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Interest accruing at faster rate than I can pay

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Joined 2016-06-12

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My question concerns best options when the interest accruing on student loans exceeds the monthly amounts I am able to repay.

I took out hefty federal loans for a graduate education at a private school and now owe a large amount. My interest rate is 7.5. I am currently on an IBR plan and my monthly payment is reasonable. However, I ran the numbers and realized that I am not even paying a fraction of the interest accruing on my student loans. From what I understand, my student loan balance will be forgiven after 20 years, but this amount will be “income forgiven” and I will owe a hefty income tax on the income forgiven.

What are my best options at this point?

1. Should I maximize my monthly payments? I could pay $1,000 a month towards my student loans, but this would leave me little to put towards retirement or savings. Also, this amount still would not cover my interest accruing.

2. Should I continue to pay the minimum amount and put aside money separately for my anticipated tax bill?

3. Should I refinance? If so, what are my options? I saw an article on this site that graduate loans can be refinanced at 1.7 to 5.3 percent, how would I do this and what would be the consequences?

3. I will probably be talking to a financial planner at this point. However, is anyone else in this situation? What are you doing? How are you balancing paying your student loans with saving for the future? I would welcome any thoughts.

4. Do you expect the federal government to pass legislation that would do away with the requirement to pay income tax on forgiven student loan debt?

Thanks so much for your time!

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Total Posts: 3

Joined 2016-06-12

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Also, has anyone heard about this : https:/lawyerist.com/83690/defusing-student-loan-interest-tax-bomb/

Do you have any thoughts?

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Total Posts: 3

Joined 2016-06-24

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What are my best options at this point?

1. Should I maximize my monthly payments? I could pay $1,000 a month towards my student loans, but this would leave me little to put towards retirement or savings. Also, this amount still would not cover my interest accruing.

I’ve seen people argue both ways. Personally, I am following the Dave Ramsey debt snowball approach and attacking the smallest debt one at a time with minimum payments on the others.  I definitely feel psychologically better with this approach because I actually see progress.  Part of the plan is that I decided to paused all retirement contributions, but will revisit contributing at the least the employer match after 3 years.  Keep in mind, I still keep a “baby emergency fund” and several sinking funds for planned expenses.  When I have free time, I do try to get supplemental income delivering food on doordash app (It’s like uber for food deliver) and selling all the unnecessary junk I’ve accumulated.  Every little bit helps. At this pace, I should be able to knock out my $40K subsidized consolidated loans by next year.  The unsubsidized is another story…that one is a mountain.

Some have advised at least doing at least the employer matching while aggressively paying on one loan at a time.

2. Should I continue to pay the minimum amount and put aside money separately for my anticipated tax bill?

I prefer to pay extra on my 2 fed loans, focusing on one at a time.  The extra payments would reduce the interest I’d have to pay and if I get momentum, then it would ultimately reduce the taxed amount at the end of 25 eyars.

3. Should I refinance? If so, what are my options? I saw an article on this site that graduate loans can be refinanced at 1.7 to 5.3 percent, how would I do this and what would be the consequences?

I’m don’t think I will refinance my fed loans into a private loan at this time because I prefer to keep the flexibility and fed protections on my federal loan despite the higher interest rate.  I think once my loan balance gets smaller and my income gets higher, I may consider that.

I was advised to consider taking smaller credit union loans to pay chunks of my fed loans as a way to build up my credit score.  But I prefer to keep it simple instead of juggling so many loans at this time

I switched to REPAYE from IBR, despite the interest capitalization, because in some ways, it is a refinance where the interest gets partially subsidized.

3. I will probably be talking to a financial planner at this point. However, is anyone else in this situation? What are you doing? How are you balancing paying your student loans with saving for the future? I would welcome any thoughts.

As I mentioned earlier, I stopped retirement contributions and I really only save for planned expenses.  I think I’ll be able to pay off my loans in 7-10 years at the rate I’m going and this will give me a better cash flow to aggressively save for retirement without the fear of a huge tax bill at the end of forgiveness or gambling that the gov doesn’t change the terms of forgiveness (cap forgiveness amount or IRS discretion on settling amount).  I think making the decision to just attack the loans gives me some peace of mind knowing I have some control in my situation rather than not having control for the next 20 years left on loan forgiveness.

4. Do you expect the federal government to pass legislation that would do away with the requirement to pay income tax on forgiven student loan debt?

The elections and the lack of government consistency, I’d say anything is possible.  That’s why I’d rather just take a little control of my situation and make some sacrifices now for some peace of mind later.

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Joined 2016-06-24

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studentloanborrower1 - 15 June 2016 02:10 AM

Also, has anyone heard about this : https:/lawyerist.com/83690/defusing-student-loan-interest-tax-bomb/

Do you have any thoughts?

I do remember reading this as it was circulated around my law school peers.  My simple response is that this is way too complicated for me to plan for a huge tax hit and I’d rather just pay as much as I can on what I owe and keep it simple.