Alrighty, I’ve been ruminating about this topic for weeks. After undergraduate was paid for by scholarships and parental units, I’m now taking on substantial loans for graduate school to leverage myself towards my future career.
I have two more years of school, so two more years until payments are due. I’d rather get through this planning now, before I’m having to go through licensure exams and get set up at a new job. Here is my process for my federal loans.
Step 1. Go HERE
This is the federal loan calculator. You can sign in or you can just run simulations and put in whatever info you wish.
Step 2: Insert Parameters
I did $60,000 in direct unsubsidized loans at 6% interest. Single with AGI of $40,000, a
family bro of one and living in Arkansas. Yes, I expect to be making more than that as a physical therapist. AGI stands for adjusted gross income which is your earnings before tax minus standard deductions and retirement account deductions. This is an extremely aggressive savings scenario whereby it is assumed that at least $20k is put in retirement accounts. Consider that $18k can go in a 401k, $5.5k can go in an IRA and $3.3k can go in an HSA. If none of that makes any sense to you, I’ll pray for you and hope you have a spouse who knows what they’re doing. If you are about that early retirement life then this is doable people.
Step 3: Hit Calculate And Weep Silently
This is a crucial step in the process. If you haven’t cried at your results then you haven’t let it sink in yet.
Step 4: Spend Way Too Much Time Making A Spreadsheet When You Should Be Studying
I took care of this for you. Student-loan.-Single. 40k Scenario
Open that bad boy up and behold.
Step 5: Appreciate The Numbers And, More Importantly, The Curves
- Things to note. I assume wages increase each year by 3% (which is different than the calculators generous assumption of 5%) and contributions to accounts increase by 1.5% each year.
- Aggressively paying off the loan in three years did the worst even though it paid the least amount of total interest. (Although the economic returns in that first three years could alter the math significantly.)
- Front loading retirement savings is enormously important.
- Income Based Repayment did best out of all three despite having to make payments for twenty years. Also, there is a tax bill at the end of this one that would be nothing to sneeze at, but the way public policy is headed it wouldn’t surprise me if this changed.
You should also notice that by saving that much you would literally be pooping cash and farting quarters in retirement.
*Update: As AGI increases I want to note that the margin between the income based repayment and other plans will narrow.
I hope that was informative in at least some manner. Feel free to manipulate the numbers for your scenario. I’ll probably tweak some numbers to make them more
mediocre realistic later. Let me know if some areas need explaining. Also let me know if you question some of my math so I can show you you’re wrong. (But seriously, if something needs to be fixed leave a reply.)
Happy machinating everyone.