Filing Married Separate vs Filing Joint - IBR vs refinance

[Sarah230]

Hi all -

Looking for some insight from all you smart number crunchers!  I haven't slept much in a week trying to run different scenarios in my head so figured I'd ask the people who have already taught me a lot about finances.

My husband is an attorney with a lot of law school Debt (356K govt, 60K private).

He is currently in IBR with projected 'forgiveness' in 19 years. (he's been in repayment for 6 years)

Projected income for him should change from a loss in 2016 to around 150K in 4-5 years.

Interest rate on govt loans is 7.625%!

Due to this and my income (500K - physician), we will need to file our taxes separately in order for him to continue in IBR.  We did this last year and it hurt but I didn't look into other options.  Filing a joint return would lead to a 25K-30K tax refund this year while filing separately means I will owe a little bit.    My accountant can't predict what future years will show but says that it will always be in my benefit tax wise to file married and until he is making 200K or more, I should expect a decent return.

I don't like the idea of waiting for this loan 'forgiveness' to occur while interest is compounding away....

I want to look at paying down some of his debt with a line of credit on our house of 100K and trying to refi with First Republic (300K limit) and paying off the two high interest private loans (see below).  My plan would be to put the entire tax return into an account that will automatically pay this refi off monthly and to repeat this process every year.  Additionally his income as it starts coming in would go to his taxes, his loans and retirement only.

I am aware this will mean I will need to co-sign the refi and that the loans will not be forgiven with death.

My husband is starting his own practice so has minimal income from last year and probably will be low for the next couple of years as he builds it up.  He feels that I should not be burdened with his loans which I can respect but I am trying to make him see that I am 'paying' them one way or another at this point.  He worries about giving up the loan forgiveness, I see a massive tax bill in 19 years when the 'forgiveness' occurs.  Trying to decide what is the less of the two evils.  Any words of wisdom or other angles much appreciated.

Here are the numbers:

Husbands Loans:

Govt loans - 377K at 7.625%

Private loans - 16K at 12.625% (plan to pay this ASAP)

33K at 5.25%

3.5K at 5.25%

11K at 7.825% (also plan to pay this ASAP)

We have good equity in our house with no plans to move and a couple of rental properties that make some money as well.

I am a salaried employee so my take home should not change much year to year unless I decide to work less (which is unlikely looking at this debt).  I also owe 120K in student loans at 3.5% but hope to pay them off early.

 

Thank you in advance for any thoughts!

[chansen]

Sarah230 wrote:

My husband is an attorney with a lot of law school Debt (356K govt, 60K private). He is currently in IBR with projected ‘forgiveness’ in 19 years.

Click to expand...

Where does the 19 years come from? If he just starting paying these loans and is not a "new" IBR borrower, he will have to make payments for 25 years not 20 years. To be a new borrower, you must not have had any loans prior to 2014.

I can run some numbers for you but those 5 years make a big difference.

[Sarah230]

Hi - He has been in repayment for 6 years.

The 19 years are the remaining term on his 25 year repayment plan.

Thank you!  Appreciate any words of wisdom on this!

[chansen]

Just data while I'm thinking out loud....

If I assumed that your husband earns $30,000 this year and increases by $30,000 for 5 years to $150,000 and then grow at 3% a year, he would...

In 19 years of IBR repayment, he will have paid $356,853. The taxable forgiveness would be $395,856. Add that to his estimated $226,888 income, at 39.6% he could pay $156,770 in taxes. Total paid (356,853+156,770) $513,623.

 

[chansen]

This is a tough one. I'm coming up with three options.

1. Refinance with a private company and cosign the loans. You will get a better interest rate but you do lose some serious benefits. Death or divorce will not clear you of the debt. If business does not go well, he can't lower the payments. You will need to check into disability benefits. This is your lowest cost option.

2. Switch out of the income driven plan and go with an extended graduated payment plan (that is not eligible for forgiveness). Add the tax refund to what he would be paying monthly. Keep the required payment as low as possible, you can always pay more. That way you are still sending the government $30,000 to $35,000 but reducing your loan versus just paying taxes. If his business takes off, he can increase the payments. This will cost more than option 1. Probably clears out the debt in around 10 or 11 years for less than $600,000. If he really gets aggressive this could work out better but you can always accelerate payments in option 1 also.

3. Keep going down the path you are on. The overall payments ON THE LOANS are lower than option 1 and 2 but does not include the money you are losing to taxes. If you lose $30,000 this year let's assume $25,000 down to $5,000 over the next 5 years. (That was a SWAG) That's an additional $75,000 this option will cost you. This option also costs around $590,000 over 19 years.

Time value of money is better with option 3 but you have this debt hanging over you for twice as long.

Maybe somebody is seeing a better option.

[jhwkr542]

You have a mortgage and rental properties? And that much student loan debt? Interesting. With your income, I'd be paying off loans like my hair's on fire. Pay the minimum on your loans and refinance his. Do you really want to hold out for loan forgiveness for 20 years? The best thing would've been your husband not to run up $400k in debt and not have income, but what's done is done. That interest rate on that amount of loans will crush you.

[DMFA]

IBR loan forgiveness sucks.  You have still paid all that massive, massive interest that has grown all those years (since you will likely get negative amortization from those payments not even covering accruing interest).  Plus, that forgiven amount is counted as taxable income the year it's forgiven...so if you've got $200,000 forgiven, you're on the hook for $30,000-$80,000 depending on your bracket.

Filing separately with $500,000 in income will result in very much of that being taxed at the maximum bracket.  Sounds like an awful idea...

I think you're stuck with the debt.  You're probably best off refinancing to the lowest possible rate and paying off in the least possible time.  5-year variables are in the low 2% range now with SoFi.

Your finances are...odd.  It's a very bad situation to have $365,000 steamrolling 7.65% debt (which hopefully doesn't capitalize).  Student loan interest often doesn't actually compound; it just grows interest on the principal without adding to the principal (i.e. capitalization), so you tend not to pay interest on interest.  I have a difficult time believing you're earning the rate you're not paying on those loans (even accounting for simple vs compound) on your rental properties and other investments.

[zippybutton]

We're a doctor/lawyer couple that's been filing separately since we got married, but to keep payments down on the 10 year PSLF for our doctor half (as residency + fellowship eats up 8 of the ten required years!).  I think that dragging your husband's high interest loans out for 19 more years in hope of a forgiveness is likely a mistake.

I have not crunched the numbers, but I did take a quick look at the federal student loan repayment estimator: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action and it looks like, if your husband's practice picks up to the $150k level, his required payment may be so high that he could have little or no principal forgiven at the end of the IBR period, so your excess tax payments would have been all for naught.

My recommendation (worth as much as all free advice) is to take the path that we did and to consider your income and student debt as one block.  If you look at it that way, you are really in pretty decent shape with an annual gross income of $500k + income the from your husband's fledgling practice compared to a total student debt load of ~$561K.  That means you are only at a approximately 112% student debt to annual gross income.  Your family's debt may look huge in absolute terms, but don't forget that you're family's income is huge too! You can refinance his debt and knock it out in no time!

We finished school with a combined about 200% student debt to income (lawyer and resident salary) and we paid off the law school loans (about 50% of the debt) in 2.5 years and saved enough to pay off the med school loans in the event PSLF is not an option in two more years -- at 4.5 year savings plan. Our absolute numbers were lower than yours, but we also didn't have that awesome $500k income either.

If you are concerned about being responsible for your husband's loans in the event of his death (a valid concern) I recommend buying an inexpensive term life insurance policy in an amount sufficient to cover the loans.  Fortunately, this will be very inexpensive because you can have these loans paid off in 5 years  

I can understand, especially in this day and age, spouses wanting to keep finances equal, not wanting to be a burden on the other, or even thinking about what will happen in the event of a divorce.  If this is a major sticking point, you can always sign an ante-nuptial agreement (essentially a pre-nup after the nup!) that handles how to treat these loan repayments in the event of a divorce.

But if you're married, I'd say in for a penny, in for a pound, and combine your finances against you're student debt.  You'll shed it quickly and be able to take advantage of the tax benefits of being married and filing jointly.  Once your debt is paid off in five years (or less   ) you'll have all the saving disciple to become quite wealthy in just a few more years.

[VagabondMD]

$400k+ in loans to become a lawyer is a brutal headwind to ever achieving financial freedom. I have no solutions for you...just in awe.

[Sarah230]

Thanks for all of the advice - it was all helpful. I agree that IBR forgiveness sucks, can imagine there are very few situations where it truly is the best option. As it stands right now, we are looking to file a joint return, use tax return/some savings to pay down a little of the loans and refi/HELOC the rest with life insurance for him and an ante-nuptial agreement. We married in our mid-late 30's after I already had rentals so didn't buy them w this debt in mind (and considered selling one to pay this off and still might). Married for love not for money but my one 'regret' is not trying harder to understand the nuances of student loans a year ago - I knew the balances but not what they really meant. I would have started this process earlier if I really understood.
One thing I have learned from our situation is how incredibly difficult it is to pay for school with zero help. I was lucky enough to have parents who paid for my private undergrad and helped with med school and still ended up with over 100K to pay back. My husband is the child of two immigrants, the first in his family to go college and financed college/private law school with very little financial direction. I see the stress this has caused him and how he feels like a burden to me. It makes me sad to think of how many people are in similar situations with monster debt just trying to create a better life for themselves and their families. It's ridiculous how expensive higher education is! I'm very thankful for this site, the advice provided and all those people out there offering direction to those of trying to navigate our way out of debt!

[Hatton]

I wish you luck.  I am once again astounded.  I sometimes feel that graduate education is starting to really rip off financially naive students.  I guess you are aware that some law school students have sued over the inability to even find a job after graduation.  My brother works as a lawyer for a local university. He says the tuition is escalating because of state funding cut backs.  I think academia really needs to tighten its belt and roll back tuition.  This current path is not sustainable for individuals or the country.

[DMFA]

Refi > HELOC imo. 5-year variable in the low 2s and knock them out. The high monthly payment might take some lifestyle adjustments, which could understandably be hard when you've gotten used to it over the years.

Every day you haven't refinanced yet is another day you've wasted more dollars on interest. Go to SoFi (or the many other sites listed for refinance on WCI that give you a free couple hundred dollars) and be amazed.

[RadMoneyMD]

Refinance, live modestly, and aggressively pay off those loans in the next 5 years or less.

It's a crime what law schools are charging these days.  Fortunately your high salary will solve the problem.