What would you do in my situation? PSLF?

[truepat76]

Hi everyone, I know this isn't a personal finance forum but I'm just hoping to get some opinions here:

 

Recent PA school grad with $130,000 in federal loans (PA school + undergrad)

Will be making ~$115,000 once I start working in a few months 

 

My s/o makes ~$40,000 and is still in school. Their total debt will be ~80,000 and will go into repayment next summer 2018. 

 

Our living situation - currently we are fortunate to be living low rent (300/month) with family - but this won't last for long. We have about 1-1.5 years left here and then will need to move out. We're hoping to purchase a house or condo. Currently unmarried and unengaged (due to financial reasons with me being unemployed while in school...) (this is another expense I need to plan for)

 

My dilemma is whether or not to pursue PSLF or to stick with the standard plan. My payments would be ~$800/month under the REPAYE plan, $1,500/month under the standard plan. My job now will qualify for PSLF, but I'm cautious about the uncertainty of the program (being capped, cancelled, disqualifying hospital-based jobs, me eventually finding a better job that doesn't qualify, etc). However, i think it would be tight trying to manage a mortgage on our incomes while both paying loans under the 10 yr standard plan (leaving us with little wiggle room each month). Starter homes in my area go for $250-$315K. We both have good credit scores (750+)

 

I've heard many different opinions - go for PSLF, just stick to the standard 10 year, try to pay off the loans sooner while living in the low-rent situation (I could do this for about 1 year, but that would affect our savings for a down payment on a home). It's a bit overwhelming and just wondering what others would do. 

Thanks

[Boatswain2PA]

Option 1:  PSLF - continue being in debt for 10 years and locked to specific jobs.

 

Option 2:  Standard repayment plan...continue being in debt for years and years while you buy a "starter home" that you would struggle to build equity in because you're making minimum payments.  Oh, and you gotta maintain that starter home, and you gotta fill it with things, etc, etc, etc.....

 

Option 3:  Continue living like you are students for another 4 years, pay off every nickle of debt you have in those four years.  Then live like a student for another 1-2 years while you save up a large down payment.  $120K down, with absolutely no other debt, and you can buy a $500K home instead.

You're going to be $210K in debt ($130 + $80) making $145K a year.  $45K for Uncle Sam, $40K to live on, $60K toward debt.  You're out of debt in less than 4 years.

 

8 year plan with option 1:  You're still in debt, working a job you may not want.

 

8 year plan with Option 2:  You're still in debt, living in your starter home.

 

8 year plan with Option 3:  You're out of debt, living in a $500K home.


 

[Lyndhurst]

Just had a very similar conversation with my wife this weekend. 

 

PSLF looks tempting but there is just too much risk involved. Politicians could change the rules or a job may not qualify. Ultimately I dont want to feel restricted in my career opportunities because I'm holding out for relief. Also I just dont feel comfortable relying on the largesse of the government.

 

I'd sooner take control and just go all out to try and clear our debt as fast as we can. This means living on the same budget we have been on for the past two years, holding off on replacing our vehicles, plus working as much overtime as I can. The plan is to be completely debt free in four years. 

 

At that point well we can start to make real plans on how we want to live , what career opportunities we want to pursue...maybe even replace my car (but probably not, its a Subaru so it is not broken in properly till you get to 500,000 miles!)

[truepat76]

Thank you both. Agreed that PSLF is a huge gamble and locks you into certain jobs. Obviously it would be best if we could stay in the low-rent situation for as long as possible while nailing our loans quickly. Unfortunately we won't be able to stay here for too much longer as mentioned. Since my SO is still in school and loans are in deferment currently - I'm thinking of spending the next year nailing my loans as much as possible (say 5K+/month) to at least put a dent into it. Then once my s/o starts working at a higher paying job (with new degree) we can start saving up for a home. Once in said "home" we'd throw any extra $$ towards loans. Smart idea? Foolish?

 

A financial advisor I met with made it seem as if despite the massive debt, we'd have no problem getting a starter home in the price range I listed and paying our mortgage, bills, and 10-year loan plan without an issue. However, I think we'd have a lot less "wiggle room" financially and as Boatswain mentioned - homes have a lot more financial burden besides the mortgage.

 

Lyndhurst - if you don't mind me asking, what's your current living situation?

[Lyndhurst]

Currently im staying with family while I finish up rotations. My wife is renting a place near her parents. Next year our plan is to continue living there. The house is not in the best shape but it is owned by family friends and the rent is cheap. Also it is across a field from her parents so easy access to baby sitting and family support while I am away.

 

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[greenmood]

You can do both, you know.

 

I'm on PSLF but pay buttloads of extra money towards debt every single month. I should be done with all of our household debt (mine + his) in five years. PSLF is my backup. If something happens and I get off track with extra payments, I can still pay the minimum every month and might have something to forgive in 7 years. There is no rule with PSLF that you can only pay the minimum.

 

If you're smart you'll forget about buying a home until you're debt-free. When you own your house, you have to maintain it and that costs a lot of (often unexpected) money.

[truepat76]

Thank you for the advice. I was considering of doing both as you mentioned - with PSLF as the back up.

 

About the living situation - I agree it would be ideal to be debt-free before buying a home. However, my living situation absolutely 100% needs to change within the next 1.5 years. No more cheap rent. We're living with family and they made it clear that they have plans to use our current space and would like us out by then. We don't think renting an apartment would be the smartest idea (in my area it would be just as expensive as a mortgage on a modest home...). That's why we are looking ahead and need to start saving to purchase something.

[greenmood]

Renting is often (always) more expensive than buying.

 

Dave Ramsey would say you're paying for patience. I think you're quite reasonably paying a set amount of extra each month (a consistent budget) so that you don't get socked with unexpected huge financial hits, which DOES happen when you own.

 

Just don't shrug it off. If you aren't in sound financial shape when you own, you can be crippled by the costs of maintaining your property.

[Boatswain2PA]

Renting is often (always) more expensive than buying.

 

Dave Ramsey would say you're paying for patience. I think you're quite reasonably paying a set amount of extra each month (a consistent budget) so that you don't get socked with unexpected huge financial hits, which DOES happen when you own.

 

Just don't shrug it off. If you aren't in sound financial shape when you own, you can be crippled by the costs of maintaining your property.

If you're going to stay in a house for more than about 5 years, then buying usually is worth it.  Less than that and the closing costs often eat up much of the difference, and THEN there is the much greater RISK of home ownership versus renting.

 

Nothing wrong with renting as you get out of debt, build a substantial emergency savings, and then huge down payment on your dream house.

 

Another alternative (and one that we are doing) is buy a very modestly priced home and pay it off in just a few years, rapidly building equity (and then savings) to put down on your dream home.  

[truepat76]

We would absolutely be planning to stay for at least 5 years (more likely 10+) while trying to build up savings as well. I see pros/cons to both options and I guess I'll need to sit down with my S/O and really think about things. I wish we were able to stay with family for longer but unfortunately it's not an option for much longer.

 

I started thinking about this a lot because I met with a financial advisor (provided by our school) and he said even paying $1,500 under my standard repayment plan, we'd have "absolutely no problem" purchasing a modest home within the next 12 months or so.  But after crunching some numbers (assuming we both save at least 15% of our PRE-tax income), I think things would be tight.

 

It's a lot to consider for sure.

[Boatswain2PA]

We would absolutely be planning to stay for at least 5 years (more likely 10+) while trying to build up savings as well. I see pros/cons to both options and I guess I'll need to sit down with my S/O and really think about things. I wish we were able to stay with family for longer but unfortunately it's not an option for much longer.

 

I started thinking about this a lot because I met with a financial advisor (provided by our school) and he said even paying $1,500 under my standard repayment plan, we'd have "absolutely no problem" purchasing a modest home within the next 12 months or so.  But after crunching some numbers (assuming we both save at least 15% of our PRE-tax income), I think things would be tight.

 

It's a lot to consider for sure.

The more frugal you live today, the better you'll be able to live tomorrow.

 

Maybe lower your standards a bit in apartment shopping, or cheaper house shopping.  If you're going to buy a house with a 5 year plan to move, I would try to have the house completely paid off in 5 years (means you're looking for a cheap house). 

 

Financial advisors are like chiropractors.  There are some good ones, but many of them are just out to make the most money for themselves as they can.  Caveat Emptor. 

[truepat76]

Boatswain2PA - thank you for your help. I like the idea of paying off a house quickly. Looking on Zillow, there are some foreclosed homes on the market for ~200K; condos around 170K - so we will look into a cheaper option such as that

 

Agreed on the financial advisor piece. He's been great so far, hasn't tried to sell/refer for anything, but I suspect that may be coming soon.

[Boatswain2PA]

I cannot think of ANYTHING I would buy from a "financial advisor."

 

I've found that the more complicated a financial instrument/deal is, the worse it actually works out, and "financial advisors" often try to sell complicated, confusing products that have poor returns for you the buyer (but make them a lot of money), like whole life insurance.

[d-wade]

Sorry to resurrect a dead thread, but you could reasonably save up money for a down payment on a home while doing the PSLF and paying the minimum payment (i.e REPAYE) on the loans. The only issue you'd run into is that your debt to income ratio would be affected, which may cap you at the amount you could spend on a home, though you could reasonably save up for a very large down payment that may bridge this gap. 

Edited June 25, 2018 by d-wade

[Rrik]

I'm in your same situation.

PSLF sounds really good on paper. It frees up extra money every month by using IBR PAYE. But, I'm evaluating what I want in life. Do I want to have to pay student loans for 10 years? Will I want to work for non-profits for 10 years? I think there is more inherent risk (for me) in choosing a path that limits opportunities, and mentally having student loan debt for 10 years. And tracking annual forms to fed loan. etc. It would be a very do-able process, but I think it will be a burden. Also, if marriage is coming, then you'll have to work out filing taxes jointly versus separately. Also, at the end of the day for me, PSLF would forgive between 20-40k, which is a lot of money, but not worth an extra 4-5 years of having student loan debt.

I am leaning towards refinancing to around 4% (federal loans are around 6.5%). I'm shortening payments to a 7-year plan, which slightly increases my monthly payment.

Now, I can take extra cash and pay down loans aggressively, or (sorry Dave Ramsey), put some money aside in an investment account. This money (hopefully) will grow and I can reassess after 3-5 years to see if I want to take that money to throw it towards loans, or use the capital to put a down on a house, fix my car, etc. It basically frees up money for me to use if needed versus sinking them into loans.