Public Service Loan Forgiveness

[pharmasaur]

has anyone currently signed up for the Public Service Loan Forgiveness program? the one where you work for 10 years in a nonprofit (ie, some hospitals) and get the rest of your loans forgiven after 10 years? trying to figure out if its worth it for pharmacy or not

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[mustang sally]

I don't know if it's something you necessarily "sign up" for but I am signed up for IBR and work at a non-profit. I'll let you know how it goes in ten years if I have any balance left to be forgiven by then.

You can always apply for IBR and make more than your minimum payment…though it might come a time when you won't qualify for IBR anymore that way.

 

[xiphoid2010]

has anyone currently signed up for the Public Service Loan Forgiveness program? the one where you work for 10 years in a nonprofit (ie, some hospitals) and get the rest of your loans forgiven after 10 years? trying to figure out if its worth it for pharmacy or not

It really depends on how much loans you have. My wife and I had $230k combined, and after my residency our income were >$250k/yr, the IBRbecame => 10 yr repayment. PSLF became moot, and it made more sense to max repayment to pay it off in 3 yrs and save >$50k on interest.

But say if our IBR was < 10 yr repayment, the situation becomes complicated. For back of napkin calculation, I would compare the scenario of (a) interest saved by max payment while still maxing out 403b+ back door Roth IRA vs. (b) amount forgiven by PSLF after paying 10 years IBR (if you plan to marry during that time, project a combined income and debt). Dont forget to normalize both to present value. Also i would discount amount of PSLF in a small % risk/uncertainty (i would hazzard 5-10%) due to risk of legislative change. Obviously, the more outrageously large the loan amount, the more it a make sense to risk PSLF.

 

[BMBiology]

If you can get on it then you should. Financially it makes sense. After 10 years your federal loans are forgiven. Gone. Done. No tax bomb like IBR and PAYE ( don't have to pay taxes on the forgiven amount).

However there is already some discussion about capping the forgiven amount to just 57 k (this is in the Obama budget proposal). The odd is that it won't be around. Will people be grandfathered in? That is the question. We should know what will happen after the mid term election.


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[confettiflyer]

Will people be grandfathered in? That is the question. We should know what will happen after the mid term election.

The DOE's official guidance on the pending legislation (aka the Obama budget) is that people would be grandfathered in. Legislatively, however, that can also be changed/amended.

As for the OP...as with all things finance, it depends on the situation. This topic has been discussed ad infinitum on these forums, have a dig and you'll find a lot of fiery discussion.

 

[xiphoid2010]

I was wondering wehn you two will show up. Didn't take long did it? Are you guys on the west coast? Back to work!

 

[BMBiology]

Politically it doesn't make sense to keep this program when it would forgive 200 k to those who can actually afford to pay for it (or perceived by the public to be well off).

That is why I think the program will be changed. It is just a matter of time. The big question is will congress grandfather those who have already enrolled in the program.


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[xiphoid2010]

Politically it doesn't make sense to keep this program when it would forgive 200 k to those who can actually afford to pay for it (or perceived by the public to be well off).

That is why I think the program will be changed. It is just a matter of time. The big question is will congress grandfather those who have already enrolled in the program.

While I agree with you that it is not feasible in the long term (there are just too many holes in this ship: SS, medicare/aid, student loans, that they will be forced to plug some up to balance cash flow), I do think that current enrollees will most likely be grandfathered in. Whether I like the US government or not, it does have more sense of fairness than most countries, and wouldn't reneg contractual obligations unless it really was impossible. Hence I would only suggest a 5-10% discount on the present value to run that risk. Maybe not the best thing for the nation as a whole but it's more humane (the Chinese government probably would sacrifice 100 million to benefit a billion people. Right strategem, but not very comforting if you are that 1 in 10).

 

[trailerpark]

With IBR, what percentage are you taxed on the amount forgiven? Say 50k is forgiven you have to pay what?

 

[xiphoid2010]

With IBR, what percentage are you taxed on the amount forgiven? Say 50k is forgiven you have to pay what?

You pay your marginal tax bracket. Most full time RPh are in the 25-28% bracket, so $50 forgiven = $12.5 or 14k due for that tax year.

 

[trailerpark]

You pay your marginal tax bracket. Most full time RPh are in the 25-28% bracket, so $50 forgiven = $12.5 or 14k due for that tax year.

But if you were maxing a roth IRA every year wouldn't you easily be able to pay that? I mean are people really getting more than 50k forgiven?

 

[xiphoid2010]

But if you were maxing a roth IRA every year wouldn't you easily be able to pay that? I mean are people really getting more than 50k forgiven?

People who graduate with $300k loans will have $20k interest a year. So if you are making IBR payment of $15-$18k a year.... So yes, people who don't know how to do math will have >$50k forgiven. Oh wait, we are in the US, non-asians can't do math.

 

[trailerpark]

 

[BMBiology]

People who graduate with $300k loans will have $20k interest a year. So if you are making IBR payment of $15-$18k a year.... So yes, people who don't know how to do math will have >$50k forgiven. Oh wait, we are in the US, non-asians can't do math.

That is the problem with IBR/PAYE. It gives the illusion of low monthly repayment until the tax bill comes.


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[trailerpark]

I don't see how someone like me (single and 150k total debt, only student loans) would benefit from any of these programs. I'd rather just live cheaply and knock out my loans in 3-4 years while maxing out roth, and 10% to savings, 401k up to company match. I went to goodwill to make a donation, but also walked through their store and I would buy furniture there. I asked and they said they have someone who checks for bed bugs and what not. I'd just throw a sheet over a comfy chair anyways.

 

[gwarm01]

I recently submitted the paperwork for this program. Just bring it to your HR department, they fill out their section, then you send it in. After that the government will become the official servicer for your loan. I don't anticipate having much of a balance left for forgiveness in 10 years, but anything is better than nothing.

 

[gtpederson]

I went to goodwill to make a donation, but also walked through their store and I would buy furniture there. I asked and they said they have someone who checks for bed bugs and what not. I'd just throw a sheet over a comfy chair anyways.

This was me before I got engaged.
Now I can't even swing in to a Goodwill to check for retro videogames without getting the stinkeye.

 

[Ackj]

I'd rather just live cheaply and knock out my loans in 3-4 years while maxing out roth, and 10% to savings, 401k up to company match.

On a pharmacist salary, I believe your money would be better off in 401k than roth (if you're not maxing both, obviously). Your roth contributions are post-tax, which will be in the 28% bracket once you're working full time. As a student/first year grad, roth is the way to go, since you'll probably be in 15% bracket.

Aside from that small point, you are correct. Living cheaply will allow you to put more money toward the loans, and pay less interest in the long run. You may not have to go to goodwill, but be on the lookout for deals anywhere. My living room was furnished P1 year when I got stuff from a P4 moving out of state and unloading stuff for cheap. $15 coffee table, why not? Sometimes can get "blemished" stuff for a huge discount too, who cares if there is a scratch on the back of my headboard? Still brand new.

 

[trailerpark]

This was me before I got engaged.
Now I can't even swing in to a Goodwill to check for retro videogames without getting the stinkeye.

Well I will be splurging on the white ps4 destiny bundle September 9th

 

[trailerpark]

Does anyone know anything about consolidation? I have mostly Stafford loans at 6.8%, but also some grad plus at 7.9%. Can you consolidate federal loans and how do they calculate what your new interest rate would be? Could it be way lower than 6.8% because I know, in general, interest rates are low right now and do they still stay government loans (ie you can defer them and all those perks?). Any disadvantages to consolidating?

 

[confettiflyer]

Does anyone know anything about consolidation? I have mostly Stafford loans at 6.8%, but also some grad plus at 7.9%. Can you consolidate federal loans and how do they calculate what your new interest rate would be? Could it be way lower than 6.8% because I know, in general, interest rates are low right now and do they still stay government loans (ie you can defer them and all those perks?). Any disadvantages to consolidating?

Nope, it's weighted, I didn't see any appreciable difference combining loans ranging from high 2's to high 7's. I got a lot more benefit consolidating to one servicer for better management on my end and easier to keep track of IBR/PSLF.

 

[pharmasaur]

I think this program is really beneficial if one does a residency for 1-2 years, making only ~40k cuz your IBR payments will be very low. that only leaves 8 years of FT pharmacist salary.

 

[confettiflyer]

That is the problem with IBR/PAYE. It gives the illusion of low monthly repayment until the tax bill comes.


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So I did numbers (as usual):

Assumptions:
$250k student loan balance
Income = $130k/yr, 3% annual raises, single filer the entire time. PAYE plan, forgiveness @ 20 years, tax bomb for forgiven amount exists at 28% tax bracket.

Monthly payment = $943/mo, increases to $1654/mo at the end.
Total payments: $304k
Total forgiven: $284k
Tax bomb: $284k x 28% = $79k to the IRS

Compare to 10 year standard repayment. Monthly payment = $2877/mo.
Total payments: $345k

So with the tax bomb in place, PAYE @ 20yrs will cost a borrower an extra $38k overall. This assumes there will be no attempt to claim insolvency and no legislative relief similar to the 2008 Housing and Economic Recovery Act on phantom mortgage income.

Now, here's the rub -- what if we take the PAYE plan and invest the difference in years 1-10 in the stock market (calculation explained in fine print below)?

@ Year 10
PAYE person has: $306,503 saved.
Traditional payment person has: $0

Now what about years 10-20? Assume the traditional person now channels the entire $2877 into an investment vehicle while PAYE person continues to contribute the difference between $2877 and their current payment:

@ Year 20
PAYE person has: $760,000 saved.
Traditional has: $455,951 saved.


How I calculated it:
PAYE years 1-10 = I took their year 1 payment and assumed their payment was steady for 10 years under it (I needed to save time). So $2877-$943 = $1934/mo difference. I then plugged it into a simple investment calculator (parameters = 10 years, compound yearly, 5% ROR), no employer match or anything.

Traditional years 1-10 = I assume zero savings, that the pharmacist is fighting tooth and nail to make the payment and will "save when the loan is paid off"

PAYE years 11-20 = I took the end value of the account at year 10, and put it a new difference between the 10yr payment and the PAYE payment at 10 years $2877-$1231 = $1646/mo difference. I plugged it into the same investment calculator with the same parameters as I stated above.

Traditional years 11-20 = I took the $2877/mo and put it into the same investment calculator with a start value of zero.



So....my bottom line I've calculated here is that neglecting to pay yourself and singularly attacking your student loan, even with unfavorable tax consequences and TWENTY years of loan payments, has a potential quarter of a million dollar cost at the end of it.

Of course, the best course of action is to pay your loan AND save for retirement.... but at $2800/mo x 2 = $5600/mo, and given that most take home pay is $6k/mo....you'll have to eat ramen noodles and McDonald's for 10 years, which has other financial costs not calculated here.

Food for thought.

 

[BMBiology]

So I did numbers (as usual):

Assumptions:
$250k student loan balance
Income = $130k/yr, 3% annual raises, single filer the entire time. PAYE plan, forgiveness @ 20 years, tax bomb for forgiven amount exists at 28% tax bracket.

Monthly payment = $943/mo, increases to $1654/mo at the end.
Total payments: $304k
Total forgiven: $284k
Tax bomb: $284k x 28% = $79k to the IRS

Compare to 10 year standard repayment. Monthly payment = $2877/mo.
Total payments: $345k

So with the tax bomb in place, PAYE @ 20yrs will cost a borrower an extra $38k overall. This assumes there will be no attempt to claim insolvency and no legislative relief similar to the 2008 Housing and Economic Recovery Act on phantom mortgage income.

I would also calculate the combined income of a married couple. The chance of you being married within the next 20 years is pretty good and probably to someone with a similar education and earning potential which means your monthly repayment may be higher depending on her situation. So I would calculate (1) a spouse who makes 130 k a year with the same 250 k student loan and (2) a spouse who makes 130 k a year with 100 k student loan.

In order to claim insolvency, the IRS can go after your assets including your 401 k so unless you are not planning to contribute (and therefore, wouldn't get the company's 401 k match), insolvency is not really a good option.

here's the rub -- what if we take the PAYE plan and invest the difference in years 1-10 in the stock market (calculation explained in fine print below)?

This is just speculation so I wouldn't give much thought to this. I wouldn't gamble away my money on the stock market if I have that much student loan debt.

Look, this is why I have always said IRB/PAYE are crappy deals. When you punched in the numbers, you will end up paying a lot more money. Do you really want to have this debt around your neck for the next 20-25 years?

 

[confettiflyer]

And since I'm bored at work, let's introduce borrower 3, who decided to do the extended 30 year repayment plan (I don't even know if that exists). So let's see here....at year 30, let's see where our three borrowers are:

PAYE person: $1.6M saved. Assumption: started year 20 w/ $700k and then channeled $2877/mo for another 10 years because he had no more loan.

Traditional person: $1.2M saved. Assumption: started year 10 w/ $0 and then channeled $2877/mo fro another 20 years because he had no more loan.

30 year loan person: $1.04M saved. Flat $1629 payment, invests difference from $2877/mo full payment x 30 years.


Further assumptions/augmentations: Let's say PAYE person has to raid his retirement account at year 20 to pay the IRS (so withdraw $120k - 30% taxes - 10% tax penalty).

PAYE person now has, @ year 30: $1.5M saved.

Further assumption: PAYE person at year 20 was subject to a $57k limit to forgiveness, for a tax bill of $16k. Assuming he/she does not need to raid retirement funds to pay it, PAYE person now has a new $227k loan to contend with ($284k remainin - $57k forgiven). Assume now that PAYE person STOPS contributing to retirement for year 20-30 and pays $2600/mo to retire the $227k loan in 10 years.

PAYE person now has, @ year 30: $1.2M saved.



So....again, tl;dr bottom line from my calculations, the end result of PAYE with all these restrictions still nets an equal, or better, end result for retirement savings than the traditional borrower. I admittedly ignore a lot of nuances financially, but I'm at work pounding away at a keyboard, and you're all welcome to pick apart my numbers, just don't be too picky

 

[confettiflyer]

This is just speculation so I wouldn't give much thought to this. I wouldn't gamble away my money on the stock market if I have that much student loan debt.

Look, this is why I have always said IRB/PAYE are crappy deals. When you punched in the numbers, you will end up paying a lot more money. Do you really want to have this debt around your neck for the next 20-25 years?

See BM... I never actually crunched your numbers because I'm confident in my assessment of the future, so I decided out of boredom to see it through to see where the #'s go if all of your predictions come true (tax bomb, $57k limit).

And honestly I don't think the #'s pan out...if the end game is total $$ saved for retirement, even given your dire predictions on IBR/PAYE, the outcomes are either even or marginally come out better for IBR/PAYE.

In fact, I think NOT putting money in the stock market is the far more treacherous path to go down. Being 35 (assuming you graduated at 25) with nothing in the bank but in possession of a paid off student loan? That's a bad place to be.

 

[confettiflyer]

I would also calculate the combined income of a married couple. The chance of you being married within the next 20 years is pretty good and probably to someone with a similar education and earning potential which means your monthly repayment may be higher depending on her situation.

I'll take this as a compliment, lol.

But that'll be my next calculation....the married scenario, but I'm getting busy at work so that'll have to wait til tomorrow or something.

I'm thinking... married from the start, married @ 5 years in, spouse makes 85% of your pay with 50% of the student loans. Or I can do 2 pharmacists of equal weight in terms of pay/debt.

 

[trailerpark]

I don't want to have the debt around my neck for the next 20-25 years. Psychologically, I need it gone just to have piece of mind even if someone can calculate ways to make it work out, but I don't have anywhere near 200K let alone 250k so I don't think it would benefit my anyways. For the people who do have >200K the payments you make all 20 years don't even seem to touch the principal so if the program changes it could be a huge gamble. Where is the government going to get all this money to forgive these loans anyway? Seems like our national debt just keeps going up and up and the government keeps on spending so how is the situation going to be better in 20 years?

 

[BMBiology]

See BM... I never actually crunched your numbers because I'm confident in my assessment of the future, so I decided out of boredom to see it through to see where the #'s go if all of your predictions come true (tax bomb, $57k limit).

And honestly I don't think the #'s pan out...if the end game is total $$ saved for retirement, even given your dire predictions on IBR/PAYE, the outcomes are either even or marginally come out better for IBR/PAYE.

In fact, I think NOT putting money in the stock market is the far more treacherous path to go down. Being 35 (assuming you graduated at 25) with nothing in the bank but in possession of a paid off student loan? That's a bad place to be.

Just so we are clear, your numbers actually showed PAYE will cost you more money than the 10 year plan. This is based on an unrealistic assumption that you will still file as a single filer when you are 45 year old (25 + 20 years).

And yes, I would choose being debt free at 35 and no money in my retirement than still having 200 k in student loan and some money in my 401 k. By a way, ever heard of the lost decade that the stock market went thru?

http://online.wsj.com/news/articles/SB125556534569686215

 

[confettiflyer]

IWhere is the government going to get all this money to forgive these loans anyway? Seems like our national debt just keeps going up and up and the government keeps on spending so how is the situation going to be better in 20 years?

I explained this once better before, but loan forgiveness isn't a budget appropriation line item as it is not discretionary spending, therefore the normal rules of "where does the money come from?" does not apply.

 

[confettiflyer]

Just so we are clear, your numbers actually showed PAYE will cost you more money than the 10 year plan. This is based on an unrealistic assumption that you will still file as a single filer when you are 45 year old (25 + 20 years).

And yes, I would choose being debt free at 35 and no money in my retirement than still having 200 k in student loan and some money in my 401 k. By a way, ever heard of the lost decade that the stock market went thru?

https://www.google.com/finance?cid=626307

What...you want me to run a scenario with a 2% ROR? I was being conservative with 5% since that's what major institutions and pension groups (like CalPERS) use. If it's good enough for them, it's good enough for you and me.

 

[confettiflyer]

And yes, I would choose being debt free at 35 and no money in my retirement than still having 200 k in student loan and some money in my 401 k.

That's being short-sighted, IMO. My example doesn't even include an employer match, which would have made the numbers even more skewed in favor of the PAYE person.

 

[confettiflyer]

Just so we are clear, your numbers actually showed PAYE will cost you more money than the 10 year plan.

Again...what's the end game? what is the end result you would like? feeling warm and fuzzy cuz you paid off some bills? That's not my end game....aside from the usual "be happy/live a full life" my financial end game is to end up with the biggest truckload of money I can possibly have by age 55.

Sure, I definitely will pay more interest over time, but the time dimension is the least appreciated dimension when it comes to money. The calculations aren't simply cash in and cash out.

If you can show me a realistic* model that shows funneling every single dollar to a student loan is the best financial option taking into account real tax and investment consequences, then I'd consider it...but I really don't think those numbers pan out and I think to push it on less financially savvy members of this board is sort of a disservice (which is why I write all these long-winded number filled posts, hopefully everyone can do their own math).

 

[BMBiology]

For the people who do have >200K the payments you make all 20 years don't even seem to touch the principal so if the program changes it could be a huge gamble. Where is the government going to get all this money to forgive these loans anyway? Seems like our national debt just keeps going up and up and the government keeps on spending so how is the situation going to be better in 20 years?

This is exactly right. Even if someone can produce some numbers that show PAYE/IBR would be better than the 10 year plan (unlikely scenario), I still wouldn't do PAYE/IBR. Once the government starts to forgive student loan debt to people who can actually afford to pay them, there will be a public outcry and the government will put a cap on the forgiven amount.

It is like 15 vs 30 year mortgage. Obviously if you decide to pay off your house over a 30 year period, you will pay a lot more interest vs. 15 years. That's how I see PAYE/IBR. There's no financial advantage to these programs. You will pay more interest and take on more risk. The chance of you or your spouse being unemployed or being sick is pretty good over a 20-25 year period. Your student loan doesn't care. It will still be there when you wake up and it will be there when you turn off the light at night.

 

[BMBiology]

Again...what's the end game? what is the end result you would like? feeling warm and fuzzy cuz you paid off some bills?

The end game is being debt free and moving on with your damn life. I had less than 150 k in student loan and I am free from student loan debt. Instead of putting just 5 k in my 401 k, I now put in the max at 17.5k. Instead of skipping my roth IRA, I now put in 5.5k, also the max. Instead of renting a small apt, I bought a house.

The best part about being debt free? You can take risk and have your money work for you. You don't have to pay high interest every month. You get to move on with your life!

Was it easy? Actually it wasn't bad at all. I have been living like a college student for a while so living like this for a few more years didn't bother me at all.

I think we all know someone who is stupid enough to borrow extra so he can go on a vacation or buy a nice car. Keep in contact with him and compare yourself to him in 5, 10, 15 years. Most likely he will still be in debt, still rent, still living off the last month check.

 

[trailerpark]

I agree with BM. I'll pay off my own debt. I don't want anything more to do with the government than I have to. I want the piece of mind of relying on myself and not risking it with a government with a poor track record of financial decisions. Am I becoming a republican?

 

[BMBiology]

Here's a scenario:

Lets say 5 years later, you become wildly successful...making 250 k a year. If you are on PAYE/IBR then your monthly payment will jump!

Lets turn the table. Lets say for whatever reason, you have to take a low paying job. Your monthly repayment will drop but when the 20 year period comes up, you will be hit with a huge tax bomb because you have not been aggressively paying off your student loan.

How does this make any sense?

 

[confettiflyer]

I don't have the luxury of detailing all of the above scenarios....what if I win the lotto?

But, you have inspired me to dive into detail with more realistic scenarios, so expect some epic spreadsheets being posted here late night tonight.

My goal is to cover the average (like 80%) of the new indebted grads who borrowed too much, have an upper limit of how much they can/will pay for debt service, and are in need of the best plan of action that fulfills financial needs, not psychological/emotional needs.

The last thing they need is anti-debt dogma or "holier than thou cuz I managed to borrow less, live at home on instant noodles, or go to school in Costa Rica" replies.

 

[BMBiology]

I don't have the luxury of detailing all of the above scenarios....what if I win the lotto?.

Winning the lotto is not even remotely possible. Making 250 k a year is possible.


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[confettiflyer]

Winning the lotto is not even remotely possible. Making 250 k a year is possible.

With inflation sure.

So my spreadsheet and scenarios are coming along nicely. I'm modeling 3 different borrowers and repayment types against 3 different policy assumptions...this is probably my best work yet, a little more detailed than back of envelope.

Hope to have it uploaded within a few hours, stay tuned.

 

[confettiflyer]

Okay so this spreadsheet isn't ready for prime time, but I managed to model two repayment scenarios. Here's the brief synopsis/set of assumptions.

Assumptions: Obama FY2015 Budget adopted as-is. PAYE over 25 years, forgiveness capped at $57,500. Remaining rolled into a 5 year accelerated loan. 3% inflation/poverty increase rate, 5% market return (vastly vastly underestimating this given historic DJIA returns of 6-6.5% per J. Nation study from SIEPR).

Borrower Details: Identical financial and personal factors are retained. Pharmacist starting salary $130k/yr, 3% annual raises, employer match of 401(k) 50% of contributions up to 6% of income. Marries at year 5, child #1 at year 7, child #2 at year 9. Spouse makes 85% of borrower's income and has a student loan of 1.5x starting salary.

Traditional repayment plan only saves 6% for 401(k) match in years 1-10, shuffles loan payment into retirement account years 11-30. At years 26-30, for parity with the PAYE borrower, an additional $91,800 per year is shuttled into retirement accounts. The PAYE borrower invests the difference between the full traditional payment and their current PAYE payment.

PAYE borrower is charged 28% taxes on $57,500 which is pulled from retirement accounts + taxes/penalty.

Results: Under the assumptions above, the traditional 10 year repayment plan results in a retirement account value of $4,696,824 vs. the PAYE plan results in a retirement account value of $4,159,213, resulting in a $537,611 benefit for the traditional repayment plan participant.

However, the break even point occurs at a market return of 7.333%. Any ROR > 7.333% results in the PAYE plan participant having a larger retirement account balance at year 30.


Aaaand goodnight for now. I'll clean up my spreadsheet and release it so you all can model your own stuff and/or catch any equation errors I may have made.

 

[BMBiology]

The spouse salary: are you also taking into consideration of 3% annual increase?

Do you know what is missing in all of your models? The risk you are taking. What if by year 5 your hours got reduced to just 24 hours making you ineligible for PSLF? What if by year 9 another president decides to change the rule again? What if you want to start a business at year 10 but the bank won't give you a loan because of your high student loan debt?

The longer you have this debt around your neck the more risk you are taking.

Assuming you are 28 when you enrolled in PSLF so after 10 years any amount over 57 k is rolled over into 25 year PAYE. So 28 + 10 years of PSLF + 25 years of PAYE = 63 year old is when you are officially done with your student loan debt! Just when you are eligible for social security.






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[xiphoid2010]

Confetti:

Just a few more points to consider, just my opinions:

(1) I would recommend maxing out 401(k) instead of just contributing 6% for 10 yr payer. I would expect most understand the basics that 401(k) contribution allowance is use it or lose it, and the tax deferred saving is too good to give up. Further more, even with $250K loan, there should be little difficulty with both maxing out $401k + $2877/mo 10 yr repayment with a $130k income (~$7k/mo take home - $2877 = $4k/mo, hardly a ketchup hotdog diet)

(2) What's the goal of saving? Is it to pass on a ton of money to kids, or spend on yourself? If the former, then comparing final $ using a 30 year career works. But if the latter, then the goal isn't actually $ amount, but when you can retire. Like I say to my parents: I don't want to inherit millions from you, you raised me to stand on my own. I hope they spend it all and would love it if the last check they write is the one that bounces.

(3) to add to (2), if you use retirement date as goal, then IMHO income needed during retirement should be adjusted to 80% of what pre-retirement spending (not gross income as most calculator uses). If your take home pay is $7k/mo, and finally finished paying $1629/mo on a 30 yr repayment the day your retire, then the income needed during retirement is really 80% of $5371/mo, not 80% of $7000. This is because I don't think people are going to all the sudden change their spending habits at retirement.

So actually (3) should help you in for the case of the long term repayment plan, although a valid counter argument would be that person lives a lower quality of life, but to a counter to that would be you don't miss what you never had.

 

[confettiflyer]

The spouse salary: are you also taking into consideration of 3% annual increase?

Yes, 3% all along the way.

Do you know what is missing in all of your models? The risk you are taking. What if by year 5 your hours got reduced to just 24 hours making you ineligible for PSLF?

I didn't model PSLF, only the proposed/not-yet-law Obama proposal with all of the caps/restrictions you wanted me to model.

What if by year 9 another president decides to change the rule again? What if you want to start a business at year 10 but the bank won't give you a loan because of your high student loan debt?

Too many variables to model effectively. As for a bank not giving you a loan, how many borrowers on SDN are trying to obtain business loans? I'm modeling for 80% of wage earning borrowers.

The longer you have this debt around your neck the more risk you are taking.

Assuming you are 28 when you enrolled in PSLF so after 10 years any amount over 57 k is rolled over into 25 year PAYE. So 28 + 10 years of PSLF + 25 years of PAYE = 63 year old is when you are officially done with your student loan debt! Just when you are eligible for social security.

Where did you get the idea/details for that program? I haven't seen anything like that, you'd be better off just skipping PSLF and go right into a PAYE 25 deal if you had to pick an income-based plan.

 

[confettiflyer]

(1) I would recommend maxing out 401(k) instead of just contributing 6% for 10 yr payer. I would expect most understand the basics that 401(k) contribution allowance is use it or lose it, and the tax deferred saving is too good to give up. Further more, even with $250K loan, there should be little difficulty with both maxing out $401k + $2877/mo 10 yr repayment with a $130k income (~$7k/mo take home - $2877 = $4k/mo, hardly a ketchup hotdog diet)

So you point out a weakness in my model in that we're juggling pre-tax (401(k) contributions) and post-tax (loan repayment) money. This does leave each borrower in the model with a significant amount of money on a post-tax basis.

I wanted to model a realistic set of decisions and set a maximum that anyone was willing to pay for retirement + student loans. I set that maximum to be (a) the 10 year reapayment plan payment ($2902) + (b) 6% of income to obtain a match, which increases in lock step with salary at 3% per year.

Is it even relevant? Maybe...my goal was to find out if, given a fixed "maximum payment" number, if money invested early trumps retiring of debt. Since I'm comparing both borrowers, if I add an extra amount to each one (like + $5k/yr to a Roth IRA/Backdoor Roth), it won't matter since it's being added to both groups and I'm seeking the delta.

(2) What's the goal of saving? Is it to pass on a ton of money to kids, or spend on yourself? If the former, then comparing final $ using a 30 year career works. But if the latter, then the goal isn't actually $ amount, but when you can retire. Like I say to my parents: I don't want to inherit millions from you, you raised me to stand on my own. I hope they spend it all and would love it if the last check they write is the one that bounces.

The assumption I made was that the borrower wants to stop working in 30 years and draw down their retirement account. There are too many different retirement scenarios to attempt to model...I used end account balance as a surrogate. My thrifty saver borrower, with more money at year 30, could retire earlier. You can probably set this whole thing up to figure out "who can retire first" but that's a moving target based on age. I'm good, but I'm not that good!

(3) to add to (2), if you use retirement date as goal, then IMHO income needed during retirement should be adjusted to 80% of what pre-retirement spending (not gross income as most calculator uses). If your take home pay is $7k/mo, and finally finished paying $1629/mo on a 30 yr repayment the day your retire, then the income needed during retirement is really 80% of $5371/mo, not 80% of $7000. This is because I don't think people are going to all the sudden change their spending habits at retirement.

So actually (3) should help you in for the case of the long term repayment plan, although a valid counter argument would be that person lives a lower quality of life, but to a counter to that would be you don't miss what you never had.

So profound. Want to take over my job?


If anyone wants this spreadsheet as-is, just PM me...I'm busy today and won't be able to do too much to it.

 

[confettiflyer]

What if by year 9 another president decides to change the rule again?

So an addendum thought here: if you consider the risk of policy changes in one direction that favors the saver, you have to correspondingly take into account policy changes that favor the debtor. Risk is a two-way street.

Obviously we have a difference of opinion in what we think will eventually happen, but being prudent means considering everything.

 

[BMBiology]

Where did you get the idea/details for that program? I haven't seen anything like that, you'd be better off just skipping PSLF and go right into a PAYE 25 deal if you had to pick an income-based plan.

10 years PSLF, cap forgiveness at 57.5 k then whatever left is then rolled over into 25 year PAYE. Here it is! Already proposed this year by the Obama administration:

"Yet, as they become more widely publicized, income-driven repayment plans are growing in popularity. As a result, the government's potential tab for loan forgiveness could grow significantly as well.

Earlier this year. the Obama administration proposed capping the amount how much debt is eventually forgiven for those entering the public sector at $57,500 per borrower. After that the borrower would have to make payments for 25 years.

Financial aid experts say this move also appears designed to address concerns that debt forgiveness, under existing terms, may remove incentives for students to be cost-conscious and for schools to keep tuition prices elevated."

http://www.cnbc.com/id/101809706

 

[confettiflyer]

10 years PSLF, cap forgiveness at 57.5 k then whatever left is then rolled over into 25 year PAYE. Here it is! Already proposed this year by the Obama administration:

"Yet, as they become more widely publicized, income-driven repayment plans are growing in popularity. As a result, the government's potential tab for loan forgiveness could grow significantly as well.

Earlier this year. the Obama administration proposed capping the amount how much debt is eventually forgiven for those entering the public sector at $57,500 per borrower. After that the borrower would have to make payments for 25 years.

Financial aid experts say this move also appears designed to address concerns that debt forgiveness, under existing terms, may remove incentives for students to be cost-conscious and for schools to keep tuition prices elevated."

http://www.cnbc.com/id/101809706

Thank you sir. So... 35 years? This is dumb.

Option A) Just do 25 years, anything left over is done/forgiven.
Option B) 10 years, $57k lobbed off, + 25 more years? The extra 10 years of payments over option B will be above and beyond the $57k you get at year 10.

Either this is really a dumb idea or really bad reporting, because it would make more sense for it to be 25 years flat with a $57k principal reduction at year 10 for PSLF people.

 

[BMBiology]

Thank you sir. So... 35 years? This is dumb.

Option A) Just do 25 years, anything left over is done/forgiven.

You are not done after 25 years. Whatever debt is left over is not exactly forgiven. You would need to pay taxes on it. Expect to pay 28-33% tax. The government will get its money and it will come from "high income earners" like ourselves.

I am telling you all of these income based repayment programs are crappy deals. Just wait until they force you to include your spouse's income when they calculate your monthly repayment.

 

[BMBiology]

Think the government will forgive your student loan debt after 20 years of PAYE? Think again.

http://www.nytimes.com/2014/06/24/u...nts-is-not-as-forgiving-as-it-seems.html?_r=0

"But let’s look at the hypothetical case of a graphic designer: A single college graduate earning $46,900 a year through full-time work who will have an annual income increase of 5 percent. She has borrowed $100,000 and is charged 6.8 percent interest. According to the federal Repayment Estimator calculator, if the graphic designer meets her payments each month for 20 years (at 10 percent of her discretionary income plus interest, her payments would start at $245 in her first month of repayment and reach $717 by her last), the federal government will forgive nearly $130,000 of her remaining debt plus interest accrued over time. In total, she will pay $106,581.

But there’s a catch. The relief of PAYE’s debt forgiveness can come with an onerous tax liability. It appears our graphic designer saves $129,419 thanks to the 20-year forgiveness stipulation, but because her chosen profession does not qualify for the Public Service Loan Forgiveness program, her “forgiven” debt could qualify as taxable income. In short, the designer’s annual income taxes could nearly double in the final year."