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It’s Friday and you know what that means! Time for another Reader Case.
The reason why this case caught our eye is because not only does this reader have one of the most interesting backstories we’ve ever read, she is also impressive as hell. Judge for yourself:
“To start I have to say that your blog and your story is giving me life right now. I’ve made some pretty poor decisions based on my own ignorance and some based on listening to bad advice, but I am hopeful that I can correct it. I’m just stuck on a few important decisions. This is going to be super long, but please don’t give up on me from first glance, I have like multiple cases in here.
My life in one really long paragraph, I grew up in poverty (living in shelters, hungry enough times that I’ve developed an unhealthy relationship with food that I struggle with today). I also had a pretty traumatic childhood, which left me with a desire to be financially independent (something my mother obviously was not) and free to leave any situation at any time. I always did well in school, but had no desire to go to college until my teachers presented it as a way to move out of the side of Chicago (where I grew up) and then all of a sudden it seemed like my ticket to getting away from my family and everything else. My middle school teacher made me promise him I would go to college and my high school teachers helped me to get there. They paid for my SAT and ACT exams and also helped me to enroll in an early college program during my sophomore year of high school. I started classes at age 15 and enrolled full-time at age 16.
Fast forward, like really fast and like really forward, I have 5 degrees with the last being a PhD and $183,000 in student loan debt. Since earning my Phd I’ve held 2 great jobs that were wonderful work environments, but could barely afford my student loan payments. My salary in my current position is $82,000 before taxes and I make another $20,400 for teaching 4 classes during the year. So, before taxes $102,400.
Student Loans: I’m in the income-based student loan repayment plan that costs me $498/month right now. The idea is that it will be forgiven after I’ve completed 10 years of service. I’ve put in 3 years of service already and I kind of want to stick with it, but the way things are going in the old U S of A right now, I’m not sure. So, I’m thinking maybe I should start paying more on it because right now my payment only covers interest.
I’m also in the middle of looking for a new job with higher pay. Thing is if I make more than the income-based agreement, I am kicked out of the 10-year forgiveness program.
What should I do?
The Finances:
Student Loans: $183,000 @ 6.75 interest rate
Gross Income: $102,400
Monthly Spending:
My mom’s car note – $334 – 0% interest 50 payments left
My car lease – $264 (finished July 2018)
Car insurance – $267 (covers my car and my mom’s car)
Groceries – $400
Dining Out – $200
Cell phone – $83
Internet for my mom – $30
Gym Membership – $88
Other Miscellaneous (physical therapy co-payments, skin treatments, braces) – $180
Rent – $780 (I rent a room in someone’s condo with everything included).
Student loan – $500 (will likely increase due to my increase in income last year, but I won’t know how much until end of month).
Savings Totals
$2000 – in CDs
$6,000 – in online high yield savings account
$11,000 – in 403b
$12,000 – in 403a
$6,300 – in Roth IRA 1(2016 plus $500 from 2017)
$5030 – in Roth IRA 2 ($5000 from 2017 contribution)
$250 – brokerage account
I spent last year paying off both of my sisters’ cars because they were in my name. One sister is paying me back with $267/month. The other sister has the title and doesn’t speak to me anymore because she doesn’t agree with my lifestyle (umm I’m guessing paying her bills is that lifestyle). The $267 goes directly to high yield savings account and sits.
Even if you don’t choose my long, crappy case, I’m extremely grateful for your website and the movement you’re starting.
–MillennialAcademicScientist.
See what I mean? How can anyone not be insanely impressed by her story? Growing up in poverty, teachers believing in her, working her butt off and getting 5 degrees. MAS, You are an inspiration, and I hope everyone around you knows it!
Even though MAS kicks ass, something that is, unfortunately, kicking her ass is her massive amount of student debt. *sigh*. Every time an American reader writes in with their student debt numbers my eyes bug out a little. No other country has even close to the debt issues US students do.
So what should she do in this case? Pay off the $183K student debt? Or rely on the loan forgiveness program which may or may not be there in 7 years.
Okay, lets break down the numbers:
Summary:
Current Gross Income: $102,400
Spending: ($334 + $264 + $267 + $400 + $200 + $83 + $30 + $88 + $180 + $780) * 12 = $31, 512/year
Debt: -$183,000
Investable Assets: $2000 + $6000 + $11,000 + $12,000 + $6300 + $5030 + $250 = $42,580
At first glance, looking at MAS’s expenses and earnings, she appears to be doing pretty well.
After plugging her income into an Illinois Tax Calculator and assuming she contributes the max $18K into her 403b each year, she has a net income of $77, 336. And since her spending is $31, 512/year + a debt repayment of $6000, that gives us a total spend of $37, 512. This means she’s cash-flow-positive to the tune of $39,824/year.
So applying the 4% rule (and assuming that debt will get forgiven so we can remove the $6k from her monthly expenses post-retirement), she’ll need $31, 512 x 25 = $787,800 to become FI. If she invests her existing savings of $42,580 and continues saving at a rate of $39,824/year, at a conservative 6%, she will become financially independent in 12.5 years.
| Year | Balance | Savings | ROI (6%) |
|---|---|---|---|
| 0 | $42,580.00 | $39,824.00 | $2,554.80 |
| 1 | $84,958.80 | $39,824.00 | $5,097.53 |
| 2 | $129,880.33 | $39,824.00 | $7,792.82 |
| 3 | $177,497.15 | $39,824.00 | $10,649.83 |
| 4 | $227,970.98 | $39,824.00 | $13,678.26 |
| 5 | $281,473.24 | $39,824.00 | $16,888.39 |
| 6 | $338,185.63 | $39,824.00 | $20,291.14 |
| 7 | $398,300.77 | $39,824.00 | $23,898.05 |
| 8 | $462,022.81 | $39,824.00 | $27,721.37 |
| 9 | $529,568.18 | $39,824.00 | $31,774.09 |
| 10 | $601,166.27 | $39,824.00 | $36,069.98 |
| 11 | $677,060.25 | $39,824.00 | $40,623.61 |
| 12 | $757,507.86 | $39,824.00 | $45,450.47 |
| 13 | $842,782.34 | $39,824.00 | $50,566.94 |
Note: No raises or promotions have been included because we’re assuming it will be used to offset rental increases. If her rent stays the same or goes up less than her raises/promotions, she will get to FI even faster.
BUT and this is a HUGE BUT, this is ALL under the assumption that after 7 years, her student loan will be forgiven.
But now that we know the Dept of Education officials have already been denying students who have previously qualified, this could very well NOT be the case anymore.
So in this case, what are her options?
Option 1: Pay the minimum
What this means is she continues paying the minimum on the loan while saving and investing the rest. Let’s see how this works out…
| Year | Balance | Savings | ROI (6%) | Loan | Interest (6.75%) | Payment | Total Net worth |
|---|---|---|---|---|---|---|---|
| 0 | $42,580.00 | $39,824.00 | $2,554.80 | -$183,000.00 | -$12,810.00 | $6,000.00 | -$104,851.20 |
| 1 | $84,958.80 | $39,824.00 | $5,097.53 | -$189,810.00 | -$13,286.70 | $6,000.00 | -$67,216.37 |
| 2 | $129,880.33 | $39,824.00 | $7,792.82 | -$197,096.70 | -$13,796.77 | $6,000.00 | -$27,396.32 |
| 3 | $177,497.15 | $39,824.00 | $10,649.83 | -$204,893.47 | -$14,342.54 | $6,000.00 | $14,734.96 |
| 4 | $227,970.98 | $39,824.00 | $13,678.26 | -$213,236.01 | -$14,926.52 | $6,000.00 | $59,310.70 |
| 5 | $281,473.24 | $39,824.00 | $16,888.39 | -$222,162.53 | -$15,551.38 | $6,000.00 | $106,471.72 |
| 6 | $338,185.63 | $39,824.00 | $20,291.14 | -$231,713.91 | -$16,219.97 | $6,000.00 | $156,366.88 |
| 7 | $398,300.77 | $39,824.00 | $23,898.05 | -$241,933.88 | -$16,935.37 | $6,000.00 | $209,153.56 |
| 8 | $462,022.81 | $39,824.00 | $27,721.37 | -$252,869.26 | -$17,700.85 | $6,000.00 | $264,998.08 |
| 9 | $529,568.18 | $39,824.00 | $31,774.09 | -$264,570.10 | -$18,519.91 | $6,000.00 | $324,076.26 |
| 10 | $601,166.27 | $39,824.00 | $36,069.98 | -$277,090.01 | -$19,396.30 | $6,000.00 | $386,573.94 |
| 11 | $677,060.25 | $39,824.00 | $40,623.61 | -$290,486.31 | -$20,334.04 | $6,000.00 | $452,687.51 |
| 12 | $757,507.86 | $39,824.00 | $45,450.47 | -$304,820.35 | -$21,337.42 | $6,000.00 | $522,624.56 |
| 13 | $842,782.34 | $39,824.00 | $50,566.94 | -$320,157.78 | -$22,411.04 | $6,000.00 | $596,604.45 |
| 14 | $933,173.28 | $39,824.00 | $55,990.40 | -$336,568.82 | -$23,559.82 | $6,000.00 | $674,859.03 |
| 15 | $1,028,987.67 | $39,824.00 | $61,739.26 | -$354,128.64 | -$24,789.00 | $6,000.00 | $757,633.29 |
| 16 | $1,130,550.93 | $39,824.00 | $67,833.06 | -$372,917.64 | -$26,104.24 | $6,000.00 | $845,186.11 |
Dang. So you can see here that if she pays the bare minimum, assuming the loan forgiveness program is toast and she has to pay off the whole thing, she can become FI in 16 years of instead of 12.
So if her loan isn’t forgiven, it adds 4 years to her time to FI.
But what happens if she continues at her savings rate and puts it all towards her debt?
Option 2: Kill the loan faster
| Year | Balance | Savings | ROI (6%) | Loan | Interest (6.75%) | Payment | Total Net Worth |
|---|---|---|---|---|---|---|---|
| 0 | $0.00 | $0.00 | $0.00 | -$139,150.00 | -$9,740.50 | $45,824.00 | -$103,066.50 |
| 1 | $0.00 | $0.00 | $0.00 | -$103,066.50 | -$7,214.66 | $45,824.00 | -$64,457.16 |
| 2 | $0.00 | $0.00 | $0.00 | -$64,457.16 | -$4,512.00 | $45,824.00 | -$23,145.16 |
| 3 | $0.00 | $21,058.68 | $0.00 | -$23,145.16 | -$1,620.16 | $24,765.32 | $21,058.68 |
| 4 | $21,058.68 | $45,824.00 | $1,263.52 | $0.00 | $0.00 | $0.00 | $68,146.20 |
| 5 | $68,146.20 | $45,824.00 | $4,088.77 | $0.00 | $0.00 | $0.00 | $118,058.98 |
| 6 | $118,058.98 | $45,824.00 | $7,083.54 | $0.00 | $0.00 | $0.00 | $170,966.52 |
| 7 | $170,966.52 | $45,824.00 | $10,257.99 | $0.00 | $0.00 | $0.00 | $227,048.51 |
| 8 | $227,048.51 | $45,824.00 | $13,622.91 | $0.00 | $0.00 | $0.00 | $286,495.42 |
| 9 | $286,495.42 | $45,824.00 | $17,189.72 | $0.00 | $0.00 | $0.00 | $349,509.14 |
| 10 | $349,509.14 | $45,824.00 | $20,970.55 | $0.00 | $0.00 | $0.00 | $416,303.69 |
| 11 | $416,303.69 | $45,824.00 | $24,978.22 | $0.00 | $0.00 | $0.00 | $487,105.91 |
| 12 | $487,105.91 | $45,824.00 | $29,226.35 | $0.00 | $0.00 | $0.00 | $562,156.27 |
| 13 | $562,156.27 | $45,824.00 | $33,729.38 | $0.00 | $0.00 | $0.00 | $641,709.64 |
| 14 | $641,709.64 | $45,824.00 | $38,502.58 | $0.00 | $0.00 | $0.00 | $726,036.22 |
| 15 | $726,036.22 | $45,824.00 | $43,562.17 | $0.00 | $0.00 | $0.00 | $815,422.39 |
She now becomes FI in just over 15 years.
Huh. That didn’t actually help much.
She was able to shave off barely 1 year by throwing all of her savings at the loan, and this is because the interest rate on the loan is not that different from the expected return on her investments. So it doesn’t really matter than much whether she pays the bare minimum versus throwing all her savings toward it. The limiting factor is the fact that her loan is just too damned big.
Okay, so what happens if she throws up her hands, says “screw staying in the public sector and holding out for the program!”
Option 3: Go into Private Sector
Here’s what’s irritating about the instability in the Loan Forgiveness program: People have decided to dedicate their careers to public sector/non-profit jobs because they expected their loans would be forgiven. If that promise doesn’t come through, not only do they lose out on now having to pay that loan themselves, they’ve lost out on years of earning potentially much higher salaries in the private sector.
So let’s say our reader decided to stop waiting around for her loan to be forgiven and finds a private sector job that pays $150K/year. What happens then?
Now we’re talking! Assuming no lifestyle creep, she would now be able to put away a whooping $75,824.00 after taxes towards killing her loan! What does this do to her FI journey?
| Year | Balance | Savings | ROI (6%) | Loan | Interest (6.75%) | Payment | Total Net Worth |
|---|---|---|---|---|---|---|---|
| 0 | $0.00 | $0.00 | $0.00 | -$140,000.00 | -$9,800.00 | $75,824.00 | -$73,976.00 |
| 1 | $0.00 | $0.00 | $0.00 | -$73,976.00 | -$5,178.32 | $75,824.00 | -$3,330.32 |
| 2 | $0.00 | $72,260.56 | $0.00 | -$3,330.32 | -$233.12 | $3,563.44 | $72,260.56 |
| 3 | $72,260.56 | $75,824.00 | $4,335.63 | $0.00 | $0.00 | $0.00 | $152,420.19 |
| 4 | $152,420.19 | $75,824.00 | $9,145.21 | $0.00 | $0.00 | $0.00 | $237,389.40 |
| 5 | $237,389.40 | $75,824.00 | $14,243.36 | $0.00 | $0.00 | $0.00 | $327,456.77 |
| 6 | $327,456.77 | $75,824.00 | $19,647.41 | $0.00 | $0.00 | $0.00 | $422,928.17 |
| 7 | $422,928.17 | $75,824.00 | $25,375.69 | $0.00 | $0.00 | $0.00 | $524,127.86 |
| 8 | $524,127.86 | $75,824.00 | $31,447.67 | $0.00 | $0.00 | $0.00 | $631,399.53 |
| 9 | $631,399.53 | $75,824.00 | $37,883.97 | $0.00 | $0.00 | $0.00 | $745,107.51 |
| 10 | $745,107.51 | $75,824.00 | $44,706.45 | $0.00 | $0.00 | $0.00 | $865,637.96 |
This means she’ll be debt free in just 3 years and FI in just over 10!
Conclusion
So there you have it. If MAS wants to bet on the loan forgiveness program sticking around in 7 years, she can keep her current job, keep paying the minimum and become FI in 12 years.
But if she thinks the loan forgiveness program may not be around for her when she needs it, it might be a good idea to keep her eyes peeled for a juicy private sector opportunity. If she can find a job in the private sector paying 50% more, screw the loan forgiveness program, make the jump, and she’ll be able to retire even sooner in just 10 years.
So that’s our take. What do you guys think? What would you do if you were MAS?
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My recommendation? Keep paying minimum off the student loans, saving as much as possible and investing in a balanced portfolio. When savings = student loan + 6 month emergency fund, pay off the student loan.
I’d do this whether or not I got that big-paying gig, but I wouldn’t stay with the current job if a big-paying gig came along.
When you get that student loan paid off, and I believe in this case it is a when and not an if (because this gal is freakin’ awesome), you are going to feel so very very good.
Thanks! No longer having that debt “over my head” will definitely feel great!
I’m surprised there was no mention of cutting down some of her higher budget items. Living more efficiently ($200 for groceries, $100 for restaurants, $35 cell phone, home gym equipment, shopping around for a better car insurance rate @ ~$150) would produce ~$465 in savings a month.
This would reduce the amount needed for FI by about $139,500, or eliminate 2.5 years of work in the first scenario. Pretty significant!
I agree. There seems to be an opportunity to improve her situation even further with some focus on the expenses. However, I think the main focus was on the numbers regarding whether or not it would be beneficial to count on the loan forgiveness program.
Good point. None of the spending numbers really popped out at us too badly (especially in light of that huge fricking loan), but you’re right that would help out even more.
Cutting down on my expenses is definitely something that I’m working on right now.
I literally shopped around for a better cell phone plan last week since my phone broke forcing me to go shopping for a quick replacement. My cell phone plan includes service for my phone and my father’s phone. Each carrier I went to indicated they could give me a better deal, but in each scenario their better deal meant unlimited data for more than I was spending now, which is not what I am interested in at all. My current plan is 2G and that’s actually more than I need, but no one that I went to offered less than that. 🙁 If others have suggestions of carriers/great plans, though, I’d love to hear them.
Car insurance is high simply because of where I live. In my prior location, I had the same coverage for half the price. Given the frequency of car accidents in my area, I definitely want to keep my coverage.
Home gym – given that I rent a room in someone else’s condo, I don’t think that’s a possibility for me.
BUT the groceries and restaurants… This is where I can definitely save more! I’ve made some improvement in this area over the last year, but I can definitely do better. I’m currently working with a counselor on developing a healthy eating schedule and hopefully this will prove to be more economical as well. If anyone has tips on how they have cut down in this area, I’d love to hear them!
Hi MAS –
Check out Ting for your mobile phone. I think they’re only available in the USA. It is a pay-as-you-go plan. I have two lines and based on using less than 2G data, I’m looking at ~$50/month total. They have a little calculator on their site you can use to estimate your bill based on prior usage. Is the service plan a must have? Not sure what they offer on that.
You can also get a new-to-you phone on swappa and move it to whatever carrier you pick with the right sim card. Not a hard task for a PhD holder! I kid. I’m also a PhD holder, and I did manage to swap the sim card without breaking anything.
Thanks! I’ll check it out.
I use Google Fi and it’s pretty low cost *IF* you have a compatible phone and don’t use much data.
https://fi.google.com/about/plan/
$20 first phone line
$15 each additional line
$10 per GB pay as you go
I ended up with 25-35 bill each month.
Hey thanks for responding! I hope it goes without saying your story is damn inspiring and I’m sure things are going to turn out great no matter what you do. I’d just like to throw out a couple suggestions for some unintuitive options (because I certainly wasn’t aware of them myself until someone told me)
Have you looked into unlocked pre-paid cell phone plans? If you don’t need anything fancy, Amazon has an ad-supported Moto g4 (last year’s model, actually a very good phone) for only $99. You can then bring that to a prepaid MNVO carrier (they use the same network as the major carriers but cost less) and pay as little as $10-30 depending on what you need. Rinse and repeat for your father’s phone if you’d like. I was able to find a huge list of MNVOs here: https://bestmvno.com/mvnos/. I’m on an old T-Mobile plan so I’m not familiar enough with individual companies to recommend anything.
For car insurance, do you keep low deductibles by any chance? Over time I’ve realized deductibles are primarily a safety net for people with no cash on hand at all. You pay many times that amount in premiums for any time (if ever) you’d use it. If you can afford it, raising that can lower the monthly rate significantly. But insurance is basically Fear Lottery so, ya know, play to your comfort level.
Also on car insurance, and this is a big one I had no idea about until recently, check to see if you carry primary injury protection. If you get decent health insurance through your job that coverage may be entirely unnecessary. I think most states require some amount of coverage, but it primarily exists to prevent the uninsured from financially imploding in the case of the slightest accident. This was one of the biggest line items on my own auto insurance and switching to Health Primary chopped a big chunk off the premium — and at no loss to actual coverage!
I rent a single room in a row-home and stay in good-ish shape with body-weight exercises and a set of dumbbells I got off amazon for $40. But I’m also a dude and get bored to death by cardio, so ymmv there.
For food, do you have an Aldi near you? I’m an unapologetic Aldi evangelist. Their prices are about 1/2 your standard grocery store and 1/4 of your fancy all-organic type places. Quality doesn’t suffer for it either. They’re just a hyper-efficient German company that doesn’t waste time with things like ads, brand names, or millions of plastic bags.
Maybe this is all old news to you, but figured I’d type it all out in case even one thing turned out to be helpful 🙂
Thanks for the tips. I’ll definitely look into them. My car insurance deductible is $500, but I could definitely afford to cover more if an accident should happen. If it will actually cut my premium by a significant amount, I think it makes sense.
No shame in Aldi’s at all. In Chicago this was definitely our go to grocery store.
Now that I’ve set a goal of maxing the 457b, I definitely need to cut as many expenses as I can.
Thanks for all of the tips!
Thanks for all the great tips. As an update, I found cheaper housing. I’m going to rent a room in a house with four other people. I get the smallest room so $470/month plus maybe another $50 in utilities. The best thing is that I can now walk to work. So I’ll save on gas as well. Maybe even try out what it’s like to be carless this last year before my lease ends. It’s in walking distance to the train station. So, that’s pretty nice.
I curious of the age of MAS? Also, why are you paying for your mother and sister? I think you are doing great for yourself ands should be very proud of all of the work you have accomplished. My recommendation would be to go into the private sector. You will earn more money and most likely have more opportunities for advancement. You could knock out this loan very quickly without worrying about the stability of the loan forgiveness program. Good luck!
I think she’s in her early 30’s. And yeah, I think the mother/sister thing was a bit strange but I wasn’t about to suggest she cut off her Mom’s car payments as a savings strategy.
Yes, I’m 33.
This is an amazing story. Way to go MAS! As an academic at a public US university myself, I’m assuming you also have access to a 457b, which can be very useful to consider too.
Huh, academics have access to 457s? If so that’s pretty fricking awesome!
Thanks for the advice! I definitely have access to this option and did not realize it. It’s on my institution’s website, but I would have never thought to look for it. I’m going to think about how I can cut down on my expenses more and enroll ASAP!
Not easy chasing FI when you have to support so much of your family, but it’s certainly very commendable! Quite the success story so big props for that. It’s always great to hear these stories of people who are dealt a shitty hand yet they pull themselves out. It’s exactly what I was referring to when I was mentioning the other day you can do anything when you have the opportunity. Even when this person had a rough life, look what she managed to do thanks to hard work and taking advantage of opportunities. So many others would have ended up
I have to say though, that’s a somewhat “average” salary for someone with 5 degrees and a PHD, no? I mean, it’s a good salary but that level of genius I’d envisage much more.
I have to agree that moving into the private sector might be beneficial if he salary is stunted so much where she is now. It would be good to know what the top range salaries would be for remaining in the public sector versus private as that plays a huge part on the decision. I’d imagine she could be earning well into the 6 figure range, if not over $150,000 in the future.
Yeah, I’d assume so. She’s a PhD in Physics and Math. She should be able to work in defence or aerospace or something. Or maybe NASA?
Actually my friends in tenure track faculty positions make much less. I actually make more than one of my former advisors who is a full professor. Granted, the cost of living where he lives is much cheaper than where I live.
One of my good friends at an R1 institution just received promotion and tenure and his salary increase put him just at $70,000.
We certainly aren’t in academia for the money.
I’d say it depends on whether you like your current job or not. Are you satisfied with your level of creative autonomy? It is probably more than you would have in the private sector, and there is something to be said for doing original research.
I’ve spoken to students who had physics degrees and weren’t interested into going into banking, for instance, even if there would be more money in it.
There’s a lot of variability between fields with respect to academic pay. Computer scientists and Electrical and Computer Engineering profs do tend to make a lot of money (but less than in industry). These days you would see starting salaries above $100k. English profs much less so. Math profs somewhere in between.
Is that you, Mr. Neil deGrasse Tyson ?
Good to see you doing so great, MAS! Soon you will be financially free and will have to work NO MAS!
Lo siento.
I agree with the people who are advocating going into the private sector. It will likely be harder work, but for someone like you, that probably wouldn’t be an issue.
I think banking on the loan forgiveness program being there for you might be a great way to go, considering that even if you get screwed over, you will still be FI in about a third the time as most people. Keep growing your income and passive investing, and set up an emergency fund. You can also set aside a “student loan screw over” fund that you contribute to so that there is cash to make a massive principal payment in case the forgiveness program disappears. But no reason to increase your student loan payments if the debt will likely disappear on it’s own anyway.
I assume the loan forgiveness program won’t do anything bad to your credit? I would find out. You know, just in case you one day want to buy a BIG GIANT EXPENSIVE HOUSE!!!! *runs away from a sword-wielding FIRECracker*
Sincerely,
ARB–Angry Retail Banker
You’re lucky FIRECracker recently pulled a hamstring from kicking a deer or you’d be in trouble.
I think the “student loan screw over” fund sounds like a good idea. I’m not sure if the plan will stick around another 7 years.
http://www.slate.com/blogs/moneybox/2017/05/17/the_trump_administration_wants_to_end_the_public_service_loan_forgiveness.html
The forgiveness program does not hurt my credit now. I actually applied for a mortgage in hopes to buy a house and found out my credit is excellent, but the student loan results in a high debt-to-income ratio. So, I did not qualify. However, I’ve heard that Fannie Mae is now changing their requirements to look at student loan repayment rather than 2% of total to determine student loan monthly debt. Now that I’ve found this blog, though, I’ve given up on the idea of buying a home.
Hi,
The learning curve in the private sector is very steep. However, the reward is great. It shortens the years to FI to great extent. I will opt for the third option.
Ben
Gracias ARB!
I love how you do the case studies and find what you have to say very valuable. I do have a question for you though. When it comes to cashing out savings (like 403b, 403a and 401K for US citizens) to pay off debt, I don’t see where you take into account that early withdrawal of retirement savings results in paying taxes on those withdrawals. Can you tell me if you do take this into account and I’m just not seeing it? Thank you for all you do for your readers!
Great question. We haven’t written about it yet but if you have a big 401k balance and a loan, you can take out a loan from your 401k to access the money tax-free. We will elaborate this on a future article.
I’m curious to know her current job satisfaction level. 15-16 years is a long time; will feel even longer if she doesn’t like her current position. Finding a higher paying, private job would not only make FI faster, but could also potentially lead to more job satisfaction and better quality of life on her path to FI. That’s a win-win-win in my book!
Well, I actually love the work that I do, but my current department is not great. My fingers are crossed that I’ll get a position in a new department at the same institution. I’ve applied and will interview soon. It takes me out of admin and into a faculty position. So, I’ll teach as part of my job, which means no extra adjunct pay, but that leaves summers open for consulting. I also have 2 grants that will pay summer salary. In my current position they are giving my department a peecentage of my salary, but I’m not getting a reduction in workload. So, I’m basically just putting in extra hours uncompensated.
I want to correct something for Millennial Academic Scientist if she is reading. She will NOT be kicked out of the PSLF program if she makes more money. That is false. However, she would not be able to receive PSLF if she changes her job and it is NOT a job that is considered public service. Those types of jobs are governmental service or a 501 3(c) organization. If she makes more money and starts making “standard” payment plans (which would eliminate her debt in 10 years) those standard payments would count to her total 10 years. I have a powerpoint presentation that I show to some of our incoming faculty. You can see it here.
https://www.academia.edu/32081389/Public_Student_Loan_Forgiveness_PSLF_.pptx
This might also help.
https://studentaid.ed.gov/sa/sites/default/files/public-service-loan-forgiveness-common-questions.pdf
Based upon my reading if you switch between an income-based payment plan AND the standard plan as long as you make 120 qualifying payments (and the standard plan is considering a “qualifying” plan) and you have student loan debt left your loans should be forgiven after those 120 payments AND you are still employed at an employer that is eligible for public service.
Thanks for the feedback. You are right, the 10 year standard payment is the only one that qualifies outside of the income based repayment plans. If you are on the 10 year repayment plan a majority of the 10 years, you’ll finish paying it off and there will be very little to “forgive.” It sort of defeats the purpose.
https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service
But since you are already 2 years into the PSLF program if you go 8 years of standard payments you will still have student loan debt left over. You will have made 120 qualifying payments (as long as your job is public service) you can still get the rest of that debt paid off. You can combine income-based AND standard payments together. I know that because 1 year of my PSLF is “standard” payments.
Gotcha! You are right. Thanks! I have 3 years in now. So, even with 7 years at the standard payment, I would finish my 120 payments and have “loan left to forgive.”
Hi MAS, FIREcracker and Wanderer I just read this article and thought about MAS and the other American readers of this blog who might be relying on the PSLF program. I know buzzfeed isn’t really known as a credible news source as most people know it for its click bait lists but I’ve heard their news site is actually supposed to be pretty good. Anyway, according to the article there are a lot of people who have signed up for the program and think they are enrolled and actually aren’t. Some have even been lead astray by their loan service for years, being told that they are on track to have their loans forgiven and they actually aren’t. It might be worth a read or worth passing on to anyone who thinks they are enrolled in the program to look into it.
https://www.buzzfeednews.com/article/annehelenpetersen/student-debt-college-public-service-loan-forgiveness
Interesting…another option would be refinancing the loan for a lower interest rate, that could potentially shave off some years to FI
Her story was really great. It shows how can a person become student if he/she had the will. In the story, she never stepped back in studying as she was in poverty, but she challenged her poverty to lift herself though education.
Hi MAS, great going! I’ve got a tip for you when it comes to cooking more healthy, yet economical meals: http://www.budgetbytes.com. I love this site, even though I have to recalculate most of the measurements due to living in Anywhere Other Than The USA (and its stupid non-metric system). Everything I’ve cooked from here has been healthy, has looked and tasted great and has not broken the bank. These days, I plan my meals for the week and do all of my groceries (and most of my cooking – I eat mostly reheated home-cooked meals or salads on the days that I am working) in the weekend. This really helps me stick to a budget and eat more healthy home-made food, and it prevents me wasting fresh stuff because I haven’t used it and it has spoiled.
Thanks! I’ve perused some of the recipes and they look delish!
Hi MAS,
Your story is truly inspirational. It’s amazing what you have achieved in your age.
I have a idea, its really stupid though and probably won’t work out for you but here it is anyway.
Have you thought about moving to canada ? If you’re working abroad then your foreign income counts as zero income in US that means you don’t have to pay a dime for your loan because it would be considered as no income in US and then after 25 years it will be forgiven. I know its not everyone and nobody wants to leave their home and family.
My wife is american she has around 60K in student debt. She has a work permit in Canada and we are on our way for her PR.
I’ve never thought about that actually, but I’ll keep it in mind. Thanks!
Hi MAS,
One other bit of food for thought. If you are thinking about reducing your student load debt using your 401K, or similar account, considering doing so only when you’ve reduced your SL down to the equivalent value of the retirement savings account. In other words, think about only tapping into the retirement account to pay the SL off completely, and not just simply to reduce it. This ensures you will at least have some type of savings while you are using other means/methods to reduce the SL. It also safe guards against, losing your job and finding yourself in a position where you can’t repay the retirement account (and thus experience penalties or default). Also, as you continue to contribute to your retirement account, you would be closing the gap between that asset, and your SL debt. You should also consider contributing less to the retirement accounts, and more to reduce SL so that the principle starts to decrease. You will be surprised how much extra money you could be putting toward reducing the SL when you use this strategy. Even freezing contributions to retirement for a quarter or two and putting the money instead on the SL could decrease your debt by $10-15K or more, depending various factors. The trick is to make the extra payments (in addition to your monthly regular one), on the same day as your regular payment. On that day, any extra payment goes completely toward the principle, because the interest has been satisfied by the regular payment. I thought about using my 401K but when I realized I would still have some SL debt, and have to pay back the 401K (even though to myself), I came up with this strategy and its working great. I also sold some stock and put it toward the loan as well. Give these strategies some thought and do what feels most right for you. Good Luck!
Thanks for the advice! I actually want to put more on the SL so that I will at least cover interest each month and some principle. I received my recalculated minimum payment today and based on my income last year, I will pay an extra $350/month on the loan for a total of $850/month. So, that will help.
#1 Debt is paid in after tax money, and it compounds, so paying off debt is the best way to keep the money that you already have, and become FI. think of it this way. What investment will pay you 6.7% compound, and you don’t have to pay ANY tax on it… none. But do the math on how much the debt is costing.
#2 never make payments on a car, I have not made a car payment in 20 years, all my cars were paid for with cash, or short term (1 year) Credit card 1% trasfer offers. I own 4 cars, 2 are collectors, which cost $200 a year to insure… yes thats right. I can drive a paid for car, all I want for $200 a year.
#3 Stop funding other peoples life styles, you aren’t doing them any favors. You don’ need a car to survive.
hello, you have $8000 sitting doing nothing in cash funds that are losing money, yet paying 6.7% on a loan ?
find a good financial advisor, and use the cash to pay off debt, yes you have figured it out, unless you declare bankruptcy, they will get most of their money back.
cheers
Thanks Spaceman! I totally get your reasoning here, but if an emergency comes up having my student loan paid down some will do nothing to help me. So, I’m still working to save up a 6 month emergency savings.
I suggest applying for a line of credit from the bank. I have a 40k unsecured line (admittedly given to me before the 2008 crash) that I use for “emergencies”. If and when an emergency comes up, I pay out of the LoC and then over the next few days sell a few ETF units to pay it off as needed.
This way, I never have money sitting around in a savings account doing nothing. 🙂
I’ll just be honest. I’m scared that something may come up with me or my family that would require cash immediately and I won’t have anything to help out. I guess it makes sense not to grow the emergency fund (in savings account) too much, especially since I have been contributing to the Roth IRA, but I’m scared to have less than a few thousand.
Mas,
If you keep $5,000 as emergency fund compared to $1000 and assuming you get 1% at your bank (less than the current short-term government bond rate so very reasonable) you’ll end up losing ($4000 e fund difference)*(.067-.01 interest rate difference) is $228 per year. That is a small price to pay for the peace of mind to know you don’t need to take on more debt at a more obscene interest rate when life throws its curve balls.
Thanks! That’s how I feel about it. I could probably reduce it to $5,000 and use the rest for monthly expenses so as to put more into retirement, but I definitely want something for emergencies.
First of all, a huge Congrats to MAS for being such a star and accomplishing so much and an equally massive thank you to FIREcracker and Wanderer for being such bada*s*es and sharing your incredible journey! /(^_^)\
I’m a Canadian expat living in Dubai where there is NO INCOME TAX. Actually, there were no taxes at all (except for liquor) until Jan this year where 5% VAT was introduced for goods and services which we all moaned and groaned about. ;o)
Let me tell you: Earning tax-free dollars is definitely a super fast way to pay off debt and become FIRE! :o) Well, that is, if you don’t get sucked into the glitz and glamour and the all-you-can-eat-and-drink Friday brunches where people are wasted by 3 pm (our weekends are Friday and Saturday).
If MAS were to teach at a university here, she would have a similar salary, but TAX-FREE, e.g. net income of $100k, unless she makes more than the foreign exclusion amount which the IRS deemed to be $102,100 last year, then she would only pay income tax on her salary above that amount. Disclaimer: Having taught here myself, the academic environment will be vastly different from the US.
If MAS is interested in pursuing non-academic careers, the UAE government has a lot of very exciting programs, e.g. Mars Mission: http://www.emiratesmarsmission.ae, http://www.dubaifuture.gov.ae/, https://dubaifutureaccelerators.com/en/about-us/, or even contests like $1 million prize for drones that are socially beneficial: http://dronesforgood.ae/.
Depending on her field of expertise, there are a lot of incredible opportunities here that don’t exist back home. I’ve had at least 6 career changes (not jobs, but professions) in 10 years.
Things are developing here literally every month and the governments are the biggest innovators, e.g. the Dubai government has a 10x initiative that challenges all its entities to be 10 years ahead of their counterparts in other cities: http://dubai10x.ae/about-dubai-10x/
and they are willing to invest in hiring the best and the brightest to get there. Again, if MAS has very specific niche expertise, she may be able to work for one of these entities.
Then there are the non-financial benefits of being an expat in Dubai: travel opportunities are abundant (due to its location as a global hub and 30 day vacation days per year), meeting people from all over the world (there are almost 200 nationalities living here where expats comprise 85% of the population), opportunities that don’t exist back home (sometimes because what is a common skill back home might be unique here), career experiences that are unique (e.g. when I was a lawyer, I would be negotiating contracts from every continent sometimes in the same day and the size of the transactions were huge by Canadian standards), private health care paid for by one’s employer is pretty awesome (Sorry, it sounds unpatriotic as a Canadian, but it’s true), the lifestyle (I live a 5 minute walk from the beach, I am extremely lazy and outsource domestic chores, EVERYTHING can be delivered here), gratitude at realizing how lucky we are that we won the lottery of life with our passports….
Of course, there too are frustrations and challenges of being an expat, but that’s for another time.
Good luck, MAS and keep on being your awesome self! /(^_^)\