Student loan forgiveness

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Dc1986
Posts: 5
Joined: Thu Dec 21, 2017 11:10 pm

Student loan forgiveness

Post by Dc1986 » Fri Dec 22, 2017 7:07 pm

Hi all,

Long time reader, but my first post on this forum.

Wife and I are early 30s and doing well financially aside from heavy student loans from her graduate school. We were aiming for student loan forgiveness in about 7-8 yrs as she works for a non-profit, but current political climate has made us second guess this strategy. We are now considering paying it off with a combination of selling off stock and using cash savings, or refinancing for a lower interest rate.


More info on us:


Income: 250k - 180 me, 70 her

Taxable investments: 200k invested 90/10 equity to fixed income

Real estate: 600k condo in HCOL area, 350k on the loan at 3.25%

Retirement accounts: 150k - 130k me, 20k her

Cash: 130 - recent windfall from wedding gifts and a bonus for me. Considering putting into our taxable account, buying a 1 yr CD as we may we plan to buy a home or larger condo in the next 2-3 yrs, or using to pay down the student loans.

Student loans: 140k at 6.5% interest in total (multiple loans between 5-7%). Currently paying only the interest as we originally valued the interest over 10 yrs at much less than the principal. This was true even if we assumed no return on the capital used for paying down principal. However, That also assumed that loan forgiveness was more likely to exist in 10 yrs than not, and I don’t believe that to be true anymore.


So what would you all recommend we do? I haven’t been able to do a detailed analysis, accounting for tax impacts, etc., so any advice on strategy or even just considerations we haven’t thought of would be greatly appreciated.

runner540
Posts: 570
Joined: Sun Feb 26, 2017 5:43 pm

Re: Student loan forgiveness

Post by runner540 » Fri Dec 22, 2017 11:11 pm

I would take $130k cash - $xk emergency fund, and pay off the student loans. If $x is $20k, you can pay off $110k of the loans immediately, and knock out the other $30k in less than a year with your income or your taxable investments.

Here's why: Your wife's (and your) life choices are severely restricted for the next 8 years to get the loan forgiveness. In the meantime, you will pay ~$75k ($140k x 6.5% x 8 years) of interest, and at the end may or may not get forgiveness. We can't discuss future policy changes, but you have judged this to be a greater than 0% chance that you are still on the hook for $140k, even after paying the $75k of interest.

Think of the freedom you'll have to not worry about where your wife is employed.

Right now, under the most optimistic scenario, your choices are:
A. Pay $140k now and never pay any more on the student loans.
B. Pay $75k over 8 years, and in the meantime be restricted in where you can move/work, and have that uncertainty of debt over your heads.

So, are you willing to pay an extra $65 k now ($140-$75k)? Over 8 years, that's ~$8k/year. Could your wife earn $8k more per year if she could work anywhere, and not just somewhere that qualifies for PLSF?

There are certainly time-value-of-money and opportunity cost of potentially investing the money, but those pale in comparison to the life choices/optionality you could "buy" by paying off the loans. Not to mention, that 6.5% is not a good interest rate these days, and I wouldn't want to bet that the markets can return 6.5% for the next 8 years, just to break even with paying the interest, let alone get ahead.

TheAncientOne
Posts: 114
Joined: Wed Jul 19, 2017 8:53 pm

Re: Student loan forgiveness

Post by TheAncientOne » Fri Dec 22, 2017 11:20 pm

You can refinance the loans at much lower rates if you don't want to use up that much cash on loan repayment. This will take away any opportunity for loan forgiveness as you will no longer have government loans.

NoGambleNoFuture
Posts: 253
Joined: Tue Feb 02, 2016 8:17 pm

Re: Student loan forgiveness

Post by NoGambleNoFuture » Fri Dec 22, 2017 11:29 pm

Inherited almost the exactttt same scenario myself OP... took less than a year for her to decide to leave the nonprofit route of making $65k/yr to have them forgiven after 10 years of paying $850/month and instead accept a job making $96k (literally two days after leaving $65k) and paying $3k/month to pay them off in under 3 years and be done with them.

Biglaw Investor
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Location: Brooklyn

Re: Student loan forgiveness

Post by Biglaw Investor » Sat Dec 23, 2017 8:04 am

Dc1986 wrote:
Fri Dec 22, 2017 7:07 pm
I haven’t been able to do a detailed analysis, accounting for tax impacts, etc.
That's going to be your first step. What repayment plan is she in (IBR or REPAYE or ... )? Now that you're married your payments are going to be based on your combined income unless you file your taxes MFS, which usually doesn't result in huge savings as you'll exchange lower student loan payments for higher tax payments.

Have you filed the PSLF certification form and moved her loans to FedLoan Servicing? And, if so, have they confirmed that you've made qualifying payments while working for a qualifying employer such that you know how many months she needs to make payments?

Once you know what repayment plan she is using and how many more payment she needs to make, you should be able to calculate how much more you'll have to pay in order to get to forgiveness. From there you'll be better able to weigh whether it's worth paying them off now or making payments on them for 8 years and then getting PSLF forgiveness.

Of course that's only the math side of the argument. You'll also need to decide if you want to be in debt for the next ~8 years.

Dc1986
Posts: 5
Joined: Thu Dec 21, 2017 11:10 pm

Re: Student loan forgiveness

Post by Dc1986 » Sun Dec 24, 2017 1:05 am

runner540 wrote:
Fri Dec 22, 2017 11:11 pm

So, are you willing to pay an extra $65 k now ($140-$75k)? Over 8 years, that's ~$8k/year. Could your wife earn $8k more per year if she could work anywhere, and not just somewhere that qualifies for PLSF?

There are certainly time-value-of-money and opportunity cost of potentially investing the money, but those pale in comparison to the life choices/optionality you could "buy" by paying off the loans. Not to mention, that 6.5% is not a good interest rate these days, and I wouldn't want to bet that the markets can return 6.5% for the next 8 years, just to break even with paying the interest, let alone get ahead.
Wife is planning to work in the non-profit space for the next several years, although I believe she could immediately earn 10-15k+ more going into the private sector. We also plan to have children soon and the clock on the 10 yrs of public service apparently stop for maternity leave.

On your second point, I agree that I wouldn’t bet on the market returning >6.5% over the next 8 yrs. However, the expected return wouldn’t need to be near that high for break even when you factor in loan forgiveness. For instance, if the difference between the two extreme scenarios is 65k, then even if loan forgiveness after 8 yrs is a 50/50% chance, then wouldn’t you want to figure out the break even with 32.5k of expected benefit to pursuing PSLF?

Dc1986
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Joined: Thu Dec 21, 2017 11:10 pm

Re: Student loan forgiveness

Post by Dc1986 » Sun Dec 24, 2017 1:10 am

NoGambleNoFuture wrote:
Fri Dec 22, 2017 11:29 pm
Inherited almost the exactttt same scenario myself OP... took less than a year for her to decide to leave the nonprofit route of making $65k/yr to have them forgiven after 10 years of paying $850/month and instead accept a job making $96k (literally two days after leaving $65k) and paying $3k/month to pay them off in under 3 years and be done with them.
Interesting to hear someone in a similar position pursue paying down the debt. If my wife was planning to pursue a higher salary immediately I think this would be a no brained for us. Would you have made the same decision if she had planned to remain in non-profit work?

If you don’t mind me asking, what does your wife do?

Dc1986
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Joined: Thu Dec 21, 2017 11:10 pm

Re: Student loan forgiveness

Post by Dc1986 » Sun Dec 24, 2017 1:16 am

Biglaw Investor wrote:
Sat Dec 23, 2017 8:04 am
[quote=Dc1986 post_id=3678176 time=<a href="tel:1513987649">1513987649</a> user_id=128289]I haven’t been able to do a detailed analysis, accounting for tax impacts, etc.
That's going to be your first step. What repayment plan is she in (IBR or REPAYE or ... )? Now that you're married your payments are going to be based on your combined income unless you file your taxes MFS, which usually doesn't result in huge savings as you'll exchange lower student loan payments for higher tax payments.

Have you filed the PSLF certification form and moved her loans to FedLoan Servicing? And, if so, have they confirmed that you've made qualifying payments while working for a qualifying employer such that you know how many months she needs to make payments?

Once you know what repayment plan she is using and how many more payment she needs to make, you should be able to calculate how much more you'll have to pay in order to get to forgiveness. From there you'll be better able to weigh whether it's worth paying them off now or making payments on them for 8 years and then getting PSLF forgiveness.

Of course that's only the math side of the argument. You'll also need to decide if you want to be in debt for the next ~8 years.
[/quote]

Thanks, BLI

The loans are income based and the filing of income and taxes as single or married is a big piece that we haven’t quite tackled. We are considering working with an accountant to figure out our best course of action. That piece, along with the uncertainty around the likelihood of the policy remaining in 8 yrs, are the most critical and ambiguous assumptions for us right now.

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neurosphere
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Re: Student loan forgiveness

Post by neurosphere » Sun Dec 24, 2017 3:37 pm

No time to respond fully now, hopefully will have more time later, but let me make some key points and ask some questions:.

-- Which specific income driven plan are you on? Only two allow one to file separate (IBR, and PAYE). REPAYE does not allow this (or rather REPAYE counts spousal income regardless of filing status). And if IBR, which "flavor" of IBR do you have, the "15%" or the "10%". The 10% is the most recent, and I suspect if your wife has finished graduate school, she is not eligible for the 10% IBR.
-- There has never been a proposal to limit/change PSLF for existing loan. Many knowledgeable people people think that retroactively changing loan terms would not be legal. FWIW, when I lecture on student loans I tell people to assume PSLF will be available to you and to ignore anything they hear on the news about this.
-- Given your wife's salary relative to yours, there may be a strong incentive to file separately. However, your taxes will likely go up. First step is to figure out how much extra you'll pay in taxes by filing separately, and next, to figure out how much your loan payments will go down. Assuming forgiveness, any reduction in payments will be eventually forgiven, so the "investment" in extra taxes is a good one as long as taxes paid are less than the amount the annual payments are reduced. Of course, if PSLF does not happen, those extra taxes are lost forever, and you won't even get a thank you note from the Treasury/IRS. :D
-- As long as one is currently in a PSLF eligible job, with no IMMEDIATE plans to change, I counsel people to pay off eligible loans as slowly as possible. Unless your income is high relative to your loan balance, the upside is huge (many thousands of dollars in forgiveness) while the downside is small (some extra interest). This assume that one uses the savings by not refinancing or pre-paying the loan for savings/investing (rather than extra spending). Certainly if one is not maxing out tax deductible investments, this should be done first. In the case of PSLF, this lowers your AGI, which then lowers your payments, which then increases your eventual forgiveness. This is in effect a 10% match (payable upon forgiveness). That's the best match you'll likely ever receive.
-- If you file jointly with IBR, your payments will exceed the "max" payments, and be limited to the same payments as calculated by a standard 10-year plan. You'll preserve any previous qualifying payments and PSLF, but will not receive any additional forgiveness. This assumes your full income listed was "AGI" rather than "salary". If either of you contribute to a 401k/403, or have other deductions (health insurance, HSA, etc) your payments will be lower of course and may drop below the 10-year standard payment.
-- If you file separately, with a wife AGI of $70,000 and that loan balance of $140,000, payments while filing separately are about $433 (vs $1617 with IBR, and $1913 with REPAYE). Note, if you are on REPAY, your payments will be HIGHER than the standard 10-year payments, and this will erode your PSLF.
-- Note that these calcs are very rough, not taking into account what amount of the loan balance is interest vs principle.
-- I realize this is unlikely to be a valid assumption, but if you select IBR, file separately, have make no qualifying payments yet, and your wife's AGI stays $70,000 for 120 payments, your total loan costs would be $52,000, with forgiveness of $183,000.

Neurosphere
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

Big Dog
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Re: Student loan forgiveness

Post by Big Dog » Sun Dec 24, 2017 3:57 pm

if you can keep the nonprofit thing going, loan forgiveness can be a good deal.

Sure, Congress cna always change the 10-year forgiveness plan, but I would be shocked if they made any changes retro. Most likely, they'd eliminate for new loans.

Biglaw Investor
Posts: 117
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Location: Brooklyn

Re: Student loan forgiveness

Post by Biglaw Investor » Mon Dec 25, 2017 7:43 am

Dc1986 wrote:
Sun Dec 24, 2017 1:16 am
The loans are income based and the filing of income and taxes as single or married is a big piece that we haven’t quite tackled. We are considering working with an accountant to figure out our best course of action. That piece, along with the uncertainty around the likelihood of the policy remaining in 8 yrs, are the most critical and ambiguous assumptions for us right now.
Yeah, the uncertainty is chilling for sure. I'm generally of the belief that people currently in the program will be grandfathered in (especially since it's baked into the Master Promissory Note) but who knows - it certainly isn't guaranteed. Plus, they can make it difficult to obtain forgiveness. It feels like we're constantly at war with FedLoan Servicing ourselves trying to make sure my wife's loans are on track for PSLF forgiveness. In general, the first wave of loans became eligible for forgiveness in October 2017 and we're all looking to find someone who has received forgiveness so we can write about them. The next year is going to be instructive!

NoGambleNoFuture
Posts: 253
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Re: Student loan forgiveness

Post by NoGambleNoFuture » Mon Dec 25, 2017 3:57 pm

Dc1986 wrote:
Sun Dec 24, 2017 1:10 am
NoGambleNoFuture wrote:
Fri Dec 22, 2017 11:29 pm
Inherited almost the exactttt same scenario myself OP... took less than a year for her to decide to leave the nonprofit route of making $65k/yr to have them forgiven after 10 years of paying $850/month and instead accept a job making $96k (literally two days after leaving $65k) and paying $3k/month to pay them off in under 3 years and be done with them.
Interesting to hear someone in a similar position pursue paying down the debt. If my wife was planning to pursue a higher salary immediately I think this would be a no brained for us. Would you have made the same decision if she had planned to remain in non-profit work?

If you don’t mind me asking, what does your wife do?
DPT. She went from a non-profit level-1 trauma center hospital setting to a traumatic brain/spine injury rehab facility that helps patients transition back into the real world.

Comp wasn't the only factor but it was certainly nice and she was well aware of what her friends were making elsewhere - brain/spine injuries being her passion along w/ more structured schedule and no weekends was more important :)

But yeah if she was planning on staying non-profit I don't think we'd choose to aggressively pay off the loans... probably take our chances and hope to have them forgiven.

Dc1986
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Joined: Thu Dec 21, 2017 11:10 pm

Re: Student loan forgiveness

Post by Dc1986 » Tue Dec 26, 2017 7:15 pm

Thanks for the replies everyone.

NoGamble - I tried to send you a PM, but not sure it went through. Did you receive?

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