PAYE/PSLF- married filing separately w/ disproportionate debt. Plan ok?

[Dr.Blue]

Long time lurker on this site which has been a tremendous resource! Me and my spouse are fellows and wondering if our plan is wise. Spouse has 400k in student loans (around 7% interest) and I am fortunate to not have any debt. During the end of her 2nd year in residency she consolidated her loans and got on a PAYE plan. She will have about 4.5 years of PAYE payments made after the completion of training. This is our first year married and we filed taxes separately to minimize our monthly payment as our accountant crunched numbers which were saving more filing that way. We both will be done with training in 2 years and have similar starting incomes of $250-300k each. I always maxed my Roth IRA but this year couldn't due to restrictions of filing separately. Should we continue the income driven plans and filing separately or refi and pay down the debt? I figured if it can be forgiven and we are in the process for going for PSLF we might as well stay on track. Also my salary as a fellow this year is going to spike from 60k last year to 120-150k due to sweet moonlighting gig I have going, and she will have 60k. No kids yet but hope to plan in the next 2-3 years, and fortunate to own property and not paying rent. I know it isn't encouraged but we like to travel alot and spend to enjoy ourselves by splurging a little but stay within means. Any advice if our plan is sound or not would be helpful!

[DMFA]

Dr.Blue wrote:

Long time lurker on this site which has been a tremendous resource! Me and my spouse are fellows and wondering if our plan is wise. Spouse has 400k in student loans (around 7% interest) and I am fortunate to not have any debt. During the end of her 2nd year in residency she consolidated her loans and got on a PAYE plan. She will have about 4.5 years of PAYE payments made after the completion of training. This is our first year married and we filed taxes separately to minimize our monthly payment as our accountant crunched numbers which were saving more filing that way. We both will be done with training in 2 years and have similar starting incomes of $250-300k each. I always maxed my Roth IRA but this year couldn’t due to restrictions of filing separately. Should we continue the income driven plans and filing separately or refi and pay down the debt? I figured if it can be forgiven and we are in the process for going for PSLF we might as well stay on track. Also my salary as a fellow this year is going to spike from 60k last year to 120-150k due to sweet moonlighting gig I have going, and she will have 60k. No kids yet but hope to plan in the next 2-3 years, and fortunate to own property and not paying rent. I know it isn’t encouraged but we like to travel alot and spend to enjoy ourselves by splurging a little but stay within means. Any advice if our plan is sound or not would be helpful!

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With equal incomes but disproportionate debts, MFS can be very useful, as you found, to limit your payments; your tax would not be particularly higher than what it would be MFJ, other than losing a couple credits and deductions, and could significantly reduce payments on a loan you don't plan on repaying anyway (PSLF).

However, now that your income will be higher, you will be in a higher tax bracket; 120-150k could put you as high as the 33% bracket (maybe 28% if on the lower end) instead of the 25% you're probably in now (maybe 15% with std deduction and one exemption).

Overall though, with debt that high, you would do well not to have to pay it...you just have to worry about PSLF being in Betsy Devos's crosshairs.  I can't tell you how bad it would suck to have $400k accruing interest at 7% ($76.71 a day!) that would eventually capitalize and you'd be on the hook for it...well, actually I *could* calculate that for you, but I'd rather induce vomiting that look at that number.

Oh, and if it's just the Roth IRA you're worried about, no problem: just do "backdoor Roth."  You can still make traditional IRA contributions, but you can't deduct them...no problem, just convert a non-deductible TIRA contribution to Roth a few days later, and Bob's your uncle.  Simple as that.

...are you sure you're fortunate to own property? (only partly kidding)

 

[jsr52]

After I get married next year I'm considering MFS as well. I'll have a fellow salary if 150,000 (if i include moonlighting), wife is child psycholgist so will be making around 75,000, the following year ill jump to >300,000 in private practice GI. She has about 200k in loans and is banking on PSLF, so it seems to make sense for us to MFS given the disproportionate income, we might just create a backup fund incase PSLF goes to ************************.

[Dr.Blue]

Thanks so much for the reply. I have never been a gambler but the PSLF payout seemed like it was worth the risk. For me to not have med school debt took living well below what a resident would live like, and I get nauseous thinking of doing that again. I worked hard a few years before med school in a non medical field with everything going to med school tuition, had supportive family, and commuted to save on rent which allowed me to avoid med school debt. I am not willing to do that all over again while finishing training but will continue to keep a side savings in case PSLF falls through. After a few years income will be higher but so will expenses and taxes esp with wanting a family but there are people in worse situations and I am thankful to be in a field I enjoy. Thanks for the help!

[jsr52]

I personally doubt PSLF will be off the table for anyone who has already taken out loans or even those who plan to take them by July 2018, they will be grandfathering a fair a mount of people. I'd be nervous if were a senior or junior in college right now and had planned on a career in public service. Otherwise I would't worry to much, but keep a side fund just incase.

[RosieQ]

jsr52 wrote:

I personally doubt PSLF will be off the table for anyone who has already taken out loans or even those who plan to take them by July 2018, they will be grandfathering a fair a mount of people. I’d be nervous if were a senior or junior in college right now and had planned on a career in public service. Otherwise I would’t worry to much, but keep a side fund just incase.

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Trump administration has confirmed that existing borrowers prior to July 2018 would be grandfathered in under existing plans. But this still would have to go through congress before any changes are made official.

[DMFA]

jsr52 wrote:

After I get married next year I’m considering MFS as well. I’ll have a fellow salary if 150,000 (if i include moonlighting), wife is child psycholgist so will be making around 75,000, the following year ill jump to >300,000 in private practice GI. She has about 200k in loans and is banking on PSLF, so it seems to make sense for us to MFS given the disproportionate income, we might just create a backup fund incase PSLF goes to ************************.

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MFS actually hurts disproportionate incomes more than equal ones because it puts the higher income into the higher bracket.  The MFS brackets are just half the MFJ brackets, so equal incomes basically means equal tax to MFJ (other than missing out on some credits and deductions).  Assuming $150k for you and $75k for her, MFJ you'd be at 28% with (assuming 2 exemptions and std deduction) $44,060 due, whereas MFS (assuming 1 exemption apiece and std deduction) you'd be well into 33% ($33,693) and she'd be 25% ($11,889), total $45,582 due, so it doesn't actually seem to hurt you quite as much now.  When you go over $300,000, then you'd be far into the 39.6% bracket with the higher income (starts at $235,351 for MFS), making it less worth it...

However, since she has debt 3x greater than her annual income, and if that income isn't going to rise particularly much, she'll pay (AGI - 1.5pov)/120 if PAYE, so (75000 - [1.5*16240])/120 = $422/mo for the remainder of her term ($633 if IBR).  Seeing as interest (assuming 6.5%) on $200,000 is (0.065/12)*200000 = $1,083.33/month, your amount owed will actually increase over time.  Hope she is able to remain full-time employed by a non-profit for the entirety of the term to obtain the tax-free forgiveness, because that's a big chunk to have to pay.  The amount you would lose to extra taxes paid due to MFS each year will probably be less than you would save by not paying the loan, likely making your plan better.

The best case for MFS is usually equal incomes (similar tax) with disproportionate debts (less debt payment)...assuming you don't plan on paying those debts, i.e. PSLF, otherwise it's just letting interest accrue.  In this instance, despite your very unequal incomes, you seem to have it sussed out pretty well, again assuming that PSLF remains in its current form for you.

I imagine you've properly certified her PSLF employment with her servicer and that they are crediting your payments as PSLF-eligible payments made, correct?

[DMFA]

Dr.Blue wrote:

Thanks so much for the reply. I have never been a gambler but the PSLF payout seemed like it was worth the risk. For me to not have med school debt took living well below what a resident would live like, and I get nauseous thinking of doing that again. I worked hard a few years before med school in a non medical field with everything going to med school tuition, had supportive family, and commuted to save on rent which allowed me to avoid med school debt. I am not willing to do that all over again while finishing training but will continue to keep a side savings in case PSLF falls through. After a few years income will be higher but so will expenses and taxes esp with wanting a family but there are people in worse situations and I am thankful to be in a field I enjoy. Thanks for the help!

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Do your math as to how much more your taxes will be with MFS than MFJ, and with how much you'll save between MFS/PAYE, find out if it ends up being worth it.  I assume it probably will, with that nauseating pile of debt at that horrendous rate.

If she ends up no longer having a "partial financial hardship" after finishing training - that is, if her calculated payment (AGI - [1.5 x pov])/120 based on her MFS AGI is greater than the 10-yr standard payment based on the amount from entering repayment (unlikely since the AGI would have to be > $573,560) - then you can stay in PAYE, paying the least possible, but switch to MFJ; if she pays the same on the loan, might as well pay less in taxes, right?  Recalculate the amount against your taxes each year to make sure it's still worth doing MFS.

If she will only have 4.5 years of payments at a high income limited at the 10-yr standard rate, I again think it's *probably* the right idea.  You have made sure that her employment has been PSLF-certified and that your servicer is counting your payments toward the 120, right? [people sometimes actually don't realize this is an active step that has to occur]

[jsr52]

Thanks for the calculations, she recently submitted the paper work. If we do MFJ, I would imagine her IBR payments would rise to about 1000 if not more, then it seems like we would have the loan paid off before she's made 120 payemnts? Does that seem about right? She's only made two payments thus far.

[Dr.Blue]

Reviving this old thread and updating. So my spouse and I are graduating this year and have continued to do MFS and have continued to make the monthly PAYE payments. She will have made little over 4.5 years of payments (reconsolidated end of 2nd year of residency) and we were hoping to be on track for PSLF. The interest on her loans are over 7% and loan keeps ballooning so we are leaning towards just cutting losses on jumping ship. Looking back, it probably would have been best to be in REPAYE and save on the interest but you live and you learn. I have no debt and she had started with nearly 400k which has gone up considerably since starting residency and 3 years of pediatric subspecialty fellowship. We have been married for 2 years so she was already re-consolidated to federal loans and started in the PAYE program.

Reason for jumping out of PSLF is there are no good jobs in California that qualify for PSLF for her and the ones that do have pretty bad pay as a NICU doc. Most importantly we are expecting our first child and she will have to extend fellowship a few months and after training she is planning on taking a few months off before working. After baby she will likely return as part time so PSLF payments would not even count. We do not want to move out of California as my job opportunities as a psychiatrist is pretty solid and we are near family and fortunate to not have housing expenses at this time. Lots of child psych jobs I have been looking at have loan forgiveness stipends of 25-50k per year and very healthy salaries and employed through state/county. I was wondering if anyone with experience has known if these positions allow for me to receive loan forgiveness stipends for my spouses loans as I don't have any loans under my name. Any advice on the best way to refinance as my salary is higher and hers is lower and will be for a few years but I am under impression its dependent on her income as loans are under her name. We have about 150k-200k saved for a down payment of a home/emergency funds/savings but thinking of just putting it to the loans to bring them to a manageable amount and get on a 5 year repayment plan. Is this wise and best way to tackle the debt? Thanks in advance!