Consensus on PAYE for biglaw Forum

[Humbert Humbert]

[I asked this question in another thread but it wasn't getting any traction...]

Just curious - what is the consensus (if there is one) on PAYE for someone pursuing big law with 200k+ in loans.

There seems to be some uncertainty currently with respect to PAYE in the proposed 2015 budget, but it seems that students who take out their first law school loan prior to July 1, 2015 will still be eligible for the current version of PAYE (see below). At least for now. The tax bomb is obviously another issue.

The positives seem obvious: having an extra 1-3k every month in your pocket that you can save/invest. Doing so (wisely) would seemingly allow you to prepare for/handle the tax bomb and still come out ahead.

Thoughts? Is anyone currently in this position that can give their thoughts/experiences?

---

http://educatedrisk.org/analysis/ed-fur ... paye-terms

"Students who borrowed their first loans prior to July 1, 2015, would continue to be able to select among the existing repayment plans (for plans for which they now qualify and for loans originated through their current course of study), in addition to the modified PAYE."

[09042014]

I'd do it but make a special savings account for your PAYE Tax bomb. Plan on 250k extra income at 30%. That's still a whopper.

[twenty]

If you have the ability, don't do PAYE over 25 years for biglaw. You end up paying more over a longer period of time.

Run the numbers yourself, you'll see what I mean.

[09042014]

If you have the ability, don't do PAYE over 25 years for biglaw. You end up paying more over a longer period of time.

Run the numbers yourself, you'll see what I mean.

If you are in big law for that long the extra interest is a drop in the bucket.

If you flame out and take a small firm job for 70k a year after 3 years in big law. PAYE save you a ton of money.

[theotherone823]

If you have the ability, don't do PAYE over 25 years for biglaw. You end up paying more over a longer period of time.

Run the numbers yourself, you'll see what I mean.

The following assumes that you paid sticker price all 3 years, which we will roughly say is $300,000. It also, for the sake of simplification, assumes that you are making a BigLaw 1st year associate's salary for all of your 20 years on PAYE (an unlikely assumption given that you are unlikely to stay in BigLaw for 20 years and your salary is going to increase every year) and that you are single the whole time.

$160,000 - $16,245 (150% of poverty cap for single person household) = $143,755

$143,755 * 10% = $14,376 in yearly loan payments

$14,376/12 = $1,198 per month in loan payments

$14,376 * 20 = $287,520 paid on loans over course of 20 years on PAYE

So, over the course of time that you stay on PAYE, you will come very close to paying off the amount that you owed on your loans at graduation. HOWEVER, do not forget that interest has been accruing and capitalizing on these loans. By the 20 year mark with all of the interest added in, the value of your loans (including what you already paid and what you have left) is going to have almost doubled. Lets say it is about $550,000.

$550,000 - $287,520 = $262,480 in loans forgiven

Now you have to pay taxes on the value of the loans that were forgiven!

$262,480 in loans forgiven + $160,000 salary = $442,480 in income for the year

You are single and made over $400,000 in income for the year, so that places you in the highest tax bracket of 39.6%. That means you are paying roughly $130,000 in income taxes for the year your loans are forgiven.

So the total amount that you end up paying for law school is:

$287,520 + $130,000 in taxes = $417,520

You paid more than $100k greater than what your original premium was by being on PAYE for 20 years.

Now ask yourself: is it really worth it to spend more than $100K extra on your loans just for the comfort of having a few extra grand around each month, rather than just paying off your loans quickly?

[theotherone823]

If you have the ability, don't do PAYE over 25 years for biglaw. You end up paying more over a longer period of time.

Run the numbers yourself, you'll see what I mean.

If you are in big law for that long the extra interest is a drop in the bucket.

If you flame out and take a small firm job for 70k a year after 3 years in big law. PAYE save you a ton of money.

This is a VERY big if.

[DrStudMuffin]

If you have the ability, don't do PAYE over 25 years for biglaw. You end up paying more over a longer period of time.

Run the numbers yourself, you'll see what I mean.

The following assumes that you paid sticker price all 3 years, which we will roughly say is $300,000. It also, for the sake of simplification, assumes that you are making a BigLaw 1st year associate's salary for all of your 20 years on PAYE (an unlikely assumption given that you are unlikely to stay in BigLaw for 20 years and your salary is going to increase every year) and that you are single the whole time.

$160,000 - $16,245 (150% of poverty cap for single person household) = $143,755

$143,755 * 10% = $14,376 in yearly loan payments

$14,376/12 = $1,198 per month in loan payments

$14,376 * 20 = $287,520 paid on loans over course of 20 years on PAYE

So, over the course of time that you stay on PAYE, you will come very close to paying off the amount that you owed on your loans at graduation. HOWEVER, do not forget that interest has been accruing and capitalizing on these loans. By the 20 year mark with all of the interest added in, the value of your loans (including what you already paid and what you have left) is going to have almost doubled. Lets say it is about $550,000.

$550,000 - $287,520 = $262,480 in loans forgiven

Now you have to pay taxes on the value of the loans that were forgiven!

$262,480 in loans forgiven + $160,000 salary = $442,480 in income for the year

You are single and made over $400,000 in income for the year, so that places you in the highest tax bracket of 39.6%. That means you are paying roughly $130,000 in income taxes for the year your loans are forgiven.

So the total amount that you end up paying for law school is:

$287,520 + $130,000 in taxes = $417,520

You paid more than $100k greater than what your original premium was by being on PAYE for 20 years.

Now ask yourself: is it really worth it to spend more than $100K extra on your loans just for the comfort of having a few extra grand around each month, rather than just paying off your loans quickly?

Don't feel like running the numbers myself right now, and I'm not really sure where they actually come down, but I'll just say "time value of money, dude."

ETA: Also, interest would have been accruing even on a standard repayment schedule, albeit probably less than on PAYE ultimately.

[patogordo]

If you have the ability, don't do PAYE over 25 years for biglaw. You end up paying more over a longer period of time.

Run the numbers yourself, you'll see what I mean.

If you are in big law for that long the extra interest is a drop in the bucket.

If you flame out and take a small firm job for 70k a year after 3 years in big law. PAYE save you a ton of money.

This is a VERY big if.

which only bolsters his point

[09042014]

ddddddddddiscount rate

[d cooper]

A $160,000 salary as a 20-year average is an extraordinary assumption. At sticker debt, if you expect to make anything under ~$138,000/year as a 20-year average, then PAYE saves you money or breaks even when compared to the standard repayment scheme. If you factor in the tax bomb (and we have no reason to believe it won't be a factor), the threshold is closer to $100,000/year as a 20-year average. Increasing the family size or lowering the income further exaggerates PAYE's lead.

Obviously it's going to be difficult to predict, but you have to think about your career goals/trajectory and expected salary in the long run. You will also have to consider (assuming tax bomb) how much you are willing to pay at the end of the term for the luxury of having more expendable income along the way, and whether paying more overall is worth that to you.

Calculator: https://studentloans.gov/myDirectLoan/m ... ment-plans

[rayiner]

My goal is to do PAY-E, but save the money I'd otherwise have paid to loans in an index fund or similar. You can always pay back the loan if it turns out you're gonna make more money over the long term, but you can't get back money from the government if you need it later. You'll probably pay a bit more overall if your return is less than the 7.61% interest on the loans, but I'd rather have the liquidity.

[patogordo]

plus odds are the us will collapse in the next twenty years

[chem]

If you have the ability, don't do PAYE over 25 years for biglaw. You end up paying more over a longer period of time.

Run the numbers yourself, you'll see what I mean.

The following assumes that you paid sticker price all 3 years, which we will roughly say is $300,000. It also, for the sake of simplification, assumes that you are making a BigLaw 1st year associate's salary for all of your 20 years on PAYE (an unlikely assumption given that you are unlikely to stay in BigLaw for 20 years and your salary is going to increase every year) and that you are single the whole time.

$160,000 - $16,245 (150% of poverty cap for single person household) = $143,755

$143,755 * 10% = $14,376 in yearly loan payments

$14,376/12 = $1,198 per month in loan payments

$14,376 * 20 = $287,520 paid on loans over course of 20 years on PAYE

So, over the course of time that you stay on PAYE, you will come very close to paying off the amount that you owed on your loans at graduation. HOWEVER, do not forget that interest has been accruing and capitalizing on these loans. By the 20 year mark with all of the interest added in, the value of your loans (including what you already paid and what you have left) is going to have almost doubled. Lets say it is about $550,000.

$550,000 - $287,520 = $262,480 in loans forgiven

Now you have to pay taxes on the value of the loans that were forgiven!

$262,480 in loans forgiven + $160,000 salary = $442,480 in income for the year

You are single and made over $400,000 in income for the year, so that places you in the highest tax bracket of 39.6%. That means you are paying roughly $130,000 in income taxes for the year your loans are forgiven.

So the total amount that you end up paying for law school is:

$287,520 + $130,000 in taxes = $417,520

You paid more than $100k greater than what your original premium was by being on PAYE for 20 years.

Now ask yourself: is it really worth it to spend more than $100K extra on your loans just for the comfort of having a few extra grand around each month, rather than just paying off your loans quickly?

Don't feel like running the numbers myself right now, and I'm not really sure where they actually come down, but I'll just say "time value of money, dude."

ETA: Also, interest would have been accruing even on a standard repayment schedule, albeit probably less than on PAYE ultimately.

Plus you deduct the poverty cap after you come to your AGI, so the payments per month are quite a bit less, especially if you know what to do vis a vis taxes. Running a conservative calculation, it came out about the same without a discount rate, assuming biglaw for 5 years and then 100k for the rest of the years.

Edit: and by about the same i mean if you paid off your loans in year one. I didnt want to do a bunch of alternative hypothesis. The only thing I really worry about under PAYE is the program being scrapped and creditors taking into account my debt to income ratio

[twenty]

If you flame out and take a small firm job for 70k a year after 3 years in big law. PAYE save you a ton of money.

Since the other fellow above me already demonstrated biglaw for 20 years (except he didn't calculate the lockstep system moving your salary well above 160k after a couple years, but hey, the point more or less remains), in a world where you flame out quickly and take a small firm job, you're basically just as fucked, except that you're putting away substantially less money every month for a much larger tax bomb.

Year one through three: Making on average 180k/year, paying $1300 a month with PAYE. Over the course of three years, you pay about 46k on your loans. Now, in the best case scenario, you're either making 70k at a mid firm with a huge pay hike every year (say 8-10%) or you're in house making more money (110k?), but with lower raises (say, 5%). In both worlds, you're looking at having paid 240k or so on your loans with 520k "forgiven." The tax bomb on 520k is about 200k, so that plus the 240k you've already paid means you're now at about 440k.

[09042014]

Paye doesn't let your loans balloon. It's limited to what you start with plus ten percent right?

[rayiner]

Paye doesn't let your loans balloon. It's limited to what you start with plus ten percent right?

Yeah. With PAY-E, the capitalized interest never exceeds 110% of your original principal.

[PrideandGlory1776]

Paye doesn't let your loans balloon. It's limited to what you start with plus ten percent right?

Yeah. With PAY-E, the capitalized interest never exceeds 110% of your original principal.

No way - is this real? If so can someone like me to this?

[chem]

Paye doesn't let your loans balloon. It's limited to what you start with plus ten percent right?

Yeah. With PAY-E, the capitalized interest never exceeds 110% of your original principal.

No way - is this real? If so can someone like me to this?

http://studentaid.ed.gov/repay-loans/un ... advantages

[d cooper]

Deleted for inaccurate information.

[twenty]

Wow, good find guys.

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.

I don't understand why you wouldn't defer your loans for three years during biglaw if your biglaw salary will be bigger than your salary at year 20 with whatever firm you're with? Invariably if your loan is going to capitalize at the 110% mark regardless, making PAYE payments on not-biglaw > making PAYE payments on biglaw.

[chem]

Wow, good find guys.

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.

I don't understand why you wouldn't defer your loans for three years during biglaw if your biglaw salary will be bigger than your salary at year 20 with whatever firm you're with? Invariably if your loan is going to capitalize at the 110% mark regardless, making PAYE payments on not-biglaw > making PAYE payments on biglaw.

If the rug isnt pulled out from under people, I think that PAYE is the way to go for biglaw + Sticker debt. Huge Huge Huge Huge If. Gov gets its money back, student isnt royally screwed and can have a decent lifestyle for the kind of job they work. I haven't crunched the numbers for other jobs, but sticker debt seems to make PAYE good all around.

[twenty]

I could be wrong on this, but PAYE seems fairly stable if it's in the MPN. I highly doubt it's legal for DoED to go "oh, you know those terms we all agreed to? Yeah, well, sorry, we're unilaterally changing the rules on you even though you're in repayment."

PSLF, on the other hand...

[chem]

I could be wrong on this, but PAYE seems fairly stable if it's in the MPN. I highly doubt it's legal for DoED to go "oh, you know those terms we all agreed to? Yeah, well, sorry, we're unilaterally changing the rules on you even though you're in repayment."

PSLF, on the other hand...

I'll take your word on it. I don't know anything about any of that

[Br3v]

I'd do it but make a special savings account for your PAYE Tax bomb. Plan on 250k extra income at 30%. That's still a whopper.

Without reading this whole thread or looking it up myself, is this saying the estimated tax bomb from the savings will equate to $75,000 in that one year?

[PrideandGlory1776]

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?