Consensus on PAYE for biglaw Forum

[bk1]

Wait can a long-time poster chime in on this because this thread is really making sticker t14 debt sound like a really appealing option this would have changed my decision this cycle not to go with the more affordable school - can someone please show why this is not accurate or at the very least not as good as it sounds?

The tax bomb is very painful if you didn't work biglaw to stash away money to cover it.

[NYSprague]

Wait can a long-time poster chime in on this because this thread is really making sticker t14 debt sound like a really appealing option this would have changed my decision this cycle not to go with the more affordable school - can someone please show why this is not accurate or at the very least not as good as it sounds?

The tax bomb is very painful if you didn't work biglaw to stash away money to cover it.

Is it still 25 years of debt payments or is it 20 years? I get the terms of these plans mixed up.

[Humbert Humbert]

Wait can a long-time poster chime in on this because this thread is really making sticker t14 debt sound like a really appealing option this would have changed my decision this cycle not to go with the more affordable school - can someone please show why this is not accurate or at the very least not as good as it sounds?

The tax bomb is very painful if you didn't work biglaw to stash away money to cover it.

Is it still 25 years of debt payments or is it 20 years? I get the terms of these plans mixed up.

20

[guano]

by mu calculation, (in the 3 minutes I spent looking this up):

Interest will capitalize unless you have a partial financial hardship, which is defined as the amount due (under 10 year repayment) exceeds 15% of the difference between your income and AGI. Biglaw starting salary ($160k no bonus) is equivalent to approximately $100k in loans. On the other hand, if you make it to year 7 or 8 (hah), your income will barely exceed $200k worth of loans.

Yeah, it's a damn good idea

[rayiner]

Is it in the MPN? I don't think so...

[Humbert Humbert]

by mu calculation, (in the 3 minutes I spent looking this up):

Interest will capitalize unless you have a partial financial hardship, which is defined as the amount due (under 10 year repayment) exceeds 15% of the difference between your income and AGI. Biglaw starting salary ($160k no bonus) is equivalent to approximately $100k in loans. On the other hand, if you make it to year 7 or 8 (hah), your income will barely exceed $200k worth of loans.

Yeah, it's a damn good idea

Sorry, can you explain the bolded part again? Re: capitalization of interest, here is the language on the PAYE website:

Limitation on the capitalization of interest—While you have a partial financial hardship, interest that accrues but is not covered by your loan payments will not be capitalized, even if interest accrues during a deferment or forbearance. Unpaid interest capitalizes if you are determined to no longer have a partial financial hardship, but the total amount of interest that capitalizes while you are repaying your loans under the Pay As You Earn plan is limited to 10% of your original principal balance when you begin paying under Pay As You Earn.

Anyone else considering it/already on it have other perspectives?

[twenty]

How a cap on capitalization works:

Suppose you took out 100k in loans and you, being a poor law graduate with no job, made payments of $0 a month. On a normal loan, your interest would capitalize, meaning you would be charged interest based on the principal AND the interest you didn't pay. At 8%, your loan is now 108k at the end of the year. So next year you'll owe interest on 108k

Presumably, that looks like (on a $0 payment over, say, four years)

100k -> 8k = 108k
108k -> 8.64k = 116.6k
116.6k -> 9.34k = 126k
126k -> 10k = 136k
etc.

When there is a cap on capitalized interest, that means the balance of your loan won't expand past, say, 110%.

100k -> 8k = 108k.
108k -> 8.64k = 110k (the cap of 110%) PLUS 6.64k. = 116.6k
110k -> 8.8k = 110k + 8.8k + 6.64k = 125k
110k -> 8.8k = 110k + 8.8k + 8.8k + 6.64k = 134.2k

So you'll still pay interest, you just won't pay compounding interest.

[guano]

How a cap on capitalization works:

Suppose you took out 100k in loans and you, being a poor law graduate with no job, made payments of $0 a month. On a normal loan, your interest would capitalize, meaning you would be charged interest based on the principal AND the interest you didn't pay. At 8%, your loan is now 108k at the end of the year. So next year you'll owe interest on 108k

Presumably, that looks like (on a $0 payment over, say, four years)

100k -> 8k = 108k
108k -> 8.64k = 116.6k
116.6k -> 9.34k = 126k
126k -> 10k = 136k
etc.

When there is a cap on capitalized interest, that means the balance of your loan won't expand past, say, 110%.

100k -> 8k = 108k.
108k -> 8.64k = 110k (the cap of 110%) PLUS 6.64k. = 116.6k
110k -> 8.8k = 110k + 8.8k + 6.64k = 115k
110k -> 8.8k = 110k + 8.8k + 8.8k + 6.64k = 134.2k

So you'll still pay interest, you just won't pay compounding interest.

without thinking about it, I daresay there's a mistake here somewhere

[chem]

ah yeah. math was wrong. its since been edited. My B

[Jchance]

.

[twenty]

Yeah, typo on my part, sorry. edited.

[JustMe83]

Sorry to bump this thread, but what exactly is meant by "you may have to pay taxes" on the forgiven loan balance?Have they just not decided whether or not this should count as taxable income, or is it circumstantial? If one could really end up not paying taxes on ~$500k of forgiven loans this is a cray cray good option for almost anyone with near-sticker debt and would make it very viable. Even still, it'd be hard to say no to a couple extra thousand every month right now just to avoid a tax bomb 20 years in the future...

[A. Nony Mouse]

Currently, when you get the balance of your loan forgiven, that counts as taxable income and you have to pay taxes on it. There are proposals floating around to do away with this requirement so that the forgiven amount doesn't count as income and you don't have to pay taxes on it. None of those proposals have yet gone anywhere. It's extremely hard to know what will happen between now and the almost 20 years from now when the first people on PAYE reach the point of getting their loans forgiven.

[Elston Gunn]

The real question doesn't seem to be whether to do PAYE vs. regular repayment (PAYE looks a big winner), but PAYE vs. SoFi (or something similar) refinancing those giant interest loans and losing the PAYE options. Anyone have thoughts on that?

[thsmthcrmnl]

The real question doesn't seem to be whether to do PAYE vs. regular repayment (PAYE looks a big winner), but PAYE vs. SoFi (or something similar) refinancing those giant interest loans and losing the PAYE options. Anyone have thoughts on that?

I'm going the SoFi-esque route because I can't bring myself to trust Congress for the next 20 years.

[brazleton]

.

[Br3v]

Also, can someone give an executive summary?

[wildhaggis]

My admittedly rudimentary understanding is that the expansion doesn't even go into effect until December 2015. This also makes almost no sense to me.

[Should I Transfer??]

PAYE has been extended to nearly everyone. People who were previously ineligible because of pre-2007 loans or lack of post-2011 loans will eventually be eligible for PAYE. Obama has ordered the Department of Education to implement regulations making this change by December 2015. As far as I can tell, this does not change the tax bomb situation.

http://www.whitehouse.gov/the-press-off ... affordable

[180kickflip]

Just so I understand this right... I still have pre 2007 loans from undergrad. Will this executive order make me eligible for PAYE when I take out loans for law school next year?

[Should I Transfer??]

Just so I understand this right... I still have pre 2007 loans from undergrad. Will this executive order make me eligible for PAYE when I take out loans for law school next year?

Yes. However, there is uncertainty regarding precisely what the regulations implementing Obama's executive order will look like. For instance, the regulations could merely expand the program to previously ineligible borrowers, under the same terms as currently eligible borrowers. Seemingly, the regulations could also add new conditions for previously ineligible borrowers that switch to PAYE repayment. For instance, capping loan forgiveness, requiring 25 years of payments for those with larger debt burdens, etc. We simply cannot be sure.

Another thing to keep in mind is that no one is really sure the extent that Congress could enact legislation retroactively modifying these programs. Potential changes could be positive (removing the tax bomb) or negative (capping forgiveness amounts) to borrowers.

[bosox777]

I don't mean to sound completely helpless, but I've read all this a bunch of times and it's still pretty much over my head as to what makes sense. So at the risk of saying "what should I do?"...any thoughts on what I should do?

Just graduated with exactly $150K in debt. Working at a firm (paying market) for one year, then clerking, then back to firm. Does PAY-E make sense for me? I was originally going to pick the standard repayment and just pound away at it and try to be done by ~year 7, or maybe going the SoFi route, but I didn't know PAY-E might be an attractive option. Based on firm salary, the studentloans.gov calculation says I wouldn't actually have any loans forgiven, and would just pay it all off in 12 years. But clerking for a year will change that, and then obviously my salary won't stay 160K but will move one way or another.

Hate sounding needy, but can someone tell me roughly what might make sense here?

[Should I Transfer??]

I don't mean to sound completely helpless, but I've read all this a bunch of times and it's still pretty much over my head as to what makes sense. So at the risk of saying "what should I do?"...any thoughts on what I should do?

Just graduated with exactly $150K in debt. Working at a firm (paying market) for one year, then clerking, then back to firm. Does PAY-E make sense for me? I was originally going to pick the standard repayment and just pound away at it and try to be done by ~year 7, or maybe going the SoFi route, but I didn't know PAY-E might be an attractive option. Based on firm salary, the studentloans.gov calculation says I wouldn't actually have any loans forgiven, and would just pay it all off in 12 years. But clerking for a year will change that, and then obviously my salary won't stay 160K but will move one way or another.

Hate sounding needy, but can someone tell me roughly what might make sense here?

Get on IBR/PAYE now. The government will pay any interest that would otherwise accrue on your subsidized loans.

Are you eligible for PAYE? (Do you have any pre-Octo 2007 loans?)

[bosox777]

I don't mean to sound completely helpless, but I've read all this a bunch of times and it's still pretty much over my head as to what makes sense. So at the risk of saying "what should I do?"...any thoughts on what I should do?

Just graduated with exactly $150K in debt. Working at a firm (paying market) for one year, then clerking, then back to firm. Does PAY-E make sense for me? I was originally going to pick the standard repayment and just pound away at it and try to be done by ~year 7, or maybe going the SoFi route, but I didn't know PAY-E might be an attractive option. Based on firm salary, the studentloans.gov calculation says I wouldn't actually have any loans forgiven, and would just pay it all off in 12 years. But clerking for a year will change that, and then obviously my salary won't stay 160K but will move one way or another.

Hate sounding needy, but can someone tell me roughly what might make sense here?

Get on IBR/PAYE now. The government will pay any interest that would otherwise accrue on your subsidized loans.

Are you eligible for PAYE? (Do you have any pre-Octo 2007 loans?)

I should have clarified - I only just graduated, and don't start working for three months. I don't have any loans before 2007 so should be eligible.

So I should start on PAYE now, even though it's during my grace period and I'll be making firm salary soon?

[dogfan14]

Question: does anyone know what happens to non-PAYE eligible loans? I.e. Perkins? My fedloan calculator is still showing my pre-2007 loans as ineligible under PAYE as well. Post-bar brain isn't working.

Biglaw, and TBH totally fine going onto PAYE and using the money set aside to pay off those non-eligible loans ASAP.

But just curious if anyone knows specifically of what happens to the non-PAYE loans. Thanks!