Student loan payments: get advice and actual numbers here Forum

[Johann]

[Johann, prolific hater of all things big law]: Dude, totally plan as if you're going to leave biglaw after 1 year/not be able to find a job to service that amount of debt. Just do wait for the PAYE bomb in 25 years, because I'd rather have no savings by the time I'm 50 (or risk having all of my savings wiped out unless this do-nothing Congress passes a law to eliminate the current tax bomb) than work in big law!

[people who think they will be able to tolerate biglaw/make enough money to pay off 250k loans over their life]: DUDE if you do PAYE you'll NEVER BE ABLE TO PAY OFF YOUR LOANS!!!! [ignoring that this is the whole premise of Johann's strategy]. WORST STRATEGY EVER.

Oh, look, another argument that's going to go in circles b/c people have different preferences, surprise!!!!! I wonder if there is some generalizable framework for determining what to consider on a case-by-case basis...

This is correct. But the reason I say to use my strategy is because you are paying maybe $10k of insurance that does not fuck for you life if you end up leaving big law to work for the federal government or be a professor or nonprofit PSLF. You have the money and have'nt wasted it. It's a basically wait and see insurance policy to see if you like biglaw where you ONLY pay the insurance if you end up liking biglaw and probably ridiing it out for many years and therefore 10k is a drop in the bucket to your 10 year earnings in biglaw. You can say what you want but there is absolutely no reason to refinance until you've worked in biglaw for at least a year unless you are really worried about paying less than 1% of your 10 year earnings not to fuck your career.

[Johann]

This is a case by case for everyone - use your first year on PAYE to accumulate money no matter what your debt.

Worst case scenario - shit I really hate biglaw I just found out 6 months in but I refinanced with SoFi and I'm staring down $3k monthly payments in an expensive city for the next 10 years. I'm so glad I refinanced and signed up for 10 straight years of this shit. It totally won't influence my decision to take this Government/NonProfit/Professor job that is PSLF eligible where I could pay 1/10th of what I signed up for monthly and have my debt forgiven at the end of 10 years! It totally wasn't a brash move to assume I would like a job a huge percentage of people don't like.

Best case scenario - Fuck I can't believe I accumulated an extra $10k in interest debt this year (and total because then you refi) only to realize I love biglaw and my earnings over the next 10 years will be $2-5 million. Where in the hell will I ever find my money for my 2 SeaDoos with that 10k wasted.

PAYE is the only right response for year 1.

Edit - this also completely ignores time value of money calculations and the fact that paying a shit ton of debt down limits your investment options later. I'm in PAYE for the long haul because I understand money makes money, paying more in the future only if I make more will be easier to swallow because I'll have more discretionary income, and there is a non-zero chance the way the country is trending student loan programs are implemented in some form or fashion.

[Old Gregg]

Just because you love big law, doesn't mean you'll make equity partner... The interest and undented principal over two years are pretty impactful

[Tiago Splitter]

I'm definitely not going to refinance on day one but two years does seem a little long.

[v5junior]

This is a case by case for everyone - use your first year on PAYE to accumulate money no matter what your debt.

Worst case scenario - shit I really hate biglaw I just found out 6 months in but I refinanced with SoFi and I'm staring down $3k monthly payments in an expensive city for the next 10 years. I'm so glad I refinanced and signed up for 10 straight years of this shit. It totally won't influence my decision to take this Government/NonProfit/Professor job that is PSLF eligible where I could pay 1/10th of what I signed up for monthly and have my debt forgiven at the end of 10 years! It totally wasn't a brash move to assume I would like a job a huge percentage of people don't like.

Best case scenario - Fuck I can't believe I accumulated an extra $10k in interest debt this year (and total because then you refi) only to realize I love biglaw and my earnings over the next 10 years will be $2-5 million. Where in the hell will I ever find my money for my 2 SeaDoos with that 10k wasted.

PAYE is the only right response for year 1.

Edit - this also completely ignores time value of money calculations and the fact that paying a shit ton of debt down limits your investment options later. I'm in PAYE for the long haul because I understand money makes money, paying more in the future only if I make more will be easier to swallow because I'll have more discretionary income, and there is a non-zero chance the way the country is trending student loan programs are implemented in some form or fashion.

This is a gross oversimplifcation of the possible outcomes.

I will also say that, assuming a $250k debt load and the ability to cut your interest rate from 7% to 3.5%, you're foregoing ~$730 per month in interest savings.Then consider that DRB will let you refinance when you have your full-time offer letter, so you can refinance in January (or earlier maybe? no personal experience earlier than January though) of your 3L year. If people follow your plan and refinance, as you say, after your second _full_ year of big law, you're talking 36 months of opportunity cost. And 36 * $730 = $26k+. So your 10k is a pretty big underestimate.

In any event, any time you try to make a "rule" for peoples' decisions here, it's a fools errand. If someone has 5 figure debt, your advice is terrible. I stand by my framework 4 posts ago or whenever it was.

[Tiago Splitter]

the ability to cut your interest rate from 7% to 3.5%

Thing people forget is that the 7% doesn't compound while the 3.5% does. No doubt 3.5% is still better but I wonder where the breakeven point is here.

[lacrossebrother]

On PAYE your payments aren't even enough to cover he interest accruing on the loans (assuming a normal debt load). BTW, the interest rate on those loans is in the 7% range. Do you know an investment vehicle that can beat that over 2 years? Probably not.

If you're going to take the 2 year PAYE route above, at least make payments you would've made if not for PAYE. That way your money will have done some work by the time you refinance.

1. It's more like 6.7.
2. Interest doesn't capitalize.
3. You don't refi to zero.
4. No. But you can pencil in 3.5. It's not all for nought. So 6.7-refi rate-stock return is the "premium" you pay for keeping your options open. I think that's basically free.
5. If you're an idiot, try not to also be a dick. People usually are only forgiving of one character flaw.

[v5junior]

the ability to cut your interest rate from 7% to 3.5%

Thing people forget is that the 7% doesn't compound while the 3.5% does. No doubt 3.5% is still better but I wonder where the breakeven point is here.

True. They are rough numbers anyway. People can get lower or higher than 3.5% based on credit rating, fixed vs. variable, repayment term, service provider. All the more reason to ignore any so-called "rules."

[Johann]

I said a year or 2, still even on the extreme end you are talking about a 36k insurance that only is wasted if you end up making at least ten times your debt load due to the nature of PAYE. So that guarantees at least $2.5 million in earnings with backloaded payments. But you should be comparing to the amount you pay back on DRB or whatever which is gonna be the full balance like $350k (I don't know what it comes out at) *10 is $3.5 million in earnings at least before you are losing. Which is still roughly the 1% price I referred to. And again that's using the extreme of my example.

Say what you want but I've paid $0 on PAYE in my first year and will be able to lock in a payment for the next year at around $400 a month. That's 2 years I'll pay $4,800 in loan repayment while y'all are losing like $65k those years. Do some time value of calculations and get back to me on that.

[indo]

Debt: around 66K with scholarships
Income : 160K

Paid off within 10 months of biglaw. Paid about 20K after 2L SA employment, knocking total down to $46K, did TA/RA while 2L/3L which knocked off another $10K. Paid around $36K within 10 months of biglaw by being incredibly stingy. Wife works and helped with bills which helped, but I paid for rent.

Currently have $30K in the bank and another $20K in 401K. Live in NYC.

+ 1 great Job

[Old Gregg]

4. No. But you can pencil in 3.5. It's not all for nought. So 6.7-refi rate-stock return is the "premium" you pay for keeping your options open. I think that's basically free.
5. If you're an idiot, try not to also be a dick. People usually are only forgiving of one character flaw.

I'm an idiot? I'm student loan free, under 30, and a homeowner in one of hte highest COL cities in the nation (if not the world). Still don't want to take advice? Dumbass.

More to the point, I actually think refinancing is smart as well. Back when I did it, I got in the high 2%s. Obviously, min payments make sense there because you can use hte rest of your liquidity to get better returns. In fact, if you took time to read the thread and not make shitty swipes about people u dont know, ud have read that ive been championing that method since the early days of this thread's existence.

And i really don't think "PAYE" keeps the options open. By far the most sensible move for the typical law grad, if they aren't sure they want to refinance early, is to go on PAYE, but make ordinary payments (i.e., payments that would put you on a thirty year plan, so you'll hit interest and principal). After two years, you'll be refinancing a lower amount.

i'd rather not throw away $24,000+ over two years to "keep my options open." retard.

[Old Gregg]

Say what you want but I've paid $0 on PAYE in my first year and will be able to lock in a payment for the next year at around $400 a month. That's 2 years I'll pay $4,800 in loan repayment while y'all are losing like $65k those years. Do some time value of calculations and get back to me on that.

...enjoy dat tax bomb!!!

[lacrossebrother]

4. No. But you can pencil in 3.5. It's not all for nought. So 6.7-refi rate-stock return is the "premium" you pay for keeping your options open. I think that's basically free.
5. If you're an idiot, try not to also be a dick. People usually are only forgiving of one character flaw.

I'm an idiot? I'm student loan free, under 30, and a homeowner in one of hte highest COL cities in the nation (if not the world). Still don't want to take advice? Dumbass.

More to the point, I actually think refinancing is smart as well. Back when I did it, I got in the high 2%s. Obviously, min payments make sense there because you can use hte rest of your liquidity to get better returns. In fact, if you took time to read the thread and not make shitty swipes about people u dont know, ud have read that ive been championing that method since the early days of this thread's existence.

And i really don't think "PAYE" keeps the options open. By far the most sensible move for the typical law grad, if they aren't sure they want to refinance early, is to go on PAYE, but make ordinary payments (i.e., payments that would put you on a thirty year plan, so you'll hit interest and principal). After two years, you'll be refinancing a lower amount.

i'd rather not throw away $24,000+ over two years to "keep my options open." retard.

How the fuck are you throwing away 24k?

[Old Gregg]

This is a gross oversimplifcation of the possible outcomes.

I will also say that, assuming a $250k debt load and the ability to cut your interest rate from 7% to 3.5%, you're foregoing ~$730 per month in interest savings.Then consider that DRB will let you refinance when you have your full-time offer letter, so you can refinance in January (or earlier maybe? no personal experience earlier than January though) of your 3L year. If people follow your plan and refinance, as you say, after your second _full_ year of big law, you're talking 36 months of opportunity cost. And 36 * $730 = $26k+. So your 10k is a pretty big underestimate.

In any event, any time you try to make a "rule" for peoples' decisions here, it's a fools errand. If someone has 5 figure debt, your advice is terrible. I stand by my framework 4 posts ago or whenever it was.

this is exactly right

[lacrossebrother]

This guy is such a clown. Can't wait to see this math.

[v5junior]

I said a year or 2, still even on the extreme end you are talking about a 36k insurance that only is wasted if you end up making at least ten times your debt load due to the nature of PAYE. So that guarantees at least $2.5 million in earnings with backloaded payments. But you should be comparing to the amount you pay back on DRB or whatever which is gonna be the full balance like $350k (I don't know what it comes out at) *10 is $3.5 million in earnings at least before you are losing. Which is still roughly the 1% price I referred to. And again that's using the extreme of my example.

Say what you want but I've paid $0 on PAYE in my first year and will be able to lock in a payment for the next year at around $400 a month. That's 2 years I'll pay $4,800 in loan repayment while y'all are losing like $65k those years. Do some time value of calculations and get back to me on that.

I think you're struggling with the finance concepts here.

Putting $65k into loans is not "losing" $65k. It's incurring the opportunity cost of the higher rate of return from investing via a retirement vehicle or the opportunity cost of the liquidity from creating a rainy day fund.

You, on the other hand, by paying less the PAYE minimum, are incurring the opportunity cost from accruing interest/negative amortization.

I can't believe I got trapped in this circular conversation. I am done. The only useful advice in these past 10+ posts was my framework. Hth.

[Johann]

I really don't think the people shitting on PAYE understand the beauty of the planning opportunities. You can lower taxable income by deferring income, avoid the tax bomb with trusts, backload your payments, etc.

Losing money is used the same way you did with your interest money you lost - paying back money you don't have to. It's not guaranteed I'm going to pay back the 65k that I would be refinancing.

This is the thing I love - just because I'm in 300k of debt under PAYE, doesn't mean I'll pay it back. So yes there is a losing money here.

[v5junior]

I really don't think the people shitting on PAYE understand the beauty of the planning opportunities. You can lower taxable income by deferring income, avoid the tax bomb with trusts, backload your payments, etc.

Losing money is used the same way you did with your interest money you lost - paying back money you don't have to. It's not guaranteed I'm going to pay back the 65k that I would be refinancing.

This is the thing I love - just because I'm in 300k of debt under PAYE, doesn't mean I'll pay it back. So yes there is a losing money here.

Okay, one last post to get rid of this straw man, and then I promise I am done with this.

I am not shitting on PAYE. I am shitting on PAYE as a 100%-of-the-time, zero-exceptions rule for law grads.

[Johann]

I am not shitting on PAYE. I am shitting on PAYE as a 100%-of-the-time, zero-exceptions rule for law grads.

Agreed. PAYE should be used by everyone for at least a year after graduating with the exception of two instances:
1) You are a fool
2) You are a sociopath and confident you will love biglaw

[Tiago Splitter]

avoid the tax bomb with trusts

How would this work? You put the money in a trust and tell the IRS you have no assets in 20 years so your tax hit is minimized? Sounds dicey.

[smaug]

Then consider that DRB will let you refinance when you have your full-time offer letter, so you can refinance in January (or earlier maybe? no personal experience earlier than January though) of your 3L year.

Hey, I learned something new from this thread! Thank you! (seriously)

I'm still not exactly sure what I'm going to do re: loans. I don't plan on following Johann's advice because (1) Johann, and (2) I'm not sure my monthly payment would be different under PAYE (so it would just amount to making minimum payments on my loans, something I'm not thrilled about)

My problem is more balancing the protection you get from having federal loans w/ the interest savings you get through refinancing. If I plan on trying to sink as much as I can into loans and not other investments (I get that's sub-optimal) is there really much a benefit to re-financing? The more quickly you pay back your loans, the less you're paying for the 'insurance' of the federal protections, yeah?

I've made a few spreadsheets with different interest rates/seeing what happens when I refinance different amounts, but I'm still not sure what would be best.

[Johann]

avoid the tax bomb with trusts

How would this work? You put the money in a trust and tell the IRS you have no assets in 20 years so your tax hit is minimized? Sounds dicey.

If your kids are the beneficiaries, why would that be property you own?

[Tiago Splitter]

avoid the tax bomb with trusts

How would this work? You put the money in a trust and tell the IRS you have no assets in 20 years so your tax hit is minimized? Sounds dicey.

If your kids are the beneficiaries, why would that be property you own?

I don't know that's why I asked. Maybe my problem is that I'd never do that for my kids but I could see how it makes sense for some.

[Johann]

avoid the tax bomb with trusts

How would this work? You put the money in a trust and tell the IRS you have no assets in 20 years so your tax hit is minimized? Sounds dicey.

If your kids are the beneficiaries, why would that be property you own?

I don't know that's why I asked. Maybe my problem is that I'd never do that for my kids but I could see how it makes sense for some.

If you aren't doing it for your kids, then just buy a bunch of cars with your cash to avoid the tax bomb. Or buy a lot of stock options that are out of the money at the time. You can also prepay for college educations etc.
Edit - prepaid college surely would count as an asset now that I think about it. But I'm not sure about options. And cars depreciate like 50% rolling off the lot.

[lacrossebrother]

I'm just going to assume that we have a wildly progressive and inflated top marginal bracket in 2036 so that 600k is like 15% but 10 mio range is 80%