Student Loan Strategy - Future Public Service Job

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qwertyman
Posts: 2
Joined: Mon Jun 16, 2014 6:43 am

Student Loan Strategy - Future Public Service Job

Post by qwertyman »

Hello all,

Sorry for the intrusion, but I could use some advice on how to proceed with repaying my student loans:

I'm currently a biglaw associate with a $185k salary. I currently have about $173k in student loans to repay (down from an original of ~250k). The highest interest loan is roughly $25k at 7.65%, and the next highest is $54k at 7.25%. Other loans are at rates of 6.5%, 5.5% and 4.25%. I have been aggressively repaying the highest interest loans (I fully repaid a $50k loan at 8.25% already) while making minimum payments on each other loan. I have a six-month emergency fund held in a combination of savings and i-bonds. I have been making minimal contributions to a 401(k) (to a Vanguard target date fund) because I have been focusing on loan repayment because the sooner I can repay the highest interest loans, the sooner I can have devise a biglaw exit strategy. However, this timetable may have just been suddenly increased.

Here's the complication: I just passed the Foreign Service Oral Exam with a high enough score that I am all but certain to be invited to join the foreign service shortly after my medical and background clearances go through. It could take up to a year for this to occur. Once I am in the foreign service, I will qualify for the PSLF program, which will forgive all student loans (without tax penalty) after ten years of student loan payments capped at 10% of discretionary income. Being a foreign service officer is something that I have wanted to do for a long time and I am excited at the prospect of spending a career in public service while having excellent travel opportunities. I do not yet know what my salary will be, but it will be less than half of what I make now.

What should I do in the meantime? I see two options:

1. Continue with aggressive student loan payments as long as I am in biglaw; or
2. Start saving for other opportunities.

If I continue with aggressive loan repayments, I could fully repay the highest interest loan by February, and there is a good chance that I would still be waiting for my appointment call by then. I could also prioritize saving money for other purposes at this stage because once I am on PSLF, student loan repayment will be a low order of priority. If I made minimal student loan payments on everything, I could save a serious amount of money in the next roughly 5-18 months. Any advice here would be greatly appreciated!
OatmealAddict
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Joined: Fri Sep 27, 2013 4:03 pm

Re: Student Loan Strategy - Future Public Service Job

Post by OatmealAddict »

I'm not going to try to convince you either way, but I will tell you that with my wife's ~$250,000 loan balance, we're doing Income Based Repayment in conjunction with PSLF. We max out her 403b which lowers her AGI, which in turn, lowers her student loan payments. We can put up with those relatively reasonable monthly payments for another 9 years in order to have that gargantuan balance forgiven.

Best of luck to you.
jms7
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Joined: Thu May 08, 2014 9:45 am

Re: Student Loan Strategy - Future Public Service Job

Post by jms7 »

Tough decision. Sounds like you're likely to be invited to and join the foreign service. What you should really think about (and I say this recognizing there's no way to know for sure) is if you're likely to stay in the foreign service for ten years. If you are, then it's a no-brainer to stop the aggressive repayment strategy; you're effectively throwing money away if everything will be forgiven after ten years. I'd use those funds to max your 401k (sounds like you have decent choices) and do a backdoor Roth. Alternately, you could build up the emergency fund.

On the other hand, if you don't think you'll last for ten years, I'd continue with the aggressive repayments. Having moved from BigLaw to MidLaw in January (beginning of my fifth year out) gave me a greater appreciation for just how big of a shovel the BigLaw salary can be for burying debt. Once you leave (whether for government work or elsewhere, except another BigLaw firm), it's almost certainly going to take you a few years to get back to that shovel size.
HMan768
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Joined: Thu May 01, 2014 1:21 pm

Re: Student Loan Strategy - Future Public Service Job

Post by HMan768 »

Yes, should be a no brainer - switch to making minimum payments until you switch to public service and then can start IBR. Good luck!
freddie
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Joined: Sat Feb 08, 2014 10:06 pm

Re: Student Loan Strategy - Future Public Service Job

Post by freddie »

As you say, the tough part is figuring out if you will make it 10 years or not. It seems like the min of maxing out the 401(k) and roth makes sense. Personally I would also stop doing more than min payments and hope things work out. It seems likely that you will know that after a couple of years (I am assuming the risk is more of not liking the job than getting fired) and that you probably are going to want that extra money to max out retirement accounts during those years when paying back the debt. I suppose there are also some tax cases where if you get married, you might have come out ahead by paying off the debt instead of going for forgiveness but those are going to be impossible to predict.

jms7 wrote:Tough decision. Sounds like you're likely to be invited to and join the foreign service. What you should really think about (and I say this recognizing there's no way to know for sure) is if you're likely to stay in the foreign service for ten years. If you are, then it's a no-brainer to stop the aggressive repayment strategy; you're effectively throwing money away if everything will be forgiven after ten years. I'd use those funds to max your 401k (sounds like you have decent choices) and do a backdoor Roth. Alternately, you could build up the emergency fund.

On the other hand, if you don't think you'll last for ten years, I'd continue with the aggressive repayments. Having moved from BigLaw to MidLaw in January (beginning of my fifth year out) gave me a greater appreciation for just how big of a shovel the BigLaw salary can be for burying debt. Once you leave (whether for government work or elsewhere, except another BigLaw firm), it's almost certainly going to take you a few years to get back to that shovel size.
campy2010
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Re: Student Loan Strategy - Future Public Service Job

Post by campy2010 »

The Obama administration is already proposing changes to the PSLF program in the 2015 budget. You should stay on top of these proposed changes if you plan to change your career based on the PSLF program. We're not allowed to talk about proposed legislation on this forum, so I will let you do your own research on the topic.
Last edited by campy2010 on Mon Jun 16, 2014 1:24 pm, edited 3 times in total.
dublin
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Re: Student Loan Strategy - Future Public Service Job

Post by dublin »

I'm in a somewhat similar situation with my wife's loans, and we've gone the route of paying as little as possible and shooting for PSLF, while in the background knowing that even if she doesn't end up going 10 years in public service, the 20 year IBR route might still be a viable option, and worst case scenario, it's debatable whether ~6% student loans are worth paying off vs tax-advantaged retirement savings even without any chance of forgiveness.

We are getting hurt though by being forced to file taxes separately, but my spreadsheets tell me it's still the best move to make right now given present circumstances and uncertainty - and if it becomes clear at some point that we made the wrong choice, we can still go back and amend up to 3 years worth of taxes to file jointly and get a bundle back, if I understand correctly.
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UroloJay
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Re: Student Loan Strategy - Future Public Service Job

Post by UroloJay »

I am in a similar situation. While I like the idea of PSLF, if there is one thing I have learned in my short life, it's that you can't predict the future no matter how hard you try. There are many scenarios where it may not work out for you to stay in public service for 10 years. For my own part, I'm paying slightly more than the minimum payment on my loans and putting the rest into my Roth. I ran numbers on this a few months ago on my and my wife's student loans (343k total, both medical residents) with several different scenarios. Balances shown are after we complete our training 5 years from now and assumes a 4% market return (hoping this is an appropriately conservative return, but have to recognize it could be worse, or even negative in the short term):

Loans are at 6.625%, starting Roth balance: $21k; $2400 to invest/payback loans per month (includes about $300/mo toward cash savings)

1) Put all my money towards my loans, don't save for retirement: Net balance (IRA-loans): -$280,973; Loan Balance: -$332,402; IRA/cash:$51,429
2) Defer my loans, put all my money toward retirement (Roth): Net balance (IRA-loans): -$285,583; Loan Balance: -$476,240; IRA/cash:$190,657
3) Put some toward loans, and some toward retirement (Roth): Net balance (IRA-loans): -$283,388; Loan Balance: -$407,746; IRA/cash:$124,358

Note that Net balance is approximately the same, but distribution of wealth (or lack thereof) is very different. You have to ask yourself what your accounts are going to look like in 5 or 10 or 20 years depending on the strategy you use. Factor in the possibility that your plans might change so that you can give yourself an idea of worst case scenario (planning on PSLF, paying down loans only at a minimum, but then not qualifying for some reason). This gives you an idea of the risk you're taking on.

For my own part, I have chosen to go the middle road above, and contribute a little toward each. Obviously the actual market return during this period and the amount you put toward each account will determine your actual outcome, but by framing it this way and doing some theoretical calculations, you give yourself a clear picture on what things could look like 10 years from now. Then you just have to decide how risky you think each scenario is, and go with the one you're most comfortable with. Also, don't forget you have to pay taxes on whatever amount is forgiven, so make sure you are planning on saving for this bill as well.
BarryZuckerkorn
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Re: Student Loan Strategy - Future Public Service Job

Post by BarryZuckerkorn »

First, congrats on the FSO exam score and killing it on the debt.

From my perspective, as an attorney with the federal government for the last 4 years and a risk-averse Boglehead, I am hesitant to call anything “guaranteed” when it comes to government employment. I’ve seen a lot of “guaranteed” job placements in the government not materialize for various (crazy) reasons. Granted, I have not heard of such situations occurring at State. However, that uncertainty, joined with the possibility of not staying with government/non-profit for 10 years and rumblings of possible changes to the PSLF program, would give me serious pause.

I would try to see if there is a way to hedge by saving the extra money until you know for sure. Maybe try reducing the loan payments for now and keeping the money relatively liquid just in case the FSO position does not materialize. Could you lump sum into the 401(k) prior to leaving Big Law for the FSO position once you know it is secure? Admittedly, I know very little about the rules regarding 401(k) contributions, since TSP has been my only employer account. I realize you would miss any market gains (or losses) in your 401(k) during the interim period, but when you consider the mounting interest on those loans, it might be offset.

All that being said, good luck and I hope everything works for the best with the FSO position.
The solution to all our problems is staring you in the face and it can't even see you!
MassInvestor
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Re: Student Loan Strategy - Future Public Service Job

Post by MassInvestor »

Remember, your freedom is worth a lot. After a year in Farawayastan, you might realize that the foreign service isn't for you.
bs010101
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Re: Student Loan Strategy - Future Public Service Job

Post by bs010101 »

How do the salaries compare? I would expect in many cases the higher salary in the private sector over ten years would more than compensate for the loss of the student loan forgiveness. I imagine a lot of people stay in government jobs for years seeing it as their only means of paying off their loans, without doing the math.

Of course, the most important thing is to enjoy your job, so that should be a major factor (maybe the biggest) in your decision.
wesef
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Re: Student Loan Strategy - Future Public Service Job

Post by wesef »

This sounded weird so I did some googling -- is the loan forgiveness capped at $60,000 lifetime? http://www.state.gov/documents/organization/85118.pdf. If so, then you should keep paying off the loans.

Don't count your chickens before they have hatched when talking about the foreign service. Plenty of people pass the oral and end up not going, or go and don't like it.

Once you are in, there are a lot of good retirement benefits, so make sure you understand them before making any key financial decisions.
Topic Author
qwertyman
Posts: 2
Joined: Mon Jun 16, 2014 6:43 am

Re: Student Loan Strategy - Future Public Service Job

Post by qwertyman »

Thanks so much for the responses! Here are my thoughts below:
wesef wrote:This sounded weird so I did some googling -- is the loan forgiveness capped at $60,000 lifetime? http://www.state.gov/documents/organization/85118.pdf. If so, then you should keep paying off the loans.
The $60,000 cap is an internal State Department program. There is a federal program called PSLF currently available to all student loan borrowers who take on certain positions in public interest positions, including federal government positions. As has been correctly noted below, there is no guarantee that this will remain fully available by the time I would start my position, and PSLF could even change retroactively.
bs010101 wrote:How do the salaries compare? I would expect in many cases the higher salary in the private sector over ten years would more than compensate for the loss of the student loan forgiveness. I imagine a lot of people stay in government jobs for years seeing it as their only means of paying off their loans, without doing the math.

Of course, the most important thing is to enjoy your job, so that should be a major factor (maybe the biggest) in your decision.
A biglaw associate position is notoriously difficult, often short, and emphatically not for everybody. The track from associate to partner in biglaw is roughly ten years, and maybe one out of every ten associates ultimately becomes a partner. Most associates either burn out or are asked to find other employment around the four year mark. I'm in my third year and unlike some of the partners, I am not OK with the prospect of being "weekend daddy" someday. In short, I could theoretically pay off all loans in 3-4 years, but there is actually a small chance that I could even last that long.
jms7 wrote:Tough decision. Sounds like you're likely to be invited to and join the foreign service. What you should really think about (and I say this recognizing there's no way to know for sure) is if you're likely to stay in the foreign service for ten years. If you are, then it's a no-brainer to stop the aggressive repayment strategy; you're effectively throwing money away if everything will be forgiven after ten years. I'd use those funds to max your 401k (sounds like you have decent choices) and do a backdoor Roth. Alternately, you could build up the emergency fund.

On the other hand, if you don't think you'll last for ten years, I'd continue with the aggressive repayments. Having moved from BigLaw to MidLaw in January (beginning of my fifth year out) gave me a greater appreciation for just how big of a shovel the BigLaw salary can be for burying debt. Once you leave (whether for government work or elsewhere, except another BigLaw firm), it's almost certainly going to take you a few years to get back to that shovel size.
This is the crux of my decision. I have done my research and have talked with current and former FSOs and believe that I would enjoy it, but it is impossible to know for certain what the future holds (as is true for everybody). I think my answer will be to start making minimum payments on the loans, maximize my tax-advantaged retirement options and build an emergency fund and, if for some reason I wash out of medical or security clearances or are just never invited, I could then make a lump sum payment on the loans and continue aggressive repayment. At the worst, I'll be in repayment longer than anticipated; best case, I'll have made a big leap forward in retirement planning and could save enough cash for a down payment on a condo in DC.
wesef
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Re: Student Loan Strategy - Future Public Service Job

Post by wesef »

I think this is implied by your approach, but the most important action item is to immediately stop "living" biglaw and start living government. Meaning limit the nice happy hours and expensive locavore restaurants and start cooking and socializing at home. No fancy trips, since you'll be doing that all your life. You probably could have saved more over the past three years, but so be it. Whether you put the cash you save into a taxable investment account or student loans, or just sit on it in a savings account for the next few months, is much less important than just saving in the first place.

You should max out your 401k this year. It's appealing to pay off the loans, because you feel you've gotten free from a huge financial burden, but tax-deferred savings are very important, given that you have a pretty realistic plan to pay off the loans. If you want to do a value tilt or REITs, you can't do that in a TSP account, so whatever you can roll over from your current 401k into a VG rollover IRA would be a good starting point (supplemented by a Roth IRA later).
leverandon
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Re: Student Loan Strategy - Future Public Service Job

Post by leverandon »

Congrats on the high FSOA score!

I've been reading Bogleheads for a few weeks now and just stumbled across this post. I'm in a fairly similar situation to the OP in that I'm a lawyer with a similarly sized student loan balance. I also passed the FSOA and will be officially joining the Foreign Service with the August 2014 A-100 training class. The only difference is that I haven't been working biglaw and instead have spent the last year and a half since I passed the bar examination working as a criminal prosecutor. So I made the decision to go with IBR and work toward PSLF awhile ago out of necessity.

Going forward, the Foreign Service has a very high retention rate (something upwards of 80%). People who get in seem to make a career of it so I am less concerned with not getting to the 10 year mark, especially since I have put some time into the forgiveness already. That being said, I do plan to try to get the $60,000 in internal State Department payments mentioned above to reduce my loan debt in case PSLF is modified and we aren't grandfathered in.
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