Pay back loan ASAP or use the money to invest? Forum

[Philafaler]

If you're on REPAYE and the government is paying part of your interest payments, can you still put additional payments towards the principle? In other words, can you take advantage of REPAYE's benefits while still pursuing an aggressive pay-down-loans approach?

[Anonymous User]

Is it possible to get on REPAYE and also to pay money directly towards your principal? In other words, is it possible to take advantage of the government's interest-subsidization program but also pursue an aggressive pay-down-loans-now approach?

[nealric]

On REPAYE for your first two years the government pays half your interest, bringing your interest down to about 3%. It’s absolutely foolish no to let the loans ride in that circumstance (and invest the money elsewhere to take advantage of capitalized interest). Anyone who tells you otherwise is being absolutely irrational.

There's a sort of rational irrationality that applied in my case. I gained more utility from not having student loans than I would have from the putative market gains. But I was not eligible for REPAYE, so that issue was a bit moot.

Keep in mind that comparing a 3% post-tax risk-free return to a higher potential returns in the market is apples to oranges. You can't beat 3% (likely closer to 4% after tax depending on your income) without adding in risk.

[Bubbles1012]

Is it possible to get on REPAYE and also to pay money directly towards your principal? In other words, is it possible to take advantage of the government's interest-subsidization program but also pursue an aggressive pay-down-loans-now approach?

Yes. I recently spoke with a financial advisor who told me to do just that if I wanted to aggressively tackle my loans. That way more of your payment goes to principal instead of interest. I think the way it works is you submit your REPAYE minimum payment and then you would submit another, additional payment to be applied towards your Highest interest rate/highest balance loan. I am not sure of the specifics as I am still a 3L.

[Bubbles1012]

.

Keep in mind that comparing a 3% post-tax risk-free return to a higher potential returns in the market is apples to oranges. You can't beat 3% (likely closer to 4% after tax depending on your income) without adding in risk.

The interest you make from investments capitalizes though, and the interest on your loan doesn’t. So yes, over time you want will beat the REPAYE subsidized interest rate.

[Bubbles1012]

Also, everyone should be eligible for REPAYE your first two years in big law since it’s based on your tax return for your 2L and 3L years.

[glitched]

I decided to max out 401(k) and then go aggressive on loans (after refinancing - wish I knew about the REPAYE thing but whatever). Sure the market likely beat out my loans, but I figured that I'd have to pay tax on any investment gains so unless the market was super hot, it just didn't seem worth having the psychological burden of loans. Plus if another recession happened during that time, I'd be SOL.

[estefanchanning]

Also, everyone should be eligible for REPAYE your first two years in big law since it’s based on your tax return for your 2L and 3L years.

If someone can get a 1.95% interest rate, with total loans at 100k, and work in biglaw, should they still ride out REPAYE or refinance at 1.95% and aggressively pay down?

[Anonymous User]

Also, everyone should be eligible for REPAYE your first two years in big law since it’s based on your tax return for your 2L and 3L years.

If someone can get a 1.95% interest rate, with total loans at 100k, and work in biglaw, should they still ride out REPAYE or refinance at 1.95% and aggressively pay down?

how can someone get this 1.95% rate? please share.

[estefanchanning]

Also, everyone should be eligible for REPAYE your first two years in big law since it’s based on your tax return for your 2L and 3L years.

If someone can get a 1.95% interest rate, with total loans at 100k, and work in biglaw, should they still ride out REPAYE or refinance at 1.95% and aggressively pay down?

how can someone get this 1.95% rate? please share.

First Republic Bank starts at 1.95%


https://www.firstrepublic.com/student-l ... ng#slide-2

[Bubbles1012]

If you can get a 1.95% interest rate why I’m God’s name would you ever pay your loan down aggressively? You will be guaranteed a better rate of return putting your money in a ROTH, maxing out your 401K, or investing in an index fund. The thing to keep in mind though, is that on REPAYE your interest doesn’t capitalize, which may not be the case for your refinancing option. Additionally, on REPAYE you use your 2L and 3L incomes the first two years and will only be required to put 10% of that negligible amount towards your loan. That frees up a lot of cash that can be used to max out your 401K and max out a back door ROTH while also putting some other cash in other investments that will provide more of a return than 3.5% (which is what your effective interest rate will be with the feds covering half). If you refinance for that 2% interest rate your monthly payment will not be capped and depending on the term of your refinanced loan may be veart high making it so you can’t max out the 401 and the Back door ROTH. There’s an opportunity cost that must be weighed against the straight up interest rate cost.

[ughbugchugplug]

Also, everyone should be eligible for REPAYE your first two years in big law since it’s based on your tax return for your 2L and 3L years.

If someone can get a 1.95% interest rate, with total loans at 100k, and work in biglaw, should they still ride out REPAYE or refinance at 1.95% and aggressively pay down?

how can someone get this 1.95% rate? please share.

First Republic Bank starts at 1.95%


https://www.firstrepublic.com/student-l ... ng#slide-2

It depends on the size of your loans - will half of your unsub be greater than 1.95%? And if it is, would you sell the ability to defer and go on income based repayment for 30-40 bucks a month for two years?

[Bubbles1012]

Also, everyone should be eligible for REPAYE your first two years in big law since it’s based on your tax return for your 2L and 3L years.

If someone can get a 1.95% interest rate, with total loans at 100k, and work in biglaw, should they still ride out REPAYE or refinance at 1.95% and aggressively pay down?

how can someone get this 1.95% rate? please share.

First Republic Bank starts at 1.95%


https://www.firstrepublic.com/student-l ... ng#slide-2

It depends on the size of your loans - will half of your unsub be greater than 1.95%? And if it is, would you sell the ability to defer and go on income based repayment for 30-40 bucks a month for two years?

This. 2% is barely inflation. Meaning, it doesn't cost you anything to let that loan ride out. Thus, if you have a 2% interest rate you should be paying the minimum you can pay and putting that money into vehicles that will make you money through capitalized interest (401K, backdoor Roth, etc.).

BUT, by refinancing you are selling your safety net. If you have federal loans and you get fired you can stay or REPAYE or go back on it, and you will never have to pay more than 10% of your income. If you never work again, that will be 0 and after 25 years of on time 0 payments, your loan will be forgiven. There is the tax bomb to think about, but there are ways to prepare for this (like making sure you liabilities outweigh your assets, which they likely will if you have been unemployed for an extensive amount of time). Obviously, that's an extreme example, but by the same measure you may go into government after you leave big law, and after 10 years of on time payments while working for the feds your loans may be forgiven without the tax bomb. You sell this safety net for a negligible amount (1.95 percent at FNB vs. 3.5% effective interest rate on REPAYE with the subsidy). For most people who will not stay in biglaw for their entire lives (or an extended period of time), its likely not worth. Now, after two years on REPAYE, if you are pretty certain you are in big law (or at least high paying law firms) for the long haul, and won't be kicked out in a year or two (remember most associates only last 3-5 years), then it might make sense for you to refinance since your effective interest rate will go up to about 7%. For most new associates though, riding out REPAYE is the clear choice. Its amazing that people have no clue about this.