DF Thread Forum

[AVBucks4239]

401K vs. Loans is very complicated.

If you had a SAFE job. Cop dat 20 year SOFI/CommunityBond rate and then max your 401k (not just matching, I'm talking about the whole 17k)

But 250k in debt also presents a cash flow issue in case you lose your jerb.

I'm going to pay down til I hit 100k and then refi for 20 years.

I mean with PAYE and REPAYE I think that argues even more in favor of building assets instead of paying down debt. What's the cash flow problem if I lose my job? I call the government and tell them I lost my job and income is 0 hooke me up on no payments.

You can do this if you're on PAYE and pay down your debt aggressively, too.

[Desert Fox]

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[AVBucks4239]

If you are a PAYE lifer, never pay a penny more. And definitely max out 401k since it reduces your PAYE payment too. If you have exta, do a Roth IRA to save for da tax bomb.

TL;DR of my opinion if you have $150k in debt or more:

Single: PAYE lifer, always make minimum payments, max 401k (not just the match, but up to the cap, which is $18.5k I think), Roth IRA to save for tax liability.

Plan to Get Married to a Spouse That Makes Decent Income ($75k): enroll in PAYE to (a) enjoy federal loan protections and (b) target the highest interest rate loans; but pay off your debt because (1) filing separately makes PAYE worthless, or (2) filing together means you'll pay off the debt anyway.

[iVi]

So the general consensus (there's no 1-size fits all solution, of course) is:

1a. Emergency fund

1b. Pay up to the amount of your employer matching in retirement accounts

2. Loans (highest interest -> lowest interest, disadvantageous to consolidate federal loans)


...right?

Go find the thread on loan repayments in legal employment. Theres like 20x the amount of back and forth in there. Your plan sounds good to me though.

Is there a threshold at which consolidating federal loans would not be disadvantageous? E.g., for someone making 160k a year who has 60k in federal loans, couldn't it make sense for them since chances are good they'll be able to pay off the debt quickly?

[AVBucks4239]

So the general consensus (there's no 1-size fits all solution, of course) is:

1a. Emergency fund

1b. Pay up to the amount of your employer matching in retirement accounts

2. Loans (highest interest -> lowest interest, disadvantageous to consolidate federal loans)


...right?

Go find the thread on loan repayments in legal employment. Theres like 20x the amount of back and forth in there. Your plan sounds good to me though.

Is there a threshold at which consolidating federal loans would not be disadvantageous? E.g., for someone making 160k a year who has 60k in federal loans, couldn't it make sense for them since chances are good they'll be able to pay off the debt quickly?

There's really no point to consolidating federal loans through the government because they simply average your interest rates (weighted by the debt amount on each loan) and then round up to the next .125%. So you're likely going to get a slightly higher interest rate by consolidating with the feds (although the interest rate increase might be slight enough that you think the convenience of having a single loan is worth it).

Your two best options are:

(1) Pay towards the highest interest rate loans (see here: http://www.consumerismcommentary.com/th ... avalanche/); or
(2) Refinance privately (SoFI or Charter One seem to have the best rates right now) and, assuming you have a good credit score, enjoy a much lower interest rate (somewhere around 4-5%).

[JenDarby]

So the general consensus (there's no 1-size fits all solution, of course) is:

1a. Emergency fund

1b. Pay up to the amount of your employer matching in retirement accounts

2. Loans (highest interest -> lowest interest, disadvantageous to consolidate federal loans)


...right?

Go find the thread on loan repayments in legal employment. Theres like 20x the amount of back and forth in there. Your plan sounds good to me though.

Is there a threshold at which consolidating federal loans would not be disadvantageous? E.g., for someone making 160k a year who has 60k in federal loans, couldn't it make sense for them since chances are good they'll be able to pay off the debt quickly?

This person should refinance to the likely very low rate they would be offered and pay off their debt making minimum payments while maximizing savings.

[iVi]

There's really no point to consolidating federal loans through the government because they simply average your interest rates (weighted by the debt amount on each loan) and then round up to the next .125%. So you're likely going to get a slightly higher interest rate by consolidating with the feds (although the interest rate increase might be slight enough that you think the convenience of having a single loan is worth it).

Your two best options are:

(1) Pay towards the highest interest rate loans (see here: http://www.consumerismcommentary.com/th ... avalanche/); or
(2) Refinance privately (SoFI or Charter One seem to have the best rates right now) and, assuming you have a good credit score, enjoy a much lower interest rate (somewhere around 4-5%).

Perfect, thanks!

[AVBucks4239]

There's really no point to consolidating federal loans through the government because they simply average your interest rates (weighted by the debt amount on each loan) and then round up to the next .125%. So you're likely going to get a slightly higher interest rate by consolidating with the feds (although the interest rate increase might be slight enough that you think the convenience of having a single loan is worth it).

Your two best options are:

(1) Pay towards the highest interest rate loans (see here: http://www.consumerismcommentary.com/th ... avalanche/); or
(2) Refinance privately (SoFI or Charter One seem to have the best rates right now) and, assuming you have a good credit score, enjoy a much lower interest rate (somewhere around 4-5%).

Perfect, thanks!

And, if you do refinance, take a good look at the offered rates. The five year rate will be the lowest but if you can get a 10-year rate at around 4-4.5%, choose that and make minimum payments and invest the rest. In other words, don't go bonkers paying off your loans just because you can.

[Anonymous User]

Selfish Q since I'm too stupid to make sense of this whole thing:

I'm graduating this year, have standard amount of debt, am clerking, then assume will be making biglaw money.

My spouse graduated from law school years ago, has above average amount of debt, has a job making five figures.

The plan has been just to file separately so my spouse could do PAYE. Will my biglaw income now be taken into account in calculating my spouse's income for PAYE? Or can we still exclude my income from my spouse's PAYE calculation because we took all our loans out before this proposal?

[AVBucks4239]

Selfish Q since I'm too stupid to make sense of this whole thing:

I'm graduating this year, have standard amount of debt, am clerking, then assume will be making biglaw money.

My spouse graduated from law school years ago, has above average amount of debt, has a job making five figures.

The plan has been just to file separately so my spouse could do PAYE. Will my biglaw income now be taken into account in calculating my spouse's income for PAYE? Or can we still exclude my income from my spouse's PAYE calculation because we took all our loans out before this proposal?

Post some numbers so we can give you a better answer (you're posting anonymously, so just post your debt/income amounts).

As to your question, no, your income will not be factored into your spouse's PAYE payment (and vice versa) if you file separately, but read this thread in its entirety so see why that might not be your best option.

[westbayguy]

Hypo

married, lawjob over 200k, PAYE eligible, 160k in debt, some private low variable rates, also lots fed guarantee- hi rates.

Spouse law job, hi 5 figures, PAYE eligible, same debt and rates.

Plan on making full 401k with match. Not eligible for Roth IRA.

Plan consolidate with SoFi at lower rates, 10 year term. make sense? Or do I hang on to PAYE as protection in case?

Should spouse stay PAYE in case she takes time off for kids? or will my hi income kill that benefit?

[Anonymous User]

Does having done a year of PAYE make a big difference in calculating whether to continue PAYE or just refi? My current balance is ~260k. Currently clerking set to start biglaw in the fall. Been paying about ~370/month under PAYE since I entered repayment. Spouse makes middle 5 figures with no debt. I'm thinking of refinancing once I start as an associate.

When I ran the numbers before graduating it seemed like PAYE vs refi ended up being a wash financially. Does the year of PAYE under my belt change this all that much? The general benefits of PAYE seem to be that even if your job situation gets fucked up that you will be okay (whether that's because I lose my job or I just can't stand working grueling hours anymore), and having more spare cash up front in case of emergencies. The benefits of refi seem to me just peace of mind of having that shit gone and not having to deal with the hassle of preparing for the tax bomb. It may not be completely rational, but I heavily prefer the idea of just getting that shit done with via an aggressive refi even if it entails higher risk.

[XxSpyKEx]

Does having done a year of PAYE make a big difference in calculating whether to continue PAYE or just refi? My current balance is ~260k. Currently clerking set to start biglaw in the fall. Been paying about ~370/month under PAYE since I entered repayment. Spouse makes middle 5 figures with no debt. I'm thinking of refinancing once I start as an associate.

When I ran the numbers before graduating it seemed like PAYE vs refi ended up being a wash financially. Does the year of PAYE under my belt change this all that much? The general benefits of PAYE seem to be that even if your job situation gets fucked up that you will be okay (whether that's because I lose my job or I just can't stand working grueling hours anymore), and having more spare cash up front in case of emergencies. The benefits of refi seem to me just peace of mind of having that shit gone and not having to deal with the hassle of preparing for the tax bomb. It may not be completely rational, but I heavily prefer the idea of just getting that shit done with via an aggressive refi even if it entails higher risk.

Your question doesn't make much sense. The only thing spending a year on PAYE did was increase your total debt since your payments weren't even covering your yearly interest for the year that you clerked. It's really just a matter of whether you're comfortable/want to refinance $260k in debt with a private lender, and your personal priorities. It sounds like paying off your debt is your priority and that you actually plan to repay it in its entirety (as oppose to doing PAYE + tax bomb/PSLF), so you might as well just refinance. There's obviously a good deal of risk there (especially with that much debt and not having actually worked as an associate in biglaw yet), but it sounds like you've already considered that and decided that you want to pay off your debt ASAP, rather than building emergency cushion, saving towards retirement, etc., and don't think there's much likelihood you'll work in government after biglaw. In that case, you might as well refinance so you can get a lower interest rate.

[Johann]

It absolutely should change your calculus because you have a year of PSLF qualifying employement and are 10% to complete forgiveness.

[Anonymous User]

I've got $120k in loans, vast majority of which are PAYE eligible, but am only making $60k a year if I meet my billable hours (1800), $50k base. Not a lot, but I'm happy with the location/the people/the practice, and I can grow here.


Should I attempt private consolidation/refinancing? My interest rates are currently like 7.3% on average. I have good credit (to the extent possible for a K-JD, not a lot of history but my score is like 720) if that matters.

[Johann]

No you should not. Max your 401K/IRA and you should be paying about $2,400 in loans a year (all of which whill be interest and you can deduct that as well.) Ride out PAYE until you start making $100k but at least 80k.

[XxSpyKEx]

I've got $120k in loans, vast majority of which are PAYE eligible, but am only making $60k a year if I meet my billable hours (1800), $50k base. Not a lot, but I'm happy with the location/the people/the practice, and I can grow here.


Should I attempt private consolidation/refinancing? My interest rates are currently like 7.3% on average. I have good credit (to the extent possible for a K-JD, not a lot of history but my score is like 720) if that matters.

The federal student loan protections, like PAYE, are in place to help people in your situation (arguably). You'd be nuts to refinance with a private lender. You can't repay $120k in debt with a $50-60k /year job. You'd basically need to be homeless and to put your entire after-tax income towards your student loans to stand a change at repaying them within half a decade.

[Anonymous User]

I've got $120k in loans, vast majority of which are PAYE eligible, but am only making $60k a year if I meet my billable hours (1800), $50k base. Not a lot, but I'm happy with the location/the people/the practice, and I can grow here.


Should I attempt private consolidation/refinancing? My interest rates are currently like 7.3% on average. I have good credit (to the extent possible for a K-JD, not a lot of history but my score is like 720) if that matters.

The federal student loan protections, like PAYE, are in place to help people in your situation (arguably). You'd be nuts to refinance with a private lender. You can't repay $120k in debt with a $50-60k /year job. You'd basically need to be homeless and to put your entire after-tax income towards your student loans to stand a change at repaying them within half a decade.

Payments on interest alone will be in the $650 range. I'd like to pay somewhere around $1000/m on my loans in order to make SOME sort of progress, and have the PAYE minimums as a fallback. It's just hard for me to fathom the advice that it's a GOOD idea for me to ride PAYE until I make more money, all the while capitalizing interest & ballooning the tax bomb.

[JenDarby]

I've got $120k in loans, vast majority of which are PAYE eligible, but am only making $60k a year if I meet my billable hours (1800), $50k base. Not a lot, but I'm happy with the location/the people/the practice, and I can grow here.


Should I attempt private consolidation/refinancing? My interest rates are currently like 7.3% on average. I have good credit (to the extent possible for a K-JD, not a lot of history but my score is like 720) if that matters.

The federal student loan protections, like PAYE, are in place to help people in your situation (arguably). You'd be nuts to refinance with a private lender. You can't repay $120k in debt with a $50-60k /year job. You'd basically need to be homeless and to put your entire after-tax income towards your student loans to stand a change at repaying them within half a decade.

Payments on interest alone will be in the $650 range. I'd like to pay somewhere around $1000/m on my loans in order to make SOME sort of progress, and have the PAYE minimums as a fallback. It's just hard for me to fathom the advice that it's a GOOD idea for me to ride PAYE until I make more money, all the while capitalizing interest & ballooning the tax bomb.

It's not necessarily a "good idea" since you seem like you want to pay off your debt in full and right now you are spending far more on interest than if you refinanced. That being said, it's probably your best option. Your refinanced minimum payments will probably be over $1,000 a month. My debt was $175,000 and my min payments are $1,800. Capitalizing interest was really stressing me out, but spending a significant portion of your income on debt payments can also be pretty stressful. Can you afford over $1,000 a month in payments right now? What would you do if you lost your job? Do you have enough savings to continue to make debt payments and look for a new job? Sofi and common bond do have mechanisms and plans for dealing with job loss, but I doubt they are anywhere as comfortable as federal protections. You would probably need a cosigner as well considering your income to debt ratio.

[AVBucks4239]

I've got $120k in loans, vast majority of which are PAYE eligible, but am only making $60k a year if I meet my billable hours (1800), $50k base. Not a lot, but I'm happy with the location/the people/the practice, and I can grow here.


Should I attempt private consolidation/refinancing? My interest rates are currently like 7.3% on average. I have good credit (to the extent possible for a K-JD, not a lot of history but my score is like 720) if that matters.

The federal student loan protections, like PAYE, are in place to help people in your situation (arguably). You'd be nuts to refinance with a private lender. You can't repay $120k in debt with a $50-60k /year job. You'd basically need to be homeless and to put your entire after-tax income towards your student loans to stand a change at repaying them within half a decade.

Payments on interest alone will be in the $650 range. I'd like to pay somewhere around $1000/m on my loans in order to make SOME sort of progress, and have the PAYE minimums as a fallback. It's just hard for me to fathom the advice that it's a GOOD idea for me to ride PAYE until I make more money, all the while capitalizing interest & ballooning the tax bomb.

(1) Definitely don't refinance. You need the protections that federal loans provide.

(2) Sign up for PAYE and auto-debit (to get the .25 interest rate deduction), then spend some time figuring out the numbers before you do anything more than pay the minimum (I paid the minimum for about 4-5 months before I figured out my plan).

(3) Build an emergency fund (3-6 months of expenses).

After that, I think it becomes a personal decision. Read through this thread and you'll find that I lean towards paying back your loans and JohannDeMann leans towards doing PAYE and building assets. One thing you definitely have to realize is that you can enroll in PAYE to enjoy (a) the protections of federal loans, (b) the flexibility of PAYE and (c) being able to attack the principal of your loans more quickly.

And that's basically what I'm doing. I had about $150k in loans and about $50k income. I'm enrolled in PAYE and my payment is about $250/month. I pay that, which keeps me current on all 12 of my loans, and then pay an extra $750 towards my highest interest rate loan. Just this year I will have knocked out an $8500 loan, a $2500 loan, and chipped away at a $27,000 loan. Furthermore, by enrolling in PAYE, the interest on several loans will be wiped out after three years, so I'm not paying anything but the minimum towards those.

I'm also modestly investing (matching my employer's 401k contribution and contributing a little bit to a Roth).

And since I'm bored at work, here are the basic numbers to illustrate Johann's point.

Current PAYE Payment (assuming you max 401k and IRA): $161
Total Paid Over 20 Years: $78,000
Amount Forgiven: $220,000
Tax Liability (Assuming 38% Tax Bracket): $83,600
Total Paid Towards Loan: $161,600
401k Balance from Maxing After 20 Years ($18,500 per year, Assuming 6% Match and 7% Returns): $958,300
Traditional IRA Balance from Maxing After 20 Years ($5,500 per year and 7% Returns): $241,258

Three things. First, you'd likely have to pull from your Traditional IRA to pay the tax liability, meaning you'd have to pay income taxes on top of what you withdraw and also pay the 10% penalty for early withdrawal (before age 59.5). So your IRA would be substantially depleted.

Second, if you get married to a spouse making decent income, all these calculations are worthless. You'll either file together and make higher payments (and maybe pay off your loan anyway) or file separately and lose the benefit of basically every tax deduction.

Third, you really don't know where your career will take you. What if you become partner after 7-8 years, your firm has a great year and you make $250k? Then you suddenly have to pay the ten year standard payment and have to pay off all the interest that's been building up.

Point is: if you are comfortable with both the personal and career unknowns that lie ahead and want to build your assets, then do PAYE and pay the minimum for 20 years. If you're like me and the numbers/risk don't add up (for me, filing jointly makes PAYE a nearly worthless endeavor aside from the plan I described above), then enroll in PAYE and attack the highest interest rate loans.

[Anonymous User]

I've got $120k in loans, vast majority of which are PAYE eligible, but am only making $60k a year if I meet my billable hours (1800), $50k base. Not a lot, but I'm happy with the location/the people/the practice, and I can grow here.


Should I attempt private consolidation/refinancing? My interest rates are currently like 7.3% on average. I have good credit (to the extent possible for a K-JD, not a lot of history but my score is like 720) if that matters.

The federal student loan protections, like PAYE, are in place to help people in your situation (arguably). You'd be nuts to refinance with a private lender. You can't repay $120k in debt with a $50-60k /year job. You'd basically need to be homeless and to put your entire after-tax income towards your student loans to stand a change at repaying them within half a decade.

Payments on interest alone will be in the $650 range. I'd like to pay somewhere around $1000/m on my loans in order to make SOME sort of progress, and have the PAYE minimums as a fallback. It's just hard for me to fathom the advice that it's a GOOD idea for me to ride PAYE until I make more money, all the while capitalizing interest & ballooning the tax bomb.

(1) Definitely don't refinance. You need the protections that federal loans provide.

(2) Sign up for PAYE and auto-debit (to get the .25 interest rate deduction), then spend some time figuring out the numbers before you do anything more than pay the minimum (I paid the minimum for about 4-5 months before I figured out my plan).

(3) Build an emergency fund (3-6 months of expenses).

After that, I think it becomes a personal decision. Read through this thread and you'll find that I lean towards paying back your loans and JohannDeMann leans towards doing PAYE and building assets. One thing you definitely have to realize is that you can enroll in PAYE to enjoy (a) the protections of federal loans, (b) the flexibility of PAYE and (c) being able to attack the principal of your loans more quickly.

And that's basically what I'm doing. I had about $150k in loans and about $50k income. I'm enrolled in PAYE and my payment is about $250/month. I pay that, which keeps me current on all 12 of my loans, and then pay an extra $750 towards my highest interest rate loan. Just this year I will have knocked out an $8500 loan, a $2500 loan, and chipped away at a $27,000 loan. Furthermore, by enrolling in PAYE, the interest on several loans will be wiped out after three years, so I'm not paying anything but the minimum towards those.

I'm also modestly investing (matching my employer's 401k contribution and contributing a little bit to a Roth).

And since I'm bored at work, here are the basic numbers to illustrate Johann's point.

Current PAYE Payment (assuming you max 401k and IRA): $161
Total Paid Over 20 Years: $78,000
Amount Forgiven: $220,000
Tax Liability (Assuming 38% Tax Bracket): $83,600
Total Paid Towards Loan: $161,600
401k Balance from Maxing After 20 Years ($18,500 per year, Assuming 6% Match and 7% Returns): $958,300
Traditional IRA Balance from Maxing After 20 Years ($5,500 per year and 7% Returns): $241,258

Three things. First, you'd likely have to pull from your Traditional IRA to pay the tax liability, meaning you'd have to pay income taxes on top of what you withdraw and also pay the 10% penalty for early withdrawal (before age 59.5). So your IRA would be substantially depleted.

Second, if you get married to a spouse making decent income, all these calculations are worthless. You'll either file together and make higher payments (and maybe pay off your loan anyway) or file separately and lose the benefit of basically every tax deduction.

Third, you really don't know where your career will take you. What if you become partner after 7-8 years, your firm has a great year and you make $250k? Then you suddenly have to pay the ten year standard payment and have to pay off all the interest that's been building up.

Point is: if you are comfortable with both the personal and career unknowns that lie ahead and want to build your assets, then do PAYE and pay the minimum for 20 years. If you're like me and the numbers/risk don't add up (for me, filing jointly makes PAYE a nearly worthless endeavor aside from the plan I described above), then enroll in PAYE and attack the highest interest rate loans.

Thank you for taking the time to write such a thoughtful response.

I actually paid $10 for an excellent Excel spreadsheet that helps to automatically calculate this kind of "snowball" repayment strategy - I don't like the feeling of all this debt hanging over me, and I'd rather attack it now. If that's my plan, is there any drawback to making interest payments (i.e., ~$650) rather than minimum PAYE payments (~$250)? Are you saying that you let interest accrue on your other loans while putting that extra $750 towards your highest interest loans?

[AVBucks4239]

Thank you for taking the time to write such a thoughtful response.

I actually paid $10 for an excellent Excel spreadsheet that helps to automatically calculate this kind of "snowball" repayment strategy - I don't like the feeling of all this debt hanging over me, and I'd rather attack it now. If that's my plan, is there any drawback to making interest payments (i.e., ~$650) rather than minimum PAYE payments (~$250)? Are you saying that you let interest accrue on your other loans while putting that extra $750 towards your highest interest loans?

Yes. You will pay less interest total that way because interest on debt works in a compound manner (i.e., as you pay off more of the loan, you owe less interest on each payment, which means more and more of your money can go to paying of the principal faster). So by attacking a higher interest rate loan and letting the smaller interest rate loans grow, you will still be paying less interest overall.

Conversely, if you try to keep up on the interest on all your loans, you will barely make any dent into the principals, meaning that the interest on the other loans will continue to grow at exactly the same rate. For example, if a loan was accruing $100 interest per month, if you paid that $100, it would still accrue $100 the next month. However, if you took that $100 and applied it to a higher interest rate loan, you'd be getting a better return on your money. And then that higher interest rate loan would be accruing even less interest the next month. And so on and so on until you're done with it and can move to the next loan.

[AVBucks4239]

Thank you for taking the time to write such a thoughtful response.

I actually paid $10 for an excellent Excel spreadsheet that helps to automatically calculate this kind of "snowball" repayment strategy - I don't like the feeling of all this debt hanging over me, and I'd rather attack it now. If that's my plan, is there any drawback to making interest payments (i.e., ~$650) rather than minimum PAYE payments (~$250)? Are you saying that you let interest accrue on your other loans while putting that extra $750 towards your highest interest loans?

Also, the snowball method is not as effective as the avalanche method. Always pay the highest interest rate loans first.

This is pretty difficult, so I've adopted a hybrid kind of strategy. I pay my highest interest rate loans first and, if I ever come across lump sums (tax refund, security deposit refund, etc.), I put it towards a loan with a smaller balance that I can pay off. This is how I wiped out that $2,500 loan. Was it the best mathematical use of my money? No. But it felt good to get 1 of 12 loans done with.

[Anonymous User]

I meant to say avalanche, not sure why snowball came to mind. I'm attacking my PAYE ineligible loans first - they aren't my highest rate loans, but they have shitty repayment terms.

When should I apply for PAYE? Just graduated, studying for the bar.

[AVBucks4239]

I meant to say avalanche, not sure why snowball came to mind. I'm attacking my PAYE ineligible loans first - they aren't my highest rate loans, but they have shitty repayment terms.

When should I apply for PAYE? Just graduated, studying for the bar.

I could be wrong but I think the correct answer is ASAP so your balance doesn't capitalize.