debt, debt repayment, Income Based Repayment, Refinance Student Loans, student loans

WHAT STUDENT LOAN REPAYMENT PLAN IS RIGHT FOR ME?

Danny’s graduation just keeps getting closer and closer which means one excellent thing: we are getting closer and closer to having a real income. But it also means that we are getting closer and closer to having to make a decision on how we are going to tackle his MOUNTAIN of debt. So, I’ve gone through each of our options (or lack of options, but hopefully it is helpful for you). Without further adieu:

Lets start off by looking at this fancy chart. You should create your own HERE as it is helpful in reviewing what the best option is for you.

ibr

1. IBR

to qualify: must have FFEL, Stafford/Graudate Plus loans (can’t have anything that contains Parent Plus loans)

Pros:

  • Loan forgiveness. After 25 years, the remaining balance of your loans disappear.
  • Live better lifestyle immediately after graduation. This is as a result of the fact that you will  be making low monthly payments.This is appealing to people who have been students (and living like students) for more than 10 years.
  • Never have to pay more than what would be required under 10 year standard repayment plan.
  • Payments change with income.This helps ensure that your payments are affordable- if you get a job that pays less, then your payments will decrease.
  • Possibility for saving and investing money earlier
Cons:
  • Doesn’t incentivize you to make lots of money (since its based off percentage (15%) of income. The more I earn, the more I pay, while interest is accruing).
  • Pay FAT taxes the year that your loan is forgiven. You are taxed on the remaining balance of your loan (which, for medical and dental students, can easily be more than $1million). Meaning, you might be paying $100k – $400k JUST IN TAXES the year your loan is “forgiven”
  • You have debt hanging over your head for 25 years
  • Your loans will earn more interest
IN SUM: Good for people who have high debt compared to income and or family size. Or who want to live a more comfortable lifestyle and not concerned about lifetime value of the loan.

2. PAYE:

To Qualify: Must have Stafford or Graduate Plus loans that were taken out ON OR AFTER Oct, 1, 2011, or have consolidaton loans that were made on or after Oct 1, 2011 OR direct loan borrowers can qualify if they have no loans made before Oct 1, 2007.

We don’t qualify for this so I didn’t research this too hard because its too depressing on what we are missing out on. If you qualify, really consider taking advantage of this!

Pros:

– 10% of your income for twenty years and then it is forgiven.
– Allows you to live comfy-ish lifestyle immediately after graduation
– total balance of your loan that you end up paying will likely be less than what you would have paid under the conventional loan option (or any other option for that matter, see chart customized to our situation above)

Cons:

– you  have debt hanging over your head for 20 years.
– You’ll be taxed on the remaining balance that is forgiven plus whatever your income is that year, so that will HURT

3. REPAYE

Pros:
receive interest subsidy during first three years of repayment
– good option if your job is not reliable or you think for some reason you may earn LESS money in the future
– only pay 10% of whatever your income is. So if you went to school and then decided to become a SAHM for example, you would pay $0 (since your income is $0).
– good option if you don’t qualify for PAYECons:
– Accrue WAY more interest than other repayment options
– Get taxed (as discussed above) when your loan is forgiven

4. STANDARD:The standard plan sets up your payments such that you’d pay off your loans within ten years.

Pros:

– smallest amount of interest accruing
– gets rid of debt hanging over your head the fastest

Cons: 

– living like students for another 10 years (ideally less, since ideally you’d be throwing more money at these monthly than what is due)
– takes a lot of discipline to not spend the money you are making

So, our expenses could look something like this next year:

Yearly expenses based on $150,000 income (ps, we don’t know what exactly our income we’ll be, so this is just a random figure I chose out of the air)
Taxes: $37,500 – 49,500 (25-33% depending on how we file)
Tithing: $15,000
Housing: $9600
Food: $5000
Standard loan: $62,000 IBR: $17,976 PAYE: $15,000 REPAYE: $15,492
Car maintenance: $500
Clothes: $500
This factors in basically no discretionary income- gifts, vacations, etc. And this could change a lot because it depends quite a bit on what our actual income is.
Super appealing to only have to spend 15k on student loans next year instead of 60k! But super unappealing to think about getting taxed to death in 20-25 years. And super unappealing to STILL be paying loans in 20-25 years. In the end, its a personal choice, obviously. What do you think? What have I not considered? What are you choosing for your student loan repayment options? Help us decide– comment below!

13 Comments on “WHAT STUDENT LOAN REPAYMENT PLAN IS RIGHT FOR ME?

  1. Get after it! If I were in your shoes I would pick the 10 year repayment. Then I would go job searching with the sole goal of making the highest income possible with the cheapest cost of living (even if that means you are living in Minnesota) then I would bust but live like I'm broke and pay that thing off As quick as I could! Then being debt free I would move where I want to live and start or buy a practice. The best day of my adult life was the day we paid off our dental school loans! Best of luck!

  2. Refinance your loans with another bank to get a lower interest rate on all or at least your highest interest loan and get it done. You don't know what taxes will be like and what kind of tax bracket you will fall under in 20-25 years. Also in order to keep your principle form increasing over that 20-25 years your gonna have to pay a couple of grand so you don't have to pay taxes on over a million dollars. I like your chart a lot though. Super helpful for me, ( I'm in Danny's class FYI)

  3. That is kind of an option but you have to commit to public service for ten years which I'm not willing to (and Danny doesnt really have that option). Miss you!!

  4. Its such a good option if it works for you! Theres not a penalty, BUT you'll have a higher balance to pay off since more interest will accrue on your principle since you'll be paying so little on it under PAYE, if that makes sense.

  5. Thanks Dane! The only thing that freaks me out a little about refinancing is that theres no changing up my options. What if Danny's hands get chopped off and he can't be a dentist anymore? Then we don't have the option of switching over to PAYE or IBR etc. But I know the interest rates can be so much better! Ah decisions. Thats a good point about not knowing what tax bracket we'll really be in in 20 years– hadn't thought of that! We are definitely leaning more towards standard repayment and just knocking it out as fast as we can

  6. Het good "own profession" disability insurance no matter what option you choose. That will ease the hands getting chopped off nightmares!

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