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Student Loan Strategy with High Savings / Low AGI?
Old 09-09-2016, 06:33 PM   #1
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Student Loan Strategy with High Savings / Low AGI?

Low AGI (133-150% FPL target) while preparing for FIRE appears to present a serious opportunity for reducing one's student loan burden. If I understand this correctly low taxable income over an extended period of time should mean student loan interest subsidies in the short term and eventual loan forgiveness in the long term.

Is there any standard advice for which repayment plans / durations are best suited to a high savings / low AGI lifestyle? IBR vs ICR vs REPAYE? 10 year vs 25 year repayment periods?

For reference I have around $50,000 in student loan debt. 2/3 is in IBR at an excellent interest rate, but not REPAYE eligible unless consolidated with the other 1/3 which is higher interest. The 1/3 at the higher interest rate is eligible for (and already in) REPAYE.

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Old 09-09-2016, 10:22 PM   #2
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We have about $100k in student loans still outstanding. We are repaying under IBR right now. With fixed rates at <1% held at our student loan issuer, we're staying with them for now instead of consolidating to the Direct Student Loans where we would lose a 2% interest rate discount but could do REPAYE (while setting our 25 year forgiveness clock back to zero).

Under REPAYE, paying 10% of income above 150% of FPL (instead of 15% under IBR) would save us a small amount in some years, and a bit more once the kids aren't included in our household size. But we would see the loan interest rate rise from 1% to 3% (half of which would be paid under REPAYE I think) and start over on our 25 years of repayment before forgiveness because we have to consolidate the loans to Direct loans.

For us, sticking with IBR is the best choice. It'll end up giving us 50% higher payments for around 10 years as the kids leave the house (and their dependent status), but we're already closing in on five years of repayment under IBR. Under REPAYE, we would have lower payments during the out years but 15 years of those payments. So it's basically a wash.

Right now I'm targeting an AGI around $42000 which will result in student loan payments at zero dollars. This year, for example, we will have to tax gain harvest a bit to get us up to $42000, but we're fortunate to be in a flexible position with our AGI.

Eventually we might face a low to mid-five figure tax bill when our $100,000 or so (plus some interest) is forgiven and the amount forgiven is treated as income. I expect a legislative fix will be passed to remove that forgiveness of debt from taxable income (on the theory that it's pointless to assess a huge tax bill against someone who's been facing a "financial hardship" in IBR language for 25 years). If not we pay the tax bill and enjoy year 26.

From a financial standpoint, the IBR/REPAYE can be a huge benefit to low AGI households both while preparing for FIRE and after retiring. It's certainly easy to get one's AGI down pretty low post-FIRE since you can pull from taxable or Roth accounts that don't drive your taxable income up to high levels unless you're withdrawing a ton of $.

Edit to add: This whole income based repayment system is relatively new, so many of the posters here didn't have that option when they were growing up and going through college (and college was generally cheaper in the past, therefore less college debt). So there's some dislike of the system and/or the people using the system. Don't be shocked if someone accuses you of "working the system", "being a deadbeat", "sucking up welfare from hard working taxpayers", etc. It's happened to me in the past on these forums.
Retired in 2013 at age 33. Keeping busy reading, blogging, relaxing, gaming, and enjoying the outdoors with my wife and 3 kids (4, 10, and 11).
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