Anonymous User wrote: XxSpyKEx wrote:
Anonymous User wrote:I've got $120k in loans, vast majority of which are PAYE eligible, but am only making $60k a year if I meet my billable hours (1800), $50k base. Not a lot, but I'm happy with the location/the people/the practice, and I can grow here.
Should I attempt private consolidation/refinancing? My interest rates are currently like 7.3% on average. I have good credit (to the extent possible for a K-JD, not a lot of history but my score is like 720) if that matters.
The federal student loan protections, like PAYE, are in place to help people in your situation (arguably). You'd be nuts to refinance with a private lender. You can't repay $120k in debt with a $50-60k /year job. You'd basically need to be homeless and to put your entire after-tax income towards your student loans to stand a change at repaying them within half a decade.
Payments on interest alone will be in the $650 range. I'd like to pay somewhere around $1000/m on my loans in order to make SOME sort of progress, and have the PAYE minimums as a fallback. It's just hard for me to fathom the advice that it's a GOOD idea for me to ride PAYE until I make more money, all the while capitalizing interest & ballooning the tax bomb.
(1) Definitely don't refinance. You need the protections that federal loans provide.
(2) Sign up for PAYE and auto-debit (to get the .25 interest rate deduction), then spend some time figuring out the numbers before you do anything more than pay the minimum (I paid the minimum for about 4-5 months before I figured out my plan).
(3) Build an emergency fund (3-6 months of expenses).
After that, I think it becomes a personal decision. Read through this thread and you'll find that I lean towards paying back your loans and JohannDeMann leans towards doing PAYE and building assets. One thing you definitely have to realize is that you can enroll in PAYE to enjoy (a) the protections of federal loans, (b) the flexibility of PAYE and (c) being able to attack the principal of your loans more quickly.
And that's basically what I'm doing. I had about $150k in loans and about $50k income. I'm enrolled in PAYE and my payment is about $250/month. I pay that, which keeps me current on all 12 of my loans, and then pay an extra $750 towards my highest interest rate loan. Just this year I will have knocked out an $8500 loan, a $2500 loan, and chipped away at a $27,000 loan. Furthermore, by enrolling in PAYE, the interest on several loans will be wiped out after three years, so I'm not paying anything but the minimum towards those.
I'm also modestly investing (matching my employer's 401k contribution and contributing a little bit to a Roth).
And since I'm bored at work, here are the basic numbers to illustrate Johann's point.
Current PAYE Payment (assuming you max 401k and IRA): $161
Total Paid Over 20 Years: $78,000
Amount Forgiven: $220,000
Tax Liability (Assuming 38% Tax Bracket): $83,600
Total Paid Towards Loan: $161,600
401k Balance from Maxing After 20 Years ($18,500 per year, Assuming 6% Match and 7% Returns): $958,300
Traditional IRA Balance from Maxing After 20 Years ($5,500 per year and 7% Returns): $241,258
Three things. First, you'd likely have to pull from your Traditional IRA to pay the tax liability, meaning you'd have to pay income taxes on top of what you withdraw and also pay the 10% penalty for early withdrawal (before age 59.5). So your IRA would be substantially depleted.
Second, if you get married to a spouse making decent income, all these calculations are worthless. You'll either file together and make higher payments (and maybe pay off your loan anyway) or file separately and lose the benefit of basically every tax deduction.
Third, you really don't know where your career will take you. What if you become partner after 7-8 years, your firm has a great year and you make $250k? Then you suddenly have to pay the ten year standard payment and have to pay off all the interest that's been building up.
Point is: if you are comfortable with both the personal and career unknowns that lie ahead and want to build your assets, then do PAYE and pay the minimum for 20 years. If you're like me and the numbers/risk don't add up (for me, filing jointly makes PAYE a nearly worthless endeavor aside from the plan I described above), then enroll in PAYE and attack the highest interest rate loans.