Student Loans: Best to Pay Down or Wait for Forgiveness?

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studentofloans
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Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by studentofloans » Thu Nov 02, 2017 1:51 pm

Hi Bogleheads - big fan of this site and often reference it for investing and personal finance!

I'm 37, have $180,000 in student loans (at around 6.6% interest) and make around $100,000/year (or $90K AGI). I save a bit each year in a 401(k) and have an emergency fund but not much else. Per the government's income-based repayment plan option (REPAYE), I can pay a minimum of 10% of my income per year for 25 years (now only 19 years left because I'm 6 years in) then have the loans forgiven after that period elapses. I have a home with probably around $350,000 equity (in a $750,000 home) in a relatively high cost of living area. I'm single and may get married but no immediate plans on that front. I have some room to move up in my field but don't expect to make a lot more money soon.

The question is: do I pay them down as fast as possible, sell the house to pay it off, or pay just the minimum and save/invest the rest?

I found what looks like a good calculator for some of this -- (EDIT I linked a slightly different and less helpful calendar initially:) https://studentloanhero.com/calculators ... alculator/

Of course, a lot depends on the input variables. Assume 6% salary growth and you wind up with $0 in forgiven loans and paying $170K more in total with REPAYE over the standard option of paying it down in ten years. Assume 3.5% growth (in line with inflation) and you still end up paying more but get some forgiveness - standard (10-year): 250K vs. REPAYE: 290K + taxes on 175K forgiven = ~350K (i.e. $100K more). Though some of that amount paid in years 10 to 25 versus the standard option will be worth 'less' so that number could get adjusted down a bit for inflation.

Options as far as I can see:

1) Pay standard amounts each month toward a 10-year payoff plan (possible, but it would cost me 401(k) space)
2) Pay the minimum and put anything else extra toward the 401(k) and/or a Roth IRA, hope for some forgiveness
3) Sell the house and pay it all off (would really rather not - have renters, pay very little of mortgage, and renting would be way more)
4) Take out some kind of home equity loan or cash-out refi to pay it off (but lose tax deductions on interest)
5) Consolidate the loans to reduce the rate at least (but lose out on any potential for forgiveness)

Open to other ideas too. I was planning on (2) but now I'm trying to decide if that's really the best way forward. Also: if your vote is for (3), can you give me your second and/or third choices? I'm not really sure that's on the table.
Last edited by studentofloans on Fri Nov 03, 2017 8:17 pm, edited 3 times in total.

studentofloans
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by studentofloans » Fri Nov 03, 2017 5:56 pm

Any takers? Would love any insights at all - if you think there's an obvious solution, great! If you have questions, let me know!

N10sive
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by N10sive » Fri Nov 03, 2017 6:10 pm

I think one big question is do you see yourself working for a company that you will have the opportunity for PSLF?

Is it 25 years of payments or 10 years of payments? The link you attached does calculations for 10 years?

"Assume 6% salary growth and you wind up with $0 in forgiven loans and paying $170K more in total with REPAYE over the standard option of paying it down in ten years"

Is this sentence correct?

John Laurens
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by John Laurens » Fri Nov 03, 2017 6:18 pm

If I were you, I would sell my house and be completely debt free.

Regards,
John

studentofloans
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by studentofloans » Fri Nov 03, 2017 6:23 pm

N10sive wrote:
Fri Nov 03, 2017 6:10 pm
I think one big question is do you see yourself working for a company that you will have the opportunity for PSLF?

Is it 25 years of payments or 10 years of payments? The link you attached does calculations for 10 years?
Sorry - I linked that page just because it had comparisons, but I should have linked this more specific REPAYE calculator (especially because it allows you to mark your loans as graduate, which really changes the picture: https://studentloanhero.com/calculators ... alculator/
N10sive wrote:
Fri Nov 03, 2017 6:10 pm
"Assume 6% salary growth and you wind up with $0 in forgiven loans and paying $170K more in total with REPAYE over the standard option of paying it down in ten years"

Is this sentence correct?
Yes. Their 'standard' scenario in the calculator assumes you pay it down over 10 years. That's a stretch - not sure it would work short of selling the house. And I definitely don't want to pay all that interest, but I hate the thought of selling the house (which breaks almost even thanks to renters) or of not contributing to retirement space.

wilked
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by wilked » Fri Nov 03, 2017 6:23 pm

What is occupation?

studentofloans
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by studentofloans » Fri Nov 03, 2017 6:26 pm

John Laurens wrote:
Fri Nov 03, 2017 6:18 pm
If I were you, I would sell my house and be completely debt free.

Regards,
John
It's tempting but it's also tough. I'd end up buying a tiny condo or (more likely) just renting. In this area, I'd spend a few thousand on rent for something much smaller and that would be way more than I pay on the mortgage due to roommates.

I get that it's not the smartest thing to have this much equity tied up in the house but I really love it and it does provide a kind of offsetting side income. I'm not really sure how to 'math out' the relative prices / cost of spending on rent versus sitting on home equity.

For the sake of argument: what if I took that option off the table? Would it make sense to pay down the loan ASAP, or to save some money in retirement accounts? Is it worth even thinking about the forgiveness option as a factor?
What is occupation?
Psychologist.

Also: thanks to everyone who has responded so far! I really appreciate having some other people to think this through with.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Dottie57 » Fri Nov 03, 2017 7:39 pm

What do you love more - the house or a better retirement?

I too would sell the house and pay off the money you borrowed.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Sandtrap » Fri Nov 03, 2017 7:59 pm

#1, #5

studentofloans
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by studentofloans » Fri Nov 03, 2017 8:16 pm

Dottie57 wrote:
Fri Nov 03, 2017 7:39 pm
What do you love more - the house or a better retirement?

I too would sell the house and pay off the money you borrowed.
I'm not sure that's the decision exactly. The house is worth around $750,000. If I sold it and rented a one-bedroom it would be ~$2,200 (median). If I bought a condo I'd have a mortgage payment similar to now, but with no renters to help. I pay about $500/month on the house after renters.

Basically, I'm not convinced (but could be!) that the math favors selling the house and using that cash to pay down the loan. Honestly I'm not really sure how to go about calculating all of this (any good spreadsheets/calculators out there for ownership minus renting versus selling then renting?).

Another way to look at it: I'm willing to pay something extra to stay in this home, but I want to try and quantify what that really is. Is it $1,000/month? $500/month? Maybe it's not even that high, because of renters? So is it really sacrificing retirement? I can't tell yet.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Dottie57 » Fri Nov 03, 2017 8:22 pm

studentofloans wrote:
Fri Nov 03, 2017 8:16 pm
Dottie57 wrote:
Fri Nov 03, 2017 7:39 pm
What do you love more - the house or a better retirement?

I too would sell the house and pay off the money you borrowed.
I'm not sure that's the decision exactly. The house is worth around $750,000. If I sold it and rented a one-bedroom it would be ~$2,200 (median). If I bought a condo I'd have a mortgage payment similar to now, but with no renters to help. I pay about $500/month on the house after renters.

Basically, I'm not convinced (but could be!) that the math favors selling the house and using that cash to pay down the loan. Honestly I'm not really sure how to go about calculating all of this (any good spreadsheets/calculators out there for ownership minus renting versus selling then renting?).

Another way to look at it: I'm willing to pay something extra to stay in this home, but I want to try and quantify what that really is. Is it $500/month? $1000/month? Maybe it's not even that high, because of renters?
For me it is not just math. You incurred an obligation willingly, so I think you should pay it off. Especially with the assets you own and salary.

Is forgiveness even possible after more than 10years? I thought the program was for 10 years.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by wilked » Fri Nov 03, 2017 8:23 pm

So salary about $100k, say $75k after taxes. $6k spent on housing. How much are you saving per month?

studentofloans
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by studentofloans » Fri Nov 03, 2017 8:28 pm

Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
For me it is not just math. You incurred an obligation willingly, so I think you should pay it off. Especially with the assets you own and salary.
I don't think this is fair. The law allows for this, just as it allows for tax loopholes and other things.
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
Is forgiveness even possible after more than 10years? I thought the program was for 10 years.
The ten-year variant is for people working in public service jobs. There's a 20-year REPAYE forgiveness for undergrads, but it's 25 years for grads.

studentofloans
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by studentofloans » Fri Nov 03, 2017 8:29 pm

wilked wrote:
Fri Nov 03, 2017 8:23 pm
So salary about $100k, say $75k after taxes. $6k spent on housing. How much are you saving per month?
Around $1,200 (so: not enough that I could just pay down the loan by skipping retirement savings, or rent without lifestyle changes).

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Dottie57 » Fri Nov 03, 2017 8:33 pm

studentofloans wrote:
Fri Nov 03, 2017 8:28 pm
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
For me it is not just math. You incurred an obligation willingly, so I think you should pay it off. Especially with the assets you own and salary.
I don't think this is fair. The law allows for this, just as it allows for tax loopholes and other things.
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
Is forgiveness even possible after more than 10years? I thought the program was for 10 years.
The ten-year variant is for people working in public service jobs. There's a 20-year REPAYE forgiveness for undergrads, but it's 25 years for grads.

Laws aren't necessarily righr. I did not flame you, just stated the facts of your situation and what I believe you should do.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by wilked » Fri Nov 03, 2017 8:37 pm

studentofloans wrote:
Fri Nov 03, 2017 8:29 pm
wilked wrote:
Fri Nov 03, 2017 8:23 pm
So salary about $100k, say $75k after taxes. $6k spent on housing. How much are you saving per month?
Around $1,200 (so: not enough that I could just pay down the loan by skipping retirement savings, or rent without lifestyle changes).
So... $75k in take home. $6k in housing. $15k in savings. Maybe $5-7k in student loan. Still feels like a lot left in there, no?

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by grabiner » Fri Nov 03, 2017 9:05 pm

If you get married, the REPAYE amount may well become enough that the loans will go away on their own before the 19 years run out (unless your spouse has large loans of his or her own, or low income).

Can you refinance the loans to a lower rate? If so, that is likely to be better than REPAYE, particularly since your interest is far more than you can deduct. Likewise, if you took out a home-equity loan or did a cash-out refinance on your home to pay off the student loans, that would lower your rate, although only interest on the first $100,000 of extra debt would be deductible. (I believe this is correct; a home-equity loan used to refinance an otherwise-deductible loan does not automatically become deductible, unless the otherwise-deductible loan was a mortgage.)
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by WoodSpinner » Fri Nov 03, 2017 9:10 pm

Op,

I admire you for working this issue proactively and not hoping it will just magically go away.

Personally, I suggest:
1. Consolidate loans and reduce that interest rate-forget forgiveness.
2. I think you have done well in having a house, and renters to help cover the costs of mortgage. I would keep up on that.
3. This is the more radical suggestion— check out the MrMoneyMustache forum and ratchet down your expenses to free up extra cash to pay off this debt.
4. Keep your Emergency fund adequately funded.
5. I would take advantage of any 401k match available and put all the remaining spare cash into paying down the loans.

Lastly, enjoy life, you have invested in yourself via college. Don’t stop now, just find ways to do it less expensively.

Hope some of the advice is useful...

8-)

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by bigred77 » Fri Nov 03, 2017 9:23 pm

I would go with option 4.

Lower your interest expense. Come up with a plan to pay it off over 10 years or so. You don’t want to be worrying about potential tax law changes over the next 19 years or be stuck with student loan payments into your mid 50s. Can you allocate $2K a month to it (plus put 10%-15% into your 401k) and live on the rest for the time being?

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by TropikThunder » Fri Nov 03, 2017 9:38 pm

studentofloans wrote:
Fri Nov 03, 2017 8:28 pm
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
For me it is not just math. You incurred an obligation willingly, so I think you should pay it off. Especially with the assets you own and salary.
I don't think this is fair. The law allows for this, just as it allows for tax loopholes and other things.
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
Is forgiveness even possible after more than 10years? I thought the program was for 10 years.
The ten-year variant is for people working in public service jobs. There's a 20-year REPAYE forgiveness for undergrads, but it's 25 years for grads.
I could not agree more. You're not cheating the system, you're seeing how an existing (legal!) program can best suit your financial goals. Would those poo-pooing this option also decline to take the mortgage interest deduction? I mean, they took on an obligation willingly, it's not fair that they game the system to reduce their tax bill [/snark]. There's no shortage of people on this board (perhaps more so on White Coat Investor) who accumulated >$250,000 in medical school loans and are on track to receive PLSF even though their salaries will be >$400,000 after residency. And as long as your current rental set-up is keeping your housing cost low while building equity, I wouldn't sell the house.

Oh, consider upping if not max'ing your 401k contributions, since that will lower your AGI and thus your REPAYE payments.

And, careful with loan consolidation. A Direct Consolidation Loan can be handled under loan forgiveness, but it will reset the payment counter. If you're six years in, you'd lose the ~72 payments you've made.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by bigred77 » Fri Nov 03, 2017 9:48 pm

TropikThunder wrote:
Fri Nov 03, 2017 9:38 pm
studentofloans wrote:
Fri Nov 03, 2017 8:28 pm
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
For me it is not just math. You incurred an obligation willingly, so I think you should pay it off. Especially with the assets you own and salary.
I don't think this is fair. The law allows for this, just as it allows for tax loopholes and other things.
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
Is forgiveness even possible after more than 10years? I thought the program was for 10 years.
The ten-year variant is for people working in public service jobs. There's a 20-year REPAYE forgiveness for undergrads, but it's 25 years for grads.
I could not agree more. You're not cheating the system, you're seeing how an existing (legal!) program can best suit your financial goals. Would those poo-pooing this option also decline to take the mortgage interest deduction? I mean, they took on an obligation willingly, it's not fair that they game the system to reduce their tax bill [/snark]. There's no shortage of people on this board (perhaps more so on White Coat Investor) who accumulated >$250,000 in medical school loans and are on track to receive PLSF even though their salaries will be >$400,000 after residency. And as long as your current rental set-up is keeping your housing cost low while building equity, I wouldn't sell the house.

Oh, consider upping if not max'ing your 401k contributions, since that will lower your AGI and thus your REPAYE payments.

And, careful with loan consolidation. A Direct Consolidation Loan can be handled under loan forgiveness, but it will reset the payment counter. If you're six years in, you'd lose the ~72 payments you've made.
I agree with this sentiment. Everyone should act in their own self interest within the confines of the law and contractual obligations. Why would anyone critique someone for optimizing government sponsored student loan programs?

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Olemiss540 » Sat Nov 04, 2017 8:30 am

It might improve the quality of responses if you added a few items:

Can you get a quote on what rate you can refinance the debt to?
Can you add your monthly expenses/budget amounts?

I would personally recommend you get familiar with dave Ramsey and work his system until you are out of debt. I would keep the house but look at cash out refinance options to accelerate payoff depending on what rate you can get your student loans consolidated to. 19 years is a long ways off, and personally I wouldn't want to have to continually monitor changes in law that could have a large impact on your planning.
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by bubbadog » Sat Nov 04, 2017 8:32 am

bigred77 wrote:
Fri Nov 03, 2017 9:48 pm
TropikThunder wrote:
Fri Nov 03, 2017 9:38 pm
studentofloans wrote:
Fri Nov 03, 2017 8:28 pm
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
For me it is not just math. You incurred an obligation willingly, so I think you should pay it off. Especially with the assets you own and salary.
I don't think this is fair. The law allows for this, just as it allows for tax loopholes and other things.
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
Is forgiveness even possible after more than 10years? I thought the program was for 10 years.
The ten-year variant is for people working in public service jobs. There's a 20-year REPAYE forgiveness for undergrads, but it's 25 years for grads.
I could not agree more. You're not cheating the system, you're seeing how an existing (legal!) program can best suit your financial goals. Would those poo-pooing this option also decline to take the mortgage interest deduction? I mean, they took on an obligation willingly, it's not fair that they game the system to reduce their tax bill [/snark]. There's no shortage of people on this board (perhaps more so on White Coat Investor) who accumulated >$250,000 in medical school loans and are on track to receive PLSF even though their salaries will be >$400,000 after residency. And as long as your current rental set-up is keeping your housing cost low while building equity, I wouldn't sell the house.

Oh, consider upping if not max'ing your 401k contributions, since that will lower your AGI and thus your REPAYE payments.

And, careful with loan consolidation. A Direct Consolidation Loan can be handled under loan forgiveness, but it will reset the payment counter. If you're six years in, you'd lose the ~72 payments you've made.
I agree with this sentiment. Everyone should act in their own self interest within the confines of the law and contractual obligations. Why would anyone critique someone for optimizing government sponsored student loan programs?
Like they say...

Don't hate the player, hate the game!

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by petulant » Sat Nov 04, 2017 8:58 am

Regarding the rightness of paying off the loan, I can say that at least for myself I am pursuing public service loan forgiveness, and that possibility of forgiveness was written into my original promissory note.

Yet, regardless of whether a forgiveness program is written into the contract, we're talking about promissory notes from the federal government--the same federal government offering forgiveness. When your own lender is telling you it will forgive your loans if you take some action, it's fair to pursue to that action.

One thing you may not have considered is that 401(k) contributions actually reduce payments under many of the income-driven programs. I'll explain how this works. Typically, under any income-driven repayment program, you must annually re-certify your income to qualify for the program. That re-certification will actually rely on your federal tax return AGI or MAGI, not a stated salary. Now, 401(k) contributions are not included in your AGI. 401(k) contributions are never reported on the W2 box stating your income and included on the 1040. Thus, if you would have had an AGI of $100,000 and you contribute $18,000 to your 401(k), the AGI would drop to $82,000, reducing payments accordingly (e.g., $82000-$15000=$67000*.10=$6700 compared to $100000-$15000=$85000*.10=$8500 or $12,000 under ten-year repayment plan).

To state the above point slightly differently, the income-driven repayment program acts like a 10 percent increase in your marginal tax rate--increasing the benefits of maximizing your 401(k) contributions.

Another consideration are a couple limitations on the student loan interest deduction. That deduction maxes out at $2,500, which at a 6.6% interest rate occurs at around $38,000 in debt. So everything owed above that amount is costing the full 6.6% rate. Further, I'm not clear how you qualify for the student loan interest deduction. Publication 970 states that single filers cannot take the deduction if their MAGI is above $80,000. MAGI in this instance is AGI with student loan interest, tuition/fees, and certain foreign activities added back in. There's also a phaseout from $65,000 to $80,000 in MAGI.

Overall, I would suggest making a spreadsheet modeling the financial outcome after 19 more years with specific cells for salary growth, inflation, stock returns, etc. That may be helpful. For example, it may show that if you experience significant salary growth removing forgiveness, a home equity loan or a simple refinance of the student loans would be beneficial.

The model won't tell you which option is best necessarily. Instead, it will give you a more concrete idea on the range of possible outcomes, and you can make a more wise decision about the risks and benefits of each option.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by neurosphere » Sat Nov 04, 2017 10:29 am

studentofloans wrote:
Thu Nov 02, 2017 1:51 pm
I'm 37, have $180,000 in student loans (at around 6.6% interest) and make around $100,000/year (or $90K AGI).
Don't forget that REPAYE has an interest subsidy which is independent of loan forgiveness.

On a balance of $180,000, interest rate 6.6% and AGI of $90,000, you'll get an annual subsidy of $2345, for an effective interest rate of 5.3%. You'll get some subsidy as long as AGI is less than $140,000. This assumes that the $180,000 is all principle and does not include interest. Under REPAYE at these values, interest will accumulate but you will not be charged interest on the interest (e.g. no capitalization). That also means that if you pay the minimum with this AGI, your loan balance in 10 years will be about $205,000. :)

Another way to think about the subsidy is that for every $1000 you can lower your AGI (e.g with 401k contributions), you'll receive an extra $500 in interest subsidies.
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by totesmagotes » Sat Nov 04, 2017 10:33 am

petulant wrote:
Sat Nov 04, 2017 8:58 am
Overall, I would suggest making a spreadsheet modeling the financial outcome after 19 more years with specific cells for salary growth, inflation, stock returns, etc. That may be helpful. For example, it may show that if you experience significant salary growth removing forgiveness, a home equity loan or a simple refinance of the student loans would be beneficial.

The model won't tell you which option is best necessarily. Instead, it will give you a more concrete idea on the range of possible outcomes, and you can make a more wise decision about the risks and benefits of each option.
My wife and I are in a similar situation. We are in our early-mid 30s. We've never been above the 15% tax bracket, though I think we'll sneak into the 25% federal bracket in 2018 as our annual income finally gets into the 6-digit range for the first time in our lives.
My student loans: $50k
Wife's student loans: $63k
Parent PLUS loan in his parents' name that we pay: $50k (This one doesn't get counted in income-dependent repayment plans since it's legally not our responsibility to repay, even though we do since it was taken out to help pay for my wife's undergrad education).

I am eligible for PSLF in 8.5 yrs. Our best long-term financial move is to minimize our AGI to reduce our REPAYE monthly payments [REPAYE annual payment is 10%*(MAGI - 150% of federal poverty level)]. To do this, we will maximize contributions to our tax-deferred retirement accounts and HSA. If we take the difference between the REPAYE payments and what we were paying before we both moved into the REPAYE plan, we'll have an extra $500/mo that we will put into one of our Roth IRAs (or split into both, since that'd be above the annual max contribution). The amount of the Roth IRA(s) in 8.5 yrs will more than pay for the remaining balance on her loan at the time my loan will be eligible for forgiveness under PSLF. In the meantime, payments on our loans are reduced, which is why we will be able to put $500/mo into our Roth IRAs. Depending upon the assumed Roth CAGR (currently assuming 5%) and AGI growth rate (assuming 1.5% annually), the total "cost" (my payments + wife's payments + wife's balance - balance on Roth IRA) after 8.5 yrs should range from ~$50k to ~$80k. Of course, we can't withdraw the *earnings* on the Roth contributions, but we can withdraw the contributions tax-free (since they are post-tax anyway) to pay off the balance on her loan after 8.5 yrs. If we were to pay down both loans more aggressively (as in take that $500/mo we'd be putting into the Roth IRA and direct it towards the loans instead), we'd pay about $125k-$130k in total.

I've debated and gone back and forth regarding the ethics of this. In the end, like we hear so many times, we are playing by the rules. It's not like we make enough to max out our tax-deferred space (contributions to my work retirement plan will be $5k/yr, though we also max out HSA contributions). Although I have minor concerns about the status of PSLF in 8.5 yrs, I need to have a financial plan one way or another, and our current plan puts us in the best position long term.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by petulant » Sat Nov 04, 2017 11:56 am

totesmagotes wrote:
Sat Nov 04, 2017 10:33 am
petulant wrote:
Sat Nov 04, 2017 8:58 am
Overall, I would suggest making a spreadsheet modeling the financial outcome after 19 more years with specific cells for salary growth, inflation, stock returns, etc. That may be helpful. For example, it may show that if you experience significant salary growth removing forgiveness, a home equity loan or a simple refinance of the student loans would be beneficial.

The model won't tell you which option is best necessarily. Instead, it will give you a more concrete idea on the range of possible outcomes, and you can make a more wise decision about the risks and benefits of each option.
My wife and I are in a similar situation. We are in our early-mid 30s. We've never been above the 15% tax bracket, though I think we'll sneak into the 25% federal bracket in 2018 as our annual income finally gets into the 6-digit range for the first time in our lives.
My student loans: $50k
Wife's student loans: $63k
Parent PLUS loan in his parents' name that we pay: $50k (This one doesn't get counted in income-dependent repayment plans since it's legally not our responsibility to repay, even though we do since it was taken out to help pay for my wife's undergrad education).

I am eligible for PSLF in 8.5 yrs. Our best long-term financial move is to minimize our AGI to reduce our REPAYE monthly payments [REPAYE annual payment is 10%*(MAGI - 150% of federal poverty level)]. To do this, we will maximize contributions to our tax-deferred retirement accounts and HSA. If we take the difference between the REPAYE payments and what we were paying before we both moved into the REPAYE plan, we'll have an extra $500/mo that we will put into one of our Roth IRAs (or split into both, since that'd be above the annual max contribution). The amount of the Roth IRA(s) in 8.5 yrs will more than pay for the remaining balance on her loan at the time my loan will be eligible for forgiveness under PSLF. In the meantime, payments on our loans are reduced, which is why we will be able to put $500/mo into our Roth IRAs. Depending upon the assumed Roth CAGR (currently assuming 5%) and AGI growth rate (assuming 1.5% annually), the total "cost" (my payments + wife's payments + wife's balance - balance on Roth IRA) after 8.5 yrs should range from ~$50k to ~$80k. Of course, we can't withdraw the *earnings* on the Roth contributions, but we can withdraw the contributions tax-free (since they are post-tax anyway) to pay off the balance on her loan after 8.5 yrs. If we were to pay down both loans more aggressively (as in take that $500/mo we'd be putting into the Roth IRA and direct it towards the loans instead), we'd pay about $125k-$130k in total.

I've debated and gone back and forth regarding the ethics of this. In the end, like we hear so many times, we are playing by the rules. It's not like we make enough to max out our tax-deferred space (contributions to my work retirement plan will be $5k/yr, though we also max out HSA contributions). Although I have minor concerns about the status of PSLF in 8.5 yrs, I need to have a financial plan one way or another, and our current plan puts us in the best position long term.
Sounds like you've considered everything well. The only thing I would point out, which you probably already know, is that if you have children, the poverty calculation will increase for both you and your wife (depending on MFJ/MFS etc.), meaning your REPAYE payments may decline quite a bit.

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Will do good
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Will do good » Sat Nov 04, 2017 12:08 pm

OP,

Have you consider taking in a roommate to help pay down the student loan or make the house less expensive, this doesn't have to be long term, maybe few years while your income rises. In a HCOL area you should be able to get good rents. In SF my brother was able to rent out a single bedroom for $2k/month.

Good luck.

Bastiat
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Bastiat » Sat Nov 04, 2017 12:31 pm

studentofloans wrote:
Fri Nov 03, 2017 8:28 pm
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
For me it is not just math. You incurred an obligation willingly, so I think you should pay it off. Especially with the assets you own and salary.
I don't think this is fair. The law allows for this, just as it allows for tax loopholes and other things.
Dottie57 wrote:
Fri Nov 03, 2017 8:22 pm
Is forgiveness even possible after more than 10years? I thought the program was for 10 years.
The ten-year variant is for people working in public service jobs. There's a 20-year REPAYE forgiveness for undergrads, but it's 25 years for grads.
Of course it is fair. You took other people's money with the promise that you'd pay it back. And you didn't, apparently, graduate from school until you were 31 to start paying it back. Do you honestly want to be paying back student loans until you're 56 in the hope that you can get out of some of the obligation you freely took on?

With an income of $100k and a housing expense of $500/mo, I don't see how you're unable to max out your tax deferred accounts and also pay down your debt.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Two Headed Mule » Sat Nov 04, 2017 12:56 pm

grabiner wrote:
Fri Nov 03, 2017 9:05 pm
Likewise, if you took out a home-equity loan or did a cash-out refinance on your home to pay off the student loans, that would lower your rate, although only interest on the first $100,000 of extra debt would be deductible. (I believe this is correct; a home-equity loan used to refinance an otherwise-deductible loan does not automatically become deductible, unless the otherwise-deductible loan was a mortgage.)
In general, amounts in excess of $100,000 of home equity indebtedness would be "traced" to their use -- so if the excess is used to repay a loan the interest on which was deductible beforehand, the interest would continue to be deductible. In addition, there is an election one can make to treat a home equity loan as not secured by the residence (meaning it isn't home equity indebtedness at all), though it would have to apply to the whole loan. This would done in the student loan context, for example, if one didn't itemize (or faced limitations) so that the interest on the first $100K would also be traced and taken above the line.

Mule

ny_knicks
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by ny_knicks » Sat Nov 04, 2017 1:28 pm

Math seems pretty easy to me.

Sell the house and payoff the loans $350 - $180 = $170k in the bank. What you do with the $170k is your choice (invest, downpayment on smaller more affordable house, take a vacation)....

Why be a slave to a government program for the next 10-20 years? Do you really want to be in your mid 50s and hoping the government bails you out of loans you took our 20+ years ago. Thats a life of unnecessary stress especially given the easy equity in the house (markets are at all time highs boy would it not feel good to watch that $350k evaporate and have no real options for the loans).

Sometimes the best decisions are the ones we don't want to but should make.

hightower
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by hightower » Sat Nov 04, 2017 1:44 pm

So you have a 400k mortgage on a 750k home and you only make 100k/yr?
That is your problem right there. You can not afford a 400k mortgage on that salary. You should not own a 750k house on that salary either. How would you be able to afford proper upkeep and repairs? It doesn't matter that roommates are helping you pay the mortgage, you're house poor. Also, you have 180k of student loans at 6.6% interest. That is a debt emergency. It would be irresponsible to do anything but pay them off asap. IMO, you absolutely have no other choice but to sell that house, pay off all of your loans and start fresh. If rent in your area is too high and seems un-affordable, then you need to consider moving to a lower cost of living area.
You're very lucky you have that option and if I were you I would hurry up and do it while home prices are still up. You'll be in an instantly better financial situation if you sell that house. Even if it means you have to rent a more expensive place. I think the fact that you are on here asking us what to do shows that the debt is weighing you down and you're worried about it, which you should be.

And I wanted to comment on all the people saying it's unethical or whatever to rely on loan forgiveness...that's completely beside the point. FWIW, I do not think it's "wrong" to accept a loan forgiveness program in anyway. However, I do think it's not the smartest financial move in this scenario. Why? Because first, there's no guarantee that this program will be there in 10 years. And if that's the case, you will end up paying those loans off much later in life and accumulating a lot of interest during that time. Not only that, but being in debt is like being a slave to your job and has negative psychological consequences (unless you're unaware of the dangers). To be $580k in debt at age 37 and only make 100k a year is a risky financial situation. You're not saving enough either, especially since you seem fond of living in a HCOL area. What would you do if the housing market crashed and all of your equity went away and your roommates decided to move out and you couldn't find anyone to replace them? You wouldn't be able to sell for a profit like you can now. And what would you do if you suddenly needed to spend 20-30 k on home repairs and it wasn't something that insurance would cover? You don't have enough savings so you'd end up taking on more debt. What would you do if during the housing market downturn you lost your job? These are all realistic things you should be concerned about. You are stretched very thin right now and you rely on other people (your roommates) to make it all work.

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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Perkunas » Sat Nov 04, 2017 4:24 pm

@ OP:

Is there any chance you could change to a different job that would get your loans forgiven after 10 years? Just sort of thinking out loud.

It looks like you'd pay a lot more under the REPAYE program: an extra $160k if you assume 6% wage growth, or an extra $100k if you assume 3.5% wage growth (100k includes the taxes on the forgiven debt). That would make me want to pay the loans fairly quickly and not bother with the REPAYE. And if you forego REPAYE, then you've got no reason to worry about consolidating at a lower interest rate.

Not to mention, with REPAYE, there are just so many things that could change in the next 19 years. I would worry that after 25 years of payments, the government would renege on the forgiveness and you'd still be on the hook.

I would suggest doing what you need to do to pay the loans off. If you can cash-flow the mortgage and the full loan payment, do it up. But I think worrying about retirement should currently go to the back-burner til you figure out the loan.

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Veiled
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Re: Student Loans: Best to Pay Down or Wait for Forgiveness?

Post by Veiled » Sun Nov 05, 2017 3:00 pm

OP, I'm an OB resident with med school loans totalling about 125k. I just faced this decision in a big way. I got tired of worrying over political changes that might happen to PSLF and just decided to refinance (Laurel Road) from a highest rate of 6.5% to 4.47%. This makes me ineligible for PSLF but it means my loans will be gone in half the time that it would take me to wait for forgiveness. It also means I'm working with a company that treats its customers like customers, not citizens. (MyFedLoans cost me 3k because I forgot to turn in an annual form. No private sector lender does that and maintains its image.)

I second the recommendation for Mr. Money Mustache (or FrugalWoods) if you decide to pay down debt. Really useful to hack expenses and throw a lot of cash at debt.
Pardon me as I read these one hundred and fifty-seven SP vs LLC vs Scorp threads...

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