Student loan payments: get advice and actual numbers here Forum

[AVBucks4239]

Sorry if I overlooked this info somewhere. Quick question regarding Dec. 2015 expansion of PAYE:

I am currently ineligible for PAYE because of loans I took out before 2007 in undergrad. I am married, and my wife and I file separately so that her income won't affect my repayment amount and vice versa. I know a lot of new policy proposals (like REPAYE) propose counting spousal income (even if you file separately) for purposes of calculating repayment amount. If PAYE is expanded in December so that old borrowers like me can take advantage of it, will they count my wife's income too in calculating my repayment amounts even if we file separately?

Thanks in advance. This thread is awesome as are all of you.

Pretty sure they won't take your wife's income into consideration if you file separately. But understand that you are giving up a ton of great tax deductions by filing separately (student loan interest deduction, can't deduct income into Traditional IRA, basically most other deductions), and that is probably the #1 most under-discussed negative aspect of PAYE in this thread.

[Golden Bear 11]

Sorry if I overlooked this info somewhere. Quick question regarding Dec. 2015 expansion of PAYE:

I am currently ineligible for PAYE because of loans I took out before 2007 in undergrad. I am married, and my wife and I file separately so that her income won't affect my repayment amount and vice versa. I know a lot of new policy proposals (like REPAYE) propose counting spousal income (even if you file separately) for purposes of calculating repayment amount. If PAYE is expanded in December so that old borrowers like me can take advantage of it, will they count my wife's income too in calculating my repayment amounts even if we file separately?

Thanks in advance. This thread is awesome as are all of you.

Pretty sure they won't take your wife's income into consideration if you file separately. But understand that you are giving up a ton of great tax deductions by filing separately (student loan interest deduction, can't deduct income into Traditional IRA, basically most other deductions), and that is probably the #1 most under-discussed negative aspect of PAYE in this thread.

Wait, I was under the impression that for REPAYE, they do take your spouse's income into consideration even if you file separately ...

[Johann]

Sorry if I overlooked this info somewhere. Quick question regarding Dec. 2015 expansion of PAYE:

I am currently ineligible for PAYE because of loans I took out before 2007 in undergrad. I am married, and my wife and I file separately so that her income won't affect my repayment amount and vice versa. I know a lot of new policy proposals (like REPAYE) propose counting spousal income (even if you file separately) for purposes of calculating repayment amount. If PAYE is expanded in December so that old borrowers like me can take advantage of it, will they count my wife's income too in calculating my repayment amounts even if we file separately?

Thanks in advance. This thread is awesome as are all of you.

Pretty sure they won't take your wife's income into consideration if you file separately. But understand that you are giving up a ton of great tax deductions by filing separately (student loan interest deduction, can't deduct income into Traditional IRA, basically most other deductions), and that is probably the #1 most under-discussed negative aspect of PAYE in this thread.

Wait, I was under the impression that for REPAYE, they do take your spouse's income into consideration even if you file separately ...

I don't believe the exact REPAYE terms have come out, we have to wait until Dec 1 to see. But yes, that has been in the Obama plans so far.

[Earl is here]

For REPAYE, my understanding is that they do take into account your spouse's income, even if you file separately. But the December 2015 change is an executive order, i.e., not REPAYE, such that there is no reason to think that they will take spousal income into account if filing separately, right?

[Johann]

The executive order and REPAYE are going to tie together and be the same thing. REPAYE's rules are being made right now but this is what Obama endorsed:

Payments under REPAYE will be capped at 10% of the borrowers discretionary income, regardless of the year they first took out student loans. For many borrowers this would mean their monthly payment would drop by about a third.
Forgiveness under REPAYE will occur after 20 years for borrowers who only borrowed undergraduate loans. Those who took out only graduate loans, or who took out both undergrad and graduate loans, will have to wait 25 years for forgiveness to kick in.
Loans forgiven under REPAYE, whether it is 20 or 25 years, will continue to be taxed.
If the borrowers monthly payment under REPAYE is less than the monthly interest, the excess interest will be reduced by 50%. This should help people worried about negative amortization.
Payments made under REPAYE will count towards the 120 payments required for Public Service Student Loan Forgiveness.
Married persons on REPAYE will have their spouses income count towards their monthly payment, regardless of whether or not the filed their taxes jointly or separately. This is a change from PAYE and IBR where separate filers income is not included.

[XxSpyKEx]

The executive order and REPAYE are going to tie together and be the same thing. REPAYE's rules are being made right now but this is what Obama endorsed:

Payments under REPAYE will be capped at 10% of the borrowers discretionary income, regardless of the year they first took out student loans. For many borrowers this would mean their monthly payment would drop by about a third.
Forgiveness under REPAYE will occur after 20 years for borrowers who only borrowed undergraduate loans. Those who took out only graduate loans, or who took out both undergrad and graduate loans, will have to wait 25 years for forgiveness to kick in.
Loans forgiven under REPAYE, whether it is 20 or 25 years, will continue to be taxed.
If the borrowers monthly payment under REPAYE is less than the monthly interest, the excess interest will be reduced by 50%. This should help people worried about negative amortization.
Payments made under REPAYE will count towards the 120 payments required for Public Service Student Loan Forgiveness.
Married persons on REPAYE will have their spouses income count towards their monthly payment, regardless of whether or not the filed their taxes jointly or separately. This is a change from PAYE and IBR where separate filers income is not included.

Where did you read this? Wonder if that makes REPAYE better than PAYE for a lot of people, despite having another 5 years to forgiveness since it could drastically reduce taxes on the year of forgiveness.

[lacrossebrother]

I'm a bit confused by that part.
So say you have 150k outstanding and make $100k
After 401k, your PAYE payment should be about $540/month
Interest @6.7 is 850.
So gov just kicks in an extra $155 a month?

[Johann]

Not sure where I read that but I think I just copied and pasted it, so you can google it from that. That's my understanding - government kicks in the rest hypothetically as half the excess interest vanishes every month.

[Anonymous User]

About $150,000 in total debt, borrowed from parents, so no interest. Parents haven't expressly said when they want it back (and encourage me to keep it in savings until they need it down the line), but I don't think they really grasp the idea that biglaw, and the biglaw salary,won't last forever.

Assuming I get an offer from my firm at the end of summer, how should I plan for repayment? I guess factors I'm trying to balance are trying not to screw my parents over vs. spending enough money on my standard of living that I might actually last longer in biglaw. Also, how long will I last in biglaw, and how can I set myself up to make some form of income when I inevitably exit.

[XxSpyKEx]

how long will I last in biglaw,

It all depends on you. Some people don't even make it a year, some people make it 3-5 years, and a relatively small number of people make it longer than that.

how can I set myself up to make some form of income when I inevitably exit.

Do corporate.

[Anonymous User]

I just paid off all of my student loans today! I feel that a dark cloud has been lifted, and I can not focus of what I want in life (travel and saving for a house). I feel that I have more freedom now.

Stats: 2013 grad (k-12) living in a high COL city. Current salary at $130k, I made half as much my first year practicing. $65k in debt at graduation.

[BuckinghamB]

Married persons on REPAYE will have their spouses income count towards their monthly payment, regardless of whether or not the filed their taxes jointly or separately. This is a change from PAYE and IBR where separate filers income is not included.

My spouse and I will be a combined half million in debt by the time we both graduate (she's in her final year of med school). Does anyone have an opinion on REPAYE as an option with biglaw + primary care physician salary (roughly $200K/yr with good job security)? I'm leaning towards not doing REPAYE because of the combined spousal income thing, but our loan payments will be so fucking high without it. Also, if $500K in debt isn't scary enough, seeing it grow larger while doing REPAYE is even more terrifying to me.

TL;DR am I dumb for not doing REPAYE with big law + doctor wife + combined $500K in debt?

[Johann]

Married persons on REPAYE will have their spouses income count towards their monthly payment, regardless of whether or not the filed their taxes jointly or separately. This is a change from PAYE and IBR where separate filers income is not included.

My spouse and I will be a combined half million in debt by the time we both graduate (she's in her final year of med school). Does anyone have an opinion on REPAYE as an option with biglaw + primary care physician salary (roughly $200K/yr with good job security)? I'm leaning towards not doing REPAYE because of the combined spousal income thing, but our loan payments will be so fucking high without it. Also, if $500K in debt isn't scary enough, seeing it grow larger while doing REPAYE is even more terrifying to me.

TL;DR am I dumb for not doing REPAYE with big law + doctor wife + combined $500K in debt?

I don't think you are dumb for doing REPAYE for a couple years. It's based on last year's tax return so you should be able to print money for a couple years and keep your payments in the $400 or less range a month.

[AVBucks4239]

Married persons on REPAYE will have their spouses income count towards their monthly payment, regardless of whether or not the filed their taxes jointly or separately. This is a change from PAYE and IBR where separate filers income is not included.

My spouse and I will be a combined half million in debt by the time we both graduate (she's in her final year of med school). Does anyone have an opinion on REPAYE as an option with biglaw + primary care physician salary (roughly $200K/yr with good job security)? I'm leaning towards not doing REPAYE because of the combined spousal income thing, but our loan payments will be so fucking high without it. Also, if $500K in debt isn't scary enough, seeing it grow larger while doing REPAYE is even more terrifying to me.

TL;DR am I dumb for not doing REPAYE with big law + doctor wife + combined $500K in debt?

I don't think you are dumb for doing REPAYE for a couple years. It's based on last year's tax return so you should be able to print money for a couple years and keep your payments in the $400 or less range a month.

Totally disagree. With that kind of income they can pay off that debt in 5-6 years while maxing their retirement accounts. Waiting to pay their loans leads to more interest paid towards the loan. I just did the math real quick and paying $400/month for "a couple years" would lead to them paying $60,400 more in interest.

Pre-Tax Gross Income: $360,000
401k Max (Each): $36,000
Traditional IRA Max: $11,000
Net Income (after retirement contributions and assuming 40% taxed...high estimate of federal, state, local): $187,800
Monthly Income: $15,650
Apartment/COL: $5,000 (high estimate)
Random: $2,000
Loans: the remaining $8,650

Doing this would allow them to pay off these loans in six years and one month. That doesn't include bonuses, tax refunds, etc, which (if applied to their loans) would allow them to pay these back in under five years. On top of that, they'd have have $289,000 in investments (excluding employer matches and assuming 7% return over the 5 years) by the time they were done. And perhaps most importantly, because they would have established a modest but comfortable standard of living, they would be well on their way to having a savings rate that would allow them to (a) very quickly purchase a house and, if they wanted, (b) retire in their 40s.

But hey, they can also play the defer game and base the next 10-20 years of their financial lives around student loans, save 10% of their income towards retirement, and work for 35 years.

I'd strongly advocate being more proactive and just getting rid of your loans.

[Johann]

I have never seen a more phony number than that $60k. You're just assuming that they aren't doing anything with their money. Not paying that $8k a month in student loans would give them a nest egg of 100k to invest. 60k in 5-6 years on that 100k is a negative investment compared to historical averages. This ignores time value of moeny and inflating debt away and the fact that committing 8k a month to loans is 100% of discretionary income when you could pay way less % of discretionary income down the road.

[AVBucks4239]

I have never seen a more phony number than that $60k. You're just assuming that they aren't doing anything with their money. Not paying that $8k a month in student loans would give them a nest egg of 100k to invest. 60k in 5-6 years on that 100k is a negative investment compared to historical averages. This ignores time value of moeny and inflating debt away and the fact that committing 8k a month to loans is 100% of discretionary income when you could pay way less % of discretionary income down the road.

- $60,400 is not a made up number. If they have $500,000 in loans at 7% interest, that's $35,000 in interest per year. Multiply that by two years and it's $70,000. Pay $400 per month toward their loans for 24 months (as you suggested) and that's $9,600. $70,000 in interest accrued minus $9,600 in payments equals $60,400.

So let's go through their options. They can pay $8,500 per month and have the principal down to (roughly) $355,000 after two years. And monthly interest accrues in a compound manner (i.e., the more one pays towards his loans, the less interest accrues), interest is now accruing at $2070 per month instead of nearly $3,000 per month.

Or they can build up a "nest egg" of $100,000 and let the student loan balance grow to $560,400 after two years. If they are now sick of their debt and decide to start paying off their loans, then it would take 12 months of $8,000 payments just to get back to the $500,000 principal.

Point is: deferring your loans for just a couple of years to build up a "nest egg" can cost you hundreds of thousands. Yes, the market returns 7% on average over the long term, but you can't project that over a short time period of 1-2 years. Thus, if you think you want to eventually pay off your loans, quit dicking around and just pay them off.

- BUT TIME VALUE OF MONEY AND NEST EGGS. Stop. TVM is a bullshit argument when they can pay off their loans in 4-5 years. Having a "nest egg" of $100k to invest is pointless when they are 100% guaranteed to make a 7% return with every dollar that goes towards their loans.

- Yes, $8,5000 is a large portion of discretionary income. But they are in a unique circumstance and have significant discretionary income. I conservatively budgeted $7,000 in living expenses. Assume they're in NYC and $3,500 for apartment (rent plus utilities). $500 for groceries. $500 for cars (if they have them). $1,000 for entertainment/dining out. $500 for cell phones and shopping per month. And they still have $1,500 left over to do whatever they want to do--while investing $47,000 per year towards retirement.

- Oh, they can pay down the road. Why would they want to if they don't have to?

Again, if they choose to max out retirement accounts and pay off their loans ASAP, by the time they are done with their loans they will have almost $300,000 saved up. They can continue to max out their retirement accounts throughout their careers and have more than $2M in the bank by the time they are 45...and no debt. And if they take the money they were paying towards their loans and shift it to investing, then they will probably have closer to $3.5-4M by the time they are 45.

[Johann]

I'm saying the 60k is in a vacuum. 60k of interest saved when it comes at the expense of investing is not a free 60k.

[AVBucks4239]

I'm saying the 60k is in a vacuum. 60k of interest saved when it comes at the expense of investing is not a free 60k.

True, but the point was more about the compound effect that aggressive payments can have on the interest you're paying towards your loan. Buckingham and his wife can dramatically reduce the interest they're paying by attacking their debt as soon as they are able.

[Johann]

And the flip side of the compound effect of investing is even more true because student loan interest does not compound.

[AVBucks4239]

And the flip side of the compound effect of investing is even more true because student loan interest does not compound.

The amount you pay in interest on a loan compounds in the same manner as compound interest on an investment.

[Johann]

No it doesn't. My loan balance racks up the same amount of interest every month since I graduated multiple years ago, even though my balance has grown by like 20K+. I have more S&P500 shares than I did when I bought because divs are reinvested in it. So my stock gains make gains whereas my interest does not create interest.

[AVBucks4239]

No it doesn't. My loan balance racks up the same amount of interest every month since I graduated multiple years ago, even though my balance has grown by like 20K+. I have more S&P500 shares than I did when I bought because divs are reinvested in it. So my stock gains make gains whereas my interest does not create interest.

Your interest does not create interest, but the amount you pay towards your principal reduces the interest you pay towards the loan, thus increasing the amount going to principal, thus increasing cash-flow when the loan is paid off.

Paying off a loan at 7% is the exact same as investing and getting a 7% return.

[Johann]

Depends how your payments are structured. Sine your initial payments are interest-heavy, you really don't get there until you are making pure principal payments. So it's still a factor of like 10% principal/90% interest means you are getting 10% of the compound benefit instead of 100% from investing. Regardless, the point of all this shows the debate is legit and if the OP wants to do PAYE instead of aggressively paying loans, they would not be stupid to do so. It's just a choice and rational one and easily defensible.

[Johann]

But also, OP should refinance since they can get like a 3%ish rate and between the two are guaranteed to have pretty great employment forl ife.

[Johann]

Shit but I keep forgetting REPAYE there is no interest accumulation if that goes through. So you get low payments and the govt subsidizes with paying whatever the interest balance. So in that case, def do REPAYE for a year based on your low student slaries from previous tax return and then just refi after a year.