Is PAYE open to people in big law? Forum

[bk1]

Look at all these combos that shouldn't get married:

http://www.nytimes.com/interactive/2015 ... .html?_r=0

We're right there in that dark-orange field of regret

What shocked me when I first learned about it is how the vast majority of dual-income couples take a penalty with a kid.

[DELG]

I would get a divorce if I hadn't worked on a case where the IRS was prosecuting "divorce fraud."

[bk1]

I would get a divorce if I hadn't worked on a case where the IRS was prosecuting "divorce fraud."

That's a thing they go after people for? wtf.

[lacrossebrother]

Why not just file separately?
Or if doing REPAYE, just become not able to reasonably determine your spouse's income?

[bk1]

Why not just file separately?
Or if doing REPAYE, just become not able to reasonably determine your spouse's income?

(The tax thing is unrelated to REPAYE.) The big thing that penalizes married couples is the inability to claim head of household (which you can do if you're single). MFS doesn't fix that.

[DELG]

Why not just file separately?
Or if doing REPAYE, just become not able to reasonably determine your spouse's income?

IDK I leave the tax shit to my husband but he claims if we file separately we will be worse off due to "family size credit."

[Anonymous User]

OP again: Is the general wisdom that signing up for PAYE is a good idea if you have no money in the bank, and 250k in loans?

[DELG]

idk if like anything is a particularly good idea if you have $250k in debt except skipping the country but i am doing PAYE so i can push the risk of me washing out of biglaw on the government instead of on me.

[Anonymous User]

idk if like anything is a particularly good idea if you have $250k in debt except skipping the country but i am doing PAYE so i can push the risk of me washing out of biglaw on the government instead of on me.

Eh I'm still very happy about the decision. My income has definitely increased >20% because of the degree. At least in the short term, it's 500% what it was before I went.

[bk1]

OP again: Is the general wisdom that signing up for PAYE is a good idea if you have no money in the bank, and 250k in loans?

I agree with DELG that there isn't really any conventional wisdom. There are generally 2 credited options: (1) refinance, (2) income-based (e.g., PAYE).

Which you choose really depends on which risks you are willing to take and the assumptions you make. For example, PAYE helps deal with the potential risk of ending up in a much lower paying job. Alternatively, refinancing may give you peace of mind sooner (because you are done with the loans earlier) and lets you avoid having to worry whether the government is going to increase the top marginal tax brackets (which would apply if you have forgiven debt at the end of PAYE).

Neither is risk-free or even "better" than the other. Pick the risks that you are willing to bear and the benefits that you prefer and choose the plan that works with that.

[Anonymous User]

OP again: Is the general wisdom that signing up for PAYE is a good idea if you have no money in the bank, and 250k in loans?

I agree with DELG that there isn't really any conventional wisdom. There are generally 2 credited options: (1) refinance, (2) income-based (e.g., PAYE).

Which you choose really depends on which risks you are willing to take and the assumptions you make. For example, PAYE helps deal with the potential risk of ending up in a much lower paying job. Alternatively, refinancing may give you peace of mind sooner (because you are done with the loans earlier) and lets you avoid having to worry whether the government is going to increase the top marginal tax brackets (which would apply if you have forgiven debt at the end of PAYE).

Neither is risk-free or even "better" than the other. Pick the risks that you are willing to bear and the benefits that you prefer and choose the plan that works with that.

Thanks! I went ahead, and applied for PAYE. I was paying 3k a month, or $36k/yr to pay off the loan in 10 years. Please correct me if I'm wrong, but if PAYE is only 10% of discretionary income then I'm going to be paying between 14k and 18k/yr for the foreseeable future.

If I make 160k-175k every year then I'm paying ~$300k (15k/yr X 20 yrs) total instead of $360k. Assuming that salaries continue to not keep up with the rate of inflation (which is a safe bet), $150k from 2025-2035 is worth much less than 150k between 2015 and 2025. I'm using the 150k figure because under PAYE if I'm at 160kish for 20 straight years then the second decade will involve 150k in loans.

More importantly even if I lost my job or had a catastrophic accident, any assets I have will be more protected than they are right now. It seems like the only way PAYE is worse than the 10-year plan is if you wind up making bank, but in this situation a 100k is worth much less to me than it is now, and you could just try to pay off the loan in full. The main thing that scares me about debt is the fact that if I got sick or got really unlikely, I won't be with my family out on the street or in default. I had always thought that if you fade out of big law early, the only options are to join the army or get on social services. Even if I pay more in the long run, the peace of mind is so worthwhile to me. I've seen both wealth and poverty in my life, and my philosophy is that the drop off between a steak and a burger is not nearly as steep as the drop off from a burger to ramen noodles. PAYE seems to mean that the middle class is sustainable even if I were fired, got Cancer, etc.

[bk1]

Take a closer look at the AGI calculation for PAYE. As lax alluded to earlier ITT, reducing your taxable income can also help reduce your PAYE payments (e.g., 401k contributions). Also, you should calculate how much will be left on your loans after 20 years so you know what the tax consequences will be on the forgiveness (assuming current tax rates).

PAYE is never worse than 10 year plan because you can always pay above the PAYE payment to meet the 10 year amount if you want to.

[Anonymous User]

Take a closer look at the AGI calculation for PAYE. As lax alluded to earlier ITT, reducing your taxable income can also help reduce your PAYE payments (e.g., 401k contributions). Also, you should calculate how much will be left on your loans after 20 years so you know what the tax consequences will be on the forgiveness (assuming current tax rates).

PAYE is never worse than 10 year plan because you can always pay above the PAYE payment to meet the 10 year amount if you want to.

Yeah that was my thought process. Also, even though you're paying more interest, inflation is basically a surety because the more that a $100 bill moves around, the more taxes are placed on it which inevitably depreciates the value of the $100 bill. Based on my calculations (which may be misguided), as long as I stay below 250k I'm basically paying about the same amount of money overall as I'd play on a 10-year plan, AND 1/2 of the money going to PAYE is inflation reduced because it will run from 2025-2035. And if by the grace of god, I'm making 300k then I'd be paying more, but money would also be much less valuable to me. When i was in high school I'd be happy working an 8-hour day for $20. Now a $100 barely moves me. Hopefully in a decade $30k will be the same as a $100 is now.

[kcdc1]

Yeah that was my thought process. Also, even though you're paying more interest, inflation is basically a surety because the more that a $100 bill moves around, the more taxes are placed on it which inevitably depreciates the value of the $100 bill. Based on my calculations (which may be misguided), as long as I stay below 250k I'm basically paying about the same amount of money overall as I'd play on a 10-year plan, AND 1/2 of the money going to PAYE is inflation reduced because it will run from 2025-2035. And if by the grace of god, I'm making 300k then I'd be paying more, but money would also be much less valuable to me. When i was in high school I'd be happy working an 8-hour day for $20. Now a $100 barely moves me. Hopefully in a decade $30k will be the same as a $100 is now.

A lot of weird stuff going on in that post, but for reference, the Fed targets an annual inflation rate of 2%, which is about what it's been over the past 20 years. Assuming a 2% inflation rate going forward, $100 today would be equivalent to $122 in a decade, not $30,000.

Also, inflation is not caused by taxes.

[Anonymous User]

Yeah that was my thought process. Also, even though you're paying more interest, inflation is basically a surety because the more that a $100 bill moves around, the more taxes are placed on it which inevitably depreciates the value of the $100 bill. Based on my calculations (which may be misguided), as long as I stay below 250k I'm basically paying about the same amount of money overall as I'd play on a 10-year plan, AND 1/2 of the money going to PAYE is inflation reduced because it will run from 2025-2035. And if by the grace of god, I'm making 300k then I'd be paying more, but money would also be much less valuable to me. When i was in high school I'd be happy working an 8-hour day for $20. Now a $100 barely moves me. Hopefully in a decade $30k will be the same as a $100 is now.

A lot of weird stuff going on in that post, but for reference, the Fed targets an annual inflation rate of 2%, which is about what it's been over the past 20 years. Assuming a 2% inflation rate going forward, $100 today would be equivalent to $122 in a decade, not $30,000.

Also, inflation is not caused by taxes.

I was referring to the value that money has to me, not inflation. If I was making $300k my life wouldn't be changed by $30k where as with these loan payments I'm basically living paycheck to paycheck because 160k is really only about 1750/week after taxes meaning that 10 year repayment requires spending 1/2 your income on the loans.

[zot1]

Yeah that was my thought process. Also, even though you're paying more interest, inflation is basically a surety because the more that a $100 bill moves around, the more taxes are placed on it which inevitably depreciates the value of the $100 bill. Based on my calculations (which may be misguided), as long as I stay below 250k I'm basically paying about the same amount of money overall as I'd play on a 10-year plan, AND 1/2 of the money going to PAYE is inflation reduced because it will run from 2025-2035. And if by the grace of god, I'm making 300k then I'd be paying more, but money would also be much less valuable to me. When i was in high school I'd be happy working an 8-hour day for $20. Now a $100 barely moves me. Hopefully in a decade $30k will be the same as a $100 is now.

A lot of weird stuff going on in that post, but for reference, the Fed targets an annual inflation rate of 2%, which is about what it's been over the past 20 years. Assuming a 2% inflation rate going forward, $100 today would be equivalent to $122 in a decade, not $30,000.

Also, inflation is not caused by taxes.

I was referring to the value that money has to me, not inflation. If I was making $300k my life wouldn't be changed by $30k where as with these loan payments I'm basically living paycheck to paycheck because 160k is really only about 1750/week after taxes meaning that 10 year repayment requires spending 1/2 your income on the loans.

Maybe you shouldn't ever leave BigLaw, especially for government...

[Johann]

OP again: Is the general wisdom that signing up for PAYE is a good idea if you have no money in the bank, and 250k in loans?

absolutely.

[Anonymous User]

OP again: Is the general wisdom that signing up for PAYE is a good idea if you have no money in the bank, and 250k in loans?

absolutely.

I applied - hopefully I'm approved? My income last year was only my SA so it's gonna be way less, which would only be about $1,300 under the PAYE terms as described above which is lolzy. I just don't have any idea what my career will be like in 5 years, much less in 30 to prioritize killing off the loans over avoiding default and establishing a 20k rainy day fund STAT. I also prefer debt that only affects me as opposed to debt secured by family members' cosigning or a home mortgage so if it's just 10% then that's a hard bargain, and not the nightmare the internet makes it out to be.

[Anonymous User]

Yeah that was my thought process. Also, even though you're paying more interest, inflation is basically a surety because the more that a $100 bill moves around, the more taxes are placed on it which inevitably depreciates the value of the $100 bill. Based on my calculations (which may be misguided), as long as I stay below 250k I'm basically paying about the same amount of money overall as I'd play on a 10-year plan, AND 1/2 of the money going to PAYE is inflation reduced because it will run from 2025-2035. And if by the grace of god, I'm making 300k then I'd be paying more, but money would also be much less valuable to me. When i was in high school I'd be happy working an 8-hour day for $20. Now a $100 barely moves me. Hopefully in a decade $30k will be the same as a $100 is now.

A lot of weird stuff going on in that post, but for reference, the Fed targets an annual inflation rate of 2%, which is about what it's been over the past 20 years. Assuming a 2% inflation rate going forward, $100 today would be equivalent to $122 in a decade, not $30,000.

Also, inflation is not caused by taxes.

I was referring to the value that money has to me, not inflation. If I was making $300k my life wouldn't be changed by $30k where as with these loan payments I'm basically living paycheck to paycheck because 160k is really only about 1750/week after taxes meaning that 10 year repayment requires spending 1/2 your income on the loans.

Maybe you shouldn't ever leave BigLaw, especially for government...

Well, if he moved to government, he wouldn't be paying as much in loans....but yeah it's not unbelievable to live paycheck to paycheck with loan repayments even if you have biglaw salaries.

I graduated before the time of PAYE and paid off my 200k loans in like around 2.75 years plus saved a good chunk of change in the meantime (both through 401k and also liquid). I lived like shit though (rented a room with my spouse in an apartment with a couple other people), commuted to work, etc. Shared a bathroom so it was like 4 people to 1 bathroom. We didn't spend any money and even inherited furniture. It took awhile and it sucked balls while doing it, but i'm glad I lived like a miser. Now I have vowed to NEVER EVER get into debt again (except maybe mortgage, for tax purposes), but NEVER again. Debt is awful and I don't think people who are 21 can really appreciate it until they are paying it back.

[Anonymous User]

How do you sign up? This seems awesome.

I think there is more than one loan service provider. Mine is Nelnet. I assume all are similar. There's simply an online form that you fill out indicating your desire to participate. It then asks you for your last year's tax return. To the extent that you make significantly different than that return reflects, it will ask you to provide 'alternative documentation,' by way of a paystub or offer letter. I made this mistake. It's a huge mistake, because they refuse to calculate your AGI. They just go off your paycheck. This means, that despite being in my stub year and contributing aggressively to retirement, my payments go immediately to a full year's salary. I hope to remedy this however when I get my 2015 taxes done.

[

Wait, so what should one do during the stub year? Report your stub year income (30kish) and then change it to 160k in January?

[Tiago Splitter]

How do you sign up? This seems awesome.

I think there is more than one loan service provider. Mine is Nelnet. I assume all are similar. There's simply an online form that you fill out indicating your desire to participate. It then asks you for your last year's tax return. To the extent that you make significantly different than that return reflects, it will ask you to provide 'alternative documentation,' by way of a paystub or offer letter. I made this mistake. It's a huge mistake, because they refuse to calculate your AGI. They just go off your paycheck. This means, that despite being in my stub year and contributing aggressively to retirement, my payments go immediately to a full year's salary. I hope to remedy this however when I get my 2015 taxes done.

[

Wait, so what should one do during the stub year? Report your stub year income (30kish) and then change it to 160k in January?

during your stub year you show the prior year tax return which would only have your SA salary. A year later you show your prior year tax return which only has your stub year salary. You only have to update every year.

[Anonymous User]

How do you sign up? This seems awesome.

I think there is more than one loan service provider. Mine is Nelnet. I assume all are similar. There's simply an online form that you fill out indicating your desire to participate. It then asks you for your last year's tax return. To the extent that you make significantly different than that return reflects, it will ask you to provide 'alternative documentation,' by way of a paystub or offer letter. I made this mistake. It's a huge mistake, because they refuse to calculate your AGI. They just go off your paycheck. This means, that despite being in my stub year and contributing aggressively to retirement, my payments go immediately to a full year's salary. I hope to remedy this however when I get my 2015 taxes done.

[

Wait, so what should one do during the stub year? Report your stub year income (30kish) and then change it to 160k in January?

during your stub year you show the prior year tax return which would only have your SA salary. A year later you show your prior year tax return which only has your stub year salary. You only have to update every year.

Doesn't that mean you'll barely be making any payments? I thought you were supposed to tell them you're actual salary of 160

[Tiago Splitter]

Doesn't that mean you'll barely be making any payments? I thought you were supposed to tell them you're actual salary of 160

Yes and maybe. What I said is what I plan to do but you might decide to tell them ASAP.

[Anonymous User]

How do you sign up? This seems awesome.

I think there is more than one loan service provider. Mine is Nelnet. I assume all are similar. There's simply an online form that you fill out indicating your desire to participate. It then asks you for your last year's tax return. To the extent that you make significantly different than that return reflects, it will ask you to provide 'alternative documentation,' by way of a paystub or offer letter. I made this mistake. It's a huge mistake, because they refuse to calculate your AGI. They just go off your paycheck. This means, that despite being in my stub year and contributing aggressively to retirement, my payments go immediately to a full year's salary. I hope to remedy this however when I get my 2015 taxes done.

[

Wait, so what should one do during the stub year? Report your stub year income (30kish) and then change it to 160k in January?

during your stub year you show the prior year tax return which would only have your SA salary. A year later you show your prior year tax return which only has your stub year salary. You only have to update every year.

Doesn't that mean you'll barely be making any payments? I thought you were supposed to tell them you're actual salary of 160

OP I had clicked on something to edit the payment when submitting the application, but they wanted all this documentation proving I won't be making 31K in 2016 - the offer letter would be insufficient. I think it's set up like that because they're paranoid people will make their income lower than what it is. The government never anticipated they'd have honest people in big law trying to pay more.

[zot1]

Yeah that was my thought process. Also, even though you're paying more interest, inflation is basically a surety because the more that a $100 bill moves around, the more taxes are placed on it which inevitably depreciates the value of the $100 bill. Based on my calculations (which may be misguided), as long as I stay below 250k I'm basically paying about the same amount of money overall as I'd play on a 10-year plan, AND 1/2 of the money going to PAYE is inflation reduced because it will run from 2025-2035. And if by the grace of god, I'm making 300k then I'd be paying more, but money would also be much less valuable to me. When i was in high school I'd be happy working an 8-hour day for $20. Now a $100 barely moves me. Hopefully in a decade $30k will be the same as a $100 is now.

A lot of weird stuff going on in that post, but for reference, the Fed targets an annual inflation rate of 2%, which is about what it's been over the past 20 years. Assuming a 2% inflation rate going forward, $100 today would be equivalent to $122 in a decade, not $30,000.

Also, inflation is not caused by taxes.

I was referring to the value that money has to me, not inflation. If I was making $300k my life wouldn't be changed by $30k where as with these loan payments I'm basically living paycheck to paycheck because 160k is really only about 1750/week after taxes meaning that 10 year repayment requires spending 1/2 your income on the loans.

Maybe you shouldn't ever leave BigLaw, especially for government...

Well, if he moved to government, he wouldn't be paying as much in loans....but yeah it's not unbelievable to live paycheck to paycheck with loan repayments even if you have biglaw salaries.

I graduated before the time of PAYE and paid off my 200k loans in like around 2.75 years plus saved a good chunk of change in the meantime (both through 401k and also liquid). I lived like shit though (rented a room with my spouse in an apartment with a couple other people), commuted to work, etc. Shared a bathroom so it was like 4 people to 1 bathroom. We didn't spend any money and even inherited furniture. It took awhile and it sucked balls while doing it, but i'm glad I lived like a miser. Now I have vowed to NEVER EVER get into debt again (except maybe mortgage, for tax purposes), but NEVER again. Debt is awful and I don't think people who are 21 can really appreciate it until they are paying it back.

I meant it more in the sense that you could be living paycheck to paycheck in government and OP didn't seem too happy about that.