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300k in loan debt with 120k income... even worth trying to pay back?
November 7, 2015
4:08 pm
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November 7, 2015
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Hello Michael, thanks so much for all the time you donate to helping everyone out with student loan information. It’s great work you do. I feel like I’ve spent at least 100 hours trying to get the details on all of the different loans and what I owe and how to pay it back.

But because my income to debt ratio is so astronomically high, I’m wondering if it is even possible to pay it all back in 25 years.

I went to IU and got an optometry degree from an overpriced school with out of state tuition. Business Insider recently ranked optometry as the #1 surprisingly low paying job. It was a very poor choice for return on investment. Dentists go to school for the same time and make ~$170k salaries. Anyway, I moved far away from home to work somewhere with a higher wage and I also work on weekends.

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I doubt you want details on all 33 of my loans, but here’s the gist: (all federal loans thankfully)

Direct loans: $277,779 @ average of 6.575%. [242,193 principal]

Perkins and Health Professions Loans: $21,500 @ 5.000%

Income: ~120k independent contractor

None of this has ever been in default. My credit is excellent and I only took the normal 6 month grace period.

The federal government’s repayment website ( https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#view-repayment-plans ) suggests the following:

Standard $3,171 /mo (!!!!!) @ 120 months Total paid: $380,483

Extended Graduated: $1,532 – $2,739 /mo @ 300 months. Total paid: $616,756 (!!!!)

Pay as you Earn: $728 – $1,982 /mo @ 240 months. [this is probably wrong as my loans are all graduate loans which I think is a 25 year plan not 20?] Total paid: $302,908 (all interest). Loan forgiveness: $342,488

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Needless to say, it is not physically possible for me to pay $3,171 a month on a ~120k salary. I live very frugally and have budgeted down pretty hard to live on the least possible. As an independent contractor, I pay more social security taxes on the $120k and have to pay for all my other benefits which adds up.

When it’s all said and done, and I’ve paid all bills for things required to live, I have about $2200/mo remaining. Clearly I am not going to spend the next 15-25 years as a doctor with almost nothing spent on a family/home/myself by paying all of that to loans. Especially since I just got through medical school living like a pauper and studying/working 70 hour weeks.

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Anyway my questions are:

1) Are my expectations and math right in that it’s not even worthwhile to try and pay this off before 25 year forgiveness? It appears that if I did PAYE at $302,908 total over 20 years. And even if the remaining $342,488 gets forgiven and I have to pay 33% of that as tax on income, that still seems relatively low compared to other plans does that sound right?

2) I assume refinancing to a private loan would be a disaster? Since then I wouldn’t have the income-based protections nor forgiveness. $300k even at 2% would still probably be undoable looking at amortization tables. The current interest rate average of 6.575% seems so obscene.

3) I guess then I should be trying to lower my AGI with income tax deductions as best as I can? It looks hard to do with deductions with such a high salary.

4) How exactly do they determine your Pay as You Earn monthly payments? Is it correct that you can submit your last two paychecks and they lock in that rate for a whole year?

5) The thing I’m focused on is the Perkins/HPL $21,500 @ 5.000% loans, because I can’t use PAYE to pay those back. Is it possible to consolidate my 8 Perkins/HPL loans into 1 Direct loan so that they are covered under that? I read something about when you consolidate they round the interest up to the nearest quarter percent or something… is that right?

6) If I can’t consolidate the Perkins and therefore have to pay back $21,500 extra outside of PAYE, should I try and pay those off ASAP? That would add an extra $ 228.04 /mo otherwise.

If you need any more information please let me know and I can provide it. If there’s anything else I should consider let me know. Again thanks for all your help and for reading all of this, it is really appreciated. Trying to get this managed and have a financial plan going forward!

November 8, 2015
8:54 am
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Excellent questions. You are asking the right questions and well on your way to putting together a well thought out plan.

1) Are my expectations and math right in that it’s not even worthwhile to try and pay this off before 25 year forgiveness? It appears that if I did PAYE at $302,908 total over 20 years. And even if the remaining $342,488 gets forgiven and I have to pay 33% of that as tax on income, that still seems relatively low compared to other plans does that sound right?
– You are slightly off on one thing that you pointed out. PAYE forgiveness does come after 20 years. IBR and graduate loan forgiveness under REPAYE takes 25 years, but the 20 year number you are seeing under PAYE is accurate. As the law is currently written, the forgiven amount will be considered to be taxable income. Obviously there are a lot of variables in play. There is a ton of support for removing the tax burden, but its a problem that is over 10 years away from happening, so don’t expect Congress to act any time soon… plus the support could disappear by then. The tax brackets and percentages may also change, so you can’t expect it to be 33%… could be more, could be less. Based upon what you have said so far, PAYE does look like a decent option. Tons of variables, but getting your student loans knocked out after 20 years does seem pretty good.

Also, the range of PAYE payments that the government calculator is showing you seems to assume that you will be getting raises over the next 20 years. You may want to project your salary and your payments on your own to get a more accurate understanding of the numbers.

2) I assume refinancing to a private loan would be a disaster? Since then I wouldn’t have the income-based protections nor forgiveness. $300k even at 2% would still probably be undoable looking at amortization tables. The current interest rate average of 6.575% seems so obscene.
– Giving up income based protections and the possibility of forgiveness would be throwing away a lot at this point. The interest rate is pretty brutal, but you are pretty much stuck with it. The only way to get is lower is the private refinance.

3) I guess then I should be trying to lower my AGI with income tax deductions as best as I can? It looks hard to do with deductions with such a high salary.
– Lower AGI does mean lower PAYE payments… assuming you verify your income using your most recent tax return. If you submit the two recent paychecks, you may not get the full benefit.

4) How exactly do they determine your Pay as You Earn monthly payments? Is it correct that you can submit your last two paychecks and they lock in that rate for a whole year?
– They will certify your income using your most recent tax return or two most recent pay checks. At that point, you are locked in for the year. If you go this route, be sure to remember to re-certify each year on time. If your payments are less than the monthly interest, the will capitalize the interest the second your one year expires. As look as you stay enrolled, interest does not capitalize.

As for how the calculation is done, assuming you use your most recent tax return. They take your AGI, subtract out the portion of your income that is non-discretionary, then divide it by 12 and multiple that number by 10%. A more complete breakdown is here: https://studentloansherpa.com/discretionary-income-calculation/

5) The thing I’m focused on is the Perkins/HPL $21,500 @ 5.000% loans, because I can’t use PAYE to pay those back. Is it possible to consolidate my 8 Perkins/HPL loans into 1 Direct loan so that they are covered under that? I read something about when you consolidate they round the interest up to the nearest quarter percent or something… is that right?
– There are loans that are ineligible for certain programs that can become eligible through federal direct consolidation. This is a question that you need to ask your servicer. When you are on the phone make sure you are talking to someone knowledgable. I suggest asking a few tricky questions that you know the answer to, if they give you bad info, you are not working with someone knowledgeable. Call back until you are satisfied you are talking to someone who knows what they are doing. Then run through your plans to make sure everything checks out.

The quarter percent rounding up does happen in a direct consolidation. They take the weighted average of all of your loans and then round up to the nearest .25% As for consolidating just the Perkins/HPL loans, it is an option and it might be a smart one for you depending upon HPL loan program eligibility (something I don’t know).

6) If I can’t consolidate the Perkins and therefore have to pay back $21,500 extra outside of PAYE, should I try and pay those off ASAP? That would add an extra $ 228.04 /mo otherwise.
– If you are definitely going to be paying back the full price of the loan, an aggressive repayment is usually the best way to go. If you do go the aggressive repayment route, refinancing those particular loans on the private sector might save you some money.

Hopefully that covers everything. Good luck!

November 8, 2015
8:57 am
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Indiana
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One other thought that does come to mind for you is the possibility of Public Service Student Loan Forgiveness. If you work for the government or a non-profit, your loans can be forgiven tax-free after 10 years worth of PAYE payments. I know that many health care providers do fit within this designation. It could make a job that might otherwise be slightly lower paying far more lucrative.

November 9, 2015
2:32 pm
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Thanks so much! That really helped me out a lot. You’re right in that they assumed an income increase of 5% each year I believe… I’m not sure how accurate that is in my profession, but who knows. There are definitely variables as you pointed out due to the tax rate and forgiveness. I think riding out PAYE is my only option though at this point. I’ll talk to my servicer about possibly rolling in the HPL/Perkins so I can go on PAYE for those too. Very good advice about asking the tricky questions…. I never would have thought about that!

Also I didn’t realize that they will capitalize your interest if you don’t reapply every year. In my case that one missed deadline would be absolutely killer! Thanks again.

November 14, 2015
8:38 am
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A couple additional question as my son is in exactly the same situation. He owes $180k and just started as a physical therapist earning $65k per yr.

1. If his grandparents want to make an additional payment for him, say $10k, can that be done towards either the capital or interest balance, whatever you select, without affecting the overall Pay as You Earn Plan.

2. What happens if he marries, say 5 years from now, and his wife has a good job and makes $100k per year?

November 14, 2015
5:59 pm
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1. This is a question that goes beyond student loans. PAYE is typically calculated based upon your yearly AGI. Some gifts are taxable while others are not. If the 10k shows up in your son’s taxes, it will affect the plan, otherwise it probably won’t. This is one of those situations where things are not 100% clear, so I’d suggest discussing the gift with your loan servicer (getting their response in writing if possible), to figure out exactly how they would handle it.

2. Marriage may or may not affect the PAYE plan, it depends upon how they file their taxes in that instance. If they file their taxes separately, the income from the wife will not be counted (but they will be paying more each April 15). If they file jointly, the wife’s income will be included in PAYE calculations. For your reference, IBR treats spousal income the same way, but REPAYE counts spousal income regardless of tax status.

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