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Student Loan Strategy - My Story May Help You Discover a Few Tricks

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unaided

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I bought into the script. I grew up in a single parent, working poor family and education was the magical elixir to set me free. It set me "free" with $185,000 in debt. Some $15K for a Master's degree, $20K for Undergraduate, $150,000 for a doctorate.

Was it worth it...yeah, ultimately for the potential income I opened up. Was it worth it for the norm...no, it wasn't.

Choose your debt wisely, and it best have income potential that's worth the debt. A general calculation that seems to work is that let's say without a degree you can reasonably make $40K a year outside of minimum wage and some basic human skills. If you're going into 30K of debt for Undergrad....you want to earn at LEAST $30K more a year than you would without the degree...so in that example $70K....in many cases, yes a $30K net debt 4 year degree is probably worth it....but that assumes less of a return on your investment than you might expect otherwise in an unscripted model. What's the opportuniity cost otherwise on that $30K? not to mention the TIME your degree took....I did undergrad in 3.5 years, started graduate school 2 weeks later, and earned the master's degree concurrently so it took my 7 years, where many it would take 10 years.....that's a lot of compounded opportunity cost in life learning, relationship building, available promotions without a degree, normal entrepreneurship bumps and bruises (time for first couple ideas to fail and to recover from said failure), code expertise, and financial accrual (plus earlier start for that accrual which is number 1 rule of compound interest). Also what if 2 years in to a 5 year graduate path you realize you made the wrong choice of career, school, location, etc? For a health professional degree....that's 2/4ths to 2/5ths of a 150K bill that you just signed up for without a degree to show for it if you quit or change paths....YIKES. For Medical doctors this might be 250-300K.

Make sure you absolutely know what you're signing up for...don't figure it out as you go, because it's too late in these circumstances because you'll start (or restart) your professional life with a tight financial noose around your neck and a fragile platform to stand on.

I consolidated most during school (before payments started) at 6.3%, the net being 5.9%. You then get 6 months grace period after you graduate and then the fun begins. So by consolidating at that time, I did not give up my income-based repayment rights like I would if I had consolidated when payments had already started.

I promptly signed up for income-based repayment and paid the minimum monthly. If the balance was going to be written off in the future and claimed as income, I figured on 50% of the balance being written off, and 50% due in taxes after the 25 year period. So be sure to consider this if you use any income-based strategy where you don't get a chance to dig into the principle. A business loan might cost you 7-9%+...the student loan debt was cheaper than this. So sometimes you actually want to request more student loan debt for "books" or a "computer" when it's really start-up money for your business.

I used the rest of the financial flexibility to get my life together....car, house, job, wife, the usual. I was a W2 employee with a decent job, but poor if you considered the debt and the plateauing future ahead of me. I started a side business that started at literally $5/profit a month, but eventually did balloon to 25-30K net over net per month, but all numbers are relative, 5K a month or less might be enough to allow you to renegotiate your career, quit your job, etc - that choice is yours. Instead, I essentially coasted on the w2 business as long, tried renegotiating my contract, but really it was a phased "quitting" as I basically laid it out as a closet ultimatum and it backfired so to speak and I went full time on my own business in March 2019.

I was able to invest and reinvest in it comfortably when my student loan payment was low based on my w2 income, and my side business money was low because I was purposely reinvesting in the business and building working capital to allow it to keep growing, buying in larger quantities for discount, etc.

1.) Instead of putting extra money toward student loans - I invested it in my business, and eventually, I invested some business returns into the market with an "unscripted" goal of 5% dividend income. I ratcheted that 5% goal down with increase rate decreases since Unscripted was written, so my goal is closer to 4.25% and if rates go up I'll tick it up again. After ~20% taxes that is a 3.4-4% net return, maybe higher if you go with some municipal bonds, maybe less with timed distributions or unrealzied capital gains. This is higher than what I perceived to be the "true" rate on my student loans after write-off and benefits are considered.

I'd rather lose 1-2% on the hedge between my investments and student loans and build my business at 5% a month by being smart about having working capital available without a penalty (like an IRA), or without the principle being lost forever (paying down debt when you could have a recurring investment) By investing some business income, it was also a way to dovetail money from my business for an extra return on capital...and it simultaneously kept the money liquid enough that I could liquidate it (at risk of losing principle) to invest in the business or pay off chunks of debt.

2. Your income-based repayment can essentially go back 2 years. If you apply in December, your taxes for the current tax year are not completed or filed until March/April. So you essentially go back to two tax returns because you have 3.5 months to file your return. When I quit the w2 income, I went to the loan servicer and put in an income change, and now my income reflected my S Corp which was only like 8K reported in the tax year considered, and because that did not meet the poverty line, I qualified for an entire year of income based repayment of $0. And, because of delaying my income verfication, I'll get a 13th month at $0. My true forward cashflow was closer to $150K. When I apply this year, the payment will be calculated closer to the 150K, but my true forward cashflow is closer to 350K (see the last tip for how these income boosts start to negate some of the strategy)

With many businesses you can "choose" how much income you report by timing expenses....If you need X inventory - buy it up by the end of the year so it pushes to the next tax year. You may pay some interest on a credit card for the large purchase - but you gain on a lower student loan payment as well as better cost of the item being purchased. Same can be said if you are paying someone to build something out for you physically or on the web. So your business purchase can also pay iin terms of lower income based student loan repayment. It's no secret that phone bill, internet bill, etc can be business expenses too that otherwise are paid with post-tax money in a W2 set-up and would also lower your studnet loan payment.

3. If your income-based payments do not meet the interest on your loan, the government actually writes off the difference of interest for up to 3 years straight (double check the fine print of your plan as well as possible changes to the rule)! Meaning you essentially get a true rate that is lower over those 3 years if your payment is not meeting the interest on the loan (or free if your payment is calculated to be $0) But yes the normal interest will otherwise compound against you after that benefit is used up or if your calculated payment changes. This gives you 3 years to build your business up before you might consider changing your strategy. 3.5 years if you figure the 6 month grace period you get after graduation, and more if you get the ball rolling before graduation. So imagine you have 185K in loans like I did, you start a side business and your calculated payment goes to $0 for 13 months and all of the interest gets written off by the government for up to 3 years straight. Meanwhile you're able to feed your business or investments like gangbusters! Not to mention maybe things like HSA, SEP IRA, 401k match which you may choose to participate/diversify your approach in despite Unscripted principles.

4. File Marry filing single so that your spouse's income does not count toward your income-based repayment. You may give up some tax credits or otherwise...but this may be outweighed by the savings of your spouse's income (10-15% of his or her income in LESS payments if their income is not considered). Many tax preparers are not aware of these subtleties and may counsel you to file a joint return base don the normal credits and deductions they're trying to get you.

5. You may NOT want to consolidate despite low rates because you give up your income-based repayment benefits. I was figuring my "true" rate on my student loans was about 50% because of the write-off (and I was actively investing money that I knew would more than cover me and give me interest to boot that I could leverage, this is how you prepare for that tax bill at the end of your income-based repayment so don't overlook this!). So even though I might be able to get a refinanced rate at 2.5%-4.5% (varies by situation and time you're reading this) this was not worth me giving up the terms where I was able to get basically 2 years of $0-300 payment based on my business income ($700 /month for W2 income)....but if I was on normal repayment, my payment might have been 1700/month. With a lower rate, ,maybe my payment would be 1200-1300 a month...it wasn't worth me losing $500-1700 of cashflow that I could feed my business or investments with! PROTECT YOUR CASHFLOW AND WORKING CAPITAL. If you watch The Profit, Shark Tank, or Billionaire Buyer, some of these companies give up their souls because they failed to protect their cashflow and working capital.....so if you don't want to give up 25-50% of your business to a shark, it might be worth maintaining your payment flexibility (or being able to order in bigger quantities to save 5-25%+ on your cost of goods sold - which can mean 10-50%+ more profit depending your business).

6. These companies often ask you 3 months in advance to provide income verification before it's due. Wait until the last minute to supply income verification. if you wait until the last minute, it will take them 2 weeks or so to process and in the meantime you actually can get a grace period of a month on your payment or get a 13th month on your previous payment terms while they await their calculation! In fact, if you want to be risky, you can to actually let the deadline pass, let them calculate your normal payment but provide the information and you'll find they will give you a "pass" so to speak and you'll get that 13th month. I walked into this by accident because I missed a submission period early on and got the email sayiing the payment was recalculating to the normal 10 year rate (yikes), I submitted my info and it took processing time and the new payment wasn't due until the following month and I was essentially put in forbearance for a month whether I needed it or not. Now I purposely let this happen and I get that extra month. Your servicer may be more with it or the terms may be stricter and less forgiving....so with any strategy like this, tread carefully.

So here's what happens, you apply in November for income based repayment (or earlier). You play your cards right and you essentially get a1 13th month with no payment or on your previous payment terms. The new 12 month terms will then expire in December, the following year January, and so forth, and you can keep playing that game of going back essentially 2 tax returns since your current year return gets processes in April or even later if you delay a filing for good reason....and you can instruct your preparer to file on the exact deadline etc to play this game as long as you wish.

7. As Your reportable income rises, do some math based on your forced payment calculation as consolidation may be better choice. Eventually you'll start meeting the interest on your loan and your principle payments will be higher. You need to do some math based on the years left in your income based repayment plan (20-25 years), and you might find that at your current income level and forced payment schedule - that you'll be paying off your balance BEFORE the 20-25 year period ends. With a higher income, your payment will eventually catch up to a level pays off your loan before you get the benefit of the "write-off". A risk of early pay off is that if the government ever completely writes off loans beyond the income- based repayment plans, you may miss out on this (think back to Obama's $8K first time home buyer credit).

Another Trump term is already essentially priced into things and it's unlikely you would get a Sanders/Warren/Biden student loan promise actually delivered in the short-term - but the chance is greater than 0%. On the other side. you MIGHT potentially get a better deduction that's higher and not income-dependent like the current rules on student loan interest and the chances of that are also greater than 0%.

But again an unscripted perspective might have you doing both paying down stupid debt while also investing in 5% money or preferentially reinvesting in your business and getting best of both worlds.

As an investor you will go through periods of leveraging (buy riskier higher return investments) and deleveraging (save cash/pay debt). We are at the "potential" peak of a debt-cycle at the time of this writing - it may make sense to deleverage and pay debts rather than opening yourself to taking 10-50% hit on new investment principle (doesn't mean dividend you expected goes down at all, or to the same degree as the principle), but again, there're ways to protect against this and a true investor eventually works with options and short positions - and there's no guarantee an "efficient" market will play by the same rules of yesterday. Trust your intuition and the inner voice (not always the "excited" and "making decisions while overly happy"-voice)

Strategies/considerations that may be new:

1. Use income based repayment - use the opened cashflow to invest or build your business - build security for you and your family (Ramit Sethi's "Tripod of Stability": talked about here: How to make $100K a year: step-by-step to a 6 figure income). If you use the opened cashflow to make idiotic consumer purchases, shame on you.
2. Under income based repayment, government paying off unpaid interest for 3 years straight before it starts to compound
3. Losing income-based repayment benefits if you consolidate to a lower rate
4. Married filing single vs. Married filing joint as per calculated student loan payment
5. Waiting very last minute to provide income verification so you get that 13th month based on previous calculation (if reportable income is lower, then recalculate as soon as possible)
6. Strategically delay the filing of your current year return so that extra month doesn't catch up to a new tax year (so you essentially skip a year for income consideration (Great when your business may only report low income in its first few years based on strategic purchases/reinvestment/other strategic writeoffs etc.
7. Switch to consolidating/ paying off the loan if your calculated payment will make it so you never see the benefit of the "write-off" - you can liquidate positions in investments to do this if you want or leverage their dividend rates with your student loan rate (taxes considered).

I am definitely not a tax professional, lawyer, and rules/rates/expectations/tax law/ can change by the time you're reading this. But ultimately, I hope this gives an idea or two and inspires many of you with some strategic options they may not have considered. It would make me happy to give a big F you to both student loan issuers and Wall Street simultaneously, while also making achieving someone's purpose faster and to a higher degree than without them.
 

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MHP368

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A business loan might cost you 7-9%+...the student loan debt was cheaper than this. So sometimes you actually want to request more student loan debt for "books" or a "computer" when it's really start-up money for your business.
Thats a terrible idea. Aside from the fraud aspect. You can declare bankruptcy on a normal loan and either have it discharged or pay it with no interest or lower than agreed interest , a student loan for our purposes cant be discharged at all.
 

reedracer

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Thats a terrible idea. Aside from the fraud aspect. You can declare bankruptcy on a normal loan and either have it discharged or pay it with no interest or lower than agreed interest , a student loan for our purposes cant be discharged at all.
I believe that is changing. Look for a run of BKs on Student Loans. My story is very similar to this guy's experience. Left school in '97 owing $77k. Now I owe $100k and after paying in $40k over the last 4 years the principle has hardly budged.

 
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unaided

unaided

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Speedway Pass
Mar 5, 2011
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Scottsdale, AZ
Thats a terrible idea. Aside from the fraud aspect. You can declare bankruptcy on a normal loan and either have it discharged or pay it with no interest or lower than agreed interest , a student loan for our purposes cant be discharged at all.
I was able to request $3-5K extra money as per textbooks/computer expenses so to speak. It's not necessarily the 20K+ you might otherwise be looking for with a legit business loan for a brick and mortar business, but can be useful to buffer the $10/20 monthly fees for services you might be using to get a site or idea set up, or to get small inventory amount rolling.
 
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unaided

unaided

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Speedway Pass
Mar 5, 2011
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82
136
35
Scottsdale, AZ
I believe that is changing. Look for a run of BKs on Student Loans. My story is very similar to this guy's experience. Left school in '97 owing $77k. Now I owe $100k and after paying in $40k over the last 4 years the principle has hardly budged.

Yes, I believe a bunch of law students did this back in the day, put a bunch of expenses on their credit cards, stopped paying and were able to lump in student loans in their bankruptcy claim. Eventually student loans were taken out for this reason.

Bankruptcy can be seen as "not that bad" if you are okay not needing a major loan in 7 years but kind of a big risk to take if you ultimately cannot make the loophole hardship claim in today's environment.
 

LaurenWelchat

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Aug 3, 2020
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I am also studying, but in university. And, yeah, you are right, studentship is hard because of money deficit. Am a big fan of archery, as you, I think. And I was using the bow which my mum has presented me when I was a child. On one of my archery classes my bowl broke. It was such a pity. I was thinking where I can borrow some money to buy a new one. I am working as a waiter, and there were 10 more days till salary. Finally, me teacher of archery said that I can find there to get payday loans in Alabama on the best term. To be honest, I found the best offer, seriously, with the help of the internet I found this company, where the percentage was not high, and I am close to return the money back. Just take that credit and buy the best bowl I can find.
 
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