Student loan payments: get advice and actual numbers here Forum

[Anonymous User]

I have a question re the student loan interest deduction.

Assuming I'm married and make somewhere in "phase out" territory (e.g., I have a MAGI between $130,000 and $160,000). Assume I paid over $2,500 in student loan interest this year. I am currently considering maxing out my trad IRA for 2015, but want to make sure I understand its impact on my MAGI (and therefore my student loan interest deduction).

My understanding of the phase out is that your "phased out" student loan interest deduction is based on the following calculation:
$2,500 - ($2,500 x (($[your MAGI] − $130,000)/$30,000)). So, for example, if your MAGI is $155,000, your student loan interest deduction will be $2,500 - ($2,500 x (($155,000-$130,000)/$30,000)) or $416.67.*

Assuming this math is correct, does it follow that for every dollar that you are able to reduce your MAGI, you save $0.08 in taxes (via the student loan interest deduction)? (In the above example, the calculated MAGI is reduced $5,000 from fully phased out and results in $416.67 in savings. $416.67/$5,000 = .083.)

If this is all correct, that means that for someone in "phase out territory," IRA contributions not only yield the traditional 25% marginal tax rate savings, but an additional 8.3% in tax rate savings on top of that via the student loan interest deduction phase out. That's pretty darn favorable, right? It's too late for me for work contributions in 2015, but that would imply that someone in this territory should be maxing out their trad 401k and not their Roth 401k, right?

On a related note, are there other ways of reducing your MAGI besides trad IRA/401k contributions? Is your MAGI pretty much just your gross earnings less IRA/401k contributions and moving expenses (the latter of which being obviously not super in one's control)?

*source: https://www.irs.gov/publications/p970/ch04.html

[bk1]

Uhhh, at that income you can't contribute to a traditional IRA. If you already have, you may need to look into recharacterizing your contributions.

Though if either you or your spouse aren't covered by a 401k, you may be within the limit.

[Anonymous User]

Uhhh, at that income you can't contribute to a traditional IRA. If you already have, you may need to look into recharacterizing your contributions.

Though if either you or your spouse aren't covered by a 401k, you may be within the limit.

Ah, thanks! Ok, but my question still applies if at least one member of the married couple isn't covered by a retirement plan at work, right? (Because then the limit is $183,000.)

[zot1]

I only pay about 10 dollars per month

Correct me if I'm wrong, but student debt is not "forgiven" by the US government after a certain period? In the UK, all debt is "forgiven" if it is not paid within 30 years.

Also, I read something on here about some students fearing a "tax bomb" when they retire? Can someone explain?

the debt is forgiven after 20 (or 25 on IBR i think) years but it is treated as a taxable event so you owe taxes on the amount forgiven

In 10 for me if the Republicans don't screw me over before that

[Tiago Splitter]

I have a question re the student loan interest deduction.

Assuming I'm married and make somewhere in "phase out" territory (e.g., I have a MAGI between $130,000 and $160,000). Assume I paid over $2,500 in student loan interest this year. I am currently considering maxing out my trad IRA for 2015, but want to make sure I understand its impact on my MAGI (and therefore my student loan interest deduction).

My understanding of the phase out is that your "phased out" student loan interest deduction is based on the following calculation:
$2,500 - ($2,500 x (($[your MAGI] − $130,000)/$30,000)). So, for example, if your MAGI is $155,000, your student loan interest deduction will be $2,500 - ($2,500 x (($155,000-$130,000)/$30,000)) or $416.67.*

Assuming this math is correct, does it follow that for every dollar that you are able to reduce your MAGI, you save $0.08 in taxes (via the student loan interest deduction)? (In the above example, the calculated MAGI is reduced $5,000 from fully phased out and results in $416.67 in savings. $416.67/$5,000 = .083.)

If this is all correct, that means that for someone in "phase out territory," IRA contributions not only yield the traditional 25% marginal tax rate savings, but an additional 8.3% in tax rate savings on top of that via the student loan interest deduction phase out. That's pretty darn favorable, right? It's too late for me for work contributions in 2015, but that would imply that someone in this territory should be maxing out their trad 401k and not their Roth 401k, right?

On a related note, are there other ways of reducing your MAGI besides trad IRA/401k contributions? Is your MAGI pretty much just your gross earnings less IRA/401k contributions and moving expenses (the latter of which being obviously not super in one's control)?

*source: https://www.irs.gov/publications/p970/ch04.html

Your MAGI is your AGI with the traditional IRA contribution (and some other stuff no one cares about) added back in. Making an IRA contribution won't decrease your MAGI.

[Anonymous User]

I have a question re the student loan interest deduction.

Assuming I'm married and make somewhere in "phase out" territory (e.g., I have a MAGI between $130,000 and $160,000). Assume I paid over $2,500 in student loan interest this year. I am currently considering maxing out my trad IRA for 2015, but want to make sure I understand its impact on my MAGI (and therefore my student loan interest deduction).

My understanding of the phase out is that your "phased out" student loan interest deduction is based on the following calculation:
$2,500 - ($2,500 x (($[your MAGI] − $130,000)/$30,000)). So, for example, if your MAGI is $155,000, your student loan interest deduction will be $2,500 - ($2,500 x (($155,000-$130,000)/$30,000)) or $416.67.*

Assuming this math is correct, does it follow that for every dollar that you are able to reduce your MAGI, you save $0.08 in taxes (via the student loan interest deduction)? (In the above example, the calculated MAGI is reduced $5,000 from fully phased out and results in $416.67 in savings. $416.67/$5,000 = .083.)

If this is all correct, that means that for someone in "phase out territory," IRA contributions not only yield the traditional 25% marginal tax rate savings, but an additional 8.3% in tax rate savings on top of that via the student loan interest deduction phase out. That's pretty darn favorable, right? It's too late for me for work contributions in 2015, but that would imply that someone in this territory should be maxing out their trad 401k and not their Roth 401k, right?

On a related note, are there other ways of reducing your MAGI besides trad IRA/401k contributions? Is your MAGI pretty much just your gross earnings less IRA/401k contributions and moving expenses (the latter of which being obviously not super in one's control)?

*source: https://www.irs.gov/publications/p970/ch04.html

Your MAGI is your AGI with the traditional IRA contribution (and some other stuff no one cares about) added back in. Making an IRA contribution won't decrease your MAGI.

Wait, so does that just make your MAGI your gross pay? Or is it your gross pay less payroll taxes?

Is there any way to impact your MAGI?

[nealric]

Uhhh, at that income you can't contribute to a traditional IRA. If you already have, you may need to look into recharacterizing your contributions.

Though if either you or your spouse aren't covered by a 401k, you may be within the limit.

Backdoor Roth to the rescue!

http://www.investopedia.com/ask/answers ... utions.asp

A Roth doesn't result in Year 1 tax savings, but the end-game economics are roughly equivalent to a deductible contribution.

[Tiago Splitter]

Is there any way to impact your MAGI?

401k salary deferrals are not added back in, so if you're looking to reduce MAGI contribute there first.

[bk1]

Uhhh, at that income you can't contribute to a traditional IRA. If you already have, you may need to look into recharacterizing your contributions.

Though if either you or your spouse aren't covered by a 401k, you may be within the limit.

Backdoor Roth to the rescue!

http://www.investopedia.com/ask/answers ... utions.asp

A Roth doesn't result in Year 1 tax savings, but the end-game economics are roughly equivalent to a deductible contribution.

Yeah backdoor Roth is useful for retirement. I was merely noting why OP's plan wouldn't work even if the reasons noted by Tiago Splitter weren't true (since backdoor just allows you to get money into a Roth, but still does not allow you to get traditional IRA deductions).

[Jrr13]

OL here,

I've been reading a lot of what you all have been saying about loans and paying them back. I have a question, how do loans (assuming 150k+ in loans and a Big Law salary) factor in when you are trying to buy an apartment or car say your second year after graduation? Do you have to pay more upfront/monthly on your mortgage?

[whysoseriousbiglaw]

I don't think there's a point to life if you spend your entire life working, but that's just me. I think people get too wrapped up in material goods, buying a big house, etc. to understand how to really enjoy life or what matters (time, freedom, ability to do stuff when you want). Working until the age of 70 sounds so depressing to me - there is literally no point to living IMO if you spend 80% of your waking hour working and then you die to buy shit you don't need or don't have the time to use. You might as well have never been born at that point - at least being unborn you wouldn't be conscious to realize how pointless and stupid your life is.

Agree with your basic premise here. The glorification of material goods and work is comical when you stop and think about it. I'm kind of blown away when people ask "well what are you going to do with your life?!?," as if work is the defining feature (or what leads to) an enjoyable life.

I will say though, post-45 I'll probably be in my own little solo shop, but only doing stuff for family/friends. Hopefully grossing something like $40-50k/year. This will only be to give me some structure with life so I can remember what day of the week it is.

Yeah, I want to run a (non-legal) business.

My MIL epitomizes this ideology - hasn't worked a day in 35 years, but values "prestige" and "luxury items" while husband slaves away at work. They are multi-millionaires thanks to husband slaving away. MIL thinks my biglaw job is super prestigious, and therefore, it's a great job to have without realizing what it entails or substantively what it means; but of course, MIL has never worked a job like this in her life and I doubt she could have worked biglaw hours in any real capacity. She's a nice person, but lacks introspection.

People who are blinded with prestige/material goods, etc. have no meaningful existence IMO. They are just empty shells and the products of consumerism who lack introspection and any real meaning in life. If they actually felt fulfilled, they wouldn't try to put their self worth on generally worthless shit in life (having lots of material goods, your job being the purpose for life, etc.).

[englawyer]

OL here,

I've been reading a lot of what you all have been saying about loans and paying them back. I have a question, how do loans (assuming 150k+ in loans and a Big Law salary) factor in when you are trying to buy an apartment or car say your second year after graduation? Do you have to pay more upfront/monthly on your mortgage?

Good Q. The student loan payment figures into your "back end ratio" on the mortgage, which is a threshold issue in obtaining a mortgage. The down payment requirement is not necessarily increased, and student loans could actually improve your credit score if promptly paid on time.

The rule of thumb is "front end ratio" less than 28% and "back-end ratio" less than 36%. The front-end ratio is housing debt as a proportion of income; the back-end ratio is all debt as a proportion of income.

If income = $10,000, and you have a $1200 student loan payment:

your "front end ratio" implies max mortgage payment should be $2,800.
your "back end ratio" implies max mortgage payment should be ($3,600 - $1,200) = $2,400.

As you can see, student loans can lower the total amount of loan a bank will give you, as a large loan payment can make it so the "back end ratio" becomes the more stringent threshold.

$10k is a reasonable approximation of a third year's take home, and that monthly payment indicates a $600k house or so is affordable assuming 20% down payment.

[LA Spring]

.... and that monthly payment indicates a $600k house or so is affordable assuming 20% down payment.

Assuming $120,000 (20%) down is really the tricky part.

[Danger Zone]

Why would you assume 20%? Don't most first time homeowners get a steep discount on the down payment or is that only a local thing?

[bk1]

Why would you assume 20%? Don't most first time homeowners get a steep discount on the down payment or is that only a local thing?

Are you referencing things like first time homeowner loans? Those usually have a cap that is lower than what most biglawyers would choose to spend on a home (e.g., those living in places like SF/NY/LA/DC/etc).

20% is probably assumed because that is the point at which you can avoid PMI and at which someone is arguably prepared to actually deal with the costs of owning a home.

[Danger Zone]

Why would you assume 20%? Don't most first time homeowners get a steep discount on the down payment or is that only a local thing?

Are you referencing things like first time homeowner loans? Those usually have a cap that is lower than what most biglawyers would choose to spend on a home (e.g., those living in places like SF/NY/LA/DC/etc).

20% is probably assumed because that is the point at which you can avoid PMI and at which someone is arguably prepared to actually deal with the costs of owning a home.

Yeah I meant something like this: http://www.state.nj.us/dca/hmfa/homeown ... ers/first/

The price cap doesn't seem so bad but the income limit would exclude big lawyers.

[JenDarby]

Why would you assume 20%? Don't most first time homeowners get a steep discount on the down payment or is that only a local thing?

If you're buying in NYC you'll be limited to how much financing you are able to receive by the building itself (definitely with coops and I've seen it with condos).

[LA Spring]

Why would you assume 20%? Don't most first time homeowners get a steep discount on the down payment or is that only a local thing?

If you're buying in NYC you'll be limited to how much financing you are able to receive by the building itself (definitely with coops and I've seen it with condos).

True.

You can have +800 credit and a hefty BL income but 20% down is still the deal. You can still buy a house with less than 20% down but there are numerous costly drawbacks and limitations.

(Saving for the 20% down is possible if you don’t mind stretching out your tuition payments for years.)

[krads153]

Re: buying in NYC, likely none of us will ever have to worry about that. At least in Manhattan, the condo/coop fees these days are my rent...so you'd be paying rent for a one bed somewhere plus a huge mortgage on top of that.

I can't imagine who would have the money to buy in Manhattan without parents funding at least the downpayment these days, if not part of the mortgage.

[Danger Zone]

Damn, some research is shedding light on this for me. LOL @ the real estate market in this area. I felt bad because my SO was shocked that buying a home was definitely not in my five year plan, but now I feel more assured about my decision.

[zot1]

It's all about that stupid down payment. What I pay in rent is more than what I would have to pay for a mortgage in my area if I had one. But since I don't have a down payment to throw around, no house for me!

[lacrossebrother]

It's all about that stupid down payment. What I pay in rent is more than what I would have to pay for a mortgage in my area if I had one. But since I don't have a down payment to throw around, no house for me!

is this a joke?

[zot1]

It's all about that stupid down payment. What I pay in rent is more than what I would have to pay for a mortgage in my area if I had one. But since I don't have a down payment to throw around, no house for me!

is this a joke?

No. But you can tell me why you thought it was one.

[ballouttacontrol]

Re: buying in NYC, likely none of us will ever have to worry about that. At least in Manhattan, the condo/coop fees these days are my rent...so you'd be paying rent for a one bed somewhere plus a huge mortgage on top of that.

I can't imagine who would have the money to buy in Manhattan without parents funding at least the downpayment these days, if not part of the mortgage.

condo association fees are $2k/month in NY? wtf? I've never heard of such a thing. Condo fees on a $5M luxury condo downtown SF are like $1-1.5k

[Tls2016]

Re: buying in NYC, likely none of us will ever have to worry about that. At least in Manhattan, the condo/coop fees these days are my rent...so you'd be paying rent for a one bed somewhere plus a huge mortgage on top of that.

I can't imagine who would have the money to buy in Manhattan without parents funding at least the downpayment these days, if not part of the mortgage.

condo association fees are $2k/month in NY? wtf? I've never heard of such a thing. Condo fees on a $5M luxury condo downtown SF are like $1-1.5k

Condo fees on my friends $3,750,000 3 bedroom in park avenue are $2100 a month. And he had to have a minimum of 50% down in cash for the board to even consider him.( There are a lot of buildings that are 100% cash.)
Of course the condo fee doesn't include lots of other building expenses.
Also his grandmother has an apartment in the building which helped him get in.