Pay off loans aggressively or save? Forum

[Anonymous User]

I have $210k in federal loans (down from $220k) that I've been paying down pretty aggressively since starting my biglaw job 6 weeks ago. I have roommates and live dirt cheap—meaning my expenses are equal to those of my roommates who make 1/3 my salary. However, I'm not sure paying so much towards my loans every month is necessarily the wisest. I think it'd be the way to go if I was committed to biglaw for a few years, but I'd honestly like to make my exit much sooner than that and potentially leave the law entirely. I'd like to have a cushion to leave when I want and spend some time figuring out what I want to do. With IBR and such, would it make more sense to leave biglaw with more savings or less debt?

Any advice appreciated.

[showusyourtorts]

I don't know much about IBR -- and it could be the case that that info is crucial to an informed response -- but wanted to share a couple of thoughts:

- If Biden ends up extending the 0% interest on loans, then there's an obvious answer: save the extra money, at the very least for the time being, because there is basically no reason not to (besides perhaps creditor protection or other things of that nature).

- You shared that you started six weeks ago but are already paying off loans aggressively. Do you already have an adequate emergency fund built up? If you don't have 3 - 6 months saved up, and if you don't have a well-off family that can float your student loan/rent bills without batting an eye, then I would work on building that up first with your excess cash flow. If you do already have that much saved up, then I think the save/payoff question is worth asking.

- Assuming that normal federal loan payments and interest rates resume on Jan 1 (as currently scheduled), you're going to have to make a very costly choice about whether you are interested in pursuing IBR. I once saw someone describe IBR as an extremely costly insurance policy. Like I said earlier, I really am not well versed in it. But it's perhaps helpful to know that as a measure stick, most folks in biglaw with decent credit that want to refinance their loans will get a rate anywhere from 2-4% pretty easily. Of course, if you were to stick with IBR (or even just postpone the decision about whether to stick with IBR), then one of the primary costs would be that you would have to temporarily forego that lowered interest rate on a relatively large principal amount until you decide whether to refinance or take a different approach -- though I imagine that that cost wouldn't really matter if you ultimately DID end up pursuing forgiveness? Not sure.

[LawrenceGazebo]

I have $210k in federal loans (down from $220k) that I've been paying down pretty aggressively since starting my biglaw job 6 weeks ago. I have roommates and live dirt cheap—meaning my expenses are equal to those of my roommates who make 1/3 my salary. However, I'm not sure paying so much towards my loans every month is necessarily the wisest. I think it'd be the way to go if I was committed to biglaw for a few years, but I'd honestly like to make my exit much sooner than that and potentially leave the law entirely. I'd like to have a cushion to leave when I want and spend some time figuring out what I want to do. With IBR and such, would it make more sense to leave biglaw with more savings or less debt?

Any advice appreciated.

If you're really living as cheap as you say, I think you'd be able to pay your loans off in 2-2.5 years--why not live that cheap and maybe put 1/2 towards the loans and half towards savings. In 2.5 years you'll have 100k+ saved and $100k in student loans. If you like the job well enough, keep going, if you don't, get out with 100k and use IBR.

[Anonymous User]

I graduated with about $260k in debt. The approach I took was to open a taxable brokerage account and, after maxing all available tax advantaged options, somewhat aggressively pile money into index funds in that account (mostly SPY) until I matched the loan balance with the amount invested in that account (excluding unrealized gains). I think of it as a student loan collateral account. I make regular payments on my loans on a 10-year plan (though obviously not since COVID, which has been fantastic). I figure once payments start up again and assuming federal student forgiveness isn’t realistically on the horizon, I’ll refi it all at the super low rates available and keep it on the books. If I lock in a ~3% rate, I can expect to net ~4% on an average ~7% annual return on the index funds over the next decade. I also have the security of knowing that, if things really go bad, I can always incrementally liquidate the collateral account to make payments on the loans if I get laid off and run out of cash. Even if that worst case happens and I have to sell at a loss to make payments, I figure the downside risk there is way smaller than the upside risk of letting $300k ride in the market for a decade with a fixed ~3% haircut.

[PrinterInk]

Build up an emergency fund, then get out of debt as quickly as possible. As long as you have debt, you will not really be free to live your life as you want. IBR is pretending like you’re free in the present while shackling your future self. Stick it out in big law until you’re debt free. You can do it in 2.5 years if you live as cheap as your say.

[fmrez]

This thread has good tips viewtopic.php?f=23&t=272809

[nealric]

Especially with low refinancing rates the mathematically correct answer may to be to let it roll and invest. But investing carries higher risk, and there's certainly a huge psychic benefit to being debt free. I paid off my loans as quickly as possible, and I don't regret it at all even though my net worth would have been slightly higher today had I invested first.

[Chrstgtr]

Assuming these are federal loans, I would not pay a dime more than necessary for as long as they are 0%. I also would wait to see if any loan relief if given by the Biden admin before I did anything or refinanced.

[Anonymous User]

To answer your question specifically, it is far better to have savings than a lower debt load if you leave law all together and rely on IBR. IBR is based on income and not assets. If you have $10k saved and $100k in debt left with a $40k income, you are screwed even on IBR. If you have $200k in debt and $100k saved with a $40k income, you are good for a while with IBR.

As others have mentioned, savings in a checking account is a terrible idea. Use tax-advantaged accounts (401k, backdoor roth) and invest in broad index funds as your savings accounts.

Do not refinance unless you plan to stay in law and repay your loans in full.

[nealric]

To answer your question specifically, it is far better to have savings than a lower debt load if you leave law all together and rely on IBR. IBR is based on income and not assets. If you have $10k saved and $120k in debt left with a $40k income, you are screwed even on IBR. If you have $200k in debt and $100k saved with a $40k income, you are good for a while with IBR.

As others have mentioned, savings in a checking account is a terrible idea. Use tax-advantaged accounts (401k, backdoor roth) and invest in broad index funds as your savings accounts.

Do not refinance unless you plan to stay in law and repay your loans in full.

I think maxing out one's 401k + a backdoor roth should be a baseline regardless of what one does with the loans. The only question is taxable investing vs. loans. Agree above that there's no sense in prepayment while loans are at 0%. If you are only a few weeks into biglaw, I imagine you still need to build up a few months living expenses first anyways.

[egergegerg]

I'm going to threadjack. I'm also class of 2020, just started biglaw. I have about $85k in federal loans (6-7% interest) about $40k in savings, about $7k in a taxable brokerage account (idk, i just did this for fun). I haven't paid a cent to my loans yet because of the interest/payment deferral, I'm hanging onto my money for now and planning to make a large payment whenever interest comes back January 31 (or later, depending on what Biden does). But what should I do in 2020? I'm contributing to my 401k, should I do backdoor Roth? Make a payment to my loan interest for the tax deduction? Something else?

[ughbugchugplug]

You should 100% be on income based repayment for the first two years without any doubt, using REPAYE. Your AGI unless you were for some reason earning huge amounts of money during law school will be very small, so the government will actually pay half your accumulating interest and your payments will be around 150 bucks. Free money!

Past year 2 it’s less clear but I’d recommend saving. Stock market will do 7-8% on average which is roughly equal to loans, but loans are flexible based on your income and can be forgiven on IBR or the government forgiveness plan if you ever do that. If your money is growing equal to the interest then from a strict net worth evaluation you’re equal, but now you’ll have hundreds of thousands of dollars of flexibility so you’re better off. Bottom line as long as you stay employed at all, loans will never really screw you cuz they can always be limited to 10% of income. Having 0 money but no loans and then running into a crisis, however, can be a huge problem.

[Anonymous User]

OP here—great info in this thread, thank you guys. I only have about 2 months of emergency funds saved up, so it looks like that's the first order of business. Hadn't even thought about investing, so lots to consider here.

[notinbiglaw]

Federal student loans have low interest rates and the interest expenses are tax deductible. Furthermore, if you don't refinance with a private lender, IBR plans provide a strong safety net and a potential for loan forgiveness.

In short, the smart thing to do is to let the loans roll and invest as much as you can, but only if carrying the loans will not cause undue psychological stress on you.

[Sad248]

Look at biglawinvestor.com as well. But agree with other posters here: make sure you have an emergency fund set up and invest a solid amount in portfolios as well. Also, don't be afraid to live a little. Not saying it's time to buy that Tesla next week, but if you want to get take out once a week where you never did before, or want to buy a videogame or two a month, go for it. Just make a financial planner and stick to it.

I myself live off 40% of my salary, pay off loans with 30% (although have been holding off since the forbearance on loans started, will pay off a massive amount in one go if payments become mandatory again) and invest with 30%. All bonuses, tax returns, salary hikes all directly go into loans or investments, so per year my 40% allocation will get lower.