Paying Down Student Loans or Income Based Repayment

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chasebrooklyn1985
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Joined: Tue Jun 25, 2019 5:59 pm

Paying Down Student Loans or Income Based Repayment

Post by chasebrooklyn1985 » Sat Jun 29, 2019 11:28 am

Since embarking upon my FI journey, I've come across a lot of negativity regarding student loans. Yes, I'm well aware that they are non-dischargeable in bankruptcy, and yes, they do have high interest rates. However, with Income Based Repayment plans, are they really such a wealth-killer?

With the Income Based Repayment plan, one's student loans are effectively forgiven after 25 years of on-time payments that never exceed 10% of said person's income. You just have to pay tax on the remaining balance.

Wouldn't it be wiser for a low-income person with a large student loan to just invest any savings after making the minimum income-based payment on their loans, instead of trying to pay the principle down?

BeyondtheWrap
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Re: Paying Down Student Loans or Income Based Repayment

Post by BeyondtheWrap » Sat Jun 29, 2019 11:46 am

You really have to do the math with the specific numbers for your situation. Calculate what your payments would be based on your income. You may find that your loans will be paid off before the 25 years is up, in which case it would be better to pay them off earlier.

Also, you are making the assumption that your income will stay very low, which may change in the future. Also, it is possible that politics will kill the IBR program by then.

chasebrooklyn1985
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Re: Paying Down Student Loans or Income Based Repayment

Post by chasebrooklyn1985 » Sat Jun 29, 2019 1:14 pm

BeyondtheWrap wrote:
Sat Jun 29, 2019 11:46 am
Also, you are making the assumption that your income will stay very low, which may change in the future. Also, it is possible that politics will kill the IBR program by then.
I could be wrong, but I'm under the impression that the IBR is a contract. It may end one day for new enrollments, but once you're in, you must be allowed to finish. Otherwise, thousands of people who made life decisions based on IBR, could be financially ruined. I belive the us gov would honor current participants, even if it phased out the program at a later date.

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Dream of Freedom
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Location: Nebraska, US

Re: Paying Down Student Loans or Income Based Repayment

Post by Dream of Freedom » Sat Jun 29, 2019 4:13 pm

Hard to shouldn't generalize. Debt can be good if it allows you to make more money. That isn't always the case. Like BTW said do the math.
Last edited by Dream of Freedom on Sat Jun 29, 2019 5:07 pm, edited 2 times in total.

thrifty++
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Re: Paying Down Student Loans or Income Based Repayment

Post by thrifty++ » Sat Jun 29, 2019 4:53 pm

I think it really depends on the circumstances. In NZ there is no interest on student loans provided you don't move overseas. So I paid mine at the very minimum required amount. But if it had incurred interest of say 6% I would have paid it off ASAP.

classical_Liberal
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Re: Paying Down Student Loans or Income Based Repayment

Post by classical_Liberal » Sat Jun 29, 2019 5:46 pm

A similar topic.
viewtopic.php?f=3&t=9039&p=145574#p145494
classical_Liberal wrote:
Tue Jun 13, 2017 10:15 pm
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.
I still think any student loan forgiveness program creates a situation that is VERY restrictive. You will very likely regret committing to this path.

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