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How to save over $100k on your student loans

Discussion in 'Pharmacy' started by grap112ler, 11.14.12.

  1. grap112ler

    grap112ler

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    As fantasyland will soon be coming to an end and my crushing $200k+ loan payments will enter repayment in less than a month, I have started to plan the most viable method of ridding myself of debt, or at least minimizing my suffering. For all you who have graduated this year or who will graduate and who are in the same boat as me, there appears to be a new loan repayment program for your federal loans named "Pay As You Earn."

    "Pay As You Earn" (you shall henceforth be known as PAYE) is similar to Income-Based Repayment (IBR). Whereas IBR caps your monthly payment to 15% of you dispensable income (income above 150% poverty level), PAYE caps your monthly payment at 10% of dispensable income. Whereas you are forgiven of any unpaid loans after 25 years with IBR, PAYE reduces loan forgiveness to 20 years. Bear in mind that any loans forgiven at the end may count as earned income in the year they are forgiven, for which you would be taxed at your marginal tax rate, probably around 35% for combined fed, state, and local. As an example, say big brother forgives $100k in loans. That year, you would pay an additional $35k in taxes. Yeah, that hurts, but not as bad as $100k. Anyways, I digress...

    Let me show you how this applies to someone like me, assumming a $225k+ loan, yearly income of $130k for the next 25 years (this *should* rise as years go on), interest rate of loans combined is ~7.4%, and married with no kids......

    Under IBR, I would make monthly payments of $1341 for the full 25 years because loan does not get payed off during this time, and remainder would be forgiven. Total cost of loan over 25 years is $402k, or about 179% of original loan, plus any tax from loan forgiveness.

    Under PAYE, I would make monthly payments of $894 for the full 20 years, then remainder would be forgiven. Total cost of loan over 20 years is $215k, or 96% of original loan, plus any tax from loan forgiveness (this tax would likely be higher than IBR example, but not by more than about $50k).

    As you can see, this PAYE program is a no-brainer from a purely financial perspective, and no other repayment plan even remotely can compare to this (except for public service 10-year thingy). The government actually REWARDS you for NOT trying to pay off your loan as quickly as possible. It is as if they are giving you a 0% interest rate on a 20-year loan (not including lump sum tax after 20 years from loan amount forgiven, but you can easily plan ahead for that).

    What's the catch, you may ask? Nothing really, but there are two things in order to qualify:

    First, no loans may have been dispersed before 2007 (or maybe 2006, can't remember). Also, one loan must have been dispersed after October 2011, or you must have done a direct consolidation after October 2011.

    Second, you must ethically be OK with doing this. While one person may view this as a tax rebate, another may view this as cheating the government and, hence, your fellow Americans.

    .....it appears fantasyland may not have ended after all. Thank you Obama!
  2. rxlea

    rxlea Unicorn in training Moderator Emeritus

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    What if someone doesn't have the 35K in taxes to pay at the end of 20 years?

    What about older students?

    They present it like there is no risk but there is. If something happens and that 20 year mark comes along and you don't have the money to pay the lump sum tax, you owe the government in the form of tax dollars. What then?

    I suppose you could enter the program now and hope that in 20 years things are different.

    The way education is financed (or not!) is ridonk. You can't send every person to college and expect everyone will get a high paying job. It's not practical. There aren't enough jobs to go around. Then people default because they majored in history and work at some coffee shop, ya know?

    I think everyone should get a fair shot but all the pressure toward a college degree is misguided. I've seen so many of my peers get a degree to only get a job that didn't require one. Are they better off? Some say no and now they are 45K+ in debt.

    I haven't had the opportunity to comb through the website so I can't really make an informed opinion yet but at face value, only some people will truly benefit. I think at a certain threshold of outstanding loans, the tax at the end might be hard to swallow.
  3. BMBiology

    BMBiology on maternity leave (again)

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    There are restrictions to the 10% for 20 year plan:

    http://thechoice.blogs.nytimes.com/2011/10/26/student-loan/

    The U.S. faces a major deficit and it wouldn't surprise me if the government changes IBR, PAYE rules for "rich" healthcare professionals. These programs were meant for teachers, public workers and students who simple can't pay back their student loans, not for well-paid healthcare professionals.
  4. BMBiology

    BMBiology on maternity leave (again)

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    In addition, these programs only apply for federal funded student loans, not private loans.
  5. FlavyFlav

    FlavyFlav

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    I plan on using IBR when I graduate as well. Even if it only lasted for a short time, it's still a great way to help me get my finances in order and pay off all of my other debt and help me get that nice 6 month expense cushion saved up. I don't think it will be going anywhere soon though (at least for 4 years anyways).
  6. pezdispenser

    pezdispenser

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    Hang on. I think you need to account for inflation. Because when you get a raise, your payments go up as well. So the total amount paid is not going to be a straight multiplication of $1,341 x 12 x 25 = $402k.

    There was a rule of thumb floating around somewhere, I don't remember exactly but I think it was that you need to have more than 2x your salary in loans, to have any left over after 25 years on IBR, which will be forgiven. This also needs to be updated for PAYE 10%x 20 yrs.

    This document has some examples:
    http://www.projectonstudentdebt.org/files/pub/IBR_forgiveness_ex.pdf
  7. grap112ler

    grap112ler

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    You have 20 years to plan ahead for this. If you can't save $35k in 20 years after saving over $100k in repayment, there is something wrong with you.

    It is likely that only those who graduated this year and in the future will qualify for this, so older grads are out of luck.

    Yes, there are restrictions. That blog post is not 100% factual, though. A loan must have been dispersed in October 2011 or later, not 2012 or later. You should be able to qualify if you graduated this year and did a direct consolidation.

    Ok, here's taking inflation and raises into account. Let's say my income increases by 5% per year. I doubt pharmacist's income will even come close to that sort of increase (over supply, we start out very high, etc), but this is just to prove my point. Over 20 years under PAYE with 5% yearly income increase, the borrower in my example would pay $384k. A straight 20-year amortization of this loan would have you paying a total of $432k, so you still save about $50k, minus taxes from forgiveness.

    I think a more realistic salary increase is about 3% per year. Under this assumption, total loan payment under PAYE would be $304k. In other words, you still save a ton of money.

    My question to all is why would you not do this if you qualify for it?
  8. BMBiology

    BMBiology on maternity leave (again)

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    A lot of things can happen in 20 years that would increase your payment. For example, if you married another pharmacist who does not have student loans, your payment will go up. You can file separately but then you would loss the tax benefits. Yes, the PAYE is better than the IBR but I still think paying it back ASAP is your best option. If you can't find a job then that is another story.
  9. type b pharmD

    type b pharmD

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    Been planning to use this repayment program ever since obama announced it.

    Only caveat will be I will have to pay off my pre-2006 loans before applying.

    Overall, I think PAYE will save me about $150k on $275,000 of loans, especially if I end up only working part time. Unfortunately, the forgiveness ends up being around 400k (550k if working part time) since loan payments dont even cover the interest. Thankfully, tax on debt forgiveness only applies to the extent that you are solvent (only pay tax on forgiveness equal to the sum of your assets.. sure as hell dont plan on having 400k in declared assets that year)
    Last edited: 11.14.12
  10. FlavyFlav

    FlavyFlav

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    This is how I planned it out, as well. Would make a great time in 20 years to take out a home equity line of credit for a few additions/upgrades/trips etc. and getting your solvency down :)

    Granted, even not knowing what's going to happen, there's nothing stopping someone from going on PAYE and still making payments as though they were trying to pay off the loan in 10 years. This would just make sure that if something goes wrong, you're not stuck with a huge payment you can't afford anymore.
  11. rxlea

    rxlea Unicorn in training Moderator Emeritus

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    This sounds like the most logical approach.

    As others pointed out, anything can happen in 20 years and you can't necessarily predict what position you may be in financially. Anything could happen.....
  12. grap112ler

    grap112ler

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    Yes, however, in my example of 3% yearly income increase, paying off this loan in 10 years would be a foolish move from a purely financial perspective. A $225k loan amortized over 10 years at 7.4% interest will cost you a total of $319k, probably more given your payments will be back-end heavy. If you just wait it out 20 years and pay the minimum under PAYE, you will only have payed (as I already pointed out) $304k, plus whatever taxes for loan forgiveness.

    As I already pointed out, my example assumes my spouse and I make $130k (i.e., spouse not working). If and when you have kids, your monthly payments will go down (due to increased poverty level) and you will save even more on the loan. You must crunch your own numbers to see what is best for you.
  13. grap112ler

    grap112ler

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    Yes, anything can happen in 20 years, but you are worrying about a one-time tax payment of maybe $70k in 20 years for something that saved you well over $200k. If someone offered you $200k right now in exchange for you paying them $70k in 20 years, surely you would take the offer?
  14. type b pharmD

    type b pharmD

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    Yep. My thoughts exactly.
  15. type b pharmD

    type b pharmD

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    When considering time value of money and net present value, (which most students and calculators are probably not doing), the decision really becomes a complete no-brainer. PAYE is basically an offer of paying much less now and a moderate amount 20 years into the future. Economically, a pure win-win.
  16. grap112ler

    grap112ler

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    Under my example you would have to pay off that loan sooner than 8.5 years to save over PAYE. That equates to a $3000 payment per month for 8.5 years.
  17. type b pharmD

    type b pharmD

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    Yes. In my situation, it would be even dumber to try paying off early. Just was agreeing that you *CAN*, to assuage the fears of the financially paranoid people.
  18. owlegrad

    owlegrad Uncontrollable Sarcasm Machine Staff Member Administrator SDN Senior Moderator

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    I agree with your line of thinking. I haven't looked into it myself (thanks for the tip OP!) but it sounds like a great deal. Don't want to ignore the one time tax expense but to write it off due to that sounds odd. Making pharmacist's salary for 20 years, I hope I can save up enough to pay the one time tax burden. ;)

    No matter how you cut it, much better deal than paying the full cost of the loan. The tax burden would always be less than the value that is being written off, so why wouldn't you do it? :confused:

    I own't lie though, finances confuse me. :oops:
  19. rxlea

    rxlea Unicorn in training Moderator Emeritus

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    Of course. What I'm saying is that people really need to be careful and plan ahead for that year...

    It shouldn't be presented as though it's risk free because it's not.
  20. type b pharmD

    type b pharmD

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    The tax burden would be MINIMAL compared to the value that is being written off.

    Example: PAYE , $900/month avg 20 year payments... on a $275k loan, after 20 years, youve paid $0 of the loan amount, paid a portion of the interest, and the most you could face is a $500k forgiveness. Even if you have a conservative 150k in assets, you still only end up paying 45k on that forgiveness. (note: by conservative i mean you were not aggressive enough in minimizing assets).

    If you have 200k or more of debt, the WORST that could happen is that you pay over a longer period but pay an effective 0% net interest rate.

    Edit: by worst, i am obviously not counting the situation where the payment plan gets abolished due to govt financial collapse, voter outrage, etc. Which , let's just say I am willing to bet $500k in forgiveness that the program remains intact, for reasons specified in earlier IBR posts.
    (but.. to help our new readers, I will summarize them again)

    Reasons why IBR/PAYE is here to stay
    --not subject to congressional appropriations and budgeting process -- no blame needs to ever be taken
    (for now at least.. the financial hit the govt takes from loan forgiveness can basically be swept under the rug)
    --voting population will become younger as baby boomers die off
    --student loan debt is "too big to fail" already and is only increasing
    --incoming generation of young and soon to be middle-aged politically active class all has high student loan debt
    --contracting or stagnant economy over next 2 decades will mean abolishing loan repayment programs would collapse the economy given the high indebtedness of the population
    Last edited: 11.14.12
  21. pezdispenser

    pezdispenser

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    Yep, let's use 3% raises per year. I was playing around with the PAYE calculator on finaid.org http://www.finaid.org/calculators/ibr10.phtml

    Total payments I got were $288k, but the weird thing was the 10% payment did not even cover the interest for the first 15 years! So the interest just kept on being capitalized, and after 20 years, $219k principal and $50k interest were forgiven!
  22. Socrates25

    Socrates25

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    Actually I'm planning on using IBR until the inevitable student loan bubble crashes. When that happens, some idiot president will put out a "loan forgiveness program" aka bailout where people with high student loans will get a brief window to amnesty their debt. Then you can discharge hundreds of thousands of dollars in debt and interest and get out free and clear!

    Hooray for bailouts! :laugh:
  23. BMBiology

    BMBiology on maternity leave (again)

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    Lets say you started undergrad in 2004 and pharmacy school in 2008. You graduated from pharmacy school in 2012. If you have been borrowing loans since 2004, you don't qualify for PAYE?
  24. type b pharmD

    type b pharmD

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    hasnt been entirely ironed out yet, but word on the street is you have to consolidate your pre-2007 loans separately.
  25. BMBiology

    BMBiology on maternity leave (again)

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    Also word on the street is that the government is 15 trillion in the hole and is looking for ways to raise revenue.

    If this is true then most new pharm grads would not qualify for PAYE.
  26. grap112ler

    grap112ler

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    Here it is straight from the horse's mouth:

    "You also must be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You are a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan as of Oct. 1, 2007, or had no outstanding balance on a Direct Loan or FFEL Program loan when you received a new loan on or after Oct. 1, 2007."
    http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn

    It looks like you would not qualify if you had any outstanding direct loans as of Oct 1, 2007 which were not paid off completely prior to accepting new direct loans.
  27. npage148

    npage148 Senior Member

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    Everyone's always looking for the easy way out. Man up to your responsibilities.
  28. type b pharmD

    type b pharmD

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    Wow! Nice! Thankfully none of my pre-2007 loans were direct :smuggrin:
  29. grap112ler

    grap112ler

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    Yes. I will man up by signing up for PAYE and then following the requirements my lender has laid out for me and making my payments on time. If my lender decides to forgive my loan, that is his/her choice.
  30. Socrates25

    Socrates25

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    Screw that. I'm sick and tired of deadbeats and 47 percenters driving up my tax rates. Its time to join the crowd!

    It's not just the welfare people either -- big business/corporate interests are screwing over the treasury too.

    I'm going to bleed the US Treasury for as much as I possibly can! :smuggrin:
  31. Momus

    Momus

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    If all you have 150k-300k in assets after 20 years of working, there is something really wrong with you.
  32. type b pharmD

    type b pharmD

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    Talking only about declared/taxable assets. For example.. taking out a cash refi during the year before forgiveness.. what you do with that money .. I cant really ethically or legally advise on that.
  33. BMBiology

    BMBiology on maternity leave (again)

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    You are basing on the assumptions that loopholes won't be closed in 20yrs
  34. type b pharmD

    type b pharmD

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    The tax structure for debt forgiveness is a fundamental part of the tax code -- it is not a loophole, it is a method of increasing economic efficiency. If they got rid of the solvency exclusion, it would basically destroy the entire system, because everyone would just file bankruptcy to get out of debt forgiveness taxes. It just does not make any rational sense to tax people on forgiven debt that they couldnt pay in the first place. With that said, I'm comfortable with my bets. (I am also not planning to participate in the regulated financial economy to as much extent as possible , .. ie, I plan to have minimal assets on the books at any given time in my life, certainly less than 100k).

    With *that* said.. I definitely understand that this plan is NOT for everyone.
    Last edited: 11.14.12
  35. BMBiology

    BMBiology on maternity leave (again)

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    219k + 50 k = 269 k is forgiven but will be taxed. How do you determine how much tax you have to pay?
  36. pezdispenser

    pezdispenser

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    Exactly! I think they will send you a 1099 which you will have to declare as income in that year. Extrapolating today's tax brackets even though we know they won't be the same in 20 years, you would pay 33% + state income tax = $89k+!
  37. rxlea

    rxlea Unicorn in training Moderator Emeritus

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    I'd like to see a payment plan for that amount :smuggrin:

    I'm sure they would be happy to garnish your wages or put a lien on your assets or, if you run and hide, throw your ass to the wolves in jail :smuggrin:
  38. BMBiology

    BMBiology on maternity leave (again)

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    I will say this again: all of these income based repayments are sh*tty. They are designed to help public workers and people who simply do not make enough to pay back their student loans, not well paid pharmacists.
  39. think

    think Junior Member

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    well this sucks... I just tried to see if i would be eligible and i am not I had one loan before 2007 and even though I graduated may 2012 my last loan was distributed July 2011..anyway around it? anyone else in the same situation?
  40. BMBiology

    BMBiology on maternity leave (again)

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    Direct loan is the cheapest loan and the most popular loan for undergrads. I am sure many people are in your situation.
  41. All4MyDaughter

    All4MyDaughter SDN Mommystrator Staff Member Administrator SDN Senior Moderator Lifetime Donor Partner Organization

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    IBR has worked out great for me so far. People have different life circumstances and there is rarely a "one size fits all" answer.
  42. BMBiology

    BMBiology on maternity leave (again)

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    Yes, if your husband makes substantially lesser than you.
  43. All4MyDaughter

    All4MyDaughter SDN Mommystrator Staff Member Administrator SDN Senior Moderator Lifetime Donor Partner Organization

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    Lesser? LOL.

    Also during residency and when not working full time.
  44. BMBiology

    BMBiology on maternity leave (again)

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    Are you offended? If IBR works for you, I think it is only fair that you explain why. If your husband is a pharmacist and does not have student loans then you would be paying a lot
  45. BMBiology

    BMBiology on maternity leave (again)

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    also to be fair, each person is different. You should do the calculation yourself.
  46. All4MyDaughter

    All4MyDaughter SDN Mommystrator Staff Member Administrator SDN Senior Moderator Lifetime Donor Partner Organization

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    :laugh: No, not offended. Well, maybe on behalf of the written word... anyway, he does make LESS than I do, although his benefits and stock options are better. No student loans for him. IBR works for us because I was a resident, then started my own business this year. Our AGI is pretty low. Lots of deductions. Looking good for next year too. I am probably going to work part time and we just had another deduction (baby).

    Kudos for saying something realistic. Nice change from the usual "IBR SUX" and "those with loans can't get homes" blanket statements. :thumbup:
  47. BMBiology

    BMBiology on maternity leave (again)

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    Of course what I post is not absolute. The concerns I have raised are valid, however.
  48. queenietess

    queenietess

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    Just spoke to my loan servicer on the phone (Direct Loan servicing center) and it turns out that PAYE is currently on hold and cannot be used just yet. I was told to check back in a few weeks.
  49. Orbit314

    Orbit314

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    I have 3 questions

    1) How do you calculate how much taxes you may owe after 20 year loan forgiveness.
    2) If you cannot pay those taxes are you liable for any type of illegal tax evasion? Or does if fall into non-student loan debt and just hurt your credit score... I am not sure how that works.
    3) Is there loan forgiveness on the IBR program?
  50. pezdispenser

    pezdispenser

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    I think in that era, FFEL Program loans were the usual Stafford loans but from companies like SallieMae, Nelnet, Access Group, etc. "Direct Loans" were rare during that time. Then the entire student loan industry was socialized ( :laugh: ) around 2010, so all loans from then on were "Direct Loans" from the government.

    So my interpretation is you can't have any Staffords from before Oct 1, 2007 (including undergrad), and you need at least 1 direct loan after Oct 1, 2011. I guess Class of 2012 grads would be the first, as long as they don't have Staffords from undergrad. This is all for the latest PAYE 10% x 20 yrs. You can still get the old IBR 15% x 25 yrs.

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