Save on Student Loans or Save Money for a House Forum

[TIKITEMBO]

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[gossipgirl]

If your loans will be totally forgiven, I don't see the downside in taking out the loans and paying rent. The only issue I can think of is when you graduate from LS and have 200k in loans, whether when applying for a mortgage at that point, you get screwed on the interest rate because of all the debt on your credit report. I can't speak to whether that's a valid concern though.

[TIKITEMBO]

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[Stinson]

If, as you assume, all the debt will be wiped away in ten years then, as you say, there is no particular reason to want the principle to be lower. In that sense, saving up is probably a good idea.

Do bear one thing in mind, though, and in fairness I don't think this falls in the category of trolling about the viability of PSLF. By that I assumed you meant something along the lines of scaremongering about the debt/deficit, the tea party getting rid of the Department of Education, etc, and I'm not going to do that, partly because you said you wouldn't listen and partly because I don't think it will happen.

What I would say, however, is that IBR/PSLF can be less viable than some people assume because the employment one must have to make PSLF-eligible payments can be really hard to get. The kinds of places that hire PI lawyers or government lawyers are not hiring. Local government finances are in tatters, and federal government hiring is a political football -i.e. no Republican wants the federal government to be able to hire more people - unless they work for Defense, perhaps - and Obama, so far as a I know, unilaterally agreed to federal pay freezes in the vain hope that Republicans will come around and work with him if he makes a nice gesture. There are foundations and charities that hire lawyers, of course, and perhaps with the return of the stock market some of these will see donations again. When they do, the few spots they have will be very competitive.

All of which is to say that, if you are interested in financial planning, as you appear to be, remember that assuming you will be debt free ten years out may be a risky proposition unless you have a pretty good connection that will pretty surely turn into a job at graduation. That's not to say you can't make it happen, only that there is a possibility it might take a little longer.

[20130312]

You do realize that you still have to pay income tax on the forgiven loans, right? That's a fair chunk of change. And, of course, that assumes that 1) you do get an IBR eligible job 2) you actually can hold on to it for 10 years without getting laid off or sick of it and 3) the IBR/PSLF loan forgiveness actually still exists ten years from now. That's a lot to hang your hat on.

[deadhipsters]

Pretty sure you only have to pay the income tax on IBR at the end of 20 years- not on PSLF. But I could be mistaken.

[TIKITEMBO]

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[Eco]

The big elephant in the room nobody is talking about is his declaration that he'll be making "$100,000-$120,000" at graduation. lol.

(There is a 90% chance that you won't)

[dixiecupdrinking]

Yeah, the public interest forgiveness is not taxable income. That problem is just for the normal, non-PSLF IBR.

Be aware of any asset caps on your school's LRAP. Having too much home equity may phase you out of forgiveness eligibility, if not at graduation then possibly within the ten-year repayment period.

On top of that, consider whether buying a house would even be smart financially. You may move shortly after graduating. Not sure when you're looking at buying (in law school or afterward) but I would be wary of committing to an area any time soon. If you want to be a public defender, for instance, you may find yourself having to cut your teeth in some rural county office for a few years. You may want to clerk elsewhere, for one or two years. And even if you were confident you were going to stay in D.C. you'd want to look long and hard at the ups and downs of the rent/buy decision. You may find it doesn't make sense for you.

Ultimately, though, whether you're putting the money toward a house or just saving or investing it is moot. The economics work out the same either way. If you were 100% assured of getting LRAP forgiveness, then there would be no reason not to borrow the maximum student loan amount and put the surplus in the bank. The problem is everyone is less than 100% assured of it. Even people who feel, as 0Ls, completely sure they want to do public interest. Even 1Ls, 2Ls, 3Ls, or recent graduates who intend to pursue public interest careers. Several factors chip away at that likelihood of getting LRAP forgiveness: changes in career plans; circumstances that keep you out of work (disability, garden variety unemployment, desire to be a stay-at-home mom/dad); income that may exceed your school's cap; asset windfalls that bump you out of eligibility; other circumstances which may make you want to file jointly with your spouse prior to getting forgiveness; and, yes, changes to LRAP/PSLF program benefits.

For every dollar that you borrow unnecessarily, you increase your risk exposure in the event that you drop out of LRAP coverage for any of the above reasons. No one can predict with any certainty the magnitude of that risk, but it is lingering in the background, to varying extents, for everyone who intends to use LRAP. You have to weigh your own risk aversion, your best guesses at the likelihood of something unexpected happening (difficult to estimate, by definition), and the fact that if you drop out of LRAP coverage, any unnecessary dollar you borrow now will have to be paid back later, with the capitalized interest that accrued during your in-school deferment, at around 8% interest.

Food for thought.

[dixiecupdrinking]

The big elephant in the room nobody is talking about is his declaration that he'll be making "$100,000-$120,000" at graduation. lol.

(There is a 90% chance that you won't)

He was referencing his combined income with his spouse. Read better.

[TIKITEMBO]

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[dixiecupdrinking]

What I would say, however, is that IBR/PSLF can be less viable than some people assume because the employment one must have to make PSLF-eligible payments can be really hard to get.

Definitely they are hard to get. There's no question on that, but there is a lot of info on this site about how those jobs are difficult to come by and so I wanted to bypass it more just for the sake of discussing the financial logistics outside of the difficulty of obtaining employment. It deserves mention here, but I wanted to have a thread for financial discussion. Also, the government is pretty awesome at letting you defer if, as you mentioned, it takes awhile to find employment. Not that that's ideal, but at least someone isn't pounding down your door.

Be aware of any asset caps on your school's LRAP. Having too much home equity may phase you out of forgiveness eligibility, if not at graduation then possibly within the ten-year repayment period.

Great point dixiecupdrinking. I'm happy to see people who know something about IBR/PSLF posting in here. At times I'm alone and fighting a crazy battle. Having a house as an asset might throw off income. Definitely want to think about that. I'm looking at buying a house after a graduate. Not closed off to the idea of living in an apartment though.


Also, I'm a woman just to let everyone know. I know my avatar is confusing.

Sorry—I try not to assume genders but fell into it in my last post.

Anyway, as a general rule the risk-averse thing to do is to minimize your debt load. If it were me, knowing that I had $200,000+ student loans hanging over my head for ten years would be very difficult psychologically, even if I thought they were most likely going to be forgiven. Honestly, that factor was the nail in the coffin for me in deciding to pursue Biglaw over public interest work. There's just a lot that can happen in a decade and you don't want to get smacked with a six-figure debt when you're seven or eight years out of school, making $65,000 and about to have your second kid or something. Considering all that, my advice would be to have your husband pay your COL as much as possible and minimize your borrowing as though you may not get loan forgiveness. But it's ultimately a question of your own risk tolerance and how much of a financial cushion you have in the event of something unforeseen happening.

[TIKITEMBO]

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[sidhesadie]

I'm pretty sure that your spouse's income counts for IBR unless you do married filing separately on your taxes. You may already know that, and that may be fine with you, but just for anyone out there who doesn't. There are definitely calculations that have to be done to see if it makes sense to file that way.

Personally, I find the risk of layoffs in PI jobs a little to risky right now to count on PSLF, so I"m minimizing debt, even though it means my husband and I aren't saving as much towards a down payment than we otherwise would. I know too many people who've been laid off, and had to go into private practice (often solo), killing PSLF.

Just food for thought. I decided that for me, the risk is too great, and if it means we delay home buying another year or two, that's fine. Your calculus may be different.

[TIKITEMBO]

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[dingbat]

without taking out a lot more than necessary.

Hope you don't take it the wrong way but I lolled at this.

The bright spot is that if your spouse takes out the mortgage and buys the house in spouse's name, then your debt wont affect the mortgage Additionally, the house will be spouse's asset and not yours, so no risk it "might throw off income" (bad news is it won't be in your name, so if you divorce, you're fucked).

If you're 100% certain of going IBR/PSLF and are 100% confident that you can maintain this and qualify, then, using your logic, you should max out your loans either way - it's free money (as long as you qualify for IBR/PSLF)

Note: I'm not discussing the viability/practicality/wisdom of going that route, just addressing the economic aspect.

[TIKITEMBO]

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[dingbat]

without taking out a lot more than necessary.

Hope you don't take it the wrong way but I lolled at this.

The bright spot is that if your spouse takes out the mortgage and buys the house in spouse's name, then your debt wont affect the mortgage Additionally, the house will be spouse's asset and not yours, so no risk it "might throw off income" (bad news is it won't be in your name, so if you divorce, you're fucked).

If you're 100% certain of going IBR/PSLF and are 100% confident that you can maintain this and qualify, then, using your logic, you should max out your loans either way - it's free money (as long as you qualify for IBR/PSLF)

Note: I'm not discussing the viability/practicality/wisdom of going that route, just addressing the economic aspect.

It is tempting to max out loans. I am dead set on IBR/PSLF, but the debt adverse person in me keeps nagging that 10 years is a long time and that I should have a back out plan if need be. Less (but still a lot) of debt is not a great back up plan, but it's better than nothing. How confident are you on the idea that my debt wouldn't affect buying a house/IBR if it's just in my spouse's name? We'll be talking with a financial advisor soon, so we'll put that question on the list, so thanks.

it depends on whether or not you need both incomes to qualify for the mortgage. If you only need your spouse's income, then your debt is irrelevant (effectively, it'll be as if your spouse is single)
If your income is needed to qualify, then your debt will be taken into account.
A good way to deal with this is to minimize your spouse's debt and costs while maximizing yours.
Note that this is about as far as I can go with generic/general advice. Be careful talking to a financial advisor - a lot of them aren't very good (and I'm in a position to know)