Getting SL and saving for retirement OR

[Deleted]

paying for school out of pocket and no saving for retirement? Which would you do and why? Our top tax bracket is 15%, state is 4% and the student loan would be subsidized while he is in school for the next 3 years and 6 month after that and then would be 6.55%.

[haapai]

What would your marginal tax rates be after graduation?

If they stay at 15% and 4%, it might be safe to assume that you'd qualify for the student loan interest deduction. In that case, you might want to calculate the effective interest rate for those student loans.

If your state income tax return starts with AGI, the relevant MTR is probably 19% instead of the 15% that most people would reflexively put in.

I'm too lazy to check up the current rates on subsidized undergraduate Staffords. Is it 6.55% this year, or have you calculated the weighted average of subsidized and unsubsidized Staffords? 6.55% seems a little high.

[haapai]

Wait a second. 6.55% is 6.8% minus the quarter point discount for paying online. Graduate school?

[Deleted]

Yes Haapi, my fiance is 29 and getting his PhD

[Plain Old Petunia]

Personally, I would avoid the student loans even if it meant I couldn't save for retirement.

[haapai]

Not married is quite significant. I could not give a darn about who you are canoodling with but your filing status matters quite a bit here.

[Deleted]

We are getting married in May and I am applying to grad school myself so the question matters for us both. I am 26. I have about $7000 in retirement assets, he only has $1600. If I get into grad school next year, we would have to make the choice of paying my classes out of pocket or saving for retirement, we can't afford both.

[Gardening Grandma]

What will your degrees be in?
Personally, at your ages, I'd focus on avoiding student debt as much as possible. After graduation and employment, then I'd work on the retirement savings.

[haapai]

Once you have married, and gotten your degrees, what kind of tax rates will you be facing and will you be able to take any student loan interest deduction on the newest loans?

Are there any matches in play?

Sigh, if we could only use real income numbers, this would be so much simpler.

[Deleted]

Neuroscience for both of us, I am applying to the master's program and he is in the PhD program. And both gardening and haapi can you explain your reasoning why?

[Gardening Grandma]

And both gardening and haapi can you explain your reasoning why?

I can speak only for myself. I am very debt adverse. Debt (even "smart" debt like SL) can become an albatross dragging you down financially. You are young. It appears that when you are employed, you will be enjoying very good salaries. With no student debt, you'll be able to afford aggressive saving (for retirement as well as other goals). And at your young ages, time is very much on your side.

Now if loans were the only way to get an education, then I'd say, "do it". But if you are able to get an education without loans, you will be way ahead of the game. Just my .02

[debtheaven]

Why does it have to be "either/or"? Can't you take out SOME SLs and contribute SOME to retirement? I think that is what I would do.

I agree it's great to have no SLs, but you are both in advanced degrees. If either and / or both of you are aiming for a career in academia, it is a very long road. So I would "hedge my bets" by doing both: trying to pay some out of pocket but taking out some SLs, and contributing some to retirement while you are both young.

ETA: Although I agree that SL debt can be crippling, if you can pay it all out of pocket on your current salaries, my guess is you're not talking about vast amounts of SLs. Once you and your DF graduate, your salaries will go up and that SL debt will be less daunting that it appears today. I'd rather have modest SL debt and start contributing to retirement sooner rather than later.

This said, I know you own a rental. Isn't that part of your "retirement plan", even if retirement is a long way off? If so, you are already contributing to your retirement.

[haapai]

In my case, I'm trying to figure out whether any loans that you might take out would be eligible for the student loan interest deduction.

Neuroscience, huh? I guess that answers the question and the answer is probably "no" unless you are both planning on staying in academia. You probably won't be eligible for the student loan interest deduction unless the bottom drops out of your worlds.

In other words, the effective interest rate on the loans that you are considering is probably the same as the stated rate 6.55%.

Could you explain the 15% and 4%. I really have no idea if those are your marginal tax rates before or after attaining degrees or before or after pushing money into deferred compensation plans.

[Deleted]

Haapi- We are both planning to stay in academia, he more so than I but I would prefer it if I had a choice. It looks like the first 2/5 year out of grad school would be the lowest income (postdoc positions). I was expecting we would be able to use the deduction for the first few years because the cap is $110,000-$140,000 and I don't expect even our first tenure track jobs to be over $70,000 each. The 15% and 4% is right now. After grad school we would be trying to get our post docs and that normally pays about $35,000 with not much difference based on cost of living. I do worry about not being able to pay the loans for those few years and my DF will probably get a postdoc and move before I graduate so we will be having to support two households. It looks like my loan would be either $7650 or $5650 depending on if we put money away for retirement or not.
Yes the rental is part of my plan but I still want about $4 million in stock/bonds in addition to 4-10 rentals.

[phil5185]

If I understand 'subsidized' correctly, that would be the tipping point for me.
I borrow capital at <6% and invest it in longterm funds to get 10% to 12%. And that has worked well for me - but 6.55% would be a no-go for me.
But if you can borrow for 3 1/2 years at zero interest and zero principal pay-down, and then start repaying after Y3.5, I would take it. And then I might prepay it (if the loan contract allows it). In that case, a paydown of 4 yrs would result in an equivalent 7.5 yr loan at about 3.25%.

[Deleted]

Well, I went back over my math and I lied, the loans would be $3500-$5500/year. Phil, the loan contract allows for prepayment, and yes subsidized means that for the next 3.5 years it is 0% then it would jump to 6.55%. So even you say don't borrow it?

[Peace77]

Pay for your education with the funds you have available.

There will be time to save for retirement later after you have graduated and are in the workforce.

You do not want to have the student loans come due and not have a way to pay for them, if you don't get jobs right away.

[Deleted]

Peace, I know my fiance's PI, he allowed another grad student to stay on until he found a postdoc position. I'm not worried about that, at least. I do worry about getting a tenure job (with health insurance) and about me getting a job and what will happen if I stay here to finish up and my DF (who will be DH) has to move.

[haapai]

It looks like I was wrong about you guys not qualifying for the student loan interest deduction.

For what it is worth, the phase out for joint filers occurs between a (modified) AGI of $120K and $150K. (In this case, the modified AGI is pretty much AGI before the student loan interest deduction. ) Those numbers get indexed each year, so goodness knows where they'll be by the time you folks even have to worry about them.

You have quite a bit of ability to keep your AGI down by making contributions to retirement plans. On the other hand, once your AGI gets over the phase-out threshold, the deduction phases out very quickly.

It sounds a lot like you guys will be in the 15% and 4% brackets for quite a bit of time after graduation. That brings the effective interest rate on your student loan down by quite a bit, from 6.55% to 5.31%.

5.31% isn't a bad rate to be carrying for a long time.

(I'm single and pretty low income, so I'm pretty weak on when joint filers pass into the 25% federal bracket. What I have seen in the past indicates that the student loan deduction starts phasing out just a few grand into the 25% bracket.)

Most of the rumination above assumes that you don't have other student loans.

[phil5185]

So even you say don't borrow it?

Sorry, I wasn't very clear. In my post I was verifying that the effective rate was 3.25% rather than 6.55%. And a 3.25% loan sounds just fine to me.

[Deleted]

We have 3, mine at $5400, 5.75%, his $5500 at 5.75, and his $17000 at 6.55%. We are paying the minimum on mine ($30), his are being deferred.

[973beachbum]

First I want to confirm a few things.

These are all Federal Graduate PLUS loans, right?

After yu graduate you are afraid that you won't be bringing in a large paycheck?

Are these loans going to be Direct or FEEL?

You will probably have to ask the Financial Aide dept the last one. If they are Direct SL's you should be able to pay them back using the Income Contingent Repayment or ICR. This is a link to the page on Finaid.org they are my favorite website for all things student loan.

www.finaid.org/loans/icr.phtml

From the website

The Income Contingent Repayment (ICR) plan is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service. It does this by pegging the monthly payments to the borrower's income, family size, and total amount borrowed. The monthly payment amount is adjusted annually, based on changes in annual income and family size.

The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. But the savings can be significant for students who wish to pursue careers in public service. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small.

In addition to discharging the remaining balance at the end of 25 years, the ICR program also indirectly subsidizes the interest by including an interest capitalization cap. If your payments don't cover the interest, unpaid interest is capitalized (added to the principal) once a year. However, this capitalization is capped at 10% of the original loan amount. Any additional unpaid interest continues to accumulate but is not compounded. This means that if you decide to prepay the loan or switch to a different plan, the unpaid interest will be included in the loan balance. But as long as you remain in the ICR program, any excess interest above the 10% threshold will not be capitalized.

The interest rate is fixed for the lifetime of the loan, and is not variable. It is based on a weighted average of the interest rates of the loans included in the program, rounded up to the nearest 1/8th of a percentage point. It may be advisable for students who wish to use this plan to switch to it just before their loans enter repayment, since the interest rate will then be the in-school rate, which is 3/5th of a percentage point lower.

Many students do not participate in the ICR program because they are intimidated by the thought of a 25-year repayment term. However, it is worth careful consideration, especially by students who might be considering using an extended or graduated repayment plan. The total amount repaid over the lifetime of the loan is only slightly more expensive than that of the 25-year extended repayment plan, but can be significantly cheaper on a constant dollar basis.

A new public service loan forgiveness program will discharge the remaining debt after 10 years of full-time employment in public service. The borrower must have made 120 payments as part of the Direct Loan program in order to obtain this benefit. Only payments made on or after October 1, 2007 count toward the required 120 monthly payments. (Borrowers may consolidate into Direct Lending in order to qualify for this loan forgiveness program starting July 1, 2008.)

After reading it I would be interested to know if it sounds like something that would be applicable to you.

[haapai]

Jan 19, 2011 21:26:08 GMT -5 @gin1984 said:

We have 3, mine at $5400, 5.75%, his $5500 at 5.75, and his $17000 at 6.55%. We are paying the minimum on mine ($30), his are being deferred.

Adding another $3500-$5500 a year for three and a half years will probably result in some of your student loan interest not being deductible for a couple of years. The credit currently has a cap of $2500 per year. (If that credit is being indexed, it's being indexed very slowly, so I would not expect it to go up much by the time you graduate.)

While these loans would not charge interest while you are in school, they also have a 1% default fee built into them.

What a calculational nightmare!

[Urban Chicago]

First I want to confirm a few things.

These are all Federal Graduate PLUS loans, right?

After yu graduate you are afraid that you won't be bringing in a large paycheck?

Are these loans going to be Direct or FEEL?

I can answer some of these, being in financial aid.

Grad students can get up to $20500 per year in Stafford loans. Of that amount, $8500 can be subsidized (no interest while in school). GradPLUS isn't generally used unless you need to borrow more than $20500/year, so hopefully the OP is not talking GradPLUS.

Very few school are still using FFEL. Those that are will probably go to direct loans during the next year. We're almost certainly dealing with direct loans here. However, in the OP's situation, I would not consider income-contingent repayment as a viable alternative to just paying as you go. They don't need the money that badly.

[Deleted]

Phil- Since it would be .5% fee the first year, 0% for the nest 2.5 years and then 6.55% for the next 10 years I think it would be closer to 5.08% then 3.25%, still ok?
BeachBum- They are Stafford loans and they are direct loans. The first year we pay a .5% then 0% till 6 months after graduation and that will be at least 3.5 years, possibility more. We would not be taking any loans till Aug 2012. I am applying in Feb of 2012 to the master's program. I do worry about having enough to pay all our bills and retire as well as school loans. I do not however, want to spend 25 years paying off my loans.
Thanks, haapi, I determined I cannot take more than $13400 total to keep that deduction.

[haapai]

Actually, phil's analysis might be spot on. I haven't tried to follow it very carefully, but he seems to be considering the amount of time that the debt/loan will not be accruing interest. It's pretty cheap use of money if you can pay it off fairly quickly once it starts charging interest.

Loans for later semesters will have higher effective interest rates since the interest-free period is shorter.

[phil5185]

Phil- Since it would be .5% fee the first year, 0% for the nest 2.5 years and then 6.55% for the next 10 years I think it would be closer to 5.08% then 3.25%, still ok?

It would be OK for me, an equivalent 5.08% is good. And after I get into the 10 yr phase (6.55%) I would keep an eye out for options. Eg, say that 5 or 7 yrs out, you have a house with some equity - refi the house at <5%, 30 yrs, and clear the remainder of the 6.55% loan. (BTW, the term of the loan is important too, if you are investing borrowed money, you need loans to be both 'low & long'.