Category Archives: Finance

Backdoor, megabackdoor, and regular Roth IRA conversions

Finance

This is an honest-to-goodness note to my future self.

Backdoor Roth IRA

Definition: Converting pre-tax 401k and/or IRA money to post-tax Roth IRA money.

Mechanics: Create a rollover IRA account, if you don’t have one. Have the 401k money transferred or distributed to this rollover IRA account. Then convert the rollover IRA money to the Roth IRA. Taxes will have to be paid, and they can’t be paid out of the conversion money, or out of the Roth IRA itself.

When it can be done: After you’ve separated from an employer, or when you’re 59.5 years old.

Mega-backdoor Roth IRA

Definition: Converting post-tax 401k and/or IRA money to post-tax Roth IRA money.

Mechanics: Create a rollover IRA account if one doesn’t exist already. Roll the post-tax money from the 401k to the Roth IRA. This is not a taxable event, because tax has already been paid.

When it can be done: Whenever you want, because it’s post-tax money.

Notes: The IRS allows individuals to contribute some amount of pre-tax money to a 401k, however individuals may contribute more than this limit, up to a second, higher limit. Anything over the first, pre-tax limit has income tax taken out when it’s deposited. It is this post-tax portion that is eligible to go through the mega-backdoor conversion process.

How I negotiated with Sallie Mae/Navient to save $115K on my student loans

Finance, Personal, , ,

March 22, 2015

This article is for people who have defaulted on their Sallie Mae/Navient student loans. If you haven’t defaulted, or if you’re paying traditional subsidized or unsubsidized federal loans, this won’t work for you. For those of you that ARE in this position, this post is for you. You can get your life back.

I’m sharing all of my actual numbers, because it makes the conversation more useful.

Managing the chaos

Like many people, I was unemployed in 2009-2010. I had the bad fortune of graduating in the middle of the recession, and had quite a bit of difficulty finding a “big kid” job, i.e. one that would let me pay my bills–including my student loans. Also like many people who are struggling with debt they can’t pay, I was plagued by phone calls, and they were universally unproductive, because stones don’t have much blood to give. The first step to getting your feet under you is to create mental space, and the biggest thing is to stop the unwanted calls.

In addition to sending letters, I did this:

  1. Get a Google Voice number
  2. Log into your delinquent accounts, and use the Google Voice number as your only phone number
  3. Don’t answer numbers you don’t recognize
  4. Take down each collection agency’s contact information (phone number, debt they’re collecting on, etc.) when they leave you a voicemail
  5. Block each caller one by one

This builds a strategic rolodex for tackling your debts when you’ve got your feet under you. If getting back on your feet takes a while–it took me 2 years–you’ll notice that debt gets resold fairly often, and as it gets resold, the settlement offers get better and better. This is particularly true for unsecured, consumer debt, and less true with student debt.

Negotiating with Sallie Mae/Navient and FMS

Sallie Mae stops trying to collect debts themselves fairly quickly, and they tend to outsource this to other agencies. Unlike consumer debt, Sallie Mae does not sell the debt to the servicing organization. Instead they retain ownership of the debt, as well as the terms and conditions under which that debt may be settled. (In fact, if you try to call Sallie Mae directly, you will be redirected to the servicing agency without ever having talked to a human being.) The debt collector is just a proxy, but they’re the ones you’ll be dealing with.

My debt was serviced by an organization called FMS. You can Google them; there are many horror stories, but my experience was pretty good, barring a few incidents. I had settled a couple of smaller credit card debts to this point, so I made sure to unblock their phone number only when I had a small lump of money available to make a down payment. I knew I wasn’t going to be able to discuss a full settlement, but maybe I could do something to move the needle in the right direction. This ended up being a good move, though the benefits weren’t obvious until much later.

Default settlements

I’m going to use the term “default settlement” below. I don’t know for sure, but I believe that Sallie Mae’s proxies are authorized to offer some percentage (65-70% or so) as a settlement amount, without phoning the Sallie Mae mothership. The reason I believe this is true, is because they would periodically offer me settlements on the spot which didn’t require them to phone home. This was in contrast to my counteroffers which required a ~24-48 hour turnaround time where they had to talk to someone with more authority.

The reduced-interest plan

June 2011 balance: $144,586.

I brought my account up to date on July 25, 2011 with a $1,493.38 payment, and set up a recurring payment every two weeks for $372.56. This was their “reduced interest plan”, where the interest rate dropped to 0.01%. There was no discussion of a settlement at this point that I can recall. If there had been, it would have been WAY more money than I had, so it didn’t matter.

I made bi-weekly payments from July 2011 to May 2012.

The first settlement offer: the first $80K

In May 2012, I got a phone call from FMS to re-up my recurring payments. (They can only schedule 12 at a time.) At this time, the rep I had been dealing with all along offered me a settlement that was still too large for me to take advantage of in one shot. I told her as much, and if I recall correctly, she conferred with her manager and the Sallie Mae mothership, and they made me a counter-offer: an $80,000 reduction if I:

  1. Made a $7000 down payment by the end of the month
  2. Paid $800/month for 45 months
  3. At the 0.01% interest rate

This dropped the loan term from 155 months to 45 months, a 9+ year reduction. BUT, if I broke the terms, the full balance came back at the original interest rate, minus whatever I’d paid. I went for it, because saving $80,000 and 9 years was too good to leave on the table.

  • Settlement starting balance: $45,375
  • Made the $7000 down-payment (with my dad’s help) in May 2012, which
  • Reduced the amount left to pay to $36,375 (or so I thought, more on that below)

I set up a $400 recurring payment every 2 weeks, including months with 3 weeks to ensure I’d make the deadline with some headroom.

A bump in the road

Unfortunately, FMS wouldn’t send me paperwork stating the terms of the settlement, which (as I suspected) came back to bite me. I also hadn’t recorded our phone conversations, because until this point, there was no reason to think that I would need to.

December 2013 rolled around, and I received a phone call telling me that I was almost out of time, and that I owed like $45,442 by ~February 2014, which didn’t sound right. Unfortunately, I was dealing with a new representative, and she couldn’t decipher the notes of the previous representative. It was my notes against theirs… and when you’re in this position, the other party holds all the cards; you’re just along for the ride, hoping they don’t fuck anything up too badly. (That said, I’m very confident that my notes were more accurate. Not that it mattered then, and I can’t imagine it would have mattered in a courtroom.)

There was about a week of back-and-forth, but the takeaway was that I owed the $45.4K, but that the terms were extended until September 20, 2018. That was a big relief–there was no way my pre-wife and I could have come up with the money in that time.

I made sure to record that conversation should things go awry again. Check the laws in your state… my state is a two-party state which means that I needed the rep’s permission to record the conversation.

The final $20K

Because FMS can’t schedule more than 12 payments at a time, I end up talking to them about once a year. While re-upping my payments for this year, the rep mentioned that for whatever reason, Sallie Mae was accepting settlements “for pennies on the dollar this month”. That’s just a figure of speech, so I didn’t know if that was literally pennies or what, but she asked if I was interested in seeing if they would re-negotiate the settlement, because I’d basically paid $35K already, and was a model citizen. Of course I said yes, and they offered me their default settlement of $24K on the $35K owed on the spot, which is 68 cents on the dollar. I told them I couldn’t do more than $10K–a true statement–fully expecting a counteroffer for somewhere between $10-20K, whereupon we’d have to borrow some money from my wife’s parents. They said they’d have to call SLMA to see if they’d approve it.

The next morning, I got a call back: Sallie Mae had approved the $10K for the remaining $35K. The rep was shocked. The manager was shocked. They told me no one in the office had thought it would go through, which I believe. I get the feeling I’m going to be an office legend for the foreseeable future.

Recap

  • $144,586 original balance
  • $45,898 paid over 3.25 years
  • $98,688 saved
  • 68% discount (or 32 cents on the dollar) when all was said and done

FMS payments

Here’s a Google spreadsheet that shows all the debits over that time. Alternatively, you can download the Excel version.

FMS payments 2011 to 2015

Total student loans paid during this time

I have more traditional subsidized and unsubsidized student loans that actually had interest rates, so I focused on overpaying those during this time.

All student loans between 2011 and 2015

Conclusions and tax implications

Once you wrap up your settlement, you’ll have taxes to pay. In my case, my income tax burden for 2015 is now my salary + $98,600, which is… a lot. Depending on where you are financially, you may be able to reduce the canceled debt “income” by whatever your net worth is, if it’s negative by filing a Form 982. To determine if this is available to you, you can fill out the worksheet on page 8 of this IRS form. If the sum you come up with is negative, you can subtract that amount from your paper “income”. (I suggest you talk to an accountant if this applies to you, though.)

Other options include maxing our your pre-tax retirement contributions (401k/403b), and/or using your FSA plan to do something expensive like getting the LASIK you always wanted. Unfortunately, doing this latter thing requires knowledge ahead of time that you’ll be settling during this particular FSA year.

Otherwise you’ll want to adjust your tax withholding, because you’ll pay an underpayment penalty in addition to the tax on this “income” if you don’t pay enough tax throughout the year.

So I settled on a settlement saving my wife and I about $100,000 and ten years. This will let us buy a house and start a family years earlier than we had thought we’d be able to. I think my situation may be unusual, but I don’t believe for a moment that I am a beautiful and unique snowflake. Three and a half years ago, my Sallie Mae situation seemed hopeless, and now… it’s over. It took a lot of hard work, and an unwavering focus to get here, but it can be done.

If I can do it, so can others.

Addendum – June 1, 2015

I wrote this article back on March 22 — 3.5 months ago. I had expected to be able to publish this much earlier, when I got the statement that our business was concluded. During this period, a few things happened

  • I never received the paperwork stating that I had fulfilled my side of the deal
  • Sallie Mae/Navient and FMS parted ways as business partners, which made it harder for me to get information from either one of them
  • I had to fight with Sallie Mae/Navient in an attempt to get them to send me paperwork. They never did. When I talked to them on the phone, they stopped allowing me to record our conversations for some reason

Until today, I had no idea whether this was really done or not. I pull my credit report every year, and was expecting to wait until the summer in order to see if the status of my Sallie Mae/Navient loans were changed. But I bought a new car last week, and part of the financing involved the dealership pulling my credit report, which I was able to take a picture of. It indicated that the loans were settled for less than the balanced owed.

I feel reasonably confident that this is the end. Finally.

Leave a comment

  • If it’s your first comment on my blog, it will probably go into the moderation queue. Don’t worry, it’s not lost; I just need to approve it. It could be a few minutes, hours, or days. I will get to it, though.
  • Try to explain how your situation is different than people that have commented before you. Questions that amount to “I owe money, but can’t afford payments. What should I do?” aren’t constructive.
  • I will assume all questions are about private loans only. Federal loans are a completely different kettle of fish.

1099-C update – Feb 2, 2016

I received ten(!) 1099-C forms from Navient on Jan 28. When I reported them on my taxes, I collapsed them down into a single entry for the total amount. I also filled out insolvency Form 982. I was deeply insolvent at the time of the discharge, so instead of paying income tax on an extra $115,282, I only paid income tax on $32,313, because I was underwater by $82,969.

I used TaxAct, which made the process very straightforward. I collapsed the ten forms into a single line item because TaxAct cannot handle more than five 1099-C forms, and their Form 982 worksheet can only be applied against a single line item. We’ll see if the IRS complains. (I don’t know why they would:- the numbers are identical whether they’re reported across ten line items or one.)

Settlement amounts from other readers

How to determine how large a mortgage you can afford using Excel

Finance

Note: this is applicable to fixed rate mortgages.

Mortgage brokers typically use your gross monthly income to calculate the amount they’re willing to lend you. Frankly, this is a very bad way of calculating what you can actually afford. It is more useful to know what you can reasonably afford each month before you go house shopping.

If you’ve got a monthly payment in mind that you’re comfortable making, you can use a present value calculation to come up with the amount you can afford to finance. In Excel, this is very easy with the pv function:

=pv(interest rate, number of payments, payment, montly payment)

  • Interest rate: If annual percentage rate (APR) is 3.5%, this number will be 3.5%/12 = (0.035/12).
  • Number of payments: 12 months * 30 years = 360
  • Payment: What you’re comfortable paying on a mortgage each month.

Suppose:

  • You’re willing to spend $1,750 a month on a house
  • APR: 3.5%
  • Term: 30 years

=pv((0.035/12), 360, 1750)

You can afford to finance: $389,716.22

When determining what you can afford each month, don’t forget the following:

  • House insurance
  • Mortgage insurance (PMI)
  • House taxes, typically calculated as some amount per thousand dollars of assessed house value
  • Homeowners’ fees, if applicable

These are things that many renters don’t need to pay, and thus forget to think about when buying their first home.

Revisiting talent in the public and private sectors

Business, Economics, Finance

At the end of November, I mused about public sector’s problem of attracting and retaining top-notch talent:

Ben Bernanke’s salary as chairman of the Fed is just over $191,000. Henry Paulson as CEO of Goldman Sachs made $16.4 million according to Forbes. […] I find it very hard to believe that compensation plays no role whatsoever in an individual’s choice of employment.

This all seems terribly obvious to anyone who thinks about it, and Nate Silver has commented on the same phenomenon with a real-world example:

In retrospect, it is clear that regulators did not have the human capital to keep up with the financial industry, and to understand it well enough to be able to exert effective regulation. Given the wage premia that we document, it was impossible for regulators to attract and retain highly-skilled financial workers, because they could not compete with private sector wages. Our approach therefore provides an explanation for regulatory failures.

That is, the excessive wages paid by Wall Street not only lure talent away from other parts of the private sector, but also from the public sector, where employees are subject to government wage controls. The very people who might be the most capable of enforcing regulations on the banks instead wind up working for them.

This is a very real problem. Some of the work that I did in my first job after college at KPMG involved valuing intellectual property in conjunction with international tax disputes. We had our economists, and the IRS had theirs. The thing was, however, that our economists were better than the IRS’s, because if someone at the IRS was any good, we’d hire them away and treble their salary. Part of a good regulatory reform plan, then, would be to increase the salaries paid to employees at institutions like the Fed, the Treasury, the IRS, and the FDIC.

So how do we solve the problem? Tripling an IRS economist’s salary probably means they’re making in excess of $400K/year, which is more than the President makes. Is it feasible to have regulators that make more than the President?

De-securitizing CDOs

Finance, ,

This might sound crazy, but…

With the absurdity of some of the tranching in the mortgage securitization process — some parts of a single mortgage rated AAA and others parts labeled something less despite the underlying risk being identical — I was curious if it were possible to de-securitize these collateralized debt obligations?

If there is a mechanism by which this can be done, it seems to me that a savvy investor with sufficient time and analytical resources could make a killing by de-securitizing and re-assembling or re-packaging the pieces of mortgages that are actually good investments. Particularly if significant percentages of good-risk mortgages are labeled as less than AAA or AA. You wouldn’t even necessarily have to hold these new CDOs for the lifetime of the mortgage. If you could demonstrate how you assessed risk and bought up these mortgage bits, you could re-package and sell these to investors as new CDOs — once they’re done being afraid of the CDO market, which could take a very long time indeed.

Not everyone that bought a home in the last 5-10 years was a deadbeat, and I have no doubt that there are some bargains hidden in the paper wreckage. Not being familiar with finance law, I don’t know if a legal vehicle exists to de-securitize these CDOs. Any kind of illumination would be most welcome…

CDOs explained

Finance, ,

I saw this a few days ago on delicious, and it’s very good. It explains how collateralized debt obligations (CDOs) work, and how they caused a problem in the financial sector.

The only thing that I would add that Paddy doesn’t really mention is that when mortgages were sliced up to be sold, pieces of a single mortgage could end up in any tranche from a legitimate, first-tier AAA rating to the lower, second-tier BBB rating. That indicates that the ratings were meaningless because it’s logically impossible for one mortgage to be both low risk and high risk at the same time — yet this kind of thing happened regularly. Pension funds and other programs that are only allowed to invest in AAA-rated securities for stability reasons were severely hurt because it was impossible for them to know they were buying junk. The ratings agencies were not doing their job, possibly because they couldn’t understand what they were evaluating, and possibly because it was in their short-term best interest to look the other way for political reasons. I suspect it was a bit of both.

The creation and sale of these investment vehicles was so complicated and obfuscated it was almost impossible to know which were truly AAA, and which were junk. Several hedge fund managers spent a whole lot of time digging into the soft underbelly of these investments, and shorted the hell out of the lower-tier BBB CDOs. Even they had a hard time figuring out which were which. This short-selling activity was the only information being added into the marketplace that was any indicator that these investments were bad. (Which is why banning short-selling is a terrible idea.) Literally everyone else thought they were great, with the exception of a handful of contrarian analysts like Meredith Whitney. While many people say they “saw it coming!” — few actually did. Hindsight is always 20-20; informational cascade tends to wash out an individual’s own private misgivings which is why analysts like Whitney were castigated and short-sellers like Steve Eisman and Andrew Lahde were scorned during the subprime heyday.

You can read more about some of this in this superb Portfolio piece.