Case Study – Casillas Family

Casillas Family Info Sophia Jose Resident: CA Age: 29 1 kid (3 years old) Education: JD Job: US Department of Justice Current Income: $145,000 2%/yr increase Has 403B & 457B Currently in Standard 10 year repayment: $786/mo Have not filed this year’s tax Resident: CA Age: 27 Currently trying for 2nd child Education: JD Job: Associate @ private firm Current Income: $65,000 Expects a 3%/yr raise $85,000 in 3 years $125,000 in 10 yrs Would like to start her own practice one day Currently ina 30 year extended

Casillas Family Goals Goals Concerns Short Term: Medium Term: Pregnant with a child this year Purchase a Home Medium Term: Jose get’s promotion Sophia starts a practice Long Term Tax savings Kids College Retirement Short Term: “We owe a quarter million dollars and are having another kid…we’re crazy” “It’s hard to think about anything other than the debt” Medium Term: Jose, “I’m hoping to pay off my loans so Sophia can start her practice, should I refinance?” Sophia, “I’ll pay off my loans when I’m making more money” Long Term: “One day we will be make 400k/yr, but need to be tax savvy with it”

Jose Loans

Sophia’s Loans

California Poverty Lines 2018 Persons in family/household Poverty guideline 1 $12,140 2 $16,460 3 $20,780 4 $25,100 5 $29,420 6 $33,740 7 $38,060 8 $42,380 For families/households with more than 8 persons, add $4,320 for each additional person.

Loans At A Glance What Observations Do You See IDR Repayment Plan Eligibility? Direct Consolidations? Employment Status? Tax Filing Status? Debt to Incomes?

Observations Jose has no loans before 10/1/2007 or after 10/1/2011 Jose has only Direct Loans Eligible: ICR, IBR, REPAYE Sophia has no loans before 10/1/2007 and loans after 10/1/2011 Sophia has already completed a Direct Consolidation Eligible for: ICR, IBR, PAYE, & REPAYE

What Repayment Plans is Best? Is it the same for both of them? What affect would tax preparation have on payment? What pre-tax contributions could improve repayment options? Who should contribute and how much? How does this fit with the clients overall financial goals?

I Feel Like Were Going To Do Math

Allocation of Joint Payments First we need to determine the allocation of payments based on joint income. Sophia’s Balance: $284,595 Jose’s Balance: $67,941 Total Balance: $352,536 Sophia’s % of total: 80.6% Jose’s % of total: 19.4%

REPAYE Amount Joint income: $210,000 Poverty line Borrower: $18,210 3 additional $19,440 Discretionary income: $172,350 Percent of income: 10% Annual payment: $17,235 Divided by 12: $1,436.25 Sofia Payment X 80.6% $1,157.62/mo Jose’s Payment X 19.4% $278.63/mo

PAYE Amount Joint income: $210,000 Poverty line Borrower: $18,210 3 additional $19,440 Discretionary income: $172,350 Percent of income: 10% Annual payment: $17,235 Divided by 12: $1,436.25 Sofia Payment X 80.6% $1,157.62/mo Jose’s Payment X 19.4% N/A

IBR Amount Joint income: $210,000 Poverty line Borrower: $18,210 3 additional $19,440 Discretionary income: $172,350 Percent of income: 15% Annual payment: $25.852.50 Divided by 12: $2,154.38 Sofia Payment X 80.6% $1,736.43/mo Jose’s Payment X 19.4% $417.95/mo

Community Property State Filing taxes married separate will required community property allocation of income Form 8958 (IRS PUB 555) Jose AGI: $105,000 vs current pay of $145,000 Sophia AGI: $105,00 vs current pay of $65,00 Will reduce the tax costs of filing separately Provides an additional documentation source AGI or Current income(ADI)?

I Need To Know Tax Stuff?

REPAYE Amount Joint income Poverty line Borrower: $18,210 ($105,000+$65,000): $170,000 Poverty line Borrower: $18,210 3 additional $19,440 Discretionary income: $132,346 Percent of income: 10% Annual payment: $13,234.60 Divided by 12: $1,102.88 Sofia Payment X 80.6% $888.94/mo Jose’s Payment X 19.4% $213.96/mo

PAYE Amount - Sophia Separate income Poverty line Borrower: $18,210 $65,000(ADI): $65,000 Poverty line Borrower: $18,210 3 additional $19,440 Discretionary income: $27,350 Percent of income: 10% Annual payment: $2,735 Divided by 12: $227.92

IBR Amount - Sophia Separate income Poverty line Borrower: $18,210 $65,000(ADI): $65,000 Poverty line Borrower: $18,210 3 additional $19,440 Discretionary income: $27,350 Percent of income: 15% Annual payment: $4,102.50 Divided by 12: $341.88

IBR Amount - Jose Separate income Poverty line Borrower: $18,210 ($105,000): $105,000 Poverty line Borrower: $18,210 3 additional $19,440 Discretionary income: $67,350 Percent of income: 15% Annual payment: $10,102.50 Divided by 12: $841.88

Payment Comparisons Married Joint REPAYE PAYE IBR Current Payment Jose $278.63 N/A $417.95 $786.83 Sophia $1,157.62 $1,763.41 $2,015.32 Married Separate REPAYE PAYE IBR Standard 10 Year Jose $213.96 N/A $841.88 $786.83 Sophia $888.94 $227.92 $341.88 $3,397.53 ***Can we do even better if we use the money being saved further?

What would you recommend?

A Possible Outcome Jose & Sophia file taxed married separate They use Jose’s AGI and Sophia’s Pay stub for Income documentation Sophia increased 401K contribution to $18,500 maximum Sophia enters into PAYE (65K -18.5K) $73.75/mo Jose enters into REPAYE (105K + 65K-18.5K) $184.06/mo

Budget Comparison Before After Joint Income: $210,000 FICA: $14,915 Fed Tax: $33,219 State Tax: $10,931 Loan payment: $33,626 Family budget: $117,309 Joint Income: $210,000 FICA: $14,915 Fed Tax: $28,779 State Tax: $11,693 Loan payment: $3,094 Family budget: $151,519 + $18,500/yr in Sophia’s 401K

Benefits of the Plan Sophia is accumulating payments toward her maximum repayment length (20 years) Jose is accumulating payments toward PSLF Sophia & Jose can start to save for a down payment on a home Debt to income ratios are improved for mortgage qualification Sophia’s payment plan allows for her to take the risk of staring his own practice Can begin saving for kids college plans 401K contributions reduce loan payments and tax

YES! YES! YES!

Future Considerations Sophia’s income as she starts and builds up his practice Sophia’s eventual incorporations and benefits Jose’s pre-tax contributions as incomes increase Changing payments and changing liabilities from potential discharged debt HSA and Health insurance review of child Prelude to a Full Financial Plan

Summary When both spouses have loans the recommendations can get very complex Tax filing status Community property Income documentation Treatment of income in different plans Different repayment lengths Different eligibility No borrowers understand the differences and thus are never going to get the best outcome on their own