4 Year Update on "How to save over $100k on your student loans"

[grap112ler]

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Hey everybody, since I was last active/mostly-lurking on this forum, I've been busy with kids, work and life. I thought I would post a 4-year update to my original thread "How to save over $100k on your student loans", since it was the first thread (that I could find) on this forum that went into detail about the new-at-that-time PAYE student loan repayment plan.

For those not aware what PAYE is, it's an income-based repayment plan that has you pay 10% of your discretionary income towards your student loan. Discretionary income is defined as your AGI minus 150% of poverty level for you family size. After 20 years of payments, you loan is forgiven, but the balance forgiven is treated as taxable income (unless you work for a non-profit, then it's even better). PAYE was/is awesome because older IBR plans made you pay 15% of your discretionary income for 25 years, which was terrible for most people.

As a review, I went to a private pharmacy school and originally owed about $225k upon graduation in 2012, at an average weighted interest rate of 7.11%. I believe on page 2 of the thread, after I accounted for some variables that I originally neglected, I came to the conclusion that I would actually save about $10k in today's dollars rather than $100k by taking as long as possible to pay off the loan.

These are my current assumptions:

• Inflation rate: 2%
• Yearly income increase: 3% (i have been more like 3.5%, which is close enough)
• Family size: 4
• Federal and State marginal tax rates and brackets for 2032 are the same as today
• I am not dead by then (if dead, all loans completely forgiven)
• I still live in the US (if I flee/emigrate permanently, I won't pay another nickel)
• I continue working for a for-profit employer
• I still live in California when loan is forgiven and I am taxed on that amount as income

Here's an update on my current projected savings/losses:

When my loan is forgiven in 2032, my loan will have a balance of $341k, which will count towards my taxable income that year. Based on today's dollars, by the time my loans are forgiven in 2032 I will have paid a total of $288k broken down as follows:

• $188k in student loan payments
• $100k in fed and state taxes on the forgiven loan balance, which will be due in 2033

If I had instead payed the loan off as fast as possible, this is how much I would have payed in today's dollars:

• 5-yr payoff @ $4411/month - $267k
• 6-yr payoff @ $3800/month - $273k
• 7-yr payoff @ $3366/month - $283k
• 8-yr payoff @ $3042/month - $292k

As you can see, busting my butt for 7 years or less makes the loan cheaper overall, but who can afford a monthly loan payment of $3366? Not me. I would say a reasonably motivated pharmacist can probably afford about $2500 month if you live cheaply, budget very well, or live with mom and dad. A $2500 monthly payment would let me pay off the loan in 11 years at a total cost of about $315k in today's dollars. No thanks!

My current monthly loan payment is $735. This relatively low payment has allowed me to:

• Buy a house (with a back yard for the kids). I could never buy a house with a $2500+ monthly student loan payment
• Take nice vacations. How you gonna take nice vacations in the prime of your life if you got a $2500+ loan payment?
• Live in a nice area. I don't wanna live the "ghetto" for 10 years while I'm paying my loan cuz I can't afford rent in a nice area
• Buy whatever else I want

I have no regrets choosing to pay off the loan the way I'm doing it. The 4-year updated verdict is that I am still on course to at least break even, if not save up to $30k over the option of paying $2500 monthly for 11 years. If I can get a good job for a non-profit company, I will pay NO tax on the forgiven loan amount, which actually would save me $100k.

 

[awval999]

In 2017 the first borrowers are eligible for forgiveness. We shall see how it goes.

 

[PharmDBro2017]

Interesting.

 

[owlegrad]

Don't they adjust the amount you have to pay every year based on your income? How have you kept your payments that low?

I ask because I did PAYE my first year of being a pharmacist but by the second year my payments we're the same as the standard repayment scheme.

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[rxdawg21]

Don't they adjust the amount you have to pay every year based on your income? How have you kept your payments that low?

I ask because I did PAYE my first year of being a pharmacist but by the second year my payments we're the same as the standard repayment scheme.

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You obviously have a low standard repayment. Someone with >200k in loans does not, as he has said he would owe >$2500 a month to pay off his loans in 10 years. I don't know any pharmacist making 300k AGI-150% of poverty level.

He also has write offs that lower his AGI, like contributing to retirement . Based on OP's monthly payment his AGI-150% of poverty level is 88k, certainly a normal amount if heavily contributing to retirement.

edit due to mortgage not reducing your AGI

 

[pezdispenser]

He also has write offs that lower his AGI, like contributing to retirement and a mortgage. Based on OP's monthly payment his AGI-150% of poverty level is 88k, certainly a normal amount if heavily contributing to retirement and interest and property tax write offs.

Mortgage interest, property tax and most other deductions do not reduce AGI.

 

[Lexington2012]

I wish there was some sort of calculator where you could type in your balances, interest rate, and other variables. I've seen a few but they all seem to be lacking in one way or another.

 

[BMBiology]

I am not going to go over your calculations because I don't have the time and because you didn't post your numbers. But I am glad you admit you are not going to "save 100k".

Even if your calculation is accurate, I don't even think you will save "10 k" because you could have invested that money...opportunity loss.

I already see your future. You will continue to work, maybe even at a job you hate, because you have so much debt. The system is set up for debtors like you so you can borrow more than you need, buy a house you can't afford, take fancy vacations so you can post them on FB. All of these things are based on the assumption that you will work for the next 30 years as a pharmacist. No room for mistakes here. No period of unemployment. Can't never work less or everything will come crashing down on you.

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[steveysmith54]

So the big question is what will happen in 3032? How much of this taxable income do u have to pay? To me this is a huge deal that people overlook

 

[pezdispenser]

When my loan is forgiven in 2032, my loan will have a balance of $341k, which will count towards my taxable income that year. Based on today's dollars, by the time my loans are forgiven in 2032 I will have paid a total of $288k broken down as follows:

• $188k in student loan payments
• $100k in fed and state taxes on the forgiven loan balance, which will be due in 2033

I don't think you should adjust to today's dollars for the total payments. If you just leave it as is, with 3% raises every year:

1st year: $735 x 12 = $8,820
2nd year: $8,820 x 1.03 = $9,084.60
...
20th year: $15,465.92
subtotal of all payments = $237k

But actually the current REPAYE plan only gives forgiveness after 25 years if you have graduate student loans, so the total of all payments after 25 years is $322k.

 

[Monsterdaddy]

I already see your future. You will continue to work, maybe even at a job you hate, because you have so much debt. The system is set up for debtors like you so you can borrow more than you need, buy a house you can't afford, take fancy vacations so you can post them on FB. All of these things are based on the assumption that you will work for the next 30 years as a pharmacist. No room for mistakes here. No period of unemployment. Can't never work less or everything will come crashing down on you.

This is inaccurate, there's plenty of room for "mistakes" as you call it (more accurate to just call them "s--t happens".)

Income based repayment plans have a built in safety net, if your income is reduced for any reason including unemployment you can ask for an immediate recalculation and even if the new payment is zero it will still count towards your total repayment requirements. You can even choose to take a leave of absence and your payment will be down to zero but still count. This is obviously a much looser requirement than PSLF since your PSLF payment must be qualified with full-time public/non-profit employment. Unemployment will not void eligibility for PSLF, it just extends the time needed to complete 120 qualified payments.

As for the taxes on forgiven debt, the tax codes allows an exception if you are insolvent (liabilities > assets). Sounds difficult but for people with children it's quite possible you could be liable for a large amount of ParentPLUS loans after burning down your liquid assets for college. You can also juggle your assets and debts legally. And there is the strong possibility the forgiven amounts may become legally exempt with future legislation. So far, all proposals for debt reform that I have read about include this provision.

 

[BMBiology]

This is inaccurate, there's plenty of room for "mistakes" as you call it (more accurate to just call them "s--t happens".)

Income based repayment plans have a built in safety net, if your income is reduced for any reason including unemployment you can ask for an immediate recalculation and even if the new payment is zero it will still count towards your total repayment requirements. You can even choose to take a leave of absence and your payment will be down to zero but still count. This is obviously a much looser requirement than PSLF since your PSLF payment must be qualified with full-time public/non-profit employment. Unemployment will not void eligibility for PSLF, it just extends the time needed to complete 120 qualified payments.

As for the taxes on forgiven debt, the tax codes allows an exception if you are insolvent (liabilities > assets). Sounds difficult but for people with children it's quite possible you could be liable for a large amount of ParentPLUS loans after burning down your liquid assets for college. You can also juggle your assets and debts legally. And there is the strong possibility the forgiven amounts may become legally exempt with future legislation. So far, all proposals for debt reform that I have read about include this provision.

You don't understand human nature. Since he is using PAYE, he is going to use his money for other things like buying a house, going to fancy vacations. This is why he is heavily in debt and therefore, he can't make any mistakes in the future. That is a debtor life.

Don't think you are not going to taxes on forgiven amount because your liabilities > assets because your retirement funds like 401 k is counted as an asset. You can forgo your 401 k and miss out on all the matching funds and gains in the stock market but that is a huge hit on your retirement money.


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[grap112ler]

I don't think you should adjust to today's dollars for the total payments. If you just leave it as is, with 3% raises every year:

1st year: $735 x 12 = $8,820
2nd year: $8,820 x 1.03 = $9,084.60
...
20th year: $15,465.92
subtotal of all payments = $237k

But actually the current REPAYE plan only gives forgiveness after 25 years if you have graduate student loans, so the total of all payments after 25 years is $322k.

You have to adjust for today's dollars to accurately get a sense for the true cost.

My loan is not on the REPAYE plan, it's on the PAYE plan, which has a repayment term of 20 years.

 

[grap112ler]

So the big question is what will happen in 3032? How much of this taxable income do u have to pay? To me this is a huge deal that people overlook

As I stated in the post, I will owe ~$100k in today's dollars in taxes on the amount forgiven. I have not overlooked this. If I get a job with a non-profit company in the next 6 years and stay with them for 10, I will owe no taxes on the balance forgiven.

 

[grap112ler]

I am not going to go over your calculations because I don't have the time and because you didn't post your numbers. But I am glad you admit you are not going to "save 100k".

Even if your calculation is accurate, I don't even think you will save "10 k" because you could have invested that money...opportunity loss.

I already see your future. You will continue to work, maybe even at a job you hate, because you have so much debt. The system is set up for debtors like you so you can borrow more than you need, buy a house you can't afford, take fancy vacations so you can post them on FB. All of these things are based on the assumption that you will work for the next 30 years as a pharmacist. No room for mistakes here. No period of unemployment. Can't never work less or everything will come crashing down on you.

You don't understand human nature. Since he is using PAYE, he is going to use his money for other things like buying a house, going to fancy vacations. This is why he is heavily in debt and therefore, he can't make any mistakes in the future. That is a debtor life.

Don't think you are not going to taxes on forgiven amount because your liabilities > assets because your retirement funds like 401 k is counted as an asset. You can forgo your 401 k and miss out on all the matching funds and gains in the stock market but that is a huge hit on your retirement money.

I'm glad we still disagree after 4 years 🙂 That means we're both happy with the choices we've made.

To answer some of your concerns, I max out my 401k and get the full employer match, as well as max out an IRA account for my wife (I also put money into a ROTH IRA, though rarely max it out). This helps keep my AGI low, which keeps my monthly payment low. I would not do this if I were being extremely aggressive with my loan repayment, so I am actually saving more money for retirement right now. My house is affordable for me, though I do live coastal southern California. We bought only as much as we needed in a nice area, and it has appreciated 15% since we purchased it 2 years ago. I agree that our economy is a debtor economy. It's purpose is to allow us access to our future excessive wealth. Without it, neither you nor I could have gone to pharmacy school (assuming you took out loans and your parents didn't pay tuition for you or you are indepently wealthy).

As far as hating my job, let's face it, most people hate their jobs. Many pharmacists hate their jobs. Do I hate my job? Some days, but usually it's tolerable and sometimes enjoyable. Do I wish I could be on permanent vacation, traveling the world? Yes. The reality, though, is that I have a family to support, and in 15 years will be putting kids through college. That means I'll be working at least 25 more years.

As I stated, my method will not cost me more money than if I had been reasonably aggressive. It will probably even save me a few $10k given that I cannot afford a monthly payment of $3300 (most people cannot, either). I think it's great that some people are able to pay off their loans quickly if it saves them money over the long run. For others like me with high loans, it might make better financial sense to use my method and drag out the loan as long as possible. Everyone has to crunch the numbers for their own situation.

 

[Momus]

There are plenty frugal families living on 20-30k a yr even though they bring in 200-300k while busting their ass with another job or two. But, op mentality is living well in good neighborhood, traveling, getting a nice house and buy whatever else he wants. It can't be helped. It's hard to sacrifice your own comfort zone.

 

[BMBiology]

People rarely prepare themselves for hard times. It will come. It always does.

Everybody thinks he is going to work for the next 30 years and therefore, he can afford X, Y, Z just as long as he can afford the monthly payment. With that mentality, I can afford to buy a $300 k Ferrari if they let me pay it off over 30 years.

Programs like PAYE disincentivized people from working hard during their prime years. Their lives evolve around paying off this debt. The less, the better. Why work overtime? The more they make, the more they pay. So they take it easy, taking on more debt and then suddenly something happened and they are crushed.


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[a student]

Even if your calculation is accurate, I don't even think you will save "10 k" because you could have invested that money...opportunity loss.

Shouldn't it be the aggressive payers who are missing out on opportunity cost?

 

[BMBiology]

Shouldn't it be the aggressive payers who are missing out on opportunity cost?

Nope. When you are paying your loans, you are saving 7% interest rate. You are not going to get a 7% guarantee rate of return anywhere.


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[a student]

Nope. When you are paying your loans, you are saving 7% interest rate. You are not going to get a 7% guarantee rate of return anywhere.


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So far, his house appreciated 15%.

 

[BMBiology]

So far, his house appreciated 15%.

Most people don't make much money from selling their house when adjusted for inflation.

It cost 10% to buy and sell a house, then you have annual property tax, maintenance cost (about 1% of the house), private mortgage insurance (if you didn't put down 20%), mortgage interest rate, etc.

The funny thing is he probably can't refinance his student loan now and get 4% interest rate because he has so much debt. If he has been aggressive during the last 4 years, he could have paid everything off and be debt free today.


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[pezdispenser]

You have to adjust for today's dollars to accurately get a sense for the true cost.

But some of your figures or points of view are adjusted and others are not, so you cannot compare them to each other. You can either adjust all of them, or none of them and just deal with the inflation.

For example, are your figures for the 5-8 year payoff really adjusted to today's dollars? It doesn't look like it to me, so you can't just compare year 7 unadjusted, to PAYE adjusted for 20 years like you did because they are at different time points.

Also you said "who can afford a monthly loan payment of $3366?" Well if you start off making $130k and get 3% raises for 7 years you will be making $155k so you probably will be able to afford a $3366 monthly payment by then.

 

[waiter]

I agree. REPAYE is a game changer and the optimal repayment method for me.

 

[grap112ler]

Most people don't make much money from selling their house when adjusted for inflation.

It cost 10% to buy and sell a house, then you have annual property tax, maintenance cost (about 1% of the house), private mortgage insurance (if you didn't put down 20%), mortgage interest rate, etc.

The funny thing is he probably can't refinance his student loan now and get 4% interest rate because he has so much debt. If he has been aggressive during the last 4 years, he could have paid everything off and be debt free today.

Cost to sell a house in SoCal is about 3-5%, depending on your realtor. Buying is more like 1-2%. Area's with cheaper housing would cost relatively more compared to the price of housing. I have no PMI because I have 20%+ equity.

As I've demonstrated, at worst I will break even with the aggressive approach with the loan at 7.1%. If I had refi'd the loan and gotten a 4% rate (doing dirty number crunching on phone) this would have at best saved me $20k, and at worst broken even with my current approach, with the added disadvantage of no loan forbearance, no house, no vacation, and a miserable 5 to 10 years of life. And there's no way I could have been debt-free in 4 years. It would have taken at least 8 years. The loan is simply too large, I am the sole provider for my family of 4, and I live in an expensive area.

Edited for slight grammatical error I noticed.

 

[BMBiology]

You have to adjust for today's dollars to accurately get a sense for the true cost.

My loan is not on the REPAYE plan, it's on the PAYE plan, which has a repayment term of 20 years.

It would be helpful if you post your numbers:

Income and AGI for you and your wife.

Don't you want to know how much this program is saving or costing you?




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[grap112ler]

But some of your figures or points of view are adjusted and others are not, so you cannot compare them to each other. You can either adjust all of them, or none of them and just deal with the inflation.

For example, are your figures for the 5-8 year payoff really adjusted to today's dollars? It doesn't look like it to me, so you can't just compare year 7 unadjusted, to PAYE adjusted for 20 years like you did because they are at different time points.

Also you said "who can afford a monthly loan payment of $3366?" Well if you start off making $130k and get 3% raises for 7 years you will be making $155k so you probably will be able to afford a $3366 monthly payment by then.

My 5-8 year payoff approach uses 2012 dollars cuz I was too lazy to adjust those. Everything else is in 2016 dollars. This means that the 5-8 year payoffs would actually be a tad bit more expensive in today's dollars (in the range of 2 - 5% more), and the numbers would work more in my favor of playing the waiting game rather than being an aggressive payor.

Quick math on $140k gross income, which is standard pay for my area (full-time work with some occasional OT):

• $18,000 to 401k
• $14,000 for family of 4 medical/dental/vision insurance through employer (only my personal cost is subsidized, which is pretty standard)
• $7,180 social security
• $1,000 CA disability tax
• = ~$100k pretax
• = ~$80k after tax
• = ~ $6,650 take home

I'm sorry, but there is no way you can afford to pay $3366 monthly in student loans if your take is $6650 living in coastal SoCal supporting a family of 4. That would leave you with only about $3,300 monthly for *everything*, including rent. Rent would be at least $2,200, possibly $2,500.

If you're living in Texas, sure, that might work.

Anyways, gotta go to work. Talk to you all later

 

[BMBiology]

Cost to sell a house in SoCal is about 3-5%, depending on your realtor. Buying is more like 1-2%. Area's with cheaper housing would cost relatively more compared to the price of housing. I have no PMI because I have 20%+ equity.

As I've demonstrated, at worst I will break even with the aggressive approach with the loan at 7.1%. If I had refi'd the loan and gotten a 4% rate (doing dirty number crunching on phone) this would have at best saved me $20k, and at worst broken even with my current approach, with the added disadvantage of no loan forbearance, no house, no vacation, and a miserable 5 to 10 years of life. And there's no way I could have been debt-free in 4 years. It would have taken at least 8 years. The loan is simply too large, I am the sole provider for my family of 4, and I live in an expensive area.

Edited for slight grammatical error I noticed.

This is what I don't like about people coming on this forum and telling half the story.

First, your wife does not work.

Second, you already have 2 kids.

These two factors help keep your monthly payment low. Most new graduates do not have a kid and they will most likely marry someone who makes a similar income. Their situation won't be like your situation and therefore, programs like PAYE will cost them more money.

I think as a courtesy you should at least explain your situation and your calculation.

And yes, it cost 10% to buy and sell a house. You are going to fix the house and make it look all pretty when you sell it right? Add everything up and it will cost you 10%.

http://www.moolanomy.com/6279/the-cost-of-buying-and-selling-a-home/



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[rxdawg21]

This is what I don't like about people coming on this forum and telling half the story.

First, your wife does not work.

Second, you already have 2 kids.

These two factors help keep your monthly payment low. Most new graduates do not have a kid and they will most likely marry someone who makes a similar income. Their situation won't be like your situation and therefore, programs like PAYE will cost them more money.

I think as a courtesy you should at least explain your situation and your calculation.

And yes, it cost 10% to buy and sell a house. You are going to fix the house and make it look all pretty when you sell it right? Add everything up and it will cost you 10%.

http://www.moolanomy.com/6279/the-cost-of-buying-and-selling-a-home/



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PAYE does not take into account spouses income if you file separately, neither does ibr, although ibr is nowhere near the same deal. Repaye forces you to count both incomes.

Also if pslf ends up being grandfathered for people already doing it that is the winning deal. Correct me if I'm wrong but I believe interest doesn't capitalize on itself in paye as well

 

[BMBiology]

PAYE does not take into account spouses income if you file separately, neither does ibr, although ibr is nowhere near the same deal. Repaye forces you to count both incomes.

Also if pslf ends up being grandfathered for people already doing it that is the winning deal. Correct me if I'm wrong but I believe interest doesn't capitalize on itself in paye as well

Of course it does but he should at least say those things in his post, instead of starting an eye grabbing thread entitled, "how to save 100 k on your student loan".

Let's face it. A lot of people are ignorant when it comes to money. Threads like this only give people a false sense security.


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[confettiflyer]

So the big question is what will happen in 3032? How much of this taxable income do u have to pay? To me this is a huge deal that people overlook

I'll take a wild guess the United States won't exist in 3032, or global warming will turn us into something that resembles The Hunger Games. No student debt there!

 

[confettiflyer]

PAYE does not take into account spouses income if you file separately, neither does ibr, although ibr is nowhere near the same deal. Repaye forces you to count both incomes.

Also if pslf ends up being grandfathered for people already doing it that is the winning deal. Correct me if I'm wrong but I believe interest doesn't capitalize on itself in paye as well

This is correct, but technically speaking all schemes take into account family size so, indirectly, having a spouse increases the amount of exempt income even if they bring zero income to the equation.

 

[steveysmith54]

As I stated in the post, I will owe ~$100k in today's dollars in taxes on the amount forgiven. I have not overlooked this. If I get a job with a non-profit company in the next 6 years and stay with them for 10, I will owe no taxes on the balance forgiven.

that's a HUGE "IF". Consider the worst case scenario, or the scenario that you're in now, meaning you do not have/will not have a non profit job, WILL you have the 100K to pay in taxes? what if you don't, does the government have the right to take ur house?

 

[Pharmacy Kid]

The amount forgiven under PSLF is not taxed.

 

[grap112ler]

that's a HUGE "IF". Consider the worst case scenario, or the scenario that you're in now, meaning you do not have/will not have a non profit job, WILL you have the 100K to pay in taxes? what if you don't, does the government have the right to take ur house?

I don't count on working for a NPO, so I assume I WILL have to pay $100k in taxes when the balance is forgiven UNLESS there is a change in legislation with how forgiven loans are treated, which is highly improbable.

 

[grap112ler]

Correct me if I'm wrong but I believe interest doesn't capitalize on itself in paye as well

You are mostly correct. Interest does not capitalize on PAYE unless a few things happen:

• You default
• You consolidate
• You no longer qualify for PAYE
• Changing your payment plan *may* cause capitalization, but I can't remember

I also think (may be wrong, someone needs to fact check), that until your loan balance is 110% of the original balance, interest will capitalize. Once the balance hits 110%, interest stops capitalizing unless one of the above items occurs.

 

[grap112ler]

There are plenty frugal families living on 20-30k a yr even though they bring in 200-300k while busting their ass with another job or two. But, op mentality is living well in good neighborhood, traveling, getting a nice house and buy whatever else he wants. It can't be helped. It's hard to sacrifice your own comfort zone.

Totally agree. Lifestyle inflation is a real thing. We all suffer from it, and I don't deny I do. That was the whole point in getting a good-paying job.

I'm not so sure there are many frugal families in my area able to live on 20-30k per year, though. That's just the cost of rent/mortgage for the year. A small family could probably sqeak by on 45k if they had to. That would be way hard. One major car repair and your budget is screwed.

 

[grap112ler]

Nope. When you are paying your loans, you are saving 7% interest rate. You are not going to get a 7% guarantee rate of return anywhere.

You are correct on a normal, non-dischargable loan. My loan differs in that it will eventually be forgiven, so my "effective" rate of return on paying off my loan is much, much less than 7%. It's been so long since I've taken a financial class that it would take me forever to figure out the effective rate given the large balloon payment I owe at the end due to taxes.

It would be helpful if you post your numbers:

Income and AGI for you and your wife.

Don't you want to know how much this program is saving or costing you?

I showed in the original post what this program is costing or saving me. AGI will be around $120k this year. Not really sure what you mean by income? Gross? Net? Either way, I don't see how it plays much of a role in the analysis. Income of wife doesn't matter in the analysis.

This is what I don't like about people coming on this forum and telling half the story.

First, your wife does not work.

Second, you already have 2 kids.

These two factors help keep your monthly payment low. Most new graduates do not have a kid and they will most likely marry someone who makes a similar income. Their situation won't be like your situation and therefore, programs like PAYE will cost them more money.

I think as a courtesy you should at least explain your situation and your calculation.

And yes, it cost 10% to buy and sell a house. You are going to fix the house and make it look all pretty when you sell it right? Add everything up and it will cost you 10%.

Whether or not a spouse works or how much they make does not impact PAYE.

As a new grad, I did not have two kids, either. They came latter, similar to most others that become pharmacists. But I stated in my original assumptions what my family size currently is. Besides, each kid only lowers your monthly payment by $52, so it's a rather minor detail.

When we bought our house, all the fees associated with the loan, title, escrow, and whomever else we paid were about $4k, which was about 1% of the cost of the house. We did not pay any points. There was other money that left our accounts, but it went towards the down payment and into the escrow account. I don't count money going *into* the escrow account a true cost of buying a house, as the escrow account represents part of the cost of owning the house.

 

[grap112ler]

Of course it does but he should at least say those things in his post, instead of starting an eye grabbing thread entitled, "how to save 100 k on your student loan".

Let's face it. A lot of people are ignorant when it comes to money. Threads like this only give people a false sense security.

I hear you. People gotta crunch the numbers for themselves and do what's best for their situation. I admit my original thread title from 2012 was a little over the top, but it was only originally intended to compare PAYE with traditional IBR (you'll see that if you go back and read my post linked in my first comment of this thread). No one was really talking about or knew much about PAYE back then, so I was trying to introduce it to all those who could benefit from it. People who were originally planning on using IBR and taking the slow-ish route to repayment (like almost everyone in my graduating class) were going to lose a fortune by not switching to PAYE. That this method is also highly competitive with, and possibly better than, an aggressive approach to repayment in limited situations like mine is fascinating.

Edit to fix duplicate word

 

[grap112ler]

I agree. REPAYE is a game changer and the optimal repayment method for me.

It's been a while since I've studied up on the various repayment plans, but doesn't REPAYE require 25 years of payment? If so, that's a harder plan to swallow, and would almost certainly be much more expensive than an aggresive payoff if you have the financial means of doing an aggressive payoff, unless you make very little money.

Are you not eligible for PAYE?

 

[SmallCapPharma]

Don't know why BMBiology is pushing his option of payment so hard. The evidence presented has been refuted.

Bottom line is you will end up paying the same or even slightly less, while living a much better life under PAYE.



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[BidingMyTime]

Don't know why BMBiology is pushing his option of payment so hard. The evidence presented has been refuted. Bottom line is you will end up paying the same or even slightly less, while living a much better life under PAYE.

Bottom line is, there is a freedom with not having debt. It gives people more options. Maybe many people wouldn't ever need those options, but no one knows for sure who will end up needing those options--which is why I agree, its best to pay off debt ASAP.

 

[owlegrad]

So far, his house appreciated 15%.

But is his house an investment or an expense?

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[BMBiology]

Your spouse income does matter:

https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#section1

Loan: $225,000 (7.1% interest rate)
Family size: 4

(1) scenario #1 (husband AGI: $120,000; wife AGI: $0)

Total amount paid: $305,646
Total forgiveness: $238,854

(2) scenario #2 (husband AGI: $120,00; wife AGI: $60,000, no loan):

Total amount paid: $433,123
Total forgiveness: $69,862





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[BMBiology]

Here are three scenarios ($225,000 student loan; adjusted for inflation):

(1) PAYE [family AGI: $160,000; interest rate: 7.1%; annual income growth: 0 (to cancel inflation)]

https://studentloanhero.com/calculators/pay-as-you-earn-calculator/

Total Amount Paid: $268,375
Total Forgiveness: $275,958 (taxed at 35% for federal and state)

So total: $268,375 + $275,958 x 0.35 = $351,162

(2) PAYE [family AGI: $120,000; interest rate: 7.1%; annual income growth: 0 (to cancel inflation)]

https://studentloanhero.com/calculators/pay-as-you-earn-calculator/

Total Paid: $148,375
Total forgiveness: $395,958 (taxed at 40% for federal and state)

So total: 148,375 x 395,958 x 0.4 = $306,758

(3) 5 year plan (refinanced interest rate: 4%)

https://studentloanhero.com/calculators/student-loan-prepayment-calculator/

So total: $4207 monthly x 12 months x 5 years: $252,420 (should be 5% less when adjusted for inflation: $240,000)


Conclusion: by refinancing your student loans from 7.1% to 4% and by paying it off in 5 years, you save $65,000 to $110,000 vs. PAYE

Of course I am sure most people would rather go with the 20 year PAYE plan because it is the easier option but I don't think you can dispute the fact that you will pay a lot less with the 5 year plan.


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[BMBiology]

Most people end up taking the easy road and take on more debt. This is why they are a slave to the system and have to work at a job they hate just to pay the bills.

 

[PharmDBro2017]

I appreciate seeing the different perspectives here, so thank you all for contributing to the thread.

As a student about to graduate in May, I enjoy reading threads like this and it helps me plan for my future.

 

[grap112ler]

Your spouse income does matter:

https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#section1

Loan: $225,000 (7.1% interest rate)
Family size: 4

(1) scenario #1 (husband AGI: $120,000; wife AGI: $0)

Total amount paid: $305,646
Total forgiveness: $238,854

(2) scenario #2 (husband AGI: $120,00; wife AGI: $60,000, no loan):

Total amount paid: $433,123
Total forgiveness: $69,862

You can do taxes married filing separately and exclude spouse's income.

 

[BMBiology]

You can do taxes married filing separately and exclude spouse's income.

Then you lose tax benefits by not filing together and end up paying more income tax.


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[grap112ler]

**********EDIT 10/16/2016:

I checked my numbers/math and found my mistake. The long repayment method of PAYE (how I am repaying, though these numbers aren't exactly mine because my interest has already capitolized to 110% of loan value) with assumptions of an initial balance of $225k at 7.1%, family of 4, AGI of $120k, 2% inflation, and income increase equal to inflation, yields a loan cost of about $275k in today's dollars.

The aggresive method, wherein a person immediately refi's the loan to 4%, costs $239k in today's dollars. This a savings of $36k over the PAYE method. But it has a monthly payment of $4144. Most borrowers in this scenario (including me) can't afford that.

A monthly payment I probably could afford after some serious scaling back of lifestyle inflation (and what the borrower in this scenario likely could afford) would be about $2500. At that payment with a 4% refi, it would take 9 years to pay off and the loan costs $247k in today's dollars, saving $28k over the PAYE method.

At a term of 15 years with a 4% refi, the loan has a monthly payment of $1664 and costs $261k in today's dollars, saving $14k over the PAYE method.

The borrower of our example would need to decide if the safety measures offered by remaining in PAYE are worth paying an extra $14k - $36k for. I actually see that as a difficult choice given the borrower in this scenario is the sole provider for the family.

One issue with dumping so much money into a 4% loan is that you could be making 7% to 8% over the long run investing that money in index funds instead. It would be interesting to include that in an analysis.

(I think I'll also put this info in a new post on this thread, given the importance of the information to new grads)

END EDIT**********

(2) PAYE [family AGI: $120,000; interest rate: 7.1%; annual income growth: 0 (to cancel inflation)]

https://studentloanhero.com/calculators/pay-as-you-earn-calculator/

Total Paid: $148,375
Total forgiveness: $395,958 (taxed at 40% for federal and state)

So total: 148,375 x 395,958 x 0.4 = $306,758

View attachment 209906

I think your approach of assigning income growth as 0 to cancel inflation is too simple to account for the balance of the loan after 20 years. When I do this same calculation using the same assumptions you do using Excel my result is a total cost of $247k in today's dollars. I will check my math tomorrow for errors, though, and update the post if the numbers change.

 

[confettiflyer]

Then you lose tax benefits by not filing together and end up paying more income tax.

That depends on the income level of the spouse, dependents, etc... I think if you have two people of equal incomes, it's a wash, whereas if you have a stay at home spouse, MFJ is the most advantageous (that's double the exemptions for the income earned by the breadwinner).