Is Paying Off Loans Fastest Always Best Idea? Forum

[abl]

I don't believe clerkships qualify for the TSP. I'm not sure about AUSA, DOJ, or other law gov positions.

[hds2388]

This surprises me. My firm in a secondary market matches up to 6%, and I wouldn't think their benefits would be any better than the top NYC, etc. firms.

Bennies at top firms actually blow pretty hard. I think they realize young prospective associates don't look past the annual salary.

Yeah. In NYC especially, matching is very rare.

[TatteredDignity]

This surprises me. My firm in a secondary market matches up to 6%, and I wouldn't think their benefits would be any better than the top NYC, etc. firms.

Bennies at top firms actually blow pretty hard. I think they realize young prospective associates don't look past the annual salary.

Yeah. In NYC especially, matching is very rare.

To be fair, that salary can cover a lot of sins (except how ridiculously expensive housing is).

[Sheffield]

So much depends on timing. During the initial six month grace payment my plan is to pay off credit cards first (higher interest rates than school loans). At that point paying down school debt in ten years with 25% of my net income. A simple formula, pay off cheap money last. Aside from a home mortgage rate, what else is cheaper? Not sure if this overly simplistic strategy is idiotic or not, but that is it.

To answer the thread’s question. No, pay off higher rate debts first.

[FKASunny]

I've searched the forums for a better fleshing out of this, but it doesn't seem like the TLS Hivemind Groupthink Machine has really come up with an opinion on PAYE.

Here's the best calculator I've been able to find so far.

Just for simplicity, say someone took out ~$200k to go to a T14. Around $65k would be in unsubsidized Stafford loans at 6.8% (I rounded up from $61,500 to account for the accrued interest that would be larded onto the principle) and around $135k at 7.9%. If this student were lucky enough to get biglaw and insane enough to stick around for a while, they could easily pay that back on the standard 10-year repayment plan.

However, under PAYE, the new associate could opt for the lower payments on a 20-year structure that adjusts payments based on your income. Making $160k, your payments would fall somewhere between $1100 and $1400 per month, way less than the standard plan. On top of that, after 20 years the remaining loan balance is forgiven. It's difficult to predict how much that balance would be considering incomes vary wildly, but assuming the student stays in the $120-180k range, the amount forgiven after 20 years could be as much as $200,000. (Caveat: They haven't addressed the tax bomb issue, and I doubt Congress will, so expect to pay a hefty chunk of that money to the IRS.)

Aside from the obvious moral questions of not paying back the money you borrowed, especially if you have the means to do so, would it really be financially smarter to pay back all of the loan money in a shorter period of time instead of capping your monthly payments and investing in retirement, housing, etc? There are many students who pay much more than $200k to attend T14s and have a shot at being in this predicament. If the total amount you're going to pay through PAYE is essentially capped since you know after 20 years it will be forgiven, then every additional dollar you put towards the principle is not a guaranteed "return" of 6.8% or 7.9%, it's just a slight reduction in a tax bill you're getting in the future.

Also, does anyone have any insight into how it affects your credit? Sure, it's a large balance, but if you're making payments as agreed, would be any worse than just having a normal-sized mortgage?

[thesealocust]

You could argue that not matching is actually a a comparable (or superior) benefit - when a business offers a matching 401(k) contribution, it's not pulling the money for it out of its ass - it's part of your compensation, and part of how they account for your compensation. My guess, especially considering debt obligations, is that 150K (or w/e number is the equivalent point) + match would be seen as inferior to most compared to 160K + no match, even though the former would be slightly more total dollars due to tax advantages.

[homestyle28]

Also, does anyone have any insight into how it affects your credit? Sure, it's a large balance, but if you're making payments as agreed, would be any worse than just having a normal-sized mortgage?

From underwriters I've talked to it's not that having a large outstanding loan damages your credit by itself, it just hampers your ability to obtain new credit. I.e. your fico score isn't going to drop just b/c you have a large balance on it, but if you think a bank is going to lend you money to buy a new house based solely on your monthly obligations, you're probably dreaming.

[thesealocust]

I don't have much insight on the specifics, but there's a lot of value to liquidity which might make PAYE smart. I also think it's all but certain that Congress or the IRS will address the debt forgiveness tax bomb, because they're always concerned about collectibility - and if somebody can't pay back $200K, they probably don't have 40% of that sitting around ready to cut a check to the IRS.

Likewise I'm not sure about the effect on credit.

Aside from the obvious moral questions of not paying back the money you borrowed, especially if you have the means to do so,

Damn it, did you learn nothing from 1L year? There is no crying in baseball or contracts. Efficient breach strategic non-repayment, baby! Morality should have a very limited place in financial transactions. Don't lie cheat or steal, but maybe do request a credit limit increase for your credit cards every 6 months while in biglaw and you can quote the CC company an insane salary, then max out your CCs on cash advances + purchasing gold which you can then discretely smuggle across the border as you leave your debts behind.

Not, uh, that I'm doing that. Or anything.

[FKASunny]

Aside from the obvious moral questions of not paying back the money you borrowed, especially if you have the means to do so,

Damn it, did you learn nothing from 1L year? There is no crying in baseball or contracts. Efficient breachstrategic non-repayment, baby! Morality should have a very limited place in financial transactions. Don't lie cheat or steal, but maybe do request a credit limit increase for your credit cards every 6 months in biglaw and can quote an insane salary, then max out your CCs on cash advances + purchasing gold which you can use to cross the border and leave your debts behind.

Not, uh, that I'm doing that.

I was more referring to the issue of the moral hazard that government loans inject into the equation. On an individual level, duh, do what the system incentivizes you to do if that's your prerogative, but there are definitely larger issues at hand. Before, tax dollars were being used to subsidize high law school tuition for those who strike out, but those who go through the biglaw process end up paying back more than their fair share. Now, with PAYE, it's conceivable that the tax payer will not only be subsidizing the ridiculously high tuition law students pay, but also the high starting salaries at big firms because those salaries are justified by high tuition. If even the high earning graduates are not required to pay that money back, then it seems like the government is just hastening a collapse in the student loan system.

But all that aside, assuming the system doesn't collapse while I'm in school, I'm looking forward to the "heads I win, tails you lose" scenario they've set up for me.

[Rahviveh]

Also, does anyone have any insight into how it affects your credit? Sure, it's a large balance, but if you're making payments as agreed, would be any worse than just having a normal-sized mortgage?

From underwriters I've talked to it's not that having a large outstanding loan damages your credit by itself, it just hampers your ability to obtain new credit. I.e. your fico score isn't going to drop just b/c you have a large balance on it, but if you think a bank is going to lend you money to buy a new house based solely on your monthly obligations, you're probably dreaming.

That's not what I've heard. A lot of lenders don't know about IBR yet either. If you have your payments limited to less than 10-15% of your income and the rest of your debt is manageable (mainly credit cards, no car note) then there shouldn't be an issue.

Granted I obviously haven't tried it yet, but checking out other forums it seems graduates aren't having issues securing mortgages while also having large student loan balances. Personally I don't plan on getting a home for a long time anyways, but I guess that could change

[paranoia4ya]

PAYE>IBR that being said, reading this post reminded me of this conversation my dad was having about how gas was 30 cents when he first got his license. If you do not get my drift, although you are going to be better off in the short run, you are taking a huge risk in assuming that you will still be making 160k in 20 years. Absolutely stupid. The question lies on how well off you plan to be in 20 years, as well. Assuming you plan on making roughly the same amount 20 years from now despite inflation, while living alone or with a spouse that doesn't have a job, i'd say that it would be stupid not to borrow a huge amount in student loans. while other people will be paying the same fixed amount over time, you will have to think about how your payments will increase over time as they hedge your salary. That being said, it is cool that they lowered it to 10 from 15% under the last plan. this plan is great for preventing people who are not making close to market from living in poverty, but it is not wise to assume that you will never be paid more than you would as a first year associate if you plan on staying on such a successful path.

oh and you might have to pay a premium of 40% of the remaining balance at the end anyway.

[guano]

At some point you should start putting your emergency funds into a Roth IRA and/or make Roth deferrals to your 401k. Roth IRA contributions can be withdrawn tax and penalty free at any time, so if you have an emergency you can access those pretty quickly. 401k funds often can't be taken until you separate from service but after a while the only emergency that could require the draw down of all your assets is job loss. And if the big emergency never materializes, you'll have a shitload of Roth money built up rather than just taxable savings.

There's an income level at which you can't make Roth contributions anymore, isn't there? Does the typical Big Law salary ($145 - $160k) fall below or above tha threshold?

You can contribute to a Traditional IRA and then immediately convert to a Roth. As long as you have no other pre-tax IRA assets it ends up being the equivalent of a Roth contribution.

A Roth IRA is not for everyone. Whether to opt for a traditional or Roth IRA is an entirely separate conversation than whether to put money into an IRA.

The main difference is that with a traditional IRA you invest pre-tax dollars and pay tax when you take the money out, whereas with a Roth IRA you invest with post tax dollars and don't pay tax when you take it out.
Example: $100 invested for 1 year at 10%. Assume 25% tax rate:
Traditional: $100 invested, growth of $10 brings it to $110, taxes of $27.50 at withdrawal for a total of $82.50
Roth: $25 tax, $75 invested, growth of $7.50 brings it to $82.50, withdrawn tax free.

Put simply, if you expect your tax rate to be higher when you withdraw, a Roth is better, but if you expect your tax rate to be lower, a traditional IRA is better.
However, there are other considerations as well, such as minimum withdrawal requirements for a traditional IRA.

[Tiago Splitter]

At some point you should start putting your emergency funds into a Roth IRA and/or make Roth deferrals to your 401k. Roth IRA contributions can be withdrawn tax and penalty free at any time, so if you have an emergency you can access those pretty quickly. 401k funds often can't be taken until you separate from service but after a while the only emergency that could require the draw down of all your assets is job loss. And if the big emergency never materializes, you'll have a shitload of Roth money built up rather than just taxable savings.

There's an income level at which you can't make Roth contributions anymore, isn't there? Does the typical Big Law salary ($145 - $160k) fall below or above tha threshold?

You can contribute to a Traditional IRA and then immediately convert to a Roth. As long as you have no other pre-tax IRA assets it ends up being the equivalent of a Roth contribution.

A Roth IRA is not for everyone. Whether to opt for a traditional or Roth IRA is an entirely separate conversation than whether to put money into an IRA.

The main difference is that with a traditional IRA you invest pre-tax dollars and pay tax when you take the money out, whereas with a Roth IRA you invest with post tax dollars and don't pay tax when you take it out.
Example: $100 invested for 1 year at 10%. Assume 25% tax rate:
Traditional: $100 invested, growth of $10 brings it to $110, taxes of $27.50 at withdrawal for a total of $82.50
Roth: $25 tax, $75 invested, growth of $7.50 brings it to $82.50, withdrawn tax free.

Put simply, if you expect your tax rate to be higher when you withdraw, a Roth is better, but if you expect your tax rate to be lower, a traditional IRA is better.
However, there are other considerations as well, such as minimum withdrawal requirements for a traditional IRA.

This has zero impact on my point, which is that a Roth provides a better way to combine retirement savings with emergency funds. And between 401k and IRA you can contribute 23K and can generally divide that up among Roth and pre-tax savings in any way you'd like. You aren't locked in to just one or the other.

[Rahviveh]

I thought you do get penalized for withdrawing from a Roth early unless you spend it on certain things (medical, tuition, etc)?

[Tiago Splitter]

I thought you do get penalized for withdrawing from a Roth early unless you spend it on certain things (medical, tuition, etc)?

Not on the contributions, which come out first.

[guano]

A Roth IRA is not for everyone. Whether to opt for a traditional or Roth IRA is an entirely separate conversation than whether to put money into an IRA.

The main difference is that with a traditional IRA you invest pre-tax dollars and pay tax when you take the money out, whereas with a Roth IRA you invest with post tax dollars and don't pay tax when you take it out.
Example: $100 invested for 1 year at 10%. Assume 25% tax rate:
Traditional: $100 invested, growth of $10 brings it to $110, taxes of $27.50 at withdrawal for a total of $82.50
Roth: $25 tax, $75 invested, growth of $7.50 brings it to $82.50, withdrawn tax free.

Put simply, if you expect your tax rate to be higher when you withdraw, a Roth is better, but if you expect your tax rate to be lower, a traditional IRA is better.
However, there are other considerations as well, such as minimum withdrawal requirements for a traditional IRA.

This has zero impact on my point, which is that a Roth provides a better way to combine retirement savings with emergency funds. And between 401k and IRA you can contribute 23K and can generally divide that up among Roth and pre-tax savings in any way you'd like. You aren't locked in to just one or the other.

that's a separate issue (and one I agree with) than:

You can contribute to a Traditional IRA and then immediately convert to a Roth. As long as you have no other pre-tax IRA assets it ends up being the equivalent of a Roth contribution.

which requires a more in-depth conversation as to the pros and cons of traditional v Roth

[AMilfordMan]

This thread makes me realize that I'm clueless.

[NoodleyOne]

This thread makes me realize that I'm clueless.

This. I have no clue about any of this stuff. Damn history degree.

[Tiago Splitter]

that's a separate issue (and one I agree with) than:

You can contribute to a Traditional IRA and then immediately convert to a Roth. As long as you have no other pre-tax IRA assets it ends up being the equivalent of a Roth contribution.

which requires a more in-depth conversation as to the pros and cons of traditional v Roth

But again I'm only talking about how to get money into a Roth, so that you can save for emergencies in a tax-efficient way without risking a penalty for withdrawal. I agree that Traditional vs. Roth is a different debate altogether.

[Sheffield]

Be nice if a Wharton TLSer would drop by and es'plain it all.

[thesealocust]

Be nice if a Wharton TLSer would drop by and es'plain it all.

As a theatre artist and almost-lawyer, I can confirm the analysis in this thread is sound.

[Sheffield]

Be nice if a Wharton TLSer would drop by and es'plain it all.

As a theatre artist and almost-lawyer, I can confirm the analysis in this thread is sound.

We have confirmation!!

[09042014]

How much should we value liquidity? That's the hard part.

[thesealocust]

How much should we value liquidity? That's the hard part.

It's only like, the crux of modern finance. There are a fuckload of well paid people who basically contemplate that question on the tree of woe for their major corporations. Banks are the best example - they're leveraged to hell and back, and are constantly fighting with regulators over precisely how liquid to stay.

As for us... dunno man. Liquidity is always expensive, you're either basically paying interest for it (while in debt) or forgoing interest for it (if not in debt but not investing). And it's got nasty correlation - you're likely to need liquidity the most when you find sources drying up (i.e. right now I have a stupidly high credit limit, but in a financial crisis the banks issuing me that credit could cut my lines, or even go bust...).

[09042014]

How much should we value liquidity? That's the hard part.

It's only like, the crux of modern finance. There are a fuckload of well paid people who basically contemplate that question on the tree of woe for their major corporations. Banks are the best example - they're leveraged to hell and back, and are constantly fighting with regulators over precisely how liquid to stay.

As for us... dunno man. Liquidity is always expensive, you're either basically paying interest for it (while in debt) or forgoing interest for it (if not in debt but not investing). And it's got nasty correlation - you're likely to need liquidity the most when you find sources drying up (i.e. right now I have a stupidly high credit limit, but in a financial crisis the banks issuing me that credit could cut my lines, or even go bust...).

I think I'll just pay mine down. I'm not sure what I'd do with it other than squander it on shit that won't really increase my QOL.

Investing? I'd just be getting a more risky, less steady return. Though I'd be somewhat hedged for inflation since stocks will rise with inflation, and my debt won't. I'm still not confident I'd make any sort of money, and I could just lose a bunch. I don't really see the market taking off from here.

Real Estate? Here I'm a little more inclined. But DC prices never fell, so I don't think I'd be getting any deal by buying a house now. Mortgage interest deduction would help. I have to sit down and figure out what % increase in value would correspond to the loan rate. The leverage of a mortgage means a smaller increase in value could really outpace the returns of paying ~7.5% loans. Though with those FHA loans, I might be able to do both home and pay loans fast. I feel like I may miss the low rate mortgage boat. But I also fear when rates goes up, prices will fall potentially leaving me underwater in a profession where job security is measured in weeks not years.

My fiance is FedGov SECURE. So I can cop dat GS scale come hell or high water. That reduces my need for liquidity since we can more than cover basic COL with that.