her reduced minimum payments. Really don't want to be throwing 4-5K per month at both of our loan balances when only one of us is making enough money to cover the payments.

If you're married and file jointly, then your income will count toward her IBR calculation, yes. Whether it would kick her out of IBR depends on the total income/debt ratio. There are calculators online that will let you figure out how much her payment would be/whether she'll still qualify.

At the moment, if you file singly, her IBR will be based only on her income. There have been noises about removing this option, but I'm not sure if any of them have passed yet. (And at least some community property states will count your income toward her income regardless, so you'd be stuck.)

IIRC, one of the proposed changes to PAYE was removing the ability to avoid your spouse's income counting towards your payment calculation by filing separately. I am not sure if there was any movement on that or if it was planned to apply to IBR though.

Very helpful. Thank you both

[Br3v]

If you want to pay down aggressive (say 4 years) would it still make since to do PAYE as a "just in case" scenario, i.e. not in Biglaw that long and can't afford to pay down as quick?

Assume Biglaw for 4 years and can pay off loans. Would it make since to use another program that accumulates less interest?


Also, how would getting married say 2 years in factor in to this decision?

[bk1]

If you want to pay down aggressive (say 4 years) would it still make since to do PAYE as a "just in case" scenario, i.e. not in Biglaw that long and can't afford to pay down as quick?

Assume Biglaw for 4 years and can pay off loans. Would it make since to use another program that accumulates less interest?


Also, how would getting married say 2 years in factor in to this decision?

You're asking whether it would make sense to get on PAYE but make aggressive, above PAYE-rate payments? I don't think that makes sense because you are forgoing the savings from refinancing. If you're going to do PAYE, may as well do it all the way with low PAYE payments and then eating the tax bomb.

Getting married 2 years in wouldn't affect you if you had refinanced. It may change your PAYE-rate payments if you were doing PAYE (see above), but if you were doing PAYE and were already making significantly higher than PAYE-rate payments then it probably wouldn't actually impact you.

[Br3v]

If you want to pay down aggressive (say 4 years) would it still make since to do PAYE as a "just in case" scenario, i.e. not in Biglaw that long and can't afford to pay down as quick?

Assume Biglaw for 4 years and can pay off loans. Would it make since to use another program that accumulates less interest?


Also, how would getting married say 2 years in factor in to this decision?

You're asking whether it would make sense to get on PAYE but make aggressive, above PAYE-rate payments? I don't think that makes sense because you are forgoing the savings from refinancing. If you're going to do PAYE, may as well do it all the way with low PAYE payments and then eating the tax bomb.

Getting married 2 years in wouldn't affect you if you had refinanced. It may change your PAYE-rate payments if you were doing PAYE (see above), but if you were doing PAYE and were already making significantly higher than PAYE-rate payments then it probably wouldn't actually impact you.

Very helpful thanks (and yes, that is what I meant). Could you explain "refinance?" I hear it thrown around a lot here but the only thing that comes to mind is like when people refinance their house. Is it in essence: going to bank and saying I have X debt and Y expected income over the next Z years and they pay off your debt and now you pay the bank at a lower interest rate?

If so, are you going to need some substantial assets or something to convince the bank to do that? Good credit? And when would one refinance? Like as soon after graduation as possible?

Lastly, is their a danger of refinancing and then not being in biglaw long enough to pay so aggressive for the remaning years on the loan?

[Br3v]

Also when I run the numbers on the tax bomb it seems kind of crazy. Say you are forgiven 450K. A rough 33% tax on that is 148,500. If you save for that over 20 years thats a monthly payment of $618.75.

$618.75 a month for 20 years on top of your regular PAYE payments…

I read ITT something about the insolvency exception, I assume that has to play a big role b/c otherwise that tax bomb seems very substantial.

[Tiago Splitter]

Could you explain "refinance?" I hear it thrown around a lot here but the only thing that comes to mind is like when people refinance their house. Is it in essence: going to bank and saying I have X debt and Y expected income over the next Z years and they pay off your debt and now you pay the bank at a lower interest rate?

If so, are you going to need some substantial assets or something to convince the bank to do that? Good credit? And when would one refinance? Like as soon after graduation as possible?

Yes, that is what people are talking about with SoFi, Common Bond, etc. These companies will pay off your loans and you pay them back at a lower rate. They are doing it for recently graduated law students so they don't seem to be requiring anything other than a pay stub showing a high salary.

As for when to do it, as a 2L you may not ever have the opportunity to refinance where it makes sense. The clock is ticking on these low rates, and they don't need to creep up much before it won't make sense to refi at all.

Also when I run the numbers on the tax bomb it seems kind of crazy. Say you are forgiven 450K. A rough 33% tax on that is 148,500. If you save for that over 20 years thats a monthly payment of $618.75.

PAYE uses simple interest, not compound interest. You'd have to take out close to sticker debt and make very low payments for the debt to get to 450k. PAYE will require a biglaw associate with ~200k debt to pay off the interest each year. Obviously you can exit to something lower paying, but as long as you have a job for 20 years it will be pretty hard to get to 450k forgiven.

Your $618.75 per month also assumes you get no return on those savings, which is impractical.

[Br3v]

As for when to [refi], as a 2L you may not ever have the opportunity to refinance where it makes sense. The clock is ticking on these low rates, and they don't need to creep up much before it won't make sense to refi at all.

Man, how do you get a market quote (estimate) on the current refi interest rates and what interest rate are you comparing it to (whatever GradPlus is, 6.9%?) in order to see if its in the money?

PAYE uses simple interest, not compound interest. You'd have to take out close to sticker debt and make very low payments for the debt to get to 450k. PAYE will require a biglaw associate with ~200k debt to pay off the interest each year. Obviously you can exit to something lower paying, but as long as you have a job for 20 years it will be pretty hard to get to 450k forgiven.

Your $618.75 per month also assumes you get no return on those savings, which is impractical.

OP has tax payment at $142,075. (I ran numbers with a lower exit salary than OP 100K) but even that comes to $592 a month on top of ordinary PAYE payments.

I don't have the time to see how much say a 2% return would reduce your monthly payments but it can't be that much?

I want you to be right (not saying you aren't!), I guess I was just a little taken back when I saw how substantial the tax bomb is.

[Tiago Splitter]

If you're on PAYE and making biglaw salary for four years and 100k for the next sixteen paying 140k to the IRS at the end of 20 years will not be difficult. It's the equivalent of maxing out your IRA for 20 years and getting no return.

[skers]

So is consensus to do refi and pay aggressively w/ less than 150k debt or is PAYE still worth it? I'll have about 140k at grad depending on how big of a bar trip I want to take and if I just want to wipe out all the interest before it capitalizes.

[mirage1287]

Isn't it potentially very risky to refi if you find yourself unexpectedly without a job/are forced to take a job with a very low salary? I like the fact that there are some protections built in to federal loans. Converting over $100K in federal loans into private loans removes a lot of these protections (ie. SoFi unemployment deferment caps at 1 year).

[KM2016]

Isn't it potentially very risky to refi if you find yourself unexpectedly without a job/are forced to take a job with a very low salary? I like the fact that there are some protections built in to federal loans. Converting over $100K in federal loans into private loans removes a lot of these protections (ie. SoFi unemployment deferment caps at 1 year).

I agree, this is why I'm staying on 10 year plan, hoping to pay off in 5. But if I can't last in Biglaw or decide to take a lower paying exit option, PAYE or some other protections may be in my future.

[15 styx]

I just spent 30 minutes online reading about bout PAYE, IBR, Tax Bomb, etc. Still baffled about what option is best. Income is 135k. At the moment I am straight out paying $1,300 monthly on my $85K loan (paying it like a car loan), which will clear me up in 7 years. Given this data, what you do? I am open to suggestions.

[bk1]

Isn't it potentially very risky to refi if you find yourself unexpectedly without a job/are forced to take a job with a very low salary? I like the fact that there are some protections built in to federal loans. Converting over $100K in federal loans into private loans removes a lot of these protections (ie. SoFi unemployment deferment caps at 1 year).

Yes that is one of the primary risks of refinancing.

[Tiago Splitter]

I just spent 30 minutes online reading about bout PAYE, IBR, Tax Bomb, etc. Still baffled about what option is best. Income is 135k. At the moment I am straight out paying $1,300 monthly on my $85K loan (paying it like a car loan), which will clear me up in 7 years. Given this data, what you do? I am open to suggestions.

If you make six figures the rest of the way you'll pay off the entire thing before 20 years even just making minimum PAYE payments so you might as well just pay it off quickly. With a 140k balance it's a closer call; four years of biglaw and then 100k the rest of the way still leaves you with 160k or so in forgiven debt.

[bk1]

I just spent 30 minutes online reading about bout PAYE, IBR, Tax Bomb, etc. Still baffled about what option is best. Income is 135k. At the moment I am straight out paying $1,300 monthly on my $85K loan (paying it like a car loan), which will clear me up in 7 years. Given this data, what you do? I am open to suggestions.

You probably don't qualify for PAYE (i.e. you income is higher than your debt). If you're looking at the easiest way to save money, I'd refinance and aggressively pay down. If you're currently saving for something (e.g. a down payment on a house), then maybe refinance with a less aggressive payment plan. If you're concerned about losing your job and being unable to make loan payments (which I wouldn't be because you can service 85k on a significantly smaller salary than 135k and even if you did lose your job it would likely be after your debt has gone down by a chunk), then you may want to stay with government loans but make more aggressive payments.

If you make six figures the rest of the way you'll pay off the entire thing before 20 years even just making minimum PAYE payments so you might as well just pay it off quickly. With a 140k balance it's a closer call; four years of biglaw and then 100k the rest of the way still leaves you with 160k or so in forgiven debt.

I think you misread OP's balance.

[kalvano]

Has anyone had to recertify their PAYE repayment plan after getting a much better job? My AGI from my previous year's return includes a couple of months of my new salary, but my overall household income will be much higher than last year's AGI. Is that what they mean by "significantly different" income?

[A. Nony Mouse]

Has anyone had to recertify their PAYE repayment plan after getting a much better job? My AGI from my previous year's return includes a couple of months of my new salary, but my overall household income will be much higher than last year's AGI. Is that what they mean by "significantly different" income?

I've done this for IBR, and (assuming it's the same) you have to recertify every 12 months (or within 12 months of your last certification, anyway). They will send you a reminder telling you that you need to recertify, and at that point you need to provide either your most recent tax return or your current pay stub to prove what your income is. So they'll just recalculate it at that point. I think what you're talking about would count as "significantly different" income, assuming it would change your payment, but you don't really have to decide that - they'll make you send in current info regardless.

(You can tell them about a "significantly different" income at any time your income changes - for instance, if you lose your job/get a better job or you file jointly and your spouse loses their job/gets a higher-paying job - so you can recertify more frequently than once a year, but the longest you can go without recertifying is 12 months.)

I hope I understood your question enough for that to be helpful...

[kalvano]

PAYE only asks for new proof of income of your income is significantly different than your tax return's AGI. I'd prefer they use my tax return's AGI, but I also don't fancy fraud charges. I'll just call the loan servicer on Monday.

[A. Nony Mouse]

PAYE only asks for new proof of income of your income is significantly different than your tax return's AGI. I'd prefer they use my tax return's AGI, but I also don't fancy fraud charges. I'll just call the loan servicer on Monday.

Oh, so you mean that this year's return will show a significantly lower income than your actual pay? Yeah, I had to do this, but the other way around (my husband was no longer working so our two-income return looked way higher than our actual income).

My friend Chad basically only recertifies for a higher income when required (when the 12 months rolls around), but recertifies for a lower income as soon as that income kicks in. The generic page about the plans suggests you're only required to recertify once a year, but yeah, your servicer will have the best answer.

[kalvano]

No, sorry, my 2013 return shows an AGI of about $80K less than what this year's return will, but my 2013 return included a few months of my current income level. I would prefer they use my AGI from 2013 but the recertification asks if your income is significantly different. But my situation doesn't fit into how they define "significantly different."

[A. Nony Mouse]

Oh, I (finally) get it (I didn't twig that you were being asked to recertify now, sorry). Yeah, I would think they will want your pay stub rather than your tax return.