New Graduate w/ Large Loans & New Job - Options

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Here2LearnMore
Posts: 3
Joined: Mon May 15, 2017 9:16 pm

New Graduate w/ Large Loans & New Job - Options

Post by Here2LearnMore »

Hello everyone, I am new to much of this and trying to wrap my head around a series of factors regarding my financial future. I am 25 years old and just finishing up a graduate program. I have taken on very large federal student loans. Recently, I have been lurking these forums and have found some great information but am having trouble weighing all the factors in my personal situation outlined below regarding a position I will be taking upon graduation.

Federal Loans: $240,000 @ 6.8%
Base Initial Salary: $90,000 (with room to grow)
Possible Bonus Incentive: 9% of Salary
Stock Purchase Plan: Up to 15% of Salary @ 85% of Fair Market Value (purchased company and can be sold immediately after purchase I believe)
The stock appears to have steadily increased over 20 years and is currently at an all-time high
401k: Company Matches 75% of first $6,000 you contribute ($4500)
Current Saving: $10,000

I am unsure as to how much to allocate towards these incentives (if not maxing them) verses paying the loans as fast as possible. I am also not sure exactly which federal repayment plan makes the most sense. PAYE seems risky as I believe my salary could reach 120-150 over 20 years and I would be relying on federal laws remaining unchanged. I apologize for any obvious oversights, I am still trying to understand all the plans in conjunction with the information listed above. Thanks!
LeeMKE
Posts: 2006
Joined: Mon Oct 14, 2013 9:40 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by LeeMKE »

That debt is pretty hefty, but you are young, so you have the grace of some time.
I am unsure as to how much to allocate towards these incentives (if not maxing them) verses paying the loans as fast as possible. I am also not sure exactly which federal repayment plan makes the most sense. PAYE seems risky as I believe my salary could reach 120-150 over 20 years and I would be relying on federal laws remaining unchanged.
I know nothing about repayment programs for student loans, so I hope others more knowledgeable will chime in on that topic.
Base Initial Salary: $90,000 (with room to grow)
Possible Bonus Incentive: 9% of Salary
Stock Purchase Plan: Up to 15% of Salary @ 85% of Fair Market Value (purchased company and can be sold immediately after purchase I believe)
The stock appears to have steadily increased over 20 years and is currently at an all-time high
401k: Company Matches 75% of first $6,000 you contribute ($4500)
1. Rule of thumb is to put away AT LEAST 15% of gross income for retirement. In most cases, I feel this needs to come first, but in your case, the interest rate on your student loans is high enough that it beats any appreciation you could be certain to earn on retirement savings. So, in your case, paying down debt needs to be the first priority.
2. 401K up to at least the company match (because this is free money)
3. Stock Purchase Plan -- You could use this to help boost your debt payments: Buy stock, sell stock to net the 15% discount, pay down student loans. Repeat.
4. 100% of bonus to pay down student loans.
5. Avoid lifestyle creep, keeping your expenses in check so you can make significant payments on your student debt. A used car instead of new; modest housing vs. dream house; cooking classes and practice on friends vs. credit cards for dining out and drinking. Live like a student for a few years so you can knock down that debt.
The mightiest Oak is just a nut who stayed the course.
High Income Parent
Posts: 162
Joined: Tue Jan 29, 2013 10:11 pm
Location: USA
Contact:

Re: New Graduate w/ Large Loans & New Job - Options

Post by High Income Parent »

Congrats on finishing your education and a pretty nice salary.

I don't know if you are single or what type of area you live in but if I were in your shoes this is what I would do.

I would contribute the full $6000 to my company to get the 75% match. Then I would figure out a way to live on $20-25k annually and knock out those student loans in four years.
I know it sucks to live extremely frugal for another four years but if you can dedicate yourself to paying off debt at a pretty hefty interest rate I might add, then you will be years ahead and used to saving money.
Then you can let your hair down a little and spend a little more on yourself and start maxing out tax deferred accounts. As your salary grows and your income tax bracket grows, the tax deferral will be more and more advantageous.
Also read the boglehead wiki as you can. Welcome!
Children are not a distraction from more important work. They are the most important work. | | C. S. Lewis
Big Dog
Posts: 2240
Joined: Mon Sep 07, 2015 4:12 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by Big Dog »

unless you are working for a nonprofit which could give you loan balance forgiveness in 10 years, I'd look into refinancing the 6.8% into something much lower.
Finance-MD
Posts: 316
Joined: Sun Mar 26, 2017 9:27 am

Re: New Graduate w/ Large Loans & New Job - Options

Post by Finance-MD »

Since you are in a for profit institution, refinance your student loans to a lower rate. With good credit, you can get a 20year fixed rate likely anear 5%. If you go to shorter terms and/or with variable rates you can go lower. You can also do multiple loans with different terms.

The different payoff types like PAYE or REPAYE are helpful if you want to stay in federal (public) loans so you can get public service loan forgiveness (PSLF) after 10 years in the non-profit sector. Even in this case, you can switch between payment types every year to get the best rate given the current tax situation. Eg when your salary goes up a lot, you can switch to the standard 10 yr repayment schedule that isn't based on your income, just the loan balance.

My order of priority
Student loans at minimum amount each month
get at least the company match in your 401k
Continue pretax 401k until you hit the 18000 max or are out of the 25% tax bracket.
At this point i switch to Roth IRA.
If still more money and more room in 401k, then do pretax or Roth 401k for the 15% bracket. At the 10% bracket i do roth 401k.

If you can churn your company stock (buy/sell/repeat), do that to the max you are allowed to every year. There is no need to keep company stock above 3% of your equity portfolio at any time unless you get an incentive to hold onto it. You put too much risk in your company if your income and retirement are both in the same company.... once you have churned all your company stock, that remainder can help you max out the 401k and Roth IRA. The rest is invested in taxable or pays off student debt.

But first thing: build up an emergency fund.
carolinaman
Posts: 4450
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: New Graduate w/ Large Loans & New Job - Options

Post by carolinaman »

The one year interest on your student loan is more than $16k. Ouch! If you can refinance to a lower rate, do so. Your first priority is to pay off the student loan. It is an albatross around your neck. You should contribute $6k to 401k to take advantage of the company match. Otherwise, you should aggressively pay off the student loan. You would be hard pressed to gain 6.8% on investments and paying off the loan is a sure 6.8% gain. Maintain a very modest style of living until the loan is paid off.
User avatar
djpeteski
Posts: 1015
Joined: Fri Mar 31, 2017 9:07 am

Re: New Graduate w/ Large Loans & New Job - Options

Post by djpeteski »

High Income Parent wrote:Congrats on finishing your education and a pretty nice salary.

I don't know if you are single or what type of area you live in but if I were in your shoes this is what I would do.

I would contribute the full $6000 to my company to get the 75% match. Then I would figure out a way to live on $20-25k annually and knock out those student loans in four years.
I know it sucks to live extremely frugal for another four years but if you can dedicate yourself to paying off debt at a pretty hefty interest rate I might add, then you will be years ahead and used to saving money.
Then you can let your hair down a little and spend a little more on yourself and start maxing out tax deferred accounts. As your salary grows and your income tax bracket grows, the tax deferral will be more and more advantageous.
Also read the boglehead wiki as you can. Welcome!

This +1 :moneybag
Topic Author
Here2LearnMore
Posts: 3
Joined: Mon May 15, 2017 9:16 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by Here2LearnMore »

Thank you for all the replies and great advice!
I actually have a series of loans at various rates listed below but was offered federal consolidation at 6.8%. Based on a few of the responses it may make more sense to consolidate in the private sector (such as SoFi) to beat this rate? Obviously moving from federal to private I am losing the forgiveness programs but was leaning towards trying to knock this out as fast as possible while living modestly. I would max the 401k match at $6000 as suggested and could modify my current savings as an emergency fund. My only worry is I will be living in a large, more expensive city. I am single and will be using public transportation but can seek out roommates.

Hypothetically if I was to enter PAYE/REPAYE in the beginning my payments would be around $600 a month. If I understand Finance-MD correctly I would max my 401k followed by a Roth IRA while churning my max discounted stock options for the 15% (with a few other options depending on more income and my bracket). At some point I would tap these accounts to knock out the loans in a single payment? Wouldn't the interest in this scenario snowball quickly?

$4,705 @ 6.8%
$5,705 @ 6.8%
$3,565 @ 6.8%
$8,511 @ 3.9%
$64,507 @ 7.2%
$23,676 @ 6.2%
$49, 609 @ 6.8%
$22,301 @ 5.8%
$21,405 @ 5.3%
$36,380 @ 6.3%

Thank again, really glad I found this site!
User avatar
neurosphere
Posts: 3913
Joined: Sun Jan 17, 2010 1:55 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by neurosphere »

Here2LearnMore wrote:
$4,705 @ 6.8%
$5,705 @ 6.8%
$3,565 @ 6.8%
$8,511 @ 3.9%
$64,507 @ 7.2%
$23,676 @ 6.2%
$49, 609 @ 6.8%
$22,301 @ 5.8%
$21,405 @ 5.3%
$36,380 @ 6.3%

Thank again, really glad I found this site!
Are any of these SUBsidized loans? And if so, which?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
User avatar
dm200
Posts: 23148
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: New Graduate w/ Large Loans & New Job - Options

Post by dm200 »

I would, generally, take advantage of savings/retirement incentives such as 401k match, while working on a long term plan to pay down/off the debt.

I would NOT plan on keeping company stock, in any significant amount, long term. Perhaps something like sell half to 3/4 after the required holding period. Too much employer stock is a significant "concentration risk", since the same factors that could lead to loss of employment will drive stock price down. Stay "diversified".

Keeping some modest amount (and knowing the risk) is probably OK - but recognize the risk.
User avatar
neurosphere
Posts: 3913
Joined: Sun Jan 17, 2010 1:55 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by neurosphere »

Here2LearnMore wrote:T
Hypothetically if I was to enter PAYE/REPAYE in the beginning my payments would be around $600 a month. If I understand Finance-MD correctly I would max my 401k followed by a Roth IRA while churning my max discounted stock options for the 15% (with a few other options depending on more income and my bracket). At some point I would tap these accounts to knock out the loans in a single payment? Wouldn't the interest in this scenario snowball quickly?
Assuming these are unsubsidized loans, your total balance is about $239,000 with a weighted average interest rate of 6.44%.

Here is a chart compared PAYE to REPAYE for various salaries. "Year" 1 is a straight $90k salary, while "Year" 2 is $90k but with an $18k 401k deduction and another $3000 for health insurance premiums you may pay (or HSA contributions, etc). Then I simply incremented the payments after that to include a range of salaries.

You'll note that REPAYE gives interest subsidizes such that your effective interest rate is as low as 4.29% in the second line. The interest that accumulates is not charged interest (not capitalized) until you leave REPAYE. Some benefits of REPAYE include that if you are laid off or lose income for some reason, the payments go down and the interest subsidies go up. Or perhaps in a year or three you switch to a job which is eligible for PSLF? Another benefit is that the rates are fixed. I haven't looked at student loan refinance rates recently, but the better rates come with shorter-term variable rate interest rates. There is no reason to do PAYE (no interest subsidy). The only benefit is that PAYE limits the amount of interest that is capitalized when you leave to $24,000, while the rest stays as interest upon which you would not pay interest. But I think the value of the interest subsidy is much greater than the value of limiting future capitalization.

You can play with this calculator here: https://www.doctoredmoney.org/student-d ... calculator

Image

Note that if there are any subsidized loans in the group, you won't pay ANY interest on those specific balances (under both REPAYE and PAYE) [edit: for the first 3 years of repayment under either plan]. The calculator includes the extra subsidies in the "REPAYE ANNUAL SUBSIDY" column, but ignores those for the purposes of PAYE and associated calculations/graphs. Including the PAYE interest subsidies for subsidized loans is on the to-do list. So if you have any subsidized loans, the charts/graphs will not be completely accurate for PAYE.

[Edit to add, if you can keep your (M)AGI near $65,000, you can also further reduce your AGI by $2500 due to the student loan interest deduction. This deduction is phased out completely at $80,000 (2016)]

NS
Last edited by neurosphere on Fri May 26, 2017 11:15 pm, edited 3 times in total.
bigred77
Posts: 2042
Joined: Sat Jun 11, 2011 4:53 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by bigred77 »

djpeteski wrote:
High Income Parent wrote:Congrats on finishing your education and a pretty nice salary.

I don't know if you are single or what type of area you live in but if I were in your shoes this is what I would do.

I would contribute the full $6000 to my company to get the 75% match. Then I would figure out a way to live on $20-25k annually and knock out those student loans in four years.
I know it sucks to live extremely frugal for another four years but if you can dedicate yourself to paying off debt at a pretty hefty interest rate I might add, then you will be years ahead and used to saving money.
Then you can let your hair down a little and spend a little more on yourself and start maxing out tax deferred accounts. As your salary grows and your income tax bracket grows, the tax deferral will be more and more advantageous.
Also read the boglehead wiki as you can. Welcome!

This +1 :moneybag
What is proposed here is impossible to do. Even with $1500 a month in non-student loan total expenses, the after tax income will not even come close to being able to repay the student loans in 4 years. OP will need to pay over $1300 a month just to keep the balance from growing, much less make any meaningful reduction in principal balance.


OP,

What is your graduate degree in? Can you take an income hit in order to do 10 years in public service and have the loans forgiven? Is your for-profit job one that can ramp up compensation significantly (like say can you reasonable hope to hit 200k+ in 5 or so years?) I would explore options, otherwise you may very well just have to bite the bullet and pay these off like a mortgage over a couple decades (nothing wrong with that, just not the ideal financial scenario.) Definately worth your time researching and exploring all options available to you.
LarryAllen
Posts: 1142
Joined: Fri Apr 22, 2016 9:41 am
Location: State of Confusion

Re: New Graduate w/ Large Loans & New Job - Options

Post by LarryAllen »

You are smart to be asking questions here. You are ahead of many your age.

Though I am not one to suggest you shouldn't enjoy life because you should. However, starting your savings program at a young age is the single best thing you can do so you can afford to retire one day. Save money and pay down that debt! Learn to live below your means. Don't be a cheapskate but live below your means. Share an apartment with a couple others, drive an old car, bring your lunch to work, etc....

Best of luck!
User avatar
neurosphere
Posts: 3913
Joined: Sun Jan 17, 2010 1:55 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by neurosphere »

Here2LearnMore wrote:Hello everyone, I am new to much of this and trying to wrap my head around a series of factors regarding my financial future. I am 25 years old and just finishing up a graduate program. I have taken on very large federal student loans. Recently, I have been lurking these forums and have found some great information but am having trouble weighing all the factors in my personal situation outlined below regarding a position I will be taking upon graduation.
I forgot a very important point, that you may know. If you consolidate your loans into a new Federal loan, you'll waive the grace period and begin making payments immediately, you can enter REPAYE immediately and will certify your income by mailing in your 2016 taxes. Did you have income for 2016? If so, I assume it was a meager graduate salary. So your payments under REPAYE will be very low, increasing the value of the subsidy and lowering the effective interest rate. This also starts the clock towards an eventual 25-year non-PSLF forgiveness (which hopefully you will not need but, life happens!). But you may as well start payments right now. Because if you wait until your job starts, they'll ask for proof of income via paystubs (I believe) and your minimum required payments will be higher.

Also note that your AGI for NEXT year's payments will be a mix of your graduate stipend (if any) and your new job. So it will be lower than you expect. The overall points are 1) The effective interest rate will be even lower 2) you'll have more money to put towards 401k, e-fund, etc 3) You'll have a few years potentially allow your income to grow to the point you make a commitment to pay off the debt rapidly. Note that there is some income-rate risk in this approach, because if interest rates rise it may make refinancing later not as good an idea as refinancing now. But I don't think you have enough income yet to refinance and begin a meaningful paydown.
User avatar
neurosphere
Posts: 3913
Joined: Sun Jan 17, 2010 1:55 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by neurosphere »

Here2LearnMore wrote: I actually have a series of loans at various rates listed below but was offered federal consolidation at 6.8%.
I just noticed this. Are you sure it was 6.8% Federal consolidation should be:
What is the interest rate on a consolidation loan?
A Direct Consolidation Loan has a fixed interest rate for the life of the loan. The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent. There is no cap on the interest rate of a Direct Consolidation Loan.
https://studentaid.ed.gov/sa/repay-loan ... erest-rate

If I typed my numbers in correctly, that's 6.44% which rounds up to 6.5%. I realize that's a tiny difference but just wanted to sure you had the right number so that you can best compare your non-Federal consolidation options.
rzk96
Posts: 72
Joined: Sat Apr 15, 2017 9:59 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by rzk96 »

I'm sure you know how to tackle debt w every penny and everyone here is giving awesome advice. I wanted to give some fun encouragement! ...when my student loans happened (only 20K), I knocked it out within 10-12 months. How? I became a hermit and had NO sbux, extra dining expense, spontaneous travel etc, haha.
ras4250
Posts: 166
Joined: Tue Mar 04, 2014 1:25 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by ras4250 »

Here2LearnMore wrote:Stock Purchase Plan: Up to 15% of Salary @ 85% of Fair Market Value (purchased company and can be sold immediately after purchase I believe)
Max this out! I used to work for a public company who had something similar. It allowed two purchase periods per year (Jan-June, July-Dec) and gave you 85% of the lower price of the stock either at Jan or June and July and Dec. This meant if the price was $75 in January and $100 in June you got 85% of $75 = $62.75 and could turn around and sell right away at $100 if you wanted. That is guaranteed return.

Even if yours is not the same, this is still a guaranteed return, and because you can sell right away there is virtually zero risk to you. 15% of $90k = $13.5k. Since you get the privilege of buying the stock at 85% of FMV, you can get outstanding returns (which could be even higher depending on what the company calculates the 85% level at (i.e., the price at beginning of period or end of period or some other way)).

Assuming you contribute the max 15% of salary in every paycheck at the end of each period to buy, you can buy the stock at 85% FMV and immediately turn around and sell. Even if it is done at 85% of the price the day you buy, Excel calculates this IRR as an over 36% annual return, guaranteed.

The only downside risk I can think of would be if somehow the stock drops by a crazy amount between the time the shares show up in your account and the time you go to sell them (which would take a major 15% immediate stock drop, not very likely).

Or don't sell and keep holding for larger gains, but even if you don't want to hold the individual stock of the company you work for it is still a guaranteed return to buy and then sell. Obviously, since these would all be short-term transactions you would also have to owe taxes on the gains, but still would end up ahead.
ras4250
Posts: 166
Joined: Tue Mar 04, 2014 1:25 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by ras4250 »

Here2LearnMore wrote:Federal Loans: $240,000 @ 6.8%
If you do not decide to use one of the federal repayment plans, go look to get it refinanced elsewhere.

Start here: https://www.nerdwallet.com/blog/refinan ... ent-loans/

I used SoFi and refinanced down to 3.99% plus they gave me a $500 cash bonus for the privilege. I bet you can do better than 6.8%.
NancyABQ
Posts: 314
Joined: Thu Aug 18, 2016 3:37 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by NancyABQ »

ras4250 wrote:
Here2LearnMore wrote:Stock Purchase Plan: Up to 15% of Salary @ 85% of Fair Market Value (purchased company and can be sold immediately after purchase I believe)
Max this out! I used to work for a public company who had something similar. It allowed two purchase periods per year (Jan-June, July-Dec) and gave you 85% of the lower price of the stock either at Jan or June and July and Dec. This meant if the price was $75 in January and $100 in June you got 85% of $75 = $62.75 and could turn around and sell right away at $100 if you wanted. That is guaranteed return.
I agree with this. As long as you can (and do) sell the stock right away, it is basically a guaranteed return that can't be beat anywhere.

Since paying off the student loans is a priority, I would think of this as an automatic payroll deduction savings towards two big extra loan payments each year. After each ESPP stock purchase period ends, take all the money from selling the stocks (which would include the money you put it, plus the return from your discount) and put it towards a big student loan payment. Just make sure you take into account the tax liability. The gains from the discount are taxed as regular income and they won't (normally) do any extra withholding, so you don't want an unpleasant surprise at tax time!
PlayingLife
Posts: 373
Joined: Sun Dec 29, 2013 3:10 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by PlayingLife »

High Income Parent wrote:Congrats on finishing your education and a pretty nice salary.

I don't know if you are single or what type of area you live in but if I were in your shoes this is what I would do.

I would contribute the full $6000 to my company to get the 75% match. Then I would figure out a way to live on $20-25k annually and knock out those student loans in four years.
I know it sucks to live extremely frugal for another four years but if you can dedicate yourself to paying off debt at a pretty hefty interest rate I might add, then you will be years ahead and used to saving money.
Then you can let your hair down a little and spend a little more on yourself and start maxing out tax deferred accounts. As your salary grows and your income tax bracket grows, the tax deferral will be more and more advantageous.
Also read the boglehead wiki as you can. Welcome!
This +1

Plus...I would try to refinance, I would think there is a way to get a better rate as that seems really high.

Also...plan your career. Talk to people about careers....increasing your take home pay will help enormously as long as you are living a frugal life style, and you keep your expenses steady while salary increases. It is of course harder to increase salary right in the beginning of your career, but consider switching jobs in a couple of years with hopes to get a significant gain. Do what's best for you. And don't waste money! GL
User avatar
dm200
Posts: 23148
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: New Graduate w/ Large Loans & New Job - Options

Post by dm200 »

Just make sure you take into account the tax liability. The gains from the discount are taxed as regular income and they won't (normally) do any extra withholding, so you don't want an unpleasant surprise at tax time!
It has been a long time, but isn't there a tax break if you hold such shares a bit longer?
NancyABQ
Posts: 314
Joined: Thu Aug 18, 2016 3:37 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by NancyABQ »

dm200 wrote:
Just make sure you take into account the tax liability. The gains from the discount are taxed as regular income and they won't (normally) do any extra withholding, so you don't want an unpleasant surprise at tax time!
It has been a long time, but isn't there a tax break if you hold such shares a bit longer?
Yes, if you hold for something like 2 years after the beginning of the offering period some or all of the gain can be long term capital gains (it's kind of complicated and I have not bothered to retain the particulars).

But now you have turned a guaranteed return into a gamble/investment in your company's stock.

I prefer to think of it as a bonus, collect my money, and reinvest it in index funds, according to my plan (or in OP's case, pay down student loans).
Topic Author
Here2LearnMore
Posts: 3
Joined: Mon May 15, 2017 9:16 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by Here2LearnMore »

neurosphere wrote:
Here2LearnMore wrote:T
Hypothetically if I was to enter PAYE/REPAYE in the beginning my payments would be around $600 a month. If I understand Finance-MD correctly I would max my 401k followed by a Roth IRA while churning my max discounted stock options for the 15% (with a few other options depending on more income and my bracket). At some point I would tap these accounts to knock out the loans in a single payment? Wouldn't the interest in this scenario snowball quickly?
Assuming these are unsubsidized loans, your total balance is about $239,000 with a weighted average interest rate of 6.44%.

Here is a chart compared PAYE to REPAYE for various salaries. "Year" 1 is a straight $90k salary, while "Year" 2 is $90k but with an $18k 401k deduction and another $3000 for health insurance premiums you may pay (or HSA contributions, etc). Then I simply incremented the payments after that to include a range of salaries.

You'll note that REPAYE gives interest subsidizes such that your effective interest rate is as low as 4.29% in the second line. The interest that accumulates is not charged interest (not capitalized) until you leave REPAYE. Some benefits of REPAYE include that if you are laid off or lose income for some reason, the payments go down and the interest subsidies go up. Or perhaps in a year or three you switch to a job which is eligible for PSLF? Another benefit is that the rates are fixed. I haven't looked at student loan refinance rates recently, but the better rates come with shorter-term variable rate interest rates. There is no reason to do PAYE (no interest subsidy). The only benefit is that PAYE limits the amount of interest that is capitalized when you leave to $24,000, while the rest stays as interest upon which you would not pay interest. But I think the value of the interest subsidy is much greater than the value of limiting future capitalization.

You can play with this calculator here: https://www.doctoredmoney.org/excel-embed-test (note that this url is expected to change soon, so the link may not work at some point in the near future)

Image

Note that if there are any subsidized loans in the group, you won't pay ANY interest on those specific balances (under both REPAYE and PAYE) [edit: for the first 3 years of repayment under either plan]. The calculator includes the extra subsidies in the "REPAYE ANNUAL SUBSIDY" column, but ignores those for the purposes of PAYE and associated calculations/graphs. Including the PAYE interest subsidies for subsidized loans is on the to-do list. So if you have any subsidized loans, the charts/graphs will not be completely accurate for PAYE.

[Edit to add, if you can keep your (M)AGI near $65,000, you can also further reduce your AGI by $2500 due to the student loan interest deduction. This deduction is phased out completely at $80,000 (2016)]

NS
The loans are not subsidized and you are correct it should be 6.5% not 6.8%.

REPAYE:

I just got off the phone with my loan servicer and this is what I am gathering from REPAYE so far but please correct me on any misconception. The monthly payment is based off 10% of your taxable income. When applying (each year) you can check a box if there has been a change in your income. If the answer is no, the payment is based off your previous tax return. Otherwise, you would submit a recent paystub (this information would eventually be verified against you tax returns for major discrepancies). It doesn’t appear there is a way to be removed from the program for making larger payments, but obviously if these payments are coming from other forms of taxable income you may have not had in the past, it likely your monthly payment would be going up as well. If your income decreases the required monthly payment would also decrease accordingly. The interest becomes subsidized and you have the option of leaving the program at any point to enter one of the standard repayment plans (even though REPAYE is applied to on a yearly basis). If the loan is not paid off in 25 years the remaining balance is considered taxable income for that year.

Attempting to apply this to my situation:
(Please correct me if any of this is incorrect or contains obvious oversight)

To qualify I would be required to consolidate all my current loans at 6.5%. The monthly payments would be low (at least initially) allowing me to max the company match on my 401k and max my stock options which I could turn around immediately with a pretax 15% gain. As @ras4250 stated there are 2 purchase periods per year at which point I can turn around and sell immediately for a guaranteed return (although this would be recognized as taxable income the following year and raise my monthly payment). It would also adjust based on my possible yearly bonus incentive. If my income for some reason increases dramatically I would look to try and refinance privately for an interest rate below 6.5%. I am guessing the interest would capitalize (as I would be leaving REPAYE) and be added to my principal which would be reflected in the refinanced loan?

Risks:

One risks I would be facing is interest rates rising therefore making refinancing later less beneficial as it could be right now. There is no cap on the monthly payment amount on REPAYE. So if your income grew a lot before your loans were forgiven, it could be possible that you would pay more than you would have paid under a standard 10-year repayment plan (however you have ability exit REPAYE at any time so I am not sure this is an issue). There also seems to be concern with the future of REPAYE and possibilities of modifications. What are the other major concerns/oversight with the approach outlined above?

Once again, thank you for all the responses. This community is truly a great resource and I hope to be able to contribute back as I gain more experience and understanding.
User avatar
Pajamas
Posts: 6015
Joined: Sun Jun 03, 2012 6:32 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by Pajamas »

In addition to what everyone else has said, review the stock purchase plan very carefully before you participate to make sure that you can buy at a 15% discount and then turn around and sell immediately. Many similar plans have some restrictions.

I agree that getting a lower rate on your loans is one of the first things you should do. If you are trying to pay off your loans quickly, increasing your income is also a good way to do it. Sometimes people focus too much on their expenses and investments without thinking about increasing their income. It does require commitment and work but sometimes there is extra income available relatively easily.
User avatar
neurosphere
Posts: 3913
Joined: Sun Jan 17, 2010 1:55 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by neurosphere »

Here2LearnMore wrote: I just got off the phone with my loan servicer and this is what I am gathering from REPAYE so far but please correct me on any misconception.
In general, your observations are correct. A few points:

-- payments are not based on 10% of your income, but 10% of the difference between your AGI and "150% of the federal poverty level". For a family size of one the poverty level is $12.060. 150% of that is $18,090. So your payments = 10% * (AGI - $18,090).
-- Yes, if you sell your stocks I believe that gain is taxable income to you, which will increase your AGI and thus increase your payments.
-- If you leave REPAYE (e.g. refinance) then yes, interest is capitalized. Your new loan provider would add interest to loan and this would be your new principal.
-- Correct, if interest rates rise, refinancing in the future may be more expensive. If interest rates rise a LOT, your savings account will make more than your Federal loans cost you. :)
-- If your income goes up, you can switch to PAYE and have your payments capped at the 10-year payments. But at this point, it would probably be a better deal to refinance to a private 10-year loan. Or not. Just make sure to switch to PAYE (if that's what you want) before your higher income is reflected in your taxes.
-- I agree that you can make a year-by-year decision as soon as you think that refinancing becomes a better option for you than an income based repayment plan.

STK
ras4250
Posts: 166
Joined: Tue Mar 04, 2014 1:25 pm

Re: New Graduate w/ Large Loans & New Job - Options

Post by ras4250 »

Here2LearnMore wrote:The monthly payments would be low (at least initially) allowing me to max the company match on my 401k and max my stock options which I could turn around immediately with a pretax 15% gain.
To be clear a 15% discount does not equal a 15% gain - the gains are much more than that. If you max out 15% of $90k salary, you can purchase $13,500 worth of stock (if you are paid bi-weekly that is $519.23 per pay period). If you have two "buy" periods per year you can buy $6,750 worth of stock each period. Pretend the stock is $100 per share, you buy at $85 per share, you get 79 shares, you sell at $100 per share = $7,900. Investment of $6,750 and a return of $1,150 over 6 months is 34% annualized if you consider that you "invested" all $6,750 on January 1. If you consider that you only paid in each pay period, the IRR as calculated by excel is 82% annualized!
Post Reply