Is PAYE open to people in big law? Forum

[Anonymous User]

I was wondering if PAYE is open to big law or if it's crazy to go onto the 30-year repayment plan. Until I develop a niche I really don't feel like my income is super secure and have no idea where I'll be in 5 years so developing a savings is important to me. We also have no idea how the politics will change outstanding student loan debt or what the rate of inflation will be, and student loans aren't secured by real property. Is cutting back on the repayments crazy?

[DELG]

yes you can be on PAYE and in biglaw

[Anonymous User]

yes you can be on PAYE and in biglaw

And what's the deal with PAYE? You pay 10% of your salary for 30 years?

[lacrossebrother]

yes you can be on PAYE and in biglaw

And what's the deal with PAYE? You pay 10% of your salary for 30 years?

10% of "discretionary income" for 20 years. discretionary income defined as your AGI above the 150% poverty line. 150% poverty line is 17655 for a family size of 1 in 2015. most common exclusions from "gross income" that give you your adjusted gross income (AGI) are your pre-tax benefits...namely 401k, health, transportation deductions. after 20 years, whatever remains of your balance is cancelled. According to the IRS, this cancellation is taxable, but only up to the point of your solvency. I.e. if you have 100k left in student loans, and you own $150k in assets...you are only 50k solvent. Therefore, you pay tax on 50k cancellation. This is likely to be taxed at about 35%, but depends on political climate and your income at that time.

At $160k, assuming you max your 401k out, but don't take any other deductions, this means you will pay about 12.5k a year. If you have around $200k in debt, at 6.5%, that would mean you are basically just paying off the interest each month. To ease the math then, and assuming you are totally solvent, you can then calculate that you'd pay (20 years*12.5k) + (.35*200k forgiven) = $320k.

If you'd pay your 10 year standard repayment, at 6.5% * 10 years, this is approximately $275k in total payments (and $2300/month). If you can refinance with a private lender, you can drop this probably to about 4.5% fixed, $2100/month, and a total of $250k paid on your loans, over 10 years.

To the extent however that you're trying to compare 250k or 275k vs. $320k over 20 years, you should calculate the value of the $10k savings annually over the 20 year time frame we are looking at. If you can expect on average a 3% return, that's worth about $68k. There's a chance my logic there is wrong though and you should make that comparison only for the 10 years difference, in which case that's an added bonus of only about $15k. So using that conservative approach, it'd be 30k or 45k more expensive over the 20 years to do PAYE if you expect a consistent $160k salary. To the extent that you value money at anything over 3%, the $2100/month would be difficult now, or there's a chance you want to leave biglaw soonish, then PAYE becomes more pragmatic.

[Clearly]

yes you can be on PAYE and in biglaw

And what's the deal with PAYE? You pay 10% of your salary for 30 years?

10% of "discretionary income" for 20 years. discretionary income defined as your AGI above the 150% poverty line. 150% poverty line is 17655 for a family size of 1 in 2015. most common exclusions from "gross income" that give you your adjusted gross income (AGI) are your pre-tax benefits...namely 401k, health, transportation deductions. after 20 years, whatever remains of your balance is cancelled. According to the IRS, this cancellation is taxable, but only up to the point of your solvency. I.e. if you have 100k left in student loans, and you own $150k in assets...you are only 50k solvent. Therefore, you pay tax on 50k cancellation. This is likely to be taxed at about 35%, but depends on political climate and your income at that time.

At $160k, assuming you max your 401k out, but don't take any other deductions, this means you will pay about 12.5k a year. If you have around $200k in debt, at 6.5%, that would mean you are basically just paying off the interest each month. To ease the math then, and assuming you are totally solvent, you can then calculate that you'd pay (20 years*12.5k) + (.35*200k forgiven) = $320k.

If you'd pay your 10 year standard repayment, at 6.5% * 10 years, this is approximately $275k in total payments (and $2300/month). If you can refinance with a private lender, you can drop this probably to about 4.5% fixed, $2100/month, and a total of $250k paid on your loans, over 10 years.

To the extent however that you're trying to compare 250k or 275k vs. $320k over 20 years, you should calculate the value of the $10k savings annually over the 20 year time frame we are looking at. If you can expect on average a 3% return, that's worth about $68k. There's a chance my logic there is wrong though and you should make that comparison only for the 10 years difference, in which case that's an added bonus of only about $15k. So using that conservative approach, it'd be 30k or 45k more expensive over the 20 years to do PAYE if you expect a consistent $160k salary. To the extent that you value money at anything over 3%, the $2100/month would be difficult now, or there's a chance you want to leave biglaw soonish, then PAYE becomes more pragmatic.

That. Was. Awesome.

[Anonymous User]

yes you can be on PAYE and in biglaw

And what's the deal with PAYE? You pay 10% of your salary for 30 years?

10% of "discretionary income" for 20 years. discretionary income defined as your AGI above the 150% poverty line. 150% poverty line is 17655 for a family size of 1 in 2015. most common exclusions from "gross income" that give you your adjusted gross income (AGI) are your pre-tax benefits...namely 401k, health, transportation deductions. after 20 years, whatever remains of your balance is cancelled. According to the IRS, this cancellation is taxable, but only up to the point of your solvency. I.e. if you have 100k left in student loans, and you own $150k in assets...you are only 50k solvent. Therefore, you pay tax on 50k cancellation. This is likely to be taxed at about 35%, but depends on political climate and your income at that time.

At $160k, assuming you max your 401k out, but don't take any other deductions, this means you will pay about 12.5k a year. If you have around $200k in debt, at 6.5%, that would mean you are basically just paying off the interest each month. To ease the math then, and assuming you are totally solvent, you can then calculate that you'd pay (20 years*12.5k) + (.35*200k forgiven) = $320k.

If you'd pay your 10 year standard repayment, at 6.5% * 10 years, this is approximately $275k in total payments (and $2300/month). If you can refinance with a private lender, you can drop this probably to about 4.5% fixed, $2100/month, and a total of $250k paid on your loans, over 10 years.

To the extent however that you're trying to compare 250k or 275k vs. $320k over 20 years, you should calculate the value of the $10k savings annually over the 20 year time frame we are looking at. If you can expect on average a 3% return, that's worth about $68k. There's a chance my logic there is wrong though and you should make that comparison only for the 10 years difference, in which case that's an added bonus of only about $15k. So using that conservative approach, it'd be 30k or 45k more expensive over the 20 years to do PAYE if you expect a consistent $160k salary. To the extent that you value money at anything over 3%, the $2100/month would be difficult now, or there's a chance you want to leave biglaw soonish, then PAYE becomes more pragmatic.

Thanks so much. I have roughly 260k in debt, and was paying the required monthly minimum of ~$3k for a 10-year repayment. The 30 year is approx. $1700/mo. I make 160k plus about 5-10k in royalties from my pre-law school drivel so income is likely around $185k year one assuming I hit the bonus. $1,000 a month for 20 years sounds much better than $1,700 a month for 30-years. Is this really how it works? How do you sign up? This seems awesome.

[Clemenceau]

yes you can be on PAYE and in biglaw

And what's the deal with PAYE? You pay 10% of your salary for 30 years?

10% of "discretionary income" for 20 years. discretionary income defined as your AGI above the 150% poverty line. 150% poverty line is 17655 for a family size of 1 in 2015. most common exclusions from "gross income" that give you your adjusted gross income (AGI) are your pre-tax benefits...namely 401k, health, transportation deductions. after 20 years, whatever remains of your balance is cancelled. According to the IRS, this cancellation is taxable, but only up to the point of your solvency. I.e. if you have 100k left in student loans, and you own $150k in assets...you are only 50k solvent. Therefore, you pay tax on 50k cancellation. This is likely to be taxed at about 35%, but depends on political climate and your income at that time.

At $160k, assuming you max your 401k out, but don't take any other deductions, this means you will pay about 12.5k a year. If you have around $200k in debt, at 6.5%, that would mean you are basically just paying off the interest each month. To ease the math then, and assuming you are totally solvent, you can then calculate that you'd pay (20 years*12.5k) + (.35*200k forgiven) = $320k.

If you'd pay your 10 year standard repayment, at 6.5% * 10 years, this is approximately $275k in total payments (and $2300/month). If you can refinance with a private lender, you can drop this probably to about 4.5% fixed, $2100/month, and a total of $250k paid on your loans, over 10 years.

To the extent however that you're trying to compare 250k or 275k vs. $320k over 20 years, you should calculate the value of the $10k savings annually over the 20 year time frame we are looking at. If you can expect on average a 3% return, that's worth about $68k. There's a chance my logic there is wrong though and you should make that comparison only for the 10 years difference, in which case that's an added bonus of only about $15k. So using that conservative approach, it'd be 30k or 45k more expensive over the 20 years to do PAYE if you expect a consistent $160k salary. To the extent that you value money at anything over 3%, the $2100/month would be difficult now, or there's a chance you want to leave biglaw soonish, then PAYE becomes more pragmatic.

That. Was. Awesome.

[Anonymous User]

Is PAYE common in big law, or do most pay it off ASAP?

[Anonymous User]

.

[ymmv]

Is PAYE common in big law, or do most pay it off ASAP?

False disjunctive.

[lacrossebrother]

How do you sign up? This seems awesome.

I think there is more than one loan service provider. Mine is Nelnet. I assume all are similar. There's simply an online form that you fill out indicating your desire to participate. It then asks you for your last year's tax return. To the extent that you make significantly different than that return reflects, it will ask you to provide 'alternative documentation,' by way of a paystub or offer letter. I made this mistake. It's a huge mistake, because they refuse to calculate your AGI. They just go off your paycheck. This means, that despite being in my stub year and contributing aggressively to retirement, my payments go immediately to a full year's salary. I hope to remedy this however when I get my 2015 taxes done.

A couple more points:

• they certify the monthly payment 12 months at a time based on your last year's taxes.
• the game here is to pay the absolute minimum. this means trying to reduce your AGI
• if your monthly payment is $500, and you pay $1000, you do not need to pay the next month. In other words, your minimum is "advanced." This is very useful in your stub year because when you make less than $80k, you are actually entitled to write $2500 off from your taxes from student loan interest. Your initial payments are considered 100% directed at interest. This means you should pay $2500 before the end of the year you begin paying. Since you will begin paying in November, normally this would be only two months, so you'd be paying too much. But, you can pay zero in January, Feb, March to the extent you overpay in December to maximize that deduction.

[bk1]

To quibble with lax's calculations a bit, while it notes that your income might go down because you leave biglaw, the converse can happen as well where your AGI goes up (most likely due to marriage).

[bk1]

Is PAYE common in big law, or do most pay it off ASAP?

False disjunctive.

Agreed, though I'll note that the number of people with a quarter million dollars in debt isn't as large as it seems on TLS (see the average debt loads of schools). People with <100k debt are not feeling the same kind of burden that people with 250k+ are. My suspicion is that most biglawyers stick to 10 year plans (whether via federal or refi).

[DELG]

Is PAYE common in big law, or do most pay it off ASAP?

False disjunctive.

Agreed, though I'll note that the number of people with a quarter million dollars in debt isn't as large as it seems on TLS (see the average debt loads of schools). People with <100k debt are not feeling the same kind of burden that people with 250k+ are. My suspicion is that most biglawyers stick to 10 year plans (whether via federal or refi).

yeah it seems like i'm in the minority around here of people who are carrying serious debt loads

[lacrossebrother]

To quibble with lax's calculations a bit, while it notes that your income might go down because you leave biglaw, the converse can happen as well where your AGI goes up (most likely due to marriage).

Could you summarize what you lose by filing separately while married to a working girl?

My super quick math shows the following:
Suppose you make $160k, she makes $100k.
Deductions are $6,300 individually or $12,600 together (so no benefit).

Filing separately:
$160k = $37,836.75
$100k = $21,036.75 in tax.
(didn't include deduction, but whatever).
$260k, jointly = $61,213. (more than the $59k above!)

It looks like there's something called a child tax credit, but that gets phased out for non-poors. There's some other ones for poors too I think.
What else am I missing?

[bk1]

Forgot to add that filing separately only applies to PAYE/IBR. It does not apply to REPAYE (spousal income always considered).

[Anonymous User]

Forgot to add that filing separately only applies to PAYE/IBR. It does not apply to REPAYE (spousal income always considered).

I'm OP. Just to clarify and anybody who knows is welcome to chime in: does this mean that if I stopped working and my spouse was the breadwinner then the IBR would be based on 2 incomes?

Also to play the pessimism game, let's say in 3 years from now my salary is 200k and I'm fired the next year and make 50k the following year, my payments will be based off the 200k for that year? Also, what happens if you stop earning an income or fall below the poverty line? Are your payments $0? Technically speaking couldn't you just receive 0 salary 15 years in and only get paid in convertible securities that don't have any value for 5 years? I like learning to game a system, not because I'll do it, but because it makes me more comfortable I have the where with all to signing onto it.

[Tiago Splitter]

Forgot to add that filing separately only applies to PAYE/IBR. It does not apply to REPAYE (spousal income always considered).

I'm OP. Just to clarify and anybody who knows is welcome to chime in: does this mean that if I stopped working and my spouse was the breadwinner then the IBR would be based on 2 incomes?

Also to play the pessimism game, let's say in 3 years from now my salary is 200k and I'm fired the next year and make 50k the following year, my payments will be based off the 200k for that year? Also, what happens if you stop earning an income or fall below the poverty line? Are your payments $0? Technically speaking couldn't you just receive 0 salary 15 years in and only get paid in convertible securities that don't have any value for 5 years? I like learning to game a system, not because I'll do it, but because it makes me more comfortable I have the where with all to signing onto it.

1) Under IBR and PAYE you can file separately to count only your income, but if you file jointly both incomes are counted. Under the new system, REPAYE, both incomes get counted regardless of how you file.

2) If your income goes down you can ask your loan servicer to re-certify your income.

3) Yes plenty of people pay zero when they don't have any income (or income is below 150% of the poverty line).

4) If you get paid for your labor you owe taxes on what you've been paid. Doesn't matter if the payment was in straight cash or anything else.

If you have federal loans you should be signing up for PAYE. You can always pay extra.

[lacrossebrother]

4) If you get paid for your labor you owe taxes on what you've been paid. Doesn't matter if the payment was in straight cash or anything else.

Right. But your w-2 doesn't go up until you've exercised your options or whatever.

[Tiago Splitter]

4) If you get paid for your labor you owe taxes on what you've been paid. Doesn't matter if the payment was in straight cash or anything else.

Right. But your w-2 doesn't go up until you've exercised your options or whatever.

Only if you're getting paid at-the-money options which don't have anything but time value. If the stock price goes down you just worked for free.

[lacrossebrother]

hmm. if you go solo, can you play with the capital structure of the corp. for awhile to keep your w-2 low?

[Tiago Splitter]

hmm. if you go solo, can you play with the capital structure of the corp. for awhile to keep your w-2 low?

I don't know if things are different for lawyers but yeah small business owners with S-corps do this all the time. One big downside is that your retirement contributions are based on your W-2.

[lacrossebrother]

well that seems like the jam for years ~18-20 on PAYE.

[Tiago Splitter]

well that seems like the jam for years ~18-20 on PAYE.

now that I think about it I dont know if it actually helps your AGI. Might just save you some self-employment taxes

[lacrossebrother]

well that seems like the jam for years ~18-20 on PAYE.

now that I think about it I dont know if it actually helps your AGI. Might just save you some self-employment taxes

Why would it not? Can an s-corp not have any cash reserves?