[00:00:00] Speaker A: In this episode, we cover a particular type of borrower for whom the pay as you earn plan may be far preferable to the other options under income driven repayment, and why. If you fall into this camp, you need to take action as soon as possible because this plan will close its doors this coming July. Let's get started.
[00:00:18] Speaker B: Are your student loan payments or loan balances a major obstacle in your financial life? Then tune in and let's escape student loan debt.
[00:00:29] Speaker A: Hello. My name is Brenton Harrison of escape student loan debt and your host for the Escape Student Loan debt podcast. Today's episode is kind of a follow up, or I would say the natural extension of three different types of episodes that we've had over the past year or so. We've done a number of episodes where we've gone into details over the different income driven repayment plans that are available to you, specifically the save plan, which is the newest plan. It's just a renamed version of Revised Pay as you earn, with some additions and tweaks. We also talked briefly about the pay as you earn plan, compared it to the save plan, and we mentioned in that episode that the pay as you earn plan will be closed and you cannot sign up for that plan after July of this year. And then the last type of episode where this is kind of the natural extension is there's a group of borrowers for whom having student loans forgiven is really not that likely of a prospect. The combination of their student loan balance and either their current or future earnings kind of puts them in a situation where if they stay on income driven repayment plans, eventually their payment will rise so high that they'll be paying so much towards their loans, they would just pay them off. And for that last group we have talked about, as we did in the last episode, does it sometimes make sense to just pay off your loans? In some cases, a little preview? The next episode will even talk about when you might refinance your loans and pay them off, instead of just paying them off in full with the federal government. In this episode, we're going to talk about a particular type of borrower who kind of straddles the fence between all three of those options, and they'll be faced with the decision of either the save plan or the pay plan, or paying it off in full, or refinancing with a private lender and paying it off at a lower interest rate. So who are these borrowers? These borrowers are people who work in a field that gives them the option of potentially working in public service. They have a low income now, but they have a defined career trajectory that will lead over the course of the years to potentially substantially higher amounts of income as their career progresses. And lastly, based on their current income, their loan balance is many multiples higher than what they earn. But again, as that income increases, that percentage will change. And there's even the possibility that they could at some point owe less than what they earn each year. You're probably already thinking of groups that could fall into this category. Attorneys could fall into this category where they have a ton of law school debt. They come out, they're not making a ton of money. It's also relevant to a PhD who might be getting paid a little bit as a graduate student. Then they become an assistant professor, then a full time professor, then their tenure, then they're getting speaking engagement, so on and so forth. And then lastly, the most obvious example would be a physician that has the ability to earn credits towards public service. Loan forgiveness while they're in residency or fellowship could remain in those programs, but over the course of time, after their training years, their pay has a very defined progression and will increase exponentially. And those aren't the only groups. You could just be very good at your job and continue to earn more and be promoted. But if you fall into these camps, I want to talk about a few things that make the pay as you earn plan, an option that I would consider choosing even over the lower payments with the save plan and definitely over refinancing your loans with a private lender. So if you'll indulge me, if you are listening to this, I'm going to describe it since you can't see it. And we'll put screenshots of this in the show notes if you are following along on screen. I actually have a calculator pulled up from a platform called Student Loan Planner. And what we're going to do over the course of this episode is we're going to walk through the progression of a potential high income earner's career trajectory, and we're going to show how their payment shifts over time and some options that that presents in terms of why they pick their payment plan. So we're going to start with this person. When they're fresh out of school, they're taking their first job where they're doing an internship, or they're in training, or they're a graduate student who happens to be paid. And we're going to have this person be a family of one. And we're going to give them an adjusted gross income of $50,000. You will recall that income driven repayment plans base their payment off of your previous year's adjusted gross income. So in this example, this person has an adjusted gross income of $50,000 that's used to calculate their payment, but they owe literally double their adjusted gross income. They owe $100,000 in student loans and they owe it at 7%. Now, the next question asks what percentage of your student loans are graduate school loans? And we're saying 80%. Now, why are they asking this question? They're asking this question because, as we talked about with the Save plan, the percentage of your income that you pay towards your debt will change based on which portion of your loans are graduate school loans and which portion are undergraduate loans. It's also relevant because if you have graduate school loans under the Save plan and under the old version of the income based repayment plan, you have to pay towards those loans for 25 years before any remaining balances can be forgiven. So that's why they're asking to try to calculate what your payment would be under all of these different versions. If you're following along based on this metrics, this calculator has pulled up an estimate of your payment plan under many of the different income driven repayment plans. It starts with the lowest payment, which is the save plan, $121 a month. The pay as you earn plan, however, is almost double. It goes from one hundred and twenty one dollars to two hundred and twenty eight dollars. Now, the reason this difference is so vast is because the less money you make, the more likely it is that the save plan is going to be the substantially lower payment. And the reason for that is based on how they calculate the payment. The save plan allows you to take away a significantly larger amount of your pay before your payment is calculated than what you find on all the other plans. So the less you make, the less is left to calculate for the payment. And that's why you have $121 payment as compared to a payment under pay as you earn. That's almost double. Now, I also want to show you all the standard ten year repayment plan. So this is a person who wants to pay off their loans in full in ten years. It is $1,161 a month. Now, if this person is making $50,000, that is likely an impossible payment to make. But it's something that I want you to kind of keep in your mind. If this person were to pay off $100,000, it would take them about $1,100 a month at the current interest rate for their loans of 7%. And this calculator is also going to show you how much it would cost to pay off those loans in ten years at 4%. And that's just over $1,000. So to recap, I'm this person and all I have is what's in front of me. I'm going to say, this is the most obvious decision I've ever made in my life. I'm going to take the save option because the other three are not even relevant to me as long as this payment is so low. But now, let's go a few years into the future. Let's increase this person's income and let's add a person to their household. We are now going to assume that they are married. So instead of a family size of one, we have a family size of two. Remember that this person is on a career trajectory that has notable and market payment increases over time. So in our first example, they earn $50,000. Now, we're going to assume that they're earning $95,000. And we're going to assume that they are married and that they file their taxes together with their spouse. So their spouse's income is going to impact their payment. We're going to assume in this scenario that their spouse earns $75,000. So we got a high income couple that we're building here, and we're going to assume that they owe $45,000 of student loan debt. So substantially less than their partner and 80% of their debt is graduate school debt as well. Again, I'm explaining this as best I can, but we are going to have screenshots for all of these in the show notes of the episode. Now let's look at what it does to the payment. The first thing that you need to know is when you each have student loan debt as a married couple, there is going to be a maximum household payment that is calculated for your household. In another episode, we'll get into how they determine that percentage, but you see that reflected in the calculator, because at the very bottom of each payment plan, you now see a total household payment for the save plan. That payment that used to be $121 a month is now $930 a month. And that payment under pay as you earn that used to be almost double what it was under the save plan is now $1,161 a month. Now, that's a lot of money, but instead of being almost double, it's still the same. Almost a couple of. But conceptually, to a couple that's earning 100 and 6170 thousand dollars a year. A couple hundred dollars a month is not as big a deal to them as it was if one person was earning $50,000. And now let's look at what is actually broken down into each of their individual payments based on how we set this up. So we have the household payment where we started this with one person, and we're evaluating the decisions that they should make towards their debt. So the save plan for just their loans would be $641 a month. The pay as you earn plan would be $801 a month. And you'll recall that if this person were to pay their loans off just in ten years, it would take just under $1,200 a month at their current interest rate. And if they were to refinance, it would be just over $1,000. So now we're in a situation where these numbers are a lot closer. To be clear, one, $200 a month is a lot more than $600 a month. $800 a month is not that much more than $641 a month. So after the break, we're going to push this person's income up even further. I'm going to show you a break even point where that decision between save pay as you earn and refinancing really rears its head based on a subtle difference with the pay as you earn plan that I have not yet discussed.
[00:10:54] Speaker B: This is the Escape Student Loan Debt.
[00:10:57] Speaker C: Podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving home ownership.
[00:11:08] Speaker B: We'll be right back.
Are you interested in learning the tools and techniques we use to get student loans forgiven, reduced, reorganized, or expedited? Well, great news. We're currently updating our flagship course, escape student loan debt, to reflect the current changes in the student loan landscape. To stay up to date on the launch of the course and opportunities to sit in on our live recording sessions, head to escapestudentloandet.com and join our email list now.
[00:11:40] Speaker C: You're listening to the Escapestudent loan debt podcast.
[00:11:44] Speaker A: Subscribe
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[00:11:47] Speaker C: Welcome back.
[00:11:50] Speaker A: Before the break, we had a person who had gone from a single person with $50,000 of household income to a married person with $170,000 of household income. Now, we're going to give this person a couple of kids, and we're going to continue with the progression of their income. So we're going to make them a family of four. We're going to give them, this individual, a $200,000 adjusted gross incomes. And we're going to assume that their spouse has increased their income over time too. Now their spouse has $100,000 adjusted gross income. So now let's look at an interesting wrinkle in terms of our original borrowers payment plan options. Their household payment, the total amount that's going towards their loan under the save plan is $1,560 a month. And now I want you to see something that's really unique for the household and also for this individual. The standard ten year payment plan is now the exact same dollar amount as what they pay under the pay as you earn plan. It used to be that there was a big gap before the break, it was $800 versus one $600. Now it's $1,509 for the standard ten year payment plan, $1,509 for the pay as you earn plan, and it is a higher amount for the save plan at $1,560. You see the same thing reflected if you look at their individual payment. The save plan payment is $1,064. But under the pay as you earn plan and the standard plan, the payment goes down about twenty dollars to one thousand and forty five dollars. This is kind of that break even that I told you about. So you're probably wondering what the hell is going on here. How is it that at the beginning of this process, the payment for these other options was double or triple or quadruple? And now we've reached the point where it's somehow under the save plan, higher than what it is under the pay as you earn plan or the standard ten year plan. Here's the first of these wrinkles that we haven't discussed that pushes this group towards the pay plan. The save plan has the lowest calculated payment for many borrowers, but what it does not have is a cap on payments. What I mean by that is, for the other popular income driven repayment plans, there's a payment cap that says that if they ever calculate your payment and find that it's higher than what it would be under a standard ten year payment plan, rather than allowing you to make that higher payment, they would simply ask you to pay what's required under the ten year payment plan, but they will still give you credit towards loan forgiveness. So what you're seeing in this example is this person's household income has reached the point where if they were to actually pay 10% of their discretionary income, it would be more each month than what they would have to pay to just pay off their loans in full with the standard ten year plan. So the income driven repayment plan option automatically knocks down their payment to the ten year payment option, but it still gives them credit towards the time that they have before their loans are forgiven. With the save plan, they're doing this same calculation, but because there is no limit on what you could pay, they have reached the point where even though if all things were equal, if the payment cap didn't exist on either plan, the save would still be the lower option because pay has it and save doesn't, the save plan is now the more expensive route to go. So if you think about what I'm saying, where you have this person where early in their career it made all the sense in the world to do the save plan because that payment was so much cheaper. And they've now reached a point where they're trying to decide, does it make more sense to just pay this thing off in full now if they were going to decide to pay it off in full? What some people do when that decision is made is they refinance it with a private lender. That's why we've referenced what it would cost to pay it off at a lower interest rate. So this person may be tempted to look at that interest rate and say, why don't I just refinance it with a private lender at this lower interest rate? Because I'll save all this money over the course of time. But recall that you cannot undo refinancing your loans with a private lender, and you do not get public service loan forgiveness with a private lender. Nor do you get the forgiveness that comes with the income driven repayment plans. So if you're trying to straddle both sides of the fence, one could argue that the pay as you earn plan is the best middle ground option. Why would you say that? First, unlike the Save plan, where when you have graduate school loans, you have to pay them for 25 years, the pay as you earn plan only requires a 20 year payment. So if they're a little bit close and they've been on the pay plan for a long time, and they got the benefit of paying those significantly smaller amounts for all these years, now they're paying a lot more to the point that it's the same payment as the ten year payment plan. There may be that kind of point where they say, I don't know if I'll have it forgiven. If I do have it forgiven, it's going to be a minuscule amount after 20 years, but at least by staying on the pay as you earn plan. I can make sure that my payment does not exceed what it would be under the ten year payment plan, and I still retain the option of having it forgiven if the numbers work out in my favor because I'm still getting credits. And here's an even better scenario. What if this person, because of their career choice, does not know if they will ever get to ten years worth of service under a qualified nonprofit or a government entity? Because any year that they work for those employers while paying their loans under an income driven repayment plan, they can get credit towards the ten years that are needed to have their loans forgiven under public service loan forgiveness. So if you are a PhD professional who may work in the private sector for a while and then come back to university work, if you are an attorney who works for the government for a while and then goes into the private sphere and then goes back into government work, at least retains the option to if you're a physician who got three to eight years worth of credit towards public service loan forgiveness, depending on your program, and then left and went into the private sector, but might come back to work in nonprofit or government medicine at some point in time, what you've also done is you've put that same cap on your payments under pay as you earn to make sure that it doesn't go too high, but you've retained your option to pick up those last few years of credits you need under public service loan forgiveness. And the reason that I'm painting this picture for you is because if this sounds like you, and I understand this is not everybody who listens to this podcast, but some of the people who listen to this podcast are in these fields. Don't just think about those three. Think about the progression of your career. Think about what you're making now as compared to what you were making ten years ago. There are plenty of people in that scenario who are making double or triple now what they were making a decade ago. And if that's you, or if it could be you in the future, you literally have until July to sign up for this plan before it goes away forever. So I know that this is a lot to digest, and you probably are going to have to take a look at these screenshots that are in the show notes. But what I want you to retain is the vision for the progression of your career and the progression of your income as compared to your student loan balance now. And if you think that there might be some line in the future where you could have reached that breakeven point then you need to consider paying a little bit more on your student loan payment now and signing up for the pay plan and doing so before it expires for good. See you in a couple of weeks.
[00:19:15] Speaker B: From escape student loan debt this was the escape Student Loan Debt podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving homeownership.
