Student loan payments: get advice and actual numbers here Forum

[XxSpyKEx]

If you can pay off within 4 years, I'd save the money for probably about 6-8 months, and if you like it then, try to refinance. But just because you "can" pay something down in 3-4 years doesn't make it smart. If you like the job and are very confident you will be in it for 10 years, pay down the debt aggressively and refinance after about the 8 month mark or 1 year mark (to make sure you like your job). If you are not confident you will be in this job for 10 years and there's a real chance you'll go to PSLF eligible jobs, then don't pay the debt down aggressively or refinance.

consider the situation where you stay in this job for 5 years, and then go PSLF:

Based on $145k salary you are looking at yearly payments of $12k under PAYE. I'd lock in PAYE right now for monthly payments of like $500 for the next year. If salary goes up, you may be looking at $15-20k in payments a year - or $25k a year based on your 25 year repayment if you get kicked off PAYE because of salary exceeding debt. PAYE is based on tax return so you are always paying based on last year's salary (another huge benefit that people overlook). I'd estimate you pay around $80k over the next 5 years.

If you pay down the 171k over the next 5 years, you just blew like 210k. That's 210k spent compared to 80k.

Then if you take a PSLF job the 80k would be like another 10k of payments under PAYE a year (assuming average $100k salary) * 10 years for forgiveness equals $100k. Thats $180k total payments spread out over 15 years instead of $210k over 5 years. Huge difference. If you take a PSLF job earlier into the 5 years, the results are even more drastic.

Go on PAYE right now, stack your money in conservative investments or even just a bank CD, if you love your job and see yourself there for the long haul or at least in the private sector for the long haul, refinance onto 10 year plan and throw a chunk of your savings youve been accumulating at the loan.

I agree with this. Although, I'd just use forbearance for the 5 years, if you're pretty sure that you're going to go into a PSLF job after that. You can also probably snag up a 6 month unemployment deferment when you're between both jobs. I think these loans have 5 years of practically no questions asked forbearance, so you might as well just use that and save that money. Then start utilizing PAYE once you're in the new PSLF qualifying job (which will have a lower salary, and hence, lower payments). You can also toss $18k /year into your 401k/TSP and reduce your PAYE payments even further (since 401k/TSP reduces your AGI).

[Anonymous User]

If you can pay off within 4 years, I'd save the money for probably about 6-8 months, and if you like it then, try to refinance. But just because you "can" pay something down in 3-4 years doesn't make it smart. If you like the job and are very confident you will be in it for 10 years, pay down the debt aggressively and refinance after about the 8 month mark or 1 year mark (to make sure you like your job). If you are not confident you will be in this job for 10 years and there's a real chance you'll go to PSLF eligible jobs, then don't pay the debt down aggressively or refinance.

consider the situation where you stay in this job for 5 years, and then go PSLF:

Based on $145k salary you are looking at yearly payments of $12k under PAYE. I'd lock in PAYE right now for monthly payments of like $500 for the next year. If salary goes up, you may be looking at $15-20k in payments a year - or $25k a year based on your 25 year repayment if you get kicked off PAYE because of salary exceeding debt. PAYE is based on tax return so you are always paying based on last year's salary (another huge benefit that people overlook). I'd estimate you pay around $80k over the next 5 years.

If you pay down the 171k over the next 5 years, you just blew like 210k. That's 210k spent compared to 80k.

Then if you take a PSLF job the 80k would be like another 10k of payments under PAYE a year (assuming average $100k salary) * 10 years for forgiveness equals $100k. Thats $180k total payments spread out over 15 years instead of $210k over 5 years. Huge difference. If you take a PSLF job earlier into the 5 years, the results are even more drastic.

Go on PAYE right now, stack your money in conservative investments or even just a bank CD, if you love your job and see yourself there for the long haul or at least in the private sector for the long haul, refinance onto 10 year plan and throw a chunk of your savings youve been accumulating at the loan.

I agree with this. Although, I'd just use forbearance for the 5 years, if you're pretty sure that you're going to go into a PSLF job after that. You can also probably snag up a 6 month unemployment deferment when you're between both jobs. I think these loans have 5 years of practically no questions asked forbearance, so you might as well just use that and save that money. Then start utilizing PAYE once you're in the new PSLF qualifying job (which will have a lower salary, and hence, lower payments). You can also toss $18k /year into your 401k/TSP and reduce your PAYE payments even further (since 401k/TSP reduces your AGI).

Thank you to you both!

[FuturePanhandler]

Why do people choose IBR over PAYE if they qualify for both? Seems like that's the case for a few, if not many. I must be missing something.

[A. Nony Mouse]

Why do people choose IBR over PAYE if they qualify for both? Seems like that's the case for a few, if not many. I must be missing something.

The only difference I know of is that PAYE only applies to Direct Loans, whereas IBR can apply to Stafford loans as well. But if you were a new borrower as of July 2014, the terms for IBR are the same as the terms for PAYE, so no difference.

[JenDarby]

Why do people choose IBR over PAYE if they qualify for both? Seems like that's the case for a few, if not many. I must be missing something.

The only difference I know of is that PAYE only applies to Direct Loans, whereas IBR can apply to Stafford loans as well. But if you were a new borrower as of July 2014, the terms for IBR are the same as the terms for PAYE, so no difference.

PAYE applies to all Stafford loans. PAYE does not apply to FEEL loans or consolidation loans, or PLUS loans to parents (but IBR doesn't cover these PLUS loans either).

PAYE is 20 years versus 25 years and payments are 10% of your discretionary income rather than 15% of your discretionary income.

There is no reason to my knowledge to choose IBR of you qualify for PAYE (unless you plan to payoff your loans and don't care about the size of your payments or term of forgiveness - in which case you should probably refi).

[Anonymous User]

Background: I graduated from NYU with 80K in debt. Started making "aggressive payments" but noticed that my principal was not being reduced at all. Finally, I refinanced the 77K of loans I had through so-fi at an interest rate of 3.43 (3.17 with .25 automatic debit reduction) in October 2014.

Update: Refinanced again with so-fi at 2.80 interest rate (reduced by .25 for automatic debit) for the remaining 60k. Obviously trying to hustle and pay this off within the next year and half. Had to get serious about not spending money on things I didn't need ($5.00 coffee when I can make one at home, cleaning service, etc.). I recently lateralled to a new firm and being closer to have this debt gone makes me less concerned about having to stay in this life for any longer than is necessary and it takes the pressure off the job. I have found that I am so much happier without this pressure and don't mind the job quite as much.

[horriblegb]

Background: I graduated from NYU with 80K in debt. Started making "aggressive payments" but noticed that my principal was not being reduced at all. Finally, I refinanced the 77K of loans I had through so-fi at an interest rate of 3.43 (3.17 with .25 automatic debit reduction) in October 2014.

Update: Refinanced again with so-fi at 2.80 interest rate (reduced by .25 for automatic debit) for the remaining 60k. Obviously trying to hustle and pay this off within the next year and half. Had to get serious about not spending money on things I didn't need ($5.00 coffee when I can make one at home, cleaning service, etc.). I recently lateralled to a new firm and being closer to have this debt gone makes me less concerned about having to stay in this life for any longer than is necessary and it takes the pressure off the job. I have found that I am so much happier without this pressure and don't mind the job quite as much.

You refinanced the sofi loan with sofi? That is something that I have been considering. How long did you wait before doing the refinancing process again?

I have been thinking about this because I feel like I could get a better rate now and I would like to stick with So-Fi but I was not exactly sure how to go about this

[Anonymous User]

Background: I graduated from NYU with 80K in debt. Started making "aggressive payments" but noticed that my principal was not being reduced at all. Finally, I refinanced the 77K of loans I had through so-fi at an interest rate of 3.43 (3.17 with .25 automatic debit reduction) in October 2014.

Update: Refinanced again with so-fi at 2.80 interest rate (reduced by .25 for automatic debit) for the remaining 60k. Obviously trying to hustle and pay this off within the next year and half. Had to get serious about not spending money on things I didn't need ($5.00 coffee when I can make one at home, cleaning service, etc.). I recently lateralled to a new firm and being closer to have this debt gone makes me less concerned about having to stay in this life for any longer than is necessary and it takes the pressure off the job. I have found that I am so much happier without this pressure and don't mind the job quite as much.

You refinanced the sofi loan with sofi? That is something that I have been considering. How long did you wait before doing the refinancing process again?

I have been thinking about this because I feel like I could get a better rate now and I would like to stick with So-Fi but I was not exactly sure how to go about this

I did the same. I waited less than a year.

[exitoptions]

Background: I graduated from NYU with 80K in debt. Started making "aggressive payments" but noticed that my principal was not being reduced at all. Finally, I refinanced the 77K of loans I had through so-fi at an interest rate of 3.43 (3.17 with .25 automatic debit reduction) in October 2014.

Update: Refinanced again with so-fi at 2.80 interest rate (reduced by .25 for automatic debit) for the remaining 60k. Obviously trying to hustle and pay this off within the next year and half. Had to get serious about not spending money on things I didn't need ($5.00 coffee when I can make one at home, cleaning service, etc.). I recently lateralled to a new firm and being closer to have this debt gone makes me less concerned about having to stay in this life for any longer than is necessary and it takes the pressure off the job. I have found that I am so much happier without this pressure and don't mind the job quite as much.

It's amazing how much just a couple percentage points makes paying off the loans so much easier. I did pretty much the same thing and now I feel I'm making a dent for the first time.

[Anonymous User]

This refinancing is really particularly valuable if you have a debt load only in the 6 figures. If we take somebody at the high end sitting at 225,000 the difference is pretty small in some circumstances, but can make it slightly easier. It pretty much depends on the variable rate and how much you're willing to pay.

Scenario 1: Assume $225K, stay on federal loans - balanced out to 6.4% - standard repayment is about $2.6K per month for 120 months -total price paid: $312K That's with a reasonable monthly payment, but still not easy to kick that much a month out of take home.

Scenario 2: After 12 months on standard w/ federal interest - $31200 paid (12*2.6K), refi with sofi. Main problem here is that if you have $205K left in debt (225K-31K including 12 months of interest), the monthly payments for a rate difference are going to kill you. To get the really low rates some people are talking about, you have to take the 5 yr payment plan - and it's variable, but if you get a really good rate - say 2.8% looking at sofi's website - you cut interest by a little less than 4%, but you have to get full repayment in 60 months even. This means your monthly payments jump to $3.65K for 5 years. This is going to be pretty difficult and will hurt even with lockstep compensation. More importantly - if you were to jump your monthly payments to $3650 under standard fed repayment without refinancing you would still pay it off it 79 months - only 7 months more than under sofi. Granted sofi would save you about $25K over the course of that 7 months which is dam good, but at the cost of significant drop in your monthly budget for 5 years.

The difference gets smaller assuming you don't get something in the 2's which I imagine is going to be less of an option in the next 6 months, so assume you get worse, but better than fed at 3.8% - which is at the bottom end of fixed and would require 5 years, and middle rate for variable which you could swing for 10. At the 5 year you're paying $3.8K, which if you did the same thing at fed - you'd make at 76 months instead of 72 - total savings over 5 years of only $15K.

If you can get 3.8% over the 10 years, than there is a more significant difference. Here, assuming you just paid the 10yr standard $2.6K but refied at 12 months, you're paying off at 104 months instead of 120 = 16 months savings at $2600 = $41K pocketed. This would also allow you to drop your monthly down to around $2.3K for the last 108 months and still be on track for 10 year total, or drop down to $2.1K monthly for the 10 years after refinancing at be at 132 month total repayment.

Those are optimistic scenarios, and unless you already have something below 4% fixed, refinancing in the next year isn't going to make a huge difference in actual monthly payments because you would have to kick up spending to offset the shorter time, and on balance the difference is only going to be a few months savings for the loss of meaningful insurance sticking with fed.

[Internetdan]

/accidental/

[wildhaggis]

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.

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.

I don't mean to derail if this has already been addressed, but is shit like the above-quoted actually true? It can't be that easy to avoid the tax bomb, right?

[AreJay711]

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.

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.

I don't mean to derail if this has already been addressed, but is shit like the above-quoted actually true? It can't be that easy to avoid the tax bomb, right?

I don't think anyone actually knows. The first tax bombs are years off. Theoretically, as it looks now, sure.

[Anonymous User]

Soliciting Advice:

Note to Mods: I had posted this as an OP, but was directed here (appropriately). Please feel free to delete my OP.

I have a $140,000 in federal student loan debt. I consolidated and the interest rate is 7%. I'm currently on IBR because I was clerking last year. I have a relatively low COL (relative to NYC DC LA etc.) and I work at mid-size boutique firm making 135K with periodic raises (although by no means guaranteed or nearly as structured as big law). My fiancee makes about $70K a year. I'm very happy here (great QOL) and I think the firm is happy with me. In short, I have no plans of leaving anytime soon. But, should the economy turn, I could see myself being laid off as I am the only junior associate at the firm.

My original plan was to stay on IBR (I have to recertify) to keep my debt-to-income ratio relatively low (want to buy a house, car soon etc.) while still making payments at rate higher than required. However, after reading this thread, I'm starting to think doing a re-fi to bring down the interest rate and pay off my loans in 5-10 years is the way to go. Any thoughts? Thanks in advance.

[Tiago Splitter]

I don't think anyone actually knows. The first tax bombs are years off.

I think the only thing we know is that someone driving from their 5000 square foot home to their accountant's/tax attorney's office in a brand new BMW to discuss how to appear insolvent for PAYE forgiveness purposes is gonna get more than just a form letter from the IRS. And I'm like the third biggest fan of PAYE on the site behind fatduck and johann

To the above anon: Refinancing is almost certainly the right answer. You'll save yourself tens of thousands of dollars with a refi and aren't likely to gain much from the advantages of IBR.

[wildhaggis]

I don't think anyone actually knows. The first tax bombs are years off.

I think the only thing we know is that someone driving from their 5000 square foot home to their accountant's/tax attorney's office in a brand new BMW to discuss how to appear insolvent for PAYE forgiveness purposes is gonna get more than just a form letter from the IRS. And I'm like the third biggest fan of PAYE on the site behind fatduck and johann

To the above anon: Refinancing is almost certainly the right answer. You'll save yourself tens of thousands of dollars with a refi and aren't likely to gain much from the advantages of IBR.

So, basically, even if everything remains in today's form, decreasing the extent of your solvency artificially to avoid the tax bomb is going to be a sketchy proposition.

[AreJay711]

I don't think anyone actually knows. The first tax bombs are years off.

I think the only thing we know is that someone driving from their 5000 square foot home to their accountant's/tax attorney's office in a brand new BMW to discuss how to appear insolvent for PAYE forgiveness purposes is gonna get more than just a form letter from the IRS. And I'm like the third biggest fan of PAYE on the site behind fatduck and johann

To the above anon: Refinancing is almost certainly the right answer. You'll save yourself tens of thousands of dollars with a refi and aren't likely to gain much from the advantages of IBR.

So, basically, even if everything remains in today's form, decreasing the extent of your solvency artificially to avoid the tax bomb is going to be a sketchy proposition.

Solvency, probably. Deferring income to take advantage of differing marginal tax rates might fly under the radar, but if someone made $150k three of the last four years, only to make 15k the year of the tax bomb it might draw suspicions. My buddy got audited because his SA job made his income way different one year to the next.

[Tiago Splitter]

Solvency, probably. Deferring income to take advantage of differing marginal tax rates might fly under the radar, but if someone made $150k three of the last four years, only to make 15k the year of the tax bomb it might draw suspicions. My buddy got audited because his SA job made his income way different one year to the next.

Making 15k the year of the tax bomb is fine but pretending like you have no assets is a different story. No way the IRS will buy an argument that out of the money options or a garage full of expensive cars that makes Jay Leno blush don't qualify as assets.

Johann's other idea was to give the money to your kids via irrevocable trusts which might work but seems really shitty unless you're on your death bed or something.

[Johann]

I don't think anyone actually knows. The first tax bombs are years off.

I think the only thing we know is that someone driving from their 5000 square foot home to their accountant's/tax attorney's office in a brand new BMW to discuss how to appear insolvent for PAYE forgiveness purposes is gonna get more than just a form letter from the IRS. And I'm like the third biggest fan of PAYE on the site behind fatduck and johann

To the above anon: Refinancing is almost certainly the right answer. You'll save yourself tens of thousands of dollars with a refi and aren't likely to gain much from the advantages of IBR.

So, basically, even if everything remains in today's form, decreasing the extent of your solvency artificially to avoid the tax bomb is going to be a sketchy proposition.

I mean all your assets that are non monetary assets are still counted towards your solvency, so buying real estate or antiques definitely won't work. It doesn't matter that they are less liquid- it's just FMV of assets plus cash. It wouldn't surprise me if people satisfying PAYE are the new audit lottery winners in 20 years. You will have to have lots of documentation supporting your positions etc. But at the same time the value of a Ford Focus 10 minutes after it rolls off the lot is 50% of what you paid for it. You're stuck with a shitty asset that you can't flip, but that does reduce your net worth. I haven't thought through this all the way yet, but I'm optimistic. Right now, I'm living like a king (low monthly pmt) with my ear open to any govt offers, so that's why I'm staying put.

[XxSpyKEx]

I mean all your assets that are non monetary assets are still counted towards your solvency, so buying real estate or antiques definitely won't work. It doesn't matter that they are less liquid- it's just FMV of assets plus cash. It wouldn't surprise me if people satisfying PAYE are the new audit lottery winners in 20 years. You will have to have lots of documentation supporting your positions etc. But at the same time the value of a Ford Focus 10 minutes after it rolls off the lot is 50% of what you paid for it. You're stuck with a shitty asset that you can't flip, but that does reduce your net worth. I haven't thought through this all the way yet, but I'm optimistic. Right now, I'm living like a king (low monthly pmt) with my ear open to any govt offers, so that's why I'm staying put.

I don't really understand the logic behind this buying a bunch of new cars to reduce solvency thing. It's not any different than blowing all your money on hookers and blow, which would also reduce your net worth to zero. You'd be better off just paying your taxes if you're left with some kind of assets afterwards. If not, then you might as well just blow all your money on hookers and blow, thereby reducing your net worth to zero and avoiding paying taxes on the student loan forgiveness. It's not exactly a great outcome, though, since your net worth will be zero when you're in your 50s, meaning you're inevitably going to work until you die (probably as a Walmart greeter when you're in your 70s and no longer mentally capable of practicing law).

[Johann]

well it started as a not-serious response to someone who didn't want to leave his money to his kids in trusts as a way of escaping tax bomb. yes, it is just blowing your money in a slightly more refined and gradual way than blow and hookers - but yeah blow and hookers is the same. I ran with the example because hey I'm sure some people holding a couple hundred grand would feel good knowing that everything you buy is 42% off that year.

[Tiago Splitter]

If nothing else that will be a good year to ask for a nice long sabbatical at your job.

[JenDarby]

I already just stare at my debt too often. I can't imagine doing that for 20 years. Linking my debt to my mint account was a poor choice. Lol at my net worth.

[horriblegb]

I already just stare at my debt too often. I can't imagine doing that for 20 years. Linking my debt to my mint account was a poor choice. Lol at my net worth.

Unfortunately I do this too, I am completely obsessed with it. I add up all of it on a weekly basis so I can see my progress. I dont know why I would do this to myself. I feel you

[Anonymous User]

Background: I graduated from NYU with 80K in debt. Started making "aggressive payments" but noticed that my principal was not being reduced at all. Finally, I refinanced the 77K of loans I had through so-fi at an interest rate of 3.43 (3.17 with .25 automatic debit reduction) in October 2014.

Update: Refinanced again with so-fi at 2.80 interest rate (reduced by .25 for automatic debit) for the remaining 60k. Obviously trying to hustle and pay this off within the next year and half. Had to get serious about not spending money on things I didn't need ($5.00 coffee when I can make one at home, cleaning service, etc.). I recently lateralled to a new firm and being closer to have this debt gone makes me less concerned about having to stay in this life for any longer than is necessary and it takes the pressure off the job. I have found that I am so much happier without this pressure and don't mind the job quite as much.

You refinanced the sofi loan with sofi? That is something that I have been considering. How long did you wait before doing the refinancing process again?

I have been thinking about this because I feel like I could get a better rate now and I would like to stick with So-Fi but I was not exactly sure how to go about this

(I am the anonymous poster above) Yep: This is exactly what I did. I waited about six months. I want every single extra dollar to go to principal that I can manage. The application process is just like the application for the "original so-fi" loan.