Case Study Casillas Family Casillas Family Info Sophia

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 403 B & 457 B • Currently in Standard 10 year repayment: $786/mo • Have not filed this year’s tax • • • Resident: CA Age: 27 Currently trying for 2 nd 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 • Short 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 Concerns • Short Term: – “We owe a nearly half a 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 400 k/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: – Jose’s % of total: 80. 6% 19. 4%

REPAYE Amount • Joint income: • Poverty line Borrower: – 3 additional • • Discretionary income: Percent of income: Annual payment: Divided by 12: – Sofia Payment X 80. 6% – Jose’s Payment X 19. 4% $210, 000 $18, 210 $19, 440 $172, 350 10% $17, 235 $1, 436. 25 $1, 157. 62/mo $278. 63/mo

PAYE Amount • Joint income: • Poverty line Borrower: – 3 additional • • Discretionary income: Percent of income: Annual payment: Divided by 12: – Sofia Payment X 80. 6% – Jose’s Payment X 19. 4% $210, 000 $18, 210 $19, 440 $172, 350 10% $17, 235 $1, 436. 25 $1, 157. 62/mo N/A

IBR Amount • Joint income: • Poverty line Borrower: – 3 additional • • Discretionary income: Percent of income: Annual payment: Divided by 12: – Sofia Payment X 80. 6% – Jose’s Payment X 19. 4% $210, 000 $18, 210 $19, 440 $172, 350 15% $25. 852. 50 $2, 154. 38 $1, 736. 43/mo $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 – ($105, 000+$65, 000): $170, 000 – 3 additional $19, 440 • Poverty line Borrower: • • Discretionary income: Percent of income: Annual payment: Divided by 12: – Sofia Payment X 80. 6% – Jose’s Payment X 19. 4% $18, 210 $132, 346 10% $13, 234. 60 $1, 102. 88 $888. 94/mo $213. 96/mo

PAYE Amount - Sophia • Separate income – $65, 000(ADI): • Poverty line Borrower: – 3 additional • • Discretionary income: Percent of income: Annual payment: Divided by 12: $65, 000 $18, 210 $19, 440 $27, 350 10% $2, 735 $227. 92

IBR Amount - Sophia • Separate income – $65, 000(ADI): • Poverty line Borrower: – 3 additional • • Discretionary income: Percent of income: Annual payment: Divided by 12: $65, 000 $18, 210 $19, 440 $27, 350 15% $4, 102. 50 $341. 88

IBR Amount - Jose • Separate income – ($105, 000): • Poverty line Borrower: – 3 additional • • Discretionary income: Percent of income: Annual payment: Divided by 12: $105, 000 $18, 210 $19, 440 $67, 350 15% $10, 102. 50 $841. 88

Payment Comparisons Married Joint REPAYE 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 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 401 K contribution to $18, 500 maximum – Sophia enters into PAYE (65 K -18. 5 K) • $73. 75/mo – Jose enters into REPAYE (105 K + 65 K-18. 5 K) • $184. 06/mo

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

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 • 401 K contributions reduce loan payments and tax

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