Student Loan Forgiveness (US)

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Viktor K
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Student Loan Forgiveness (US)

Post by Viktor K »

This is a topic I broached in my own journal which was met with pretty much full opposition and no agreement with me. I did focus on amount saved using my method, however, maybe there will be more consensus when focusing on ERE date and total asset size at time of loan forgiveness.

Should you pay off student loans as quickly as possible or enroll in a student loan forgiveness plan?

Note: This refers to student loan forgiveness in the US, information can be found on the relevant website

As the OP, I will argue first that it is better to enroll in the student loan forgiveness plan, specifically the Pay-as-you-earn (PAYE) plan. This directly contradicts traditional wisdom advising. However, I plan to do so because my charts suggest that it will allow me to reach ERE sooner.

Information on this plan:
  • Under the PAYE Plan, your monthly payment is 10 percent of your discretionary income.
  • your discretionary income is the difference between your AGI and 150 percent of the U.S. Department of Health and Human Services (HHS) Poverty Guideline amount for your family size and state
  • Any loan balance that remains after 20 years will be forgiven
  • Under current law the IRS considers loan amounts forgiven under an income-driven repayment plan to be taxable income.
  • Interest is not capitalized during the payment period
My goal is to reach ERE by 2023 at the latest. Currently, my graphs show this:

edit: The graphs represent my taxable account starting balance, return rate, monthly contribution (or withdrawal), and ending balance

Scenario 1: Wait for forgiveness:
Image

Scenario 2:Pay off and then save:
Image

My loan balance is -$50,100.00 @ 6.7% interest.

My current monthly payments are $0/month, and I have 16 more years of this. My income is anywhere from $17,000-$23,000/year with 65-90% savings rate. If payments continue at this level, I estimate owing some $30,000 in income taxes for the loan forgiveness year.

I feel my logic is sound, so I'm mostly worried that I may be missing something, or making an inaccurate assumption. My financial knowledge is nothing substantial, so I ask you all for your own analysis as well as your own perspective.
Last edited by Viktor K on Tue Jun 13, 2017 6:58 pm, edited 1 time in total.

James_0011
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Re: Student Loan Forgiveness (US)

Post by James_0011 »

It seems like a good plan to me. However, what about making more money? Getting a higher paying job and paying off the loans than saving could help you reach ere faster....

Also, if you make more in the future your plan could be messed up.

bryan
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Re: Student Loan Forgiveness (US)

Post by bryan »

Yet another topic I think would be great for a madFIentist treatment but won't be done since he has checked out from such analytical posts :P

I may have to think about FIRE strategies for a couple, one with lots of student debt and one that is almost FIRE, soon..

The Old Man
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Re: Student Loan Forgiveness (US)

Post by The Old Man »

I don't understand your tables. How much is your school debt?

Viktor K
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Re: Student Loan Forgiveness (US)

Post by Viktor K »

scriptbunny wrote:
Tue Jun 13, 2017 3:22 am
Also do capital gains count as income under PAYE? If so, that could become a hassle if you need to rebalance or have a major liquidation event.
I received direct correspondence from my loan servicers today that yes, capital gains would be used in the calculation of my PAYE plan for that year.
General Snoopy wrote:
Tue Jun 13, 2017 1:50 pm
I don't understand your tables. How much is your school debt?
I will edit the original post with more information. The table is for my taxable account at the start of each year, return rate, monthly contribution, and ending balance. I didn't list the loan amounts and interest rates but I will add those.

Viktor K
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Re: Student Loan Forgiveness (US)

Post by Viktor K »

scriptbunny wrote:
Tue Jun 13, 2017 3:22 am
Some assumptions you are making, over the next 16 years:

1. Your income won't increase. You seem like a high functioning and risk taking individual. I would be surprised if you didn't end up doing something or other over the next decade and a half that ended up earning you a lot of money or at least a lot more money than you have been. In the alternative, you may feel stymied from pursuing higher paying work if you are married to the idea of debt forgiveness.

2. PAYE will continue to exist or that you would be grandfathered in if it is eliminated. I worry that rising student debt levels across the US may mean that PAYE, IBR, PSLF, etc. are soon capped or eliminated completely. The downside risk of that would be very very bad since your current payments don't even cover interest.

3. You are not interested in owning property or starting a business with financing or whatever else that might require taking out a substantial loan.

Also do capital gains count as income under PAYE? If so, that could become a hassle if you need to rebalance or have a major liquidation event.
To point 1: This is something I'm not so sure on. A key facet of my personality you're overlooking is laziness. I've no interest in trying to earn money. It would literally have to fall into my lap. This is why I'm in China working <20 hours per week to ERE. But definitely would matter for other people who may be more ambitious and/or wise than I am.

To point 2: This is a concern you and I share. It is impossible to tell what would happen. However, I have found that suddenly having to pay off my loan in full in year 20 is more or less equivalent to paying it off now, as far as future asset balance with regards to a given ERE year. The difference is some $30,000. Either way I would be either A) working longer or B) back to work. Maybe a way to hedge against this in my instance is to continue building assets slowly post ERE via part-time work, otherwise, of course, take the pay now approach.

To point 3: Something I have thought before but haven't considered (does that make sense?) because I personally did not know/research enough in this area. I assume high debt would make a mortgage more difficult? Or does debt-to-asset ratio make a difference?
James_0011 wrote:
Tue Jun 13, 2017 10:19 am
It seems like a good plan to me. However, what about making more money? Getting a higher paying job and paying off the loans than saving could help you reach ere faster....

Also, if you make more in the future your plan could be messed up.
Definitely something to consider for more ambitious/wise people.
bryan wrote:
Tue Jun 13, 2017 1:40 pm
Yet another topic I think would be great for a madFIentist treatment but won't be done since he has checked out from such analytical posts :P

I may have to think about FIRE strategies for a couple, one with lots of student debt and one that is almost FIRE, soon..
Maxing IRA, Roth, and HSA contributions in forgiveness year could especially help with the tax burden.

Viktor K
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Re: Student Loan Forgiveness (US)

Post by Viktor K »

I suppose my strategy essentially opens me up to a lot of risk where the total reward would be reducing ERE date by 1-2 years and saving 10-15k in loan payments, which could be a foolish gamble.

classical_Liberal
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Re: Student Loan Forgiveness (US)

Post by classical_Liberal »

From a purely numbers standpoint I see why this is appealing to you. What I don't like about your plan is the level of controls you must endure to make it work. Assuming the programs remains the same through the term (which is a relatively risky assumption as you have pointed out) you are forced to live with a certain level of taxable income. This can limit many options, lazy or not. You may very well have to make significant tactical adjustments to your freedom throughout the next 16 years. Personally, my major motivation for ERE to is do what I want, when I want. Realistically I have no idea what that may be in 5, 10, or 15 years. I would rather not have such a burden.

That being said, I took (am taking) advantage of a Perkins loan repayment program for nurses. I'm at the end of year four of a five year repayment plan that only requires me to remain licensed and employed "full-time" in the US. The Fed's reward me with a percentage of balance forgiveness each year and I can opt out at any time without losing previous forgiven $.

Even over this shorter period, with relatively "light" restrictions, I have had to make tactical career decisions to maintain my full-time status which has limited my freedom. This was over only 8K of debt, I can only imagine how determined I would be to make it work with 50K plus interest on the line. You will feel VERY obligated to ride it out in a decade from now, no matter the limitations. If you take this route I believe you will eventually restrict your life's options more than you may think at present.

Scott 2
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Re: Student Loan Forgiveness (US)

Post by Scott 2 »

How often do you have to requalify? Could you fail to qualify?

What happens to the interest you are not paying? Is there a way to end up on the hook for it?

Some US residents may look down upon you for taking the assistance to not work. Effectively, you are shifting the financial burden of your loans to other tax payers, or alternatively, taking assistance dollars from those who may be in greater need

It does feel great to be debt free.

Scott 2
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Re: Student Loan Forgiveness (US)

Post by Scott 2 »

This is a good example of the legislative risk:

https://www.forbes.com/sites/zackfriedm ... efccbe34b9

Viktor K
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Re: Student Loan Forgiveness (US)

Post by Viktor K »

Maybe it is due in part to feeling hella disenfranchised, but using my tax dollars vs. others tax dollars has never been a concern of mine. There are so many areas where I wouldn't want my tax dollars going as well, but the system is in place and I lose no sleep squeezing every ounce of advantage out of it that I can. Perhaps I should view tax dollars as more a scarce resource?

Requalification is once a year. This is actually a hurdle since it requires filing taxes quicly, much before the deadline, since the tax return has to be sent in to the loan servicer in order to confirm income levels and establish the next year's monthly payment. If you miss this deadline, interest is capitalized, but otherwise still forgiven at the end of the pay period.

What is resonating most with me right now is potential constraints I'll be placing on the future me if I go the forgiveness route. I think classical_Liberal's anecdote was especially enlightening/insightful.

I could pay the loans off in about ~2 years, give or take a few months. I could pay them off even quicker if I hustled hard in China with part-time work and private gigs. The compromise is the risk that something happens between now and then where I need capital (e.g. an injury, job change, job loss, etc) and instead of having $25,000 in the bank, I'll instead only have a +$25,000 net worth change while still actually being penniless.

Maybe the most sense for me would be to:

1) build up a comfortable cash reserve then,
2) pay off the loans as quickly as possible, after which
3) proceed to save for ERE as normal.

Scott 2
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Re: Student Loan Forgiveness (US)

Post by Scott 2 »

Skipping the forgiveness program does not require you to minimize the payback period of the loan. Depending on your interest rate, and the other investment options available to you, making the minimum payment could be the most reasonable option.

Cash cushion is a very good idea.

Viktor K
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Re: Student Loan Forgiveness (US)

Post by Viktor K »

What do you mean? For example, right now my minimum payment is $0/month.

If I were to earn more, the minimum payment would eventually reach the 10 year payment plan, and be something like $500-$600/month.

The current plan was to earn and save, and then wait for forgiveness period. As mentioned, this assumes a lot: laws won't change, income won't rise...

When you say minimum payment this is what I think of.

The interest rate is pretty high, too, I think I have one at ~6.5% and then the other 5-6 of them are 7.5%

Scott 2
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Re: Student Loan Forgiveness (US)

Post by Scott 2 »

Ouch, those interest rates are high. I'd want to minimize the payback period too. Student lending really has become predatory.

The accumulated interest on 50k over 20 years at that rate is crushing, especially if compounding. It does trap you into the forgiveness program.

Have you ever looked to see if consolidation can lower your rates?

I was thinking more in terms of a traditional loan. My mortgage was at 3.25%, if itemizing taxes, the interest was tax deductible. Taking the full term of the loan to pay it off, investing any extra money, was the financially optimal move.

I did not do that, ultimately. I reached a point where I was lost in the current investment climate, so I took the sure thing, and eliminated debt.

I am thoroughly enjoying the low cash flow demands of being debt free. The financial freedom has definitely made me a lazier saver, however.

Viktor K
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Re: Student Loan Forgiveness (US)

Post by Viktor K »

Well to clarify, there's no need to work a job under this forgiveness plan. Unemployment means the monthly "payment" is $0. If income goes above the threshold in a given year, then the payments go back up.

Really, paying the debt off later rather than now shortens the time to ERE by one or two years even.

As well, the result at year 20 for a given time period of work, where scenario A is reaching an ERE number without paying the loans off, and scenario B being one where the loans are paid off and both scenarios pull the plug at the same time, is several hundred thousand in favor of scenario A. Again, this comes from putting $60k in year 1, 2, and maybe 3 if the loans last that long towards investments, rather than into the black hole of student loan debt.

As for the re-emerging issue with who pays what and how much for what in taxes, that's more for the political forum. If I elaborated on how much I care or what I think beyond that, I imagine it would quickly get off-topic :D Still, valid input as a pro/con for some people who would attach more importance to what for and how much others pay in taxes.

Viktor K
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Re: Student Loan Forgiveness (US)

Post by Viktor K »

@Scott 2 The interests rates are high, and so under most circumstances, re-financing would be the first thing to do. They are eligible, however doing so takes them out of the realm of federal student loans and into the domain of private debt. This then makes them ineligible for a pay-as-you-earn plan.

The idea, I think, would be to keep them in the payment plan, and pay them off rapidly (1-2 years).

That way, if the worst case happens and somehow I lose my job, am disabled, or am otherwise unable or unwilling to pay my new reduced-interest consolidation loan's monthly payment, I won't have to. Rather, I can just submit documentation for payment adjustment and wait the 16 more years.

I think the extra that I would pay at the high interest rate over the next 1-2 years would be worth it to keep this "safety net" in place, if the goal is to pay them off with haste.

As for lazier saver post-paying off debt - possible unforeseen con to paying off now that I hadn't considered! However, if China is the go-to, which it is now for some undetermined but significant length of time, saving is relatively easy with little effort.

Viktor K
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Re: Student Loan Forgiveness (US)

Post by Viktor K »

Getting a higher paying job is a great solution for most things :D. Of course putting 50k towards the loan in 1 year would pay it off...

From this thread I'm leaning more towards committing my funds up front to pay off the loans. With part-time work at $44/hour, and minimal hours at a public school starting in September, I should be able to get rid of the loans within 2 years or less while working essentially part-time hours, taking summers and winter breaks off.

Alternatively, at $44/hour I could sacrifice an entire year and pay them off quickly, but I don't know if that's really worth it for me. I would hate to do nothing but work (my hours/week tolerance is extremely low) and then drop dead next year.

Rather, I want to fully enjoy my life while also earning and saving at a decent clip in order to reach my 7 year ERE goal. I think the best scenario here, from this thread, is to get rid of the debt first. It is do-able without any sort of career or life change, and my ERE goal is within reach either way. This way, though, I won't have the debt restricting my future self in anyway, and I'll be free from any sort of political risk.

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