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With PAYE, is there any point in trying to actually pay off my loans?
January 15, 2018
5:26 pm
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January 15, 2018
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My student loan balance is ~$132K, plus unpaid interest totaling just under $140K. I have been on PAYE and my payments have been $0, and are about to increase to ~$200 (I was unemployed after law school and then was a law clerk, so my new repayment amount is based on my law clerk salary). All of my loans are from law school (Stafford and Plus). I am no longer a law clerk and am now practicing as an attorney. So, I can afford more than my minimum payments on PAYE. According to the calculators I have been looking at, my ten year repayment amount would be ~$1500/month. My question is, though, is it even worth it for me to attempt to pay off my loans? Right now my salary is $75,000. My rough calculation for what my PAYE payments would be on this salary doesn’t even cover the interest of the loans. Should I just stay on PAYE and make minimum payments for 25 years and wait for the balance to be forgiven, allowing me to invest extra money in other areas like a home and retirement? What level of salary would I need to make for there to even be a point in attempting to pay off my loans? Thank you for any guidance.

January 15, 2018
9:30 pm
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This is definitely a tricky situation.

One tool that is very helpful is the Department of Education’s student loan repayment estimator. It can be found here: https://studentloans.gov/myDirectLoan/repaymentEstimator.action

Note that the site assumes 3% raises each year which may or may not be accurate in your case. Your salary may increase considerably which could change the math in a significant way, but the estimator is a helpful start. In addressing this same situation for myself, I made an excel spreadsheet and basically played out different income scenarios. Just remember that if the remaining balance after 25 years gets forgiven, that is considered to be taxable income, so you will need to include that in your analysis.

I’d suggest looking into the REPAYE plan. It isn’t as favorable as PAYE if you are married, but the treatment of excess interest on REPAYE is better.

Ultimately, getting you loan balance forgiven can be a great perk. However, chasing forgiveness can also cost more money than paying it off aggressively. When you do your analysis, keep an eye on total spending. You may spend way more getting to forgiveness than you would if you just paid off the loan due to interest over the years.

If you run the numbers and it isn’t clear which option is best, you could consider saving or conservatively investing money with the understanding that it will be used towards your student loans. If it becomes clear that it is better to pay off your loans in full, you can make a huge payment to give yourself a big boost. If forgiveness ends up being the best path, you can use that money to pay the huge tax bill in 25 years.

Another thing to consider would be public interest legal work. If you get a job as a government attorney, prosecutor, or public defender, you can go after public service loan forgiveness and have the debt forgiven tax free in 10 years. It may make up for the lower salary in government work. Also, as a former prosecutor, I think it is an awesome line of work to be in.

My last tip would be to revisit this issue once a year or whenever you have an employment circumstance change. What is foggy now may become very clear in a year or two.

January 16, 2018
3:17 pm
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Thank you, this is helpful. Oddly, the calculator puts my total repayment with PAYE at just over $202K, and my total repayment with REPAYE as $297K. I’m struggling to see why, as the plans look almost identical to me. Do you have a post that breaks down the differences between these two options?

January 16, 2018
3:33 pm
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That is odd that there would be such a big difference between the two estimates. Graduate school debt, might explain this issue. I believe forgiveness with PAYE comes after 20 years for all eligible borrowers, but REPAYE forgivness comes after 20 for undergrad borrowers and 25 for graduate school borrowers. This table might help clarify: https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven#repayment-period

Additionally, I don’t know if the Repayment estimator knows to factor in the interest that is forgiven under REPAYE.

I think both these issues merit a discussion with your student loan servicer. They should be able to talk you through everything for your specific loans. If they cannot, or you suspect they don’t know what they are talking about, don’t hesitate to call back and speak with another representative. It really is luck of the draw sometimes.

As to an article explaining the differences between the two, we did publish this when REPAYE was first released: https://studentloansherpa.com/repaye-vs-paye-student-loan-payment-plan-better/

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