Student loan payments: get advice and actual numbers here Forum

[jchiles]

Can some IBR/PAYE train people update us with numbers as far as how much as been paid over what time and what your loan balance was at graduation versus your balance now?

There should be some people a couple years out (or more) by now.

I'll bite.

Debt at graduation in May of 2014 was approximately $143,000. I got a job in my hometown in Ohio and make about $50,000/year.

After six months of forbearance, total paid towards my loans over eighteen months is $5,643.81. This should be lower but I went through a three month kick where I was really throwing everything I could at the loans (including my entire tax return one year...sigh). My payment right now is $194/month (this could be lower, but my AGI is higher than I'd like because I need cash to pay for my wedding next spring). Based on my current savings ($12k to 401k this year, $2,250 to HSA), my payment next year should be $136/month.

Current debt is at $149,382, but I have yet to get my 50% reimbursement of unpaid accrued interest. So my technical balance is probably in the $147,000 range.

Meanwhile, I have approximately $9,000 in savings (six months of expenses), will have $16,000 in 401k by end of year (this should be higher, but wedding plus I bought a house last year), $1,000 in traditional IRA, $3,350 in HSA, and probably $2,000 in checking. In short: I'll have saved approximately 30% of my earnings during my first two years of work.

My now GF's income will become part of my REPAYE calculation for payments in 2018. She's on board with the whole saving thing (our goal is retire by 45). So next year we should be earning about $115,000 gross, contributing $36k to 401ks, $6,500 to HSAs, then hopefully some leftover to traditional IRAs. This is going to leave me with about a $350 payment.

Add in the interest subsidy and my loan is going up about $3,000 per year. Then my GF will have kids, earn less, my student loan payments will go down, and we will continue to save as much as humanly possible so we pay as little towards my loan as possible.

Also, I have no current plan for the tax liability because I'm about 75% certain the government will wipe out the "tax bomb." But who knows. That's 25 years away.

Do you factor in salary increases at your job or just in general throughout your career into this? Obviously thats hard to know now but would making significantly more 10 years or so down the road mess up your planning?

[AVBucks4239]

Sorry in advance for the long post, but early retirement is like porn to me (always thinking about it, but don't talk much about it in public).

Do you factor in salary increases at your job or just in general throughout your career into this? Obviously thats hard to know now but would making significantly more 10 years or so down the road mess up your planning?

Yes, salary increases factor in, but loan payments should remain manageable for two main reasons: (1) tax deferred contribution limits should rise; and (2) payments decrease with family size.

To the first point, the 401k max in 1996 was about $9,000 per year. Twenty years later it's $18,000 per year. That contribution limit will continue to increase with inflation, as will the contribution limits for other tax-deferred accounts like traditional IRAs and HSAs.

To the second point, you get to deduct 150% of the poverty level of your family size when calculating your REPAYE payment. Right now, as a single filer, I deduct $17,820 from my AGI. When I get married it will be $24,030. When I (god-willing) have a kid it will be $30,040. When I have a second kid, it will be $36,040. And like the contribution limits, these numbers will continue to rise with inflation.

So let's say ten years from now, I'm making $100,000 per year and my wife is making $40,000 per year. I bet the 401k max will be about $21,000 by then (which, if we both max, brings us down to an AGI of $98,000). Traditional IRA contribution limits will be about $7,500 (both max, down to $83,000)*. HSA limit is up to $9,000 (down $74,000). I'm sure there's other AGI deductions (e.g., child care credit) we can use (AGI down to $70,000).

Note: I know I only might get a partial deduction here, but who knows what the income cap will be by then.

Now I have a family of four, and that deduction will be up to $40,000 by then. So $70,000 minus $40,000 equals $30,000. Ten percent of that is $3,000, divided by 12 and you have a payment of $250/month. And assuming we max everything, we saved $66,000 in tax deferred accounts that year.

Can you say more about how you plan to retire by 45 on your income and having kids? That's not intended to sound snotty, I'm pretty ignorant about this stuff except at the most general level.

The first and most important thing is that I live in a very low COL area (NE Ohio...GO CAVS BABY). I just played with a couple COL calculators and my GF and I's income of $115,000 gives us the same standard of living as a couple making about $300-325,000 in New York City.

Some hardcore early retirement people call this "geographic arbitrage" (i.e., moving to a low COL area to retire early), but I was born here, and that in itself is going to be very valuable as we have kids.

Not only is my cost of living low, but I also am pretty frugal. And by frugal I mean I cut costs everywhere I can but spend extravagantly on things I like (Ramit Sethi's "I Will Teach You To Be Rich" is great). I don't have a car payment, have Sling TV, I call and reduce my car insurance every year, my groceries are like $40/week, etc. But I also spend probably $2,000 a year on OSU tickets, $3,000 per year on other vacations/visiting friends, etc.

All in all I average about $1,200 per month in total expenses (outside of things like OSU tickets). Once my GF pays off her student loans and car (should be by next year), her cost of living will be about $1,300 per month.

Now here's why I spent all that text talking about low expenses: the lower your expenses, the less you need to retire. Financial advisors get all hot and bothered and say you can't retire with less than $3,000,000, but that's absurd. To retire, you need 25 times your yearly expenses (in 96% of 50 years periods, 25x your expenses lasts forever). I'm conservative, so my goal is to have 30x my expenses (which I think should cover taxes, which are laughably minimal if you retire early and have a family).

Of course, the lower your expenses, the lower your retirement number.

Say your family spends $125,000 per year. $125,000 times 25 is $3.125M. So, at a minimum (unless you're 75), you need $3.125M to retire.

Once my GF pays off her car and student loans, we will spend about $38,000 per year. Add in kids at about $1,000 per month (they're going to public school and paying for the majority of their own college), so $50,000 per year in expenses. But, when we retire, we intend to have our mortgage (about $115,000 left) paid off, so subtract $625/month, which leaves us at $42,500 per year in expenses. Multiple that by 25 and we need $1.062M to retire. Multiply it by 30 and we need $1.275M to retire.

Assuming 7% returns, and with our current account balances, that means we need to save about $33,000 per year to get to $1.275M. And really, that's not that hard when we've intentionally made our cost of living so low. Hell, this year we are paying for a bunch of shit for our new house and paying out the ass for a wedding next year, and we are still on pace to save about $36,000 this year.

Yes, you could sit there and poke holes in a few of my numbers, but that retirement number ($1.275M) assumes ZERO retirement income. That's not going to happen. I'm going to continue refereeing and perhaps become a soccer coach, and I'm also thinking about becoming a professor or tutor at the local college. My GF will work part time as a speech therapist. And then we will have social security (in some form).

I honestly think I might be able to retire by 40 (would require about $52,000 in savings per year), but I'm foreseeing some bumps in the road and don't want to get my hopes up too much, so 45 seems like a more modest goal.

[bern victim]

i'm sticking with my plan to go hard until 50 and then kill myself penniless but i respect your commitment and planning

[Total Litigator]

Debt: $190k

Income: $68k

Plan: Don't even know, just deferred another year.

Life: Ruined

Height: 5'9

...Why are you deferring instead of getting on IBR or PAYE?

Not eligible for PAYE. What's the point of IBR at this point? So I can get tax bombed in 25 years? Don't want to consolidate anyway.I'm just throwing money at it trying to keep it at $190k (jfc it increases like $80 a day lol) until my salary increase to $68k once I'm admitted then do all I can do to pay it down.

IBR is really the worst option you can have. It's 25 years at 15% and you are going to get MURDERED by the tax bomb at the end. In 25 years the total will be like $500k if I IBR. Also, once you get married it's 15% of both salaries. Might as well hit the bottle for a while, keep it at bay, then man up and pay it.

Meh, I had the same thought process as you... but IBR is really the way to go.

I have about as much debt as you do, and a similar salary. If I suddenly win a proverbial / actual lottery, sure I will pay off my loans. But intending to repay the $190k later, while $10K+ in interest stacks up per year is not really a constructive plan.

Also, your first year IBR payments should be based on your 3L earnings, so you will likely knock off 1 year off of the 25 years without having paid anything anyways.

Furthermore, at around $190K per year, under the 25 year straight payment plan, that is about $1,500 a year for 25 years anyways (thank interest for that).

Also, if you want to overpay, IBR allows you to focus your payments on the high interest loans after you make your IBR payment, so it will actually save you money as long as your basic plan is to pay back your loans one way or another.

Finally, with regards to the tax bomb, putting money saved via IBR in a 'tax bomb preparation' account is more effective than putting that money towards your loans if you are not able to reduce the principle. Also, remember than the principle does not capitalize on IBR. Your ultimate loan forgivement amount, assuming Congress doesn't void the tax bomb in the next 25 years, will be taxed at about 33%. Therefore (for example) if you put $100K in a 'tax bomb preparation account' for an ultimate loan forgiveness amount of $300K, you will still spent less money than you would have paying it back in full. (I haven't done the actual math here, but it'd be tough to beat having to pay back 'only' 33% of the final unpaid amount versus having paid it back on a 25 year payment plan with interest stacking but no capitalizing priniciple).

Can someone explain the "tax bomb?"

When a bank writes off a loan...or in this case when the government forgives the remaining balance after 20 or 25 years (depending on the repayment program), the forgiven amount is considered income by the IRS. This means that, for a person making $50,000/year who has $200,000 forgiven in loans, they will have to pay taxes on $250,000 in income for the year that their loans are forgiven.

For many people, saving up and investing over the course of the 20-25 years is sufficient to cover the extra taxes in the year of forgiveness (the "tax bomb"), and they still come out ahead of where they would have been if they paid off all of their loans.

The 10-year PSLF program does not count the forgiven amount as income, so there is no tax bomb for those individuals.

I also want to add that interest does not capitalize when you are on IBR (or PAYE). Don't defer -get on IBR.

[mushybrain]

But, when we retire, we intend to have our mortgage (about $115,000 left) paid off, so subtract $625/month, which leaves us at $42,500 per year in expenses. Multiple that by 25 and we need $1.062M to retire. Multiply it by 30 and we need $1.275M to retire.

I'm confused, are you both planning to be dead at 70? Have your kids support you? Or just social security? My family lives until like 90+ so I'd just need to calendar my suicide for this to work.

[JenDarby]

But, when we retire, we intend to have our mortgage (about $115,000 left) paid off, so subtract $625/month, which leaves us at $42,500 per year in expenses. Multiple that by 25 and we need $1.062M to retire. Multiply it by 30 and we need $1.275M to retire.

I'm confused, are you both planning to be dead at 70? Have your kids support you? Or just social security? My family lives until like 90+ so I'd just need to calendar my suicide for this to work.

I thought something similar

even with a very low COL area, there's medical catastrophes, potentially end of life care, maybe your kids make some bad choices and you choose to get them into expensive drug rehab rather than having them do heroin on the streets, etc etc

[Mr. Peanutbutter]

Sorry in advance for the long post, but early retirement is like porn to me (always thinking about it, but don't talk much about it in public).

I love this analogy.

[pigzorz]

But, when we retire, we intend to have our mortgage (about $115,000 left) paid off, so subtract $625/month, which leaves us at $42,500 per year in expenses. Multiple that by 25 and we need $1.062M to retire. Multiply it by 30 and we need $1.275M to retire.

I'm confused, are you both planning to be dead at 70? Have your kids support you? Or just social security? My family lives until like 90+ so I'd just need to calendar my suicide for this to work.

I thought something similar

even with a very low COL area, there's medical catastrophes, potentially end of life care, maybe your kids make some bad choices and you choose to get them into expensive drug rehab rather than having them do heroin on the streets, etc etc

He's not spending 1/30th of the principle every year. If he needs $42.5k/yr, then he needs to draw a little over 3% of the money per year, but assuming 3% gains, the principal actually remains the same. That's the whole idea of retirement savings.

[AVBucks4239]

But, when we retire, we intend to have our mortgage (about $115,000 left) paid off, so subtract $625/month, which leaves us at $42,500 per year in expenses. Multiple that by 25 and we need $1.062M to retire. Multiply it by 30 and we need $1.275M to retire.

I'm confused, are you both planning to be dead at 70? Have your kids support you? Or just social security? My family lives until like 90+ so I'd just need to calendar my suicide for this to work.

So long as you have a safe withdrawal rate (mine is 3.3%), there is very little difference between a 20 year retirement, a 40 year retirement, or a 60 year retirement. Assuming you continue to invest the money and the market continues to have even some sort of nominal returns (i.e., 4%), the money lasts forever. This is a nice chart:



You can also play around with this calculator: https://www.dinkytown.net/java/Retireme ... tion3.html.

Plug in whatever numbers you want, and so long as you have a safe withdrawal rate, that money will last forever. I actually just plugged in that I would live until 2500 and the calculator predicted "you will be able to fund 100 plus years in retirement."

Of course, calamities can arise that are out of my control. But that can happen whether I'm working or not.

And actually, because the money remains invested, that account is more than likely growing if you have the stones to keep it invested in 100% stocks and keep your withdrawal rate low.

[JenDarby]

But, when we retire, we intend to have our mortgage (about $115,000 left) paid off, so subtract $625/month, which leaves us at $42,500 per year in expenses. Multiple that by 25 and we need $1.062M to retire. Multiply it by 30 and we need $1.275M to retire.

I'm confused, are you both planning to be dead at 70? Have your kids support you? Or just social security? My family lives until like 90+ so I'd just need to calendar my suicide for this to work.

I thought something similar

even with a very low COL area, there's medical catastrophes, potentially end of life care, maybe your kids make some bad choices and you choose to get them into expensive drug rehab rather than having them do heroin on the streets, etc etc

He's not spending 1/30th of the principle every year. If he needs $42.5k/yr, then he needs to draw a little over 3% of the money per year, but assuming 3% gains, the principal actually remains the same. That's the whole idea of retirement savings.

I get that. 42.5k/yr just seems low for catastrophic events that can happen over 60 years with kids. At least alimony would likely be low in the case of divorce though.

[mushybrain]

On that chart I put in 1275000 savings at retirement, 42000 needed annually after tax, 4% returns and got 26 years. It only tells me it'll last 100 years if I tell it 7% returns and DEPOSITING 42k annually.

Oh but if I delete the annual spend but tell it I'm withdrawing 42k a year it says 100 years. I don't understand what's happening. Guess I'm working forever.

[AVBucks4239]

I get that. 42.5k/yr just seems low for catastrophic events that can happen over 60 years with kids. At least alimony would likely be low in the case of divorce though.

If a catastrophic event strikes, ho hum, you pull a little more from your account that year. This is why I want a 3.3% withdrawal rate: it gives me an awful lot of wiggle room without needing to go back to work.

[JenDarby]

On that chart I put in 1275000 savings at retirement, 42000 needed annually after tax, 4% returns and got 26 years. It only tells me it'll last 100 years if I tell it 7% returns and DEPOSITING 42k annually.

Oh but if I delete the annual spend but tell it I'm withdrawing 42k a year it says 100 years. I don't understand what's happening. Guess I'm working forever.

I haven't looked too far into retirement, I just figured that I will need more than a mil and change if I wanted to retire in 12 years. I don't have an incredibly high cost of living, but kids can be money sucking leeches (which even still I might avoid entirely). Also I figure once I'm retired my cost of living might go up significantly since I'll have all that free time.

[AVBucks4239]

On that chart I put in 1275000 savings at retirement, 42000 needed annually after tax, 4% returns and got 26 years. It only tells me it'll last 100 years if I tell it 7% returns and DEPOSITING 42k annually.

Oh but if I delete the annual spend but tell it I'm withdrawing 42k a year it says 100 years. I don't understand what's happening. Guess I'm working forever.

That calculator is admittedly not the best. But go read about the Trinity Study (https://en.wikipedia.org/wiki/Trinity_study), or Wade Pfau's updated version of it (http://wpfau.blogspot.com/2012/02/trini ... ccess.html), or other similar articles about the 4% withdrawal rate (https://www.bogleheads.org/wiki/Safe_withdrawal_rates).

A 3% withdrawal rate lasts forever.

For an overly simple explanation why: history shows that stocks go up at 7%, inflation goes up at 3%, and the gap in between is money you can use to fund an eternal retirement.

It's more complicated than that, so read those other articles if you are intrigued.

[mushybrain]

Ok thanks. Maybe I'll retire one day after all.

[abl]

I get that. 42.5k/yr just seems low for catastrophic events that can happen over 60 years with kids. At least alimony would likely be low in the case of divorce though.

If a catastrophic event strikes, ho hum, you pull a little more from your account that year. This is why I want a 3.3% withdrawal rate: it gives me an awful lot of wiggle room without needing to go back to work.

Have you actually run the numbers? For example, what happens if you have to draw down $250,000 at age 60 for medical bills? Or what happens if one of your kids has a semi-serious health condition that requires $20,000 in extra medical expenses each year for 18 years? Your plan seems to accommodate little problems well, like dips in the stock market or you having unexpectedly to buy a new car once, but I'm skeptical that you've given yourself enough wiggle room to account for anything bigger. But I didn't run the numbers myself, so maybe I'm wrong.

[Nebby]

Retirement seems boring as fuck. Who the hell wants to just sit around twiddling for 30 years until they die

[A. Nony Mouse]

Thanks for the answer, AVBucks.

And if you can't find things to do in retirement just kill yourself now. Damn. I'd love to spend my days doing whatever I want.

[JenDarby]

Thanks for the answer, AVBucks.

And if you can't find things to do in retirement just kill yourself now. Damn. I'd love to spend my days doing whatever I want.

See this is why I think I'd want as big of a retirement cushion as possible. If I have nothing but time until I die then I'll want to do a lot of things to keep busy and enjoy myself. Right now work takes care of all of that for me.

[AVBucks4239]

I haven't looked too far into retirement, I just figured that I will need more than a mil and change if I wanted to retire in 12 years. I don't have an incredibly high cost of living, but kids can be money sucking leeches (which even still I might avoid entirely). Also I figure once I'm retired my cost of living might go up significantly since I'll have all that free time.

I think most early retiree's expenses actually decrease once they retire. There are a ton of costs associated with work (transportation, clothes, going to bullshit events, etc.) that just don't exist once you retire early.

Have you actually run the numbers? For example, what happens if you have to draw down $250,000 at age 60 for medical bills? Or what happens if one of your kids has a semi-serious health condition that requires $20,000 in extra medical expenses each year for 18 years? Your plan seems to accommodate little problems well, like dips in the stock market or you having unexpectedly to buy a new car once, but I'm skeptical that you've given yourself enough wiggle room to account for anything bigger. But I didn't run the numbers myself, so maybe I'm wrong.

I think we will still make about $30-40k per year in income, so I'm not worried about it. We could also go back to work if need be.

Retirement seems boring as fuck. Who the hell wants to just sit around twiddling for 30 years until they die

Perhaps "retirement" is the wrong word. Maybe "financial independence" is better. Because as I said in my first post, I still intend to do shit. I'd just rather be financially independent so I had the option of not coming in today so I didn't have to research whether this particular corporation is conducting interstate commerce and thus can or cannot initiate a lawsuit in Ohio.

Stuff off the top of my head includes writing ebooks, starting sports blogs about my teams, being a professor at the local college, coaching soccer, perhaps conducting referee courses, reffing soccer, maybe staying as a consultant or of counsel at my firm, etc. I could write all day about what I'd do. And I'm not 100% certain, but I'm 99% certain that I'd rather be doing any of those than any real job.

[AVBucks4239]

See this is why I think I'd want as big of a retirement cushion as possible. If I have nothing but time until I die then I'll want to do a lot of things to keep busy and enjoy myself. Right now work takes care of all of that for me.

I used to have the same objection until someone asked, "Imagine you could take a year off and do whatever you wanted with your current standard of living. What would you do?"

That opened a Pandora's box for me to the point that it made early retirement the central goal of my financial planning.

[abl]

Have you actually run the numbers? For example, what happens if you have to draw down $250,000 at age 60 for medical bills? Or what happens if one of your kids has a semi-serious health condition that requires $20,000 in extra medical expenses each year for 18 years? Your plan seems to accommodate little problems well, like dips in the stock market or you having unexpectedly to buy a new car once, but I'm skeptical that you've given yourself enough wiggle room to account for anything bigger. But I didn't run the numbers myself, so maybe I'm wrong.

I think we will still make about $30-40k per year in income, so I'm not worried about it. We could also go back to work if need be.

I gotcha -- so you view $30k-40k/year in income as being a hedge against major disasters. Presumably, you'll sock most of that away until you have a couple hundred thousand dollars extra saved up, and then when you're 55 or 60 or so--assuming you continue to pull in an extra $30-40k/year--that'll just become funsies income?

[AVBucks4239]

I gotcha -- so you view $30k-40k/year in income as being a hedge against major disasters. Presumably, you'll sock most of that away until you have a couple hundred thousand dollars extra saved up, and then when you're 55 or 60 or so--assuming you continue to pull in an extra $30-40k/year--that'll just become funsies income?

Basically. I think I'd actually like to use that money for recurring expenses and have as small of a withdrawal rate as possible, thus letting the nest egg compound on itself like an unstoppable monster.

I did the math once, and if we withdrew 1% each year for the first ten years (and lived off the other $40k income per year), the nest egg would grow to somewhere around $2.2M in 10 years. A 3% withdrawal rate after that would be like $65,000 per year (or more than $20k what I need to live), which would allow me to basically do whatever the fuck I wanted every year until I died. Of course, that buffer also acts as a hedge, but I'd rather dream about renting an RV for an entire fall and going to 30 college football games than my kid having some incurable disease.

[lymenheimer]

BIGRETIREMENT to 190years

[Johann]

Debt: $190k

Income: $68k

Plan: Don't even know, just deferred another year.

Life: Ruined

Height: 5'9

...Why are you deferring instead of getting on IBR or PAYE?

Not eligible for PAYE. What's the point of IBR at this point? So I can get tax bombed in 25 years? Don't want to consolidate anyway.I'm just throwing money at it trying to keep it at $190k (jfc it increases like $80 a day lol) until my salary increase to $68k once I'm admitted then do all I can do to pay it down.

IBR is really the worst option you can have. It's 25 years at 15% and you are going to get MURDERED by the tax bomb at the end. In 25 years the total will be like $500k if I IBR. Also, once you get married it's 15% of both salaries. Might as well hit the bottle for a while, keep it at bay, then man up and pay it.

Meh, I had the same thought process as you... but IBR is really the way to go.

I have about as much debt as you do, and a similar salary. If I suddenly win a proverbial / actual lottery, sure I will pay off my loans. But intending to repay the $190k later, while $10K+ in interest stacks up per year is not really a constructive plan.

Also, your first year IBR payments should be based on your 3L earnings, so you will likely knock off 1 year off of the 25 years without having paid anything anyways.

Furthermore, at around $190K per year, under the 25 year straight payment plan, that is about $1,500 a year for 25 years anyways (thank interest for that).

Also, if you want to overpay, IBR allows you to focus your payments on the high interest loans after you make your IBR payment, so it will actually save you money as long as your basic plan is to pay back your loans one way or another.

Finally, with regards to the tax bomb, putting money saved via IBR in a 'tax bomb preparation' account is more effective than putting that money towards your loans if you are not able to reduce the principle. Also, remember than the principle does not capitalize on IBR. Your ultimate loan forgivement amount, assuming Congress doesn't void the tax bomb in the next 25 years, will be taxed at about 33%. Therefore (for example) if you put $100K in a 'tax bomb preparation account' for an ultimate loan forgiveness amount of $300K, you will still spent less money than you would have paying it back in full. (I haven't done the actual math here, but it'd be tough to beat having to pay back 'only' 33% of the final unpaid amount versus having paid it back on a 25 year payment plan with interest stacking but no capitalizing priniciple).

Can someone explain the "tax bomb?"

When a bank writes off a loan...or in this case when the government forgives the remaining balance after 20 or 25 years (depending on the repayment program), the forgiven amount is considered income by the IRS. This means that, for a person making $50,000/year who has $200,000 forgiven in loans, they will have to pay taxes on $250,000 in income for the year that their loans are forgiven.

For many people, saving up and investing over the course of the 20-25 years is sufficient to cover the extra taxes in the year of forgiveness (the "tax bomb"), and they still come out ahead of where they would have been if they paid off all of their loans.

The 10-year PSLF program does not count the forgiven amount as income, so there is no tax bomb for those individuals.

I also want to add that interest does not capitalize when you are on IBR (or PAYE). Don't defer -get on IBR.

Get on REPAYE now.