PSA: You should think about PAYE, even if you're in BigLaw Forum

[Elston Gunn]

So New America published a pretty great calculator for figuring out whether you should use PAYE (called New IBR in the sheet) vs. paying the money back normally. I know someone who works there who sent me a version that includes an NPV calculation, but I assume most can figure out how to do that themselves.

Here’s some stuff that’s particular to my situation, but you can do your own math for yourselves, though I’m mostly talking to people with $200K+ debt.

Here’s my loans if I assume clerkship + 4 years BL* + $100k exit w/ 2% salary increases:



Here is $200K exit:



By $300K exit (and obviously higher), I pay back all my loans without forgiveness:



Headline to me is that, unless you get PSLF, there’s not a huge npv difference between doing 10 year and doing PAYE, even assuming you have to pay the tax bomb. I actually thought the difference would be smaller, but it’s still within a similar band. At the extremes we’re talking saving/costing about $50k in npv. Obviously that’s a lot of money, but it’s also over 10/20 years. The difference is bigger if you assume a 5-6% fixed rate with SOFI/CommonBond/DRB by about $15-20K.

Considering that, in the most likely scenario, the difference doesn’t seem that huge, I think PAYE is a pretty clear winner:
(1) PAYE gives you much more flexibility than refi, since you never feel locked into a job that can service 10 year repayment. You’ll never feel trapped in Biglaw by your debt. You’ll never feel like you can’t take a lower paying job that you really want. Go be a teacher, go to an early-stage startup, whatever--if you’re on PAYE, your loans won’t stop you.
(2) If you exit to gov or non-profit, you come out WAY ahead by doing PAYE while in BL versus aggressively paying down debt. Anyone in lit or regulatory has a pretty good chance of doing this, even if you’re not currently planning to.
(3) There’s a decent chance no one will ever pay the tax bomb, and you’ll have the money you saved for college or whatever. Then there’s also things like being able to buy a house much sooner, the value of which I’m not really clear on.

I’m pretty dumb about personal finance, so I’d love to hear pushback. (OBUMMER/SHITCONS will take away PAYE is not particularly helpful, though. We’ll all have our opinions on this, but I don’t think discussion of it ends up being fruitful.)

*This is probably on the high side, but reducing the years just makes PAYE more attractive.
**I assume having kids--it’s a few thousand dollars difference in npv if you get rid of them.

This is not financial advice, I’m an idiot and you shouldn’t listen to me, etc., etc.

[mirage1287]

How do you come to the conclusion that there's a decent chance no one will pay the tax bomb?

[Elston Gunn]

How do you come to the conclusion that there's a decent chance no one will pay the tax bomb?

Because 20 years from now we will be the boomers.

[Elston Gunn]

More seriously, because it's going to be bad optics for the IRS to tax someone who's been making $35k for 20 years on $500k of "income."

[84651846190]

Nah, it wouldn't have made sense for me. I refinanced for a really low interest rate (~3%). I only took out about 110k, though.

[Elston Gunn]

Nah, it wouldn't have made sense for me. I refinanced for a really low interest rate (~3%). I only took out about 110k, though.

Yeah, if you either have less than $150k debt or can get a really low rate, then you shouldn't. I'm mostly talking to people with near-sticker debt and haven't started repayment, and thus won't be able to get the amazing rates that have been available with the fed holding everything down (right? don't want to pretend I understand more than I do).

[What the f.supp?]

Does anybody know what the deal is with that new bill or whatever that will allow all people to use PAYE? I have pre-2008 loans so my understanding is that I am not currently eligible to do PAYE.

[bk1]

With 250k+ debt and similar assumptions, PAYE+taxbomb ends up being about the same as total payments as 10 year unrefinanced. Personally, I think I'd rather just do an aggressive 5ish year plan with refinancing. I like the idea of my loans being gone. In turn for that peace of mind, I am giving up flexibility (e.g. being able to afford a down payment on a house). To me the idea of being student loan free and not having to worry about it is worth giving up the flexibility afforded by PAYE.

That said, it's a bit of a risk. If you flame out of biglaw early, or force yourself to stay in biglaw while it ruins your relationships/family/health/etc just to make your loan payments, you're worse off if you refinance than if you do PAYE. On the other hand, if you value on the idea of being debt free, going through PAYE requires you to carry debt around for 20 years. PAYE seems like the more risk-averse way to go, but personally I'd contemplate taking more risk because I value the idea of being done with student loans.

[dixiecupdrinking]

Isn't the best move to lower your required monthly payments pretty much in all cases, so that you can allocate a bigger proportion of your discretionary extra payments to your highest interest loans? If PAYE accomplishes that for you then it's worth it.

[Elston Gunn]

With 250k+ debt and similar assumptions, PAYE+taxbomb ends up being about the same as total payments as 10 year unrefinanced. Personally, I think I'd rather just do an aggressive 5ish year plan with refinancing. I like the idea of my loans being gone. In turn for that peace of mind, I am giving up flexibility (e.g. being able to afford a down payment on a house). To me the idea of being student loan free and not having to worry about it is worth giving up the flexibility afforded by PAYE.

That said, it's a bit of a risk. If you flame out of biglaw early, or force yourself to stay in biglaw while it ruins your relationships/family/health/etc just to make your loan payments, you're worse off if you refinance than if you do PAYE. On the other hand, if you value on the idea of being debt free, going through PAYE requires you to carry debt around for 20 years. PAYE seems like the more risk-averse way to go, but personally I'd contemplate taking more risk because I value the idea of being done with student loans.

Yeah. I realize now the title is kind of click-baity. It's not that I think everyone should do it, and wanting to be out of debt is a valid input here. But, considering how often the biglawyers talk about hating their jobs but being trapped in them, going PAYE seems like something a lot more biglaw people should at least consider.

[Elston Gunn]

Isn't the best move to lower your required monthly payments pretty much in all cases, so that you can allocate a bigger proportion of your discretionary extra payments to your highest interest loans? If PAYE accomplishes that for you then it's worth it.

Don't you have to consolidate to do PAYE?

[Desert Fox]

Isn't the best move to lower your required monthly payments pretty much in all cases, so that you can allocate a bigger proportion of your discretionary extra payments to your highest interest loans? If PAYE accomplishes that for you then it's worth it.

Don't you have to consolidate to do PAYE?

No you don't.

But I think you'd be better off under PAYE no matter what. Even if the tax bomb is never fixed and you pay an extra 50k in interest, that is 50k in future money.

[Tiago Splitter]

Isn't the best move to lower your required monthly payments pretty much in all cases, so that you can allocate a bigger proportion of your discretionary extra payments to your highest interest loans? If PAYE accomplishes that for you then it's worth it.

I think the unstated assumption is that "do PAYE" means make the minimum PAYE payments. Everyone will be on PAYE it's just a question of how much over the minimum you should pay. For people who decide to pay extra your strategy is credited.

[Elston Gunn]

Isn't the best move to lower your required monthly payments pretty much in all cases, so that you can allocate a bigger proportion of your discretionary extra payments to your highest interest loans? If PAYE accomplishes that for you then it's worth it.

I think the unstated assumption is that "do PAYE" means make the minimum PAYE payments. Everyone will be on PAYE it's just a question of how much over the minimum you should pay. For people who decide to pay extra your strategy is credited.

Yes.

[jimmythecatdied6]

Have you considered the possibility that the feds may totally gut PAYE?

[bk1]

Have you considered the possibility that the feds may totally gut PAYE?

That's a risk but IMO a highly unlikely one. They may very well eliminate PAYE for future debtors, but I doubt that they would eliminate it for people already in the program. Plus, it's far more likely that you'll flame out of biglaw into a job that makes 10 year repayment difficult (or even impossible) than that the gov would gut PAYE for current enrollees.

[sweeteavodka]

I'd be interested in seeing someone run numbers on those of us who have pre-08 loans and don't qualify for FAYE, only traditional IBR. My understanding is that if the IBR formula spits out a number bigger than the standard 10-year monthly payment (which would disqualify all BigLaw folks), you basically get no benefit from IBR at all. Correct me if I'm wrong.

[buttes]

Is the version you linked the same as the one you used? I downloaded the excel and it seems to be a different version without NPV instead comparing against old IBR and standard 10 year plan.

It's excel so it would be trivial to get present value myself, but I have a tendency to go too deep down the rabbit hole once I start playing pretend finance.

[Johann]

Does this even in factor in money you make by putting your money in the market? I started to do the analysis one day and it wasn't even close for my situation(so and I over half a mill in debt).

[Elston Gunn]

Is the version you linked the same as the one you used? I downloaded the excel and it seems to be a different version without NPV instead comparing against old IBR and standard 10 year plan.

It's excel so it would be trivial to get present value myself, but I have a tendency to go too deep down the rabbit hole once I start playing pretend finance.

Yeah, they're different, sorry. Like I said, I know I guy who worked there and sent me this version. You'll have to do the NPV calc yourself.

Does this even in factor in money you make by putting your money in the market? I started to do the analysis one day and it wasn't even close for my situation(so and I over half a mill in debt).

Well, it's npv, so it should, right, at least conservatively? I honestly am a near-idiot with finance.

[swampman]

More seriously, because it's going to be bad optics for the IRS to tax someone who's been making $35k for 20 years on $500k of "income."

First, the tax bomb has an insolvency exception, so if you have 200k in assets and 500k in loans, you will only be taxed on 200k of the the forgiveness. Second, the IRS can and will negotiate will people who, even after the insolvency exception, still can't afford to pay the tax bomb. Getting rid of the tax bomb would actually only benefit people who have the assets to pay it in the first place, and the "optics" of giving a bunch of hot-shot lawyers a tax break on top of forgiving their debt is really, really bad.

Count on the tax bomb being there. Still, the math looks good to me.

[Old Gregg]

A lot of misplaced faith ITT on our political system to get rid of the tax bomb.

[Elston Gunn]

A lot of misplaced faith ITT on our political system to get rid of the tax bomb.

It's mostly just hope, but it's actually only a big deal in the case where you either have really huge debt (like $300k) or you exit to a roughly sub-$150k non-government job. And even in that case you're already coming out way ahead by doing PAYE the whole time, even assuming tax bomb.

Honestly, though, hasn't it been put forward in a number of go-nowhere proposals, including Obama's? People freaked out when he tried to cap PSLF, but hasn't the tax bomb "fix" gotten just as much play? That it's in the discussion at least makes me think it's possible.

[Old Gregg]

A lot of misplaced faith ITT on our political system to get rid of the tax bomb.

It's mostly just hope, but it's actually only a big deal in the case where you either have really huge debt (like $300k) or you exit to a roughly sub-$150k non-government job. And even in that case you're already coming out way ahead by doing PAYE the whole time, even assuming tax bomb.

Honestly, though, hasn't it been put forward in a number of go-nowhere proposals, including Obama's? People freaked out when he tried to cap PSLF, but hasn't the tax bomb "fix" gotten just as much play? That it's in the discussion at least makes me think it's possible.

I think the math works out in favor of SoFi/DRBank when you include the tax bomb.

And yes it's been put forward, but LOL at anything getting through a Republican-controlled congress, especially valuable tax revenue that assumes dicking over millenials.

And when you realize all of this, it sort of makes the whole PSA concept unnecessary.

[sinfiery]

If they have already been thinking about capping PSLF, I see the jump to include a cap on PAYE in an attempt to "fight rising tuition costs" as not far off. It's in line with the rhetoric, at least. Likely not retroactive though.


Numerically, yeah, it makes sense. Not substantially so though when factoring in Sofi/aggresive repayment plans.

The greatest benefit seems to be you can always leave biglaw/the legal field if you hate it, but, as far as I am aware, can you not just go on PAYE if/when that happens and still retain that benefit? It may be worse financially speaking at that point, as the repayment amounts for 10 year vs PAYE while in biglaw seems to be 2k a month vs 1k a month thus a lower nest egg when you leave, (Though the tax bomb hit would be a bit less) but you can still leave and survive.

The biggest deal that will likely stop me from taking this route is just buying into a new program like PAYE with a life cycle of 25 years where there is so much potential variance (both positive and negative to your situation) for a somewhat small financial gain.


If you think you will do a govt stint though, I'd definitely recommend this