Student Loans / Expected Value of Paying Down or Waiting

I have been deliberating what to do with my student loans.

I have approximately 85,000.00 in student loan debt from law school. I graduated a year ago. The average interest rate across my various loans is as follows: 61,000.00 at 6.5%, and 24,000.00 at 7.9% (Stafford and GradPlus, respectively). The propriety of my decision in going to law school is not in dispute.

The issue:

I am currently in income-based repayment, which, due to my income, is only $10.00 a month (I was unemployed for most of last year). It is re-evaluated annually based on tax return (not balance), and will likely be about $550.00 per month next year. I have no idea what my lifetime earning potential is, and the legal market in Florida (and everywhere else) is oversaturated.

If I can stay in income-based repayment for 25 years, any remaining balance is forgiven (and treated as income for tax purposes), however, if my income increases too much, then my payments will adjust to approximately $1,100.00 per month, and I may end up paying more over the life of the loan that under a traditional 10 year model.

The curve ball: $30,000.00 of my principal balance will not accrue interest the first 3 years I am in repayment, due to the income-based program.

Any advice or ideas as to whether I should throw as much money as I can at my loans now, or just make minimum payments until it is either paid off, or forgiven (25 years)?

Is there a pre-payment penalty in the income-based program? If not, you've got the best of both worlds - very low initial payments and "free" principal paydowns until the minimum payments increase.

You should absolutely extend the initial term of your loan as far into the future as you can. Most of the repayment programs (with the possible exception of the income-based program) have no early payment penalty. You can gain the flexibility of having lower minimum payments, and retain your ability to make additional payments on the principal balance as you're able.

It's also worth noting that student loan interest is tax deductible (subject to a soft income cap), so there's a small value associated with preserving your balance if you can deduct the interest and make more than 6.9% investing your would-be loan payments elsewhere. Prosper is one place where you can earn a nearly-guaranteed return in excess of the weighted average 6.9% student loan interest rate. I've never invested there, but I've borrowed (for school, before new laws made it illegal) from there and had a great experience.

To me, what it comes down to is: Do you really want to PLAN to live at lower than your true potential earning levels, just so that some debt can be retired in 25 years?!

I would not count on forgiving the debt, so I would make the biggest payments I could while still living a comfortable life. The interest rates aren't great, I have some debt not in my mortgage at 4%

You might want to also consider the viewpoints of the Bar regarding throwing in the towel prematurely, particularly if you want to continue as a member of the bar, albeit a presently unemployed one. I assume that Florida does not grant reciprocity since that would mean all lawyers in cold climates would open up down in Florida and skim the cream of the market. Therefore you might be limited in your options on both a time and geographic basis.

I see little difference between law school and some matchbook school purporting to teach data processing or something but actually churning out graduates with little in the way of actual training or ability. The formula is still the same: anticipated income versus anticipated payments. A cleansing bath through the bankruptcy courts can be a boon but it can haunt you for twelve years or more.

Many schools churn out graduates whose actual employment prospects are dismal. Virtually all modeling schools are a joke, most corrections officer schools are a joke. Professional schools should be above such things but they are not. You knew the job prospects going into law school. Not all that much changed, but the law is that if you have the filing fee you can file a petition to be adjudicated a bankrupt.

Be sure to go out and buy a Family Bible and two bushels of oats or whatever it is the various state and federal laws allow you to keep. Pay your utility bills but don't make it a preference. Student loans were only made difficult to discharge in bankruptcy because college students were routinely accepting a diploma with one hand and handing them a petition in bankruptcy with the other during the sixties.

Quote: dwheatley

I would not count on forgiving the debt, so I would make the biggest payments I could while still living a comfortable life. The interest rates aren't great, I have some debt not in my mortgage at 4%

6.5% is about spot on for non-undergraduate student loan rates.

Quote: dlevinelaw

Any advice or ideas as to whether I should throw as much money as I can at my loans now, or just make minimum payments until it is either paid off, or forgiven (25 years)?

You haven't given enough information. For example: what is the income limit for the "income-based repayment"? And what kind of law do you practice, what are the expected salary bands for 1/3/5 years out, etc.

Generally speaking, unless you're bumping up against your available credit and/or driving your scores down, I tend to favor an opportunity-cost approach to the question of debt repayment. If you have a place for your next dollar that will earn more than the cost of keeping your loans, don't pay down the loans and invest instead, use the proceeds to carry the debt, and pocket the difference. If anything, try to get your notes refinanced at a lower rate (though I don't know if this is possible).

Quote: rdw4potus

Prosper is one place where you can earn a nearly-guaranteed return in excess of the weighted average 6.9% student loan interest rate. I've never invested there, but I've borrowed (for school, before new laws made it illegal) from there and had a great experience.

Prosper doesn't allow everybody to invest, dependent on what state you live in. For example, I live in Arizona, and thus I'm unable to invest with Prosper. Prior to this change of theirs occurring, I had deposited money with Prosper and invested it, but now I can no longer re-invest the money that is there. And I'm finding it extremely difficult to get my money back from them. If you're going to use Prosper to invest in micro loans, just make sure you are able to do so from your state.