Biglaw & Loan Repayment Forum

[Elston Gunn]

Note to the anon who originally asked, there is no tax bomb if your debt is forgiven after working 10 years in government/non-profit.

[Desert Fox]

[Elston Gunn]

What is this tax bomb?

When your loans get forgiven, the IRS considers you to have extra income that year equal to the amount forgiven. So you have to pay taxes on the forgiven amount.

Wow, great to know. Thanks

Cancellation of debt is considered income. I don't know how "they'd get rid of it".

Act of congress

UM EXCUSE ME DESSERT FOX THAT VIOLATES THE PRINCIPLES I LEARNED IN FEDERAL INCOME TAX

[bruinfan10]

UM EXCUSE ME DESSERT FOX THAT VIOLATES THE PRINCIPLES I LEARNED IN FEDERAL INCOME TAX

[03152016]

anyone know what the deal is for pre-2007 borrowers
i thought obama issued an exec order making them paye eligible but fed loans sites still say no paye for pre-2007 ppl

[Johann]

anyone know what the deal is for pre-2007 borrowers
i thought obama issued an exec order making them paye eligible but fed loans sites still say no paye for pre-2007 ppl

coming out dec 2015

[Anonymous User]

I had 264k and I refi'd with SOFI for 3.5% variable for ten years. I regret it.

Do PAYE and just pay the minimum. Start a savings account, max your 401k, and buy a house. After you buy a house, add 500 a month to a "tax bomb fund." You'll be set.

This just seems... insane. Won't the PAYE at a certain level be the same/more than a normal PAYE repayment? Or is that when you're an 8th year/partner so by that time fuck it you have more money than you can count-type shit.

If you've got that much debt IIRC you come out ahead unless you average significantly more than $250k/yr over those 20 years. It's totally possible to lose money doing it, but you're paying for flexibility + the possibility that you spend 10 of those years in government/501c3. And if you end up making what most people who exit lit to private practice make (let's say $150k or less), you come out ahead anyway.

the numbers vary wildly based on your projected future earnings + the discount rate you use, and it's easy to come up with plausible scenarios for $265k in debt that come out either way.

I guess this strategy isn't completely nuts if you're doing litigation, but in corporate given (a) higher expected career earnings and (b) low likelihood of entering a PSLF eligible job, I would not do this as a corporate associate.

Where are all of the high-paying corporate jobs post-biglaw? Sure, there are in-house counsel jobs, but the majority of those are available to the more senior associates. If you're a senior associate on the verge of partnership you should hopefully have, salary increase and bonus, be nearly paid off.

But for the majority of biglaw associates exiting in the first few years, where do they go and what does their pay look like?

[Dessert Fox]

imposter!

[03152016]

anyone know what the deal is for pre-2007 borrowers
i thought obama issued an exec order making them paye eligible but fed loans sites still say no paye for pre-2007 ppl

coming out dec 2015

sweet thx

[rickgrimes69]

What is this tax bomb?

When your loans get forgiven, the IRS considers you to have extra income that year equal to the amount forgiven. So you have to pay taxes on the forgiven amount.

Wow, great to know. Thanks

Cancellation of debt is considered income. I don't know how "they'd get rid of it".

Um, by passing a law saying we're going to deduct it from income as with any other tax deduction? Or whatever they did with the forgiven PSLF debt? Just spitballin'.

They used to have an interest rate deduction and they specifically got rid of it (for everything other than Mortgages) with the Tax Reform Act of 1986. Not sure why they'd bring it back now.

[Rahviveh]

What is this tax bomb?

When your loans get forgiven, the IRS considers you to have extra income that year equal to the amount forgiven. So you have to pay taxes on the forgiven amount.

Wow, great to know. Thanks

Cancellation of debt is considered income. I don't know how "they'd get rid of it".

Um, by passing a law saying we're going to deduct it from income as with any other tax deduction? Or whatever they did with the forgiven PSLF debt? Just spitballin'.

They used to have an interest rate deduction and they specifically got rid of it (for everything other than Mortgages) with the Tax Reform Act of 1986. Not sure why they'd bring it back now.

The interest rate deduction is something else. He is talking about excluding the income from canceling student debt, which is what they currently do for mortgage debt

[Elston Gunn]

They used to have an interest rate deduction and they specifically got rid of it (for everything other than Mortgages) with the Tax Reform Act of 1986. Not sure why they'd bring it back now.

Odds are they don't get rid of it, but there's no question they could. Also, we're talking about something different from an interest deduction.

[Anonymous User]

What I did was split my debt. I refinanced $150K of my 8% loans to be down at 3.5% variable, then left $80K at 6% in federal loans, hedging in a way. Paying off the refinanced stuff fast as I can (10 year plan - so I pay $3000 when minimum payments are $1600 - able to cut huge chucks off of principal every month, especially when I take any savings surplus and throw a few grand at a time and throw it in). Then I pay the minimum for the 80K in a 25 year plan (with every few months throwing like $5K at it in chunks from my savings account).

Found this to be helping in a huge way, looking to pay off at least $50K in principal from my loans this year as a first year in NYC, and I don't live a particularly frugal life (especially after bonuses - another $7.5K towards it). However, I want total freedom, after 5 years I want no debt and no reason why I can't walk out and never come back.

[bdubs]

Aren't you all forgetting about spousal income? Doesn't PAYE count all of the income on your tax return?

[Desert Fox]

[Lacepiece23]

I've got about 100k right now. My plan is to pay them as slow as possible, and beat the interest rate by investing in real estate. Then switch over to public interest after I have enough investment properties to bridge my pay cut. Hoping it works out.

[Jessep]

I aggressively paid off loans first few years in big law then decided to focus on savings. In retrospect, I wish I had focused on savings more. I would have been able to avoid PMI when I bought a place. Unless your loans are 7%+ (in which case, seriously consider refi), I personally would focus on savings until you have a very comfortable nest egg. C.R.E.A.M.

If you decide you want to throw $10K of savings against your loans, you have the $10K in cash. You can't take $10K out of your loans. Everyone needs to evaluate their own financial needs and goals, but I think too many people are obsessive with paying down loans. Better to balance this with retirement and savings...not to mention the instability of a job in big law unless you have a book of business. If you are sitting on $100K cash, fine, throw some at your loans, but I am guessing most people aggressively paying down loans don't even have $30K in savings.

[Johann]

Aren't you all forgetting about spousal income? Doesn't PAYE count all of the income on your tax return?

You gotta file separate.

or just get a civil union which will get you benefits access to spouse health insurance if you need and has no option for filing jointly. haventgone this route yet but pretty sure i will.

[Johann]

I aggressively paid off loans first few years in big law then decided to focus on savings. In retrospect, I wish I had focused on savings more. I would have been able to avoid PMI when I bought a place. Unless your loans are 7%+ (in which case, seriously consider refi), I personally would focus on savings until you have a very comfortable nest egg. C.R.E.A.M.

If you decide you want to throw $10K of savings against your loans, you have the $10K in cash. You can't take $10K out of your loans. Everyone needs to evaluate their own financial needs and goals, but I think too many people are obsessive with paying down loans. Better to balance this with retirement and savings...not to mention the instability of a job in big law unless you have a book of business. If you are sitting on $100K cash, fine, throw some at your loans, but I am guessing most people aggressively paying down loans don't even have $30K in savings.

totally agree. this cannot be reiterated enough on this board where peopleare risk averse to the point of losing tens of thousands in the long run.

[emciosn]

So is TCR to either pay loans down and quickly as possible or stretch it out as long as possible with PAYE? Is the middle ground of just saving some (assuming biglaw salary) and going with the standard 10 year federal repayment (thus keeping PAYE open as an option--I have about $190k in debt) foolish?

[Elston Gunn]

So is TCR to either pay loans down and quickly as possible or stretch it out as long as possible with PAYE? Is the middle ground of just saving some (assuming biglaw salary) and going with the standard 10 year federal repayment (thus keeping PAYE open as an option--I have about $190k in debt) foolish?

I don't know if it's foolish--it can be probably be perfectly rational to prefer both the backup of fed loans and the higher living standard from paying more slowly--but you leave a decent amount of money on the table that way.

[Anonymous User]

60k should be paid off asap, right?

[Elston Gunn]

60k should be paid off asap, right?

Depends on the rate you can get, but definitely refi.

[emciosn]

So is TCR to either pay loans down and quickly as possible or stretch it out as long as possible with PAYE? Is the middle ground of just saving some (assuming biglaw salary) and going with the standard 10 year federal repayment (thus keeping PAYE open as an option--I have about $190k in debt) foolish?

I don't know if it's foolish--it can be probably be perfectly rational to prefer both the backup of fed loans and the higher living standard from paying more slowly--but you leave a decent amount of money on the table that way.

Right. So the debate between rapid paydown and PAYE for 20 years is mainly about either avoiding the payment of interest or principal (purely financial considerations). While sticking to the standard federal 10-year plan may be utility maximizing for some (flexibility/QOL/etc.), it lacks the pure financial benefits of the foregoing options.

[Johann]

Nah that's not how it works. 10 year is fine too assuming you are saving and investing the money you would have been paying in loans.