How would you feel if you found out that almost without any effort on your part, you could save hundreds of dollars? What about thousands of dollars? How would it make you feel to learn that you could save hundreds of thousands of dollars? Well, that is exactly what happened to us. We are literally saving hundreds of thousands of dollars on our student loans under our student loan repayment plan. And it is actually easier than you might think. And if you are a high debt, high income earner, there is a good chance that our student loan repayment plan will likewise save you the most money.
OUR STUDENT LOAN REPAYMENT PLAN:
STEP 1: Forego grace period and sign up for REPAYE.
STEP 2: Start making student loan payments immediately.
STEP 3: Refinance with a private lender
STEP 4: Live frugally to make aggressive payments until student loans are history.
STEP 5: Keep living frugally and invest extra income.
Not long ago we were contacted by Travis at Student Loan Planner. He offered to crunch our student loan debt numbers so that we could make sure that we were choosing the right student loan repayment plan for us. We agreed because we had talked to just about everyone and researched just about everything regarding our student loan situation. This included but was not limited to: talking to school counselors and financial advisers, many discussions with similarly situated peers, seeking out our loan servicers, and spending HOURS reading books, searching forums, and googling the subject. We left no stone unturned.
While the school counselors and the folks at the lending company were probably well meaning, none of them seemed to know as much as we knew. And we didn’t really know that much. That was concerning. Some of their advice was frankly inconsistent with what we learned on our own. That did not make us feel confident since they should be the “experts.”
In fact, we received a lot of inconsistent advice. Several people advised us to fully take advantage of income driven repayment and to invest extra income since the market could possibly offer interest higher than what is accruing on our loans. But one thing that made us leery of income driven repayment is the fact that you are taxed on the amount of the loan that is forgiven the year that it is forgiven. For us, that means the year that our loans would be forgiven we would be paying somewhere between $100,000-$325,000 in actual taxes, in addition to the taxes on whatever we earned that year. (see chart below). I’m not smart enough to figure out how to get out of paying that big of a tax burden. And taxes seem to change with whoever is elected in the White House. That reason alone was enough for us to pass up income driven repayment. Way too much uncertainty.
Anyway, enter Travis, he asked us some personal questions and ran our numbers and found the exact same thing we found. If we hustle and pay this thing off on our own, as quickly as we can, it will save us the most money, by far. You can view the details of his analysis HERE, but for the quick version, here is a chart of his findings: (these were our actual numbers in 2016)
As you can see, paying off our loans on our own, especially if we refinance with a private lender to lower our interest rate, will literally save us hundreds of thousands of dollars. This is clearly the best financial choice for us. We were stoked that his analysis was fairly consistent with what we had come up with on our own (spending a million hours googling it and chatting with similarly situated friends).
So, with that framework, these are the steps we are taking to pay off our loans and the reasons why.
STEP 1: Forego our grace period and sign up for REPAYE.
Why sign up for REPAYE? First, all of our loans are graduate loans so we do not qualify for the interest subsidy offered under PAYE. Under REPAYE, however, we get a 50% interest subsidy for any period of time that our REPAYE monthly payment due is not sufficient to pay the monthly interest. This is appealing as we are just starting our careers and may need a couple of years to build up our clientele (aka, start earning significant money). If we are not immediately able to start making big payments on our loans, this gives us a little bit of a safety net and effectively cut sour interest rate in half until we can refinance and get things going with our payoff plan.
To be clear, we have no intention of staying on the REPAYE plan. As you can see from the chart, that would be our most expensive option. This is only a good idea for us during this start up period where we aren’t able to make hefty payments on our loans.
STEP 2: Start making student loan payments immediately.
Even if we can only make small payments right now while we are still in our grace period, we are going to make them. Interest is accruing on the daily and anything we can do to minimize its effects will be of consequence to our overall repayment schedule.
To earn money, my husband and I both have day jobs (he’s a dentist, I’m a lawyer). I also draft, review, and negotiate contracts for people and businesses on the side and obviously, run this blog. We also have a plethora of side hustles. We save money on groceries by using apps like IBOTTA. We also meal plan and freeze our meals ahead of time.
We mystery shop. We run a small photography business. We sell stuff around the house. These side hustles allow us to make extra payments on our loans and still be able to eat and pay our bills.
STEP 3: Refinance with a private lender.
As soon as we have a good feel for how much income we will be earning and after we have made some payments under REPAYE, we will refinance our loans with a private lender.
There are some cons to refinancing student loans. The most obvious is that we will be giving up some of the protections that we have under federal programs. Once you refinance, you can never go back so you have to make sure it is something that makes sense (cents) for you.
The good news is that many private lenders do offer some protections, for example, SoFi offers unemployment protection which will allow you to defer payments for up to a year. You just won’t ever be able to switch over to an income based repayment plan.
This doesn’t bother us at all. If we had to switch back over to income based repayment, it would practically be financial suicide, we would be losing so much money. Once we have refinanced our student loans, there is no going back.
STEP 4: Live frugally and make aggressive student loan payments until our loans are history.
We are doing tons of things to live frugally as discussed above. The most important thing we are doing, is living on a budget. It is currently set at $3000 per month. This includes everything except our student loan payments and tithing to our church. If you want to learn more about our monthly budget you can subscribe to our newsletter where we share all of our budget details.
STEP 5: Live frugally and make smart investments to catch up for the decade that we missed making investments.
A lot of people forget to plan what they will do with their money after their debts have been repaid. We plan to invest in real estate, among other things, after our student loans are paid off. We have a goal of purchasing 10 rental income properties.We will of course fully fund a 401(k) if it is an option, and whatever IRA options are available to us. We will make some safe investments (like mutual funds) and some risky ones (like investing directly in start ups), if our financial situation allows.
So there you have our student loan repayment plan in five easy steps. If you are similarly situated, you are free to borrow it. If you are unsure what student loan repayment plan is right for you, see THIS POST so that you can make an informed decision!
What about YOU? Do you have a student loan debt repayment plan? What are you doing and why? We’d love to know!
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The video version:
Hi there! I’m Amber! And welcome to the Deeply in Debt blog where we’re offering simple solutions for big debt.
Thanks for the shoutout guys! It was an awesome experience getting to run the numbers for RedTwoGreen. Can’t wait to hear about the day you pay off the balance in full.
What you really need to think about is what your actual payment strategy is for once the second salary comes into play. What loan is the extra money going towards and why? What emergency fund are you comfortable with and why? You are going to be in debt for at least 5 years which is very, very different than folks who are buckling down for a year or two to payoff 30k in loans or CCs. Make your plan make sense and be sustainable! It will be a long journey.
With that in mind, please don’t put retirement savings on the back burner. While I admire your willingness to payoff of the loans ASAP I think it would be wise to incorporate heavy retirement savings mainly for taxes and annual contribution limits. 401k contributions will lower your AGI which will also reduce your required payments on REPAYE and student loan interest deduction. The newer refi companies look at how much you have saved so having a higher balance would help you on that end too. Like I said, many, many reasons to investigate a full payoff strategy and not keep contributions to a bare minimum!
Sorry to lecture on. High student loans get me excited because rarely are there others that have to work through the pain. It kills me when I open a blog and their “huge” debt is like 25k in student loans. We are on track to pay the remainder this year but started with 245k 10 years ago.
Thanks Angie! You definitely raised some good points. There is certainly a lot of points to think about when you have the debt load and income we have. We will likely contribute to a 401k but are still hashing out all of the deets which we will for sure blog about. Congrats on being so close to paying off your loans!! helps me feel like we might actually be able to do it.
Also, I likewise die a little when people tell me about their “huge” debt that is well under 6 figures. Anyway, thanks for the advice. It is well received.
Since student loans are paid with almost entirely after tax dollars (the interest deduction is almost nil), contributing to a 401k and paying down your loans is a toss up at best, easy decision to use an aggressive paydown strategy at worst.
The only exception is making sure you get a full employer match. That should definitely come first before paying down debt. Consider Angie that the risk free rate on the 10 year treasury bond is around 1.5%. After taxes that’s about 0.8%. In contrast, Amber and Danny can earn a guaranteed 7.9% by paying down their highest interest debt right now until they refinance. I’d say that’s a huge win to keep an aggressive paydown posture.
You asked in an earlier post if it was realistic to be able to pay off your loans in 5 years. I say you got this. After reading Travis’s analysis and seeing how committed you guys are to be debt free, I have no doubt you’ll hit your five year goal!
I second Angie’s comments about retirement, especially vehicles that will lower your tax burden.
I think you’re dismissing the tax effect on 401K contributions a little too quickly.
They will be in the 33% tax bracket so that means every pre-tax dollar is worth around $0.70-$0.75 after taxes (depending on state income taxes).
So, hypothetically, they could either invest $36,000/year at a 7% inflation adjusted historical average for the stock market.
Or, that $36,000 could be taxed and the resulting $25,000/year could be applied to a weighted student loan interest rate of 6.8%.
I know the difference doesn’t seem dramatic, but after 5 years your networth will be $69,000 better off if you had maxed your 401K. That $69,000 would have then compounded to over $250,000 after another 20 years.
Half a million in debt is no joke so I totally understand if psychologically you want to throw everything you have at the debt, but do so knowing it’s not the mathematically optimal option. Just my 2 cents.
I’ve probably over simplified the tax implication, but the Mad Fientist does a great post explaining the tax implications and how you can get your 401K dollars out tax free later:
http://www.madfientist.com/retire-even-earlier/
This is definitely something we go back and forth on all the time. We do have a couple of retirement accounts that I was forced to have through a government job. Since I ended up leaving that job I can access them before retirement (aka cash them out to pay student loans) or roll them into a new 401k option. I can’t tell you how many times I’ve stared at my computer screen trying to decide if we actually want to pull the trigger and toss them at loans like we have planned or not. It definitely boils down to the psychology of the thing. It’s an insane feeling having nearly 600k in debt. We appreciate your two cents!!
If you do refinance to a private lender keep in mind you likely will loose the death and disability discharge protection that comes with federal loans. So you might need to look into life/disability insurance policies for personal protection. Not fun to think about but important never the less.
I think hitting those loans hard is a great idea. I know for myself, paying off my law school loans really gave me a ton more flexibility. I’m not sure what your incomes are, but I imagine you’re making a strong income, which should hopefully help a lot. Refinancing I think is a great idea to really cut down the interest.
You guys should totally call into Dave Ramsey and see if you can get on his radio show. He’d have a heart attack!
Haha I’ve thought about calling the Dave Ramsey show and I think you are right- He would probably die hearing not only how much debt we have, but also that we bought a rental income property while still in debt. ?
“SoFi offers unemployment protection which will allow you to defer payments for up to a year.” I did not know this! I need to head over there and read the fine print. Super interested.
Yeah for sure. Most of the bigger refinancing companies (especially ones targeting millennials) have stepped up their game to compete with what the fed govt offers, thankfully!
Curious as to whether you opted for consolidation and why or why not?
Hey Sam! We responded to your email but just in case others are wondering about consolidating with the federal government–
We aren’t consolidating using the feds and honestly we never really considered it. I think the only real benefits are 1) to get a lower payment (and spread out the life of the loan for 30 years) and 2) it might be easier to manage if you have a ton of loans with different servicers, since it streamlines everything into one payment. Income based repayment would suit us better than consolidation if we were choosing to simply opt for a lower monthly payment (and not trying to pay off as quickly as possible so as to reduce the total amount we will pay over the life of the loan.)
Consolidating with the fed govt might make more sense if you were morally opposed to income based repayment. However, many private lenders offer 30 year repayment options and you could likely get a lower interest rate with a private lender. You lose the ability to change your mind whether you consolidate with the fed govt or a private lender, so I would just go for whoever has the lowest rate.
Hope that helps!
So, we have several hundred thousand dollars in student loan debt as well (dental school only) and we decided to do IBR for as long as we can. While we are on IBR, I pay those minimum payments, then choose the highest interest individual loan and pay as much as i can each month to that. It seems to be working out okay for us so far although every year when we recertify, the loan companies don’t quite know what to do or think when they see how much extra we pay on the loans when are on IBR. I wish we had a bigger shovel, but we’ll probably be doing this for somewhere around 7-9 years. I cannot even imagine the feeling we’ll have when we pay them off. They’ve been just such a huge burden for so long.
I think that is a great strategy Jessica. 7-9 years seems like a long time but is really not and I agree- I think it is going to feel amazing when those bad boys are paid off. Good luck to you both! So glad you are here. Hope you feel free to comment and ask lots of questions. A lot of our readers are in the same situation as you/us and I think we all need to learn from each together.
I forgot to mention that eventually when we don’t qualify for IBR anymore, we’ll probably just sign up for the longest repayment plan & then continue to do the same where we put all extra money on the highest rate loans until they’re gone (way before the original payoff date).
I’m so happy I found your blog! Not many blog address graduate student loans which are 10x more than undergrad loans. I just graduated pharmacy school (currently at 205k debt) and my grace period ends next month. Since I’m only working part time as a graduate intern pharmacist (pending my pharmacist license), I barely make any money.
I called up my student loan provider and I received the same answer as you. I was able to switch to the REPAYE, have the government pay 50% of the interest on my loans, and I have zero monthly payments for a year (I’m on forbearance). Of course, I’ve been making payments during my grace period and will continue to do so once I’m in forbearance (hopefully a larger amount once I’m on a pharmacist’s salary).
I’m currently living the sad life of paycheck to paycheck with a ~2k emergency fund and all remaining amount after rent, bills and food going into my loans. It really feels like throwing money into a black hole but I was able to get one of my loans from $21,000 down to $13,400 so there’s progress!
I’m so happy you are here too! Congrats on graduating pharmacy school! And you are definitely making progress, it will be so much better once you are licensed. Hang in there!!
Super helpful reading all the comments. I went to a private college for my BS. After graduating it was over $100k. Can’t remember amount. I’m 12 years out of college and it’s so high still at $83k. Such a tough burden. I’m doing my best chipping away at it. Any suggestions?