Author Topic: student loan repayment - Pay ASAP or PSLF?  (Read 9108 times)

duck-duck

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student loan repayment - Pay ASAP or PSLF?
« on: April 05, 2014, 12:21:30 PM »
Here's the situation. I recently started my first position post graduate degree and am looking at some hefty loans to repay, about 140k at 7.3%, ouch! The good news is that my wife and I have a pretty decent combined income of around 150k per year net. We also have an nice emergency fund built up, are fully funding our 401ks and have about 25k in roll over IRAs from previous employers. I have several possible repayment options that I've been mulling over for the last several months, but just can't seem to come to a conclusion so I ask you all.

Option 1: Due to my employer, I qualify for the public service loan forgiveness (PSLF) program. This would eliminate any remaining balance on my loans after 120 payments area made, 10 years. Through another program, income based repayment (IBR) I am able to get my monthly payment down to $868 per month. This will adjust with increases in salary over the life of the loan. At the current amount, I am really just paying interest only. As an estimate, multiplying this $868 by 120 payments yields a total of $104k paid over the course of the next 10 years, with the balance being forgiven after the 120th payment.

Option 2: Get this loan with a ridiculously high interest rate paid off ASAP. I have 50k in a Vanguard Roth IRA that I could throw at it immediately. Using an online repayment calculator, I figure I could pay $2828 per month and have the balance paid off in 3 years. I may also be able to get a lump payment from my parents or in-laws to reduce the interest rate and then just repay them over the next 3 years.

Pros for option 1: This is pretty obvious, the total payment would be about $45k less over the course of 10 years, not even accounting for the investment return of the difference. This would allow us to save much more for a possible home purchase, we are currently renting.

Pros for option 2: While I'm really enjoying my job and could see myself here for 10+ years, I think that within 5-6 years we may want to move closer to family and I'm not sure that I would find another job at a 501c3 and thus may not continue to qualify for the PSLF program. If we were to move after 5 years, I would still owe the 140k that I owe now. With option 2 we would be able to file our taxes jointly. Then there's also the psychological gratification of crushing this huge debt as quickly as possible.

I see taking option 1 as a pretty big gamble that we will be happy in the same position and location for 10 years or that I would be able to find another position at a non-for profit organization. Ultimately I know that this is as much of a psychological choice as a logical one, but am very interested to hear any other opinions. Thanks all.

Gin1984

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #1 on: April 05, 2014, 12:36:43 PM »
I would not cash out your IRA at all, but I would cash flow paying off the loans.  Do you have loans which are all at different rates or have you consolidated?

duck-duck

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #2 on: April 05, 2014, 12:44:52 PM »
Thanks for the quick reply. Why not use the Roth if I go for that option? My loans are consolidated, maybe a mistake if I decide to pay them off ASAP.

Gin1984

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #3 on: April 05, 2014, 01:02:27 PM »
Because the Roth IRA is caped at the amount you can put in, it would take awhile to refund that amount.  How long ago did you consolidate?  Can you unconsolidate?  Personally I'd put myself on the income repayment plan, max out your 401k and throw every extra cent into pay it off.  Have you considers using cc offers to rollover the debt and pay it down quicker?

stevewisc

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #4 on: April 05, 2014, 01:12:15 PM »
140k at 7.3% - crap! seems like a pretty big hole.

It looks like you might be able to pull the Roth IRA dollars penalty free but there seems to be fine print around that whole aspect so I'd be careful.

Is there anyway to lower the interest rate of that thing?  Refinance part through lending club a 6.5% - though that may mess up the whole 501c3 get out of debt free thing.  But if you are going to pay it off in three years the small improvement in the rate for part will only save a tiny %.

I'm not a big fan of making your neighbors pay for your debt with the 501c3 perk but if those are the rules it does cost less.  Another risk there though is if the rule changes and that benefit is eliminated, then the 10 years of not changing jobs ends up as more debt slavery with a big debt still in place.  I would think painful if it happened.  On the other hand, there may be more of that type of debt forgiveness as the student debt continues to be disastrously large.  Lots depends on the politicians - not a stable place to be.

If you pay it off fast and happen to change jobs over time is there a chance your salary will go up outside of a 501c3?  The income differential say in years 5-10 might make a difference too.

Good Luck!!! 

(what type of degree did you get?)

duck-duck

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #5 on: April 05, 2014, 09:05:01 PM »
Can you unconsolidate?  Personally I'd put myself on the income repayment plan, max out your 401k and throw every extra cent into pay it off.  Have you considers using cc offers to rollover the debt and pay it down quicker?
Unfortunately I am not able to unconsolidate the loans. I haven't looked into using cc offers, but not sure that I'd be comfortable with that.

I'm not a big fan of making your neighbors pay for your debt with the 501c3 perk but if those are the rules it does cost less.  Another risk there though is if the rule changes and that benefit is eliminated, then the 10 years of not changing jobs ends up as more debt slavery with a big debt still in place.  I would think painful if it happened.  On the other hand, there may be more of that type of debt forgiveness as the student debt continues to be disastrously large.  Lots depends on the politicians - not a stable place to be.

If you pay it off fast and happen to change jobs over time is there a chance your salary will go up outside of a 501c3?  The income differential say in years 5-10 might make a difference too.

Good Luck!!! 

(what type of degree did you get?)

I believe the PSLF was started to encourage people to take positions in which they make a lower salary, but provide a benefit to society. I'm not saying it always gets used in that manner, but that's the idea. Anyway, I don't feel too bad as I think that 6-8% interest for student loans is a bit ridiculous. I knew what I was signing up for but ridiculous the same. I have also considered that the PSLF program may not be around in 10 years depending on the political environment, but I don't consider this to be likely. I think that even if the program were to be discontinued, people already in the system would most likely be allowed to complete it. But who knows.

I'm not here to complain as I have a job that I'm really enjoying and life is good. I'm just trying use my paycheck as efficiently as possible. I'm a physician assistant working in abdominal transplant and hepatology for a non-for profit hospital system.

Thanks again to all who've chimed in.

horsepoor

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #6 on: April 05, 2014, 09:28:30 PM »
Interesting question!  If you were to throw $50K at it right now, would your minimum payment go down?  It seems like it might be worthwhile if you could reduce the monthly interest payment, and arrive at the 120th payment with a decent chunk of principal that would then be forgiven.  If your minimum payment would stay the same, and you're reasonably sure you'll fulfill the requirements for forgiveness of the $40K or so, it might be worth sitting tight and paying the minimum.

mlipps

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #7 on: April 05, 2014, 09:31:41 PM »
Keep in mind that there's a movement afoot to cap PSLF at something like $60k or so.

duck-duck

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #8 on: April 06, 2014, 10:43:31 AM »
If you were to throw $50K at it right now, would your minimum payment go down?  It seems like it might be worthwhile if you could reduce the monthly interest payment, and arrive at the 120th payment with a decent chunk of principal that would then be forgiven.

I don't think that putting 50k toward my loans would greatly reduce my monthly payment as it's based on my current salary. I will play with an online calculator though and double check.

Keep in mind that there's a movement afoot to cap PSLF at something like $60k or so.

Interesting. This could definitely be a factor as I would be well about 60k with all the accumulated interest. mlipps, where did you hear this?

Gin1984

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #9 on: April 06, 2014, 11:06:06 AM »
Can you unconsolidate?  Personally I'd put myself on the income repayment plan, max out your 401k and throw every extra cent into pay it off.  Have you considers using cc offers to rollover the debt and pay it down quicker?
Unfortunately I am not able to unconsolidate the loans. I haven't looked into using cc offers, but not sure that I'd be comfortable with that.

I'm not a big fan of making your neighbors pay for your debt with the 501c3 perk but if those are the rules it does cost less.  Another risk there though is if the rule changes and that benefit is eliminated, then the 10 years of not changing jobs ends up as more debt slavery with a big debt still in place.  I would think painful if it happened.  On the other hand, there may be more of that type of debt forgiveness as the student debt continues to be disastrously large.  Lots depends on the politicians - not a stable place to be.

If you pay it off fast and happen to change jobs over time is there a chance your salary will go up outside of a 501c3?  The income differential say in years 5-10 might make a difference too.

Good Luck!!! 

(what type of degree did you get?)

I believe the PSLF was started to encourage people to take positions in which they make a lower salary, but provide a benefit to society. I'm not saying it always gets used in that manner, but that's the idea. Anyway, I don't feel too bad as I think that 6-8% interest for student loans is a bit ridiculous. I knew what I was signing up for but ridiculous the same. I have also considered that the PSLF program may not be around in 10 years depending on the political environment, but I don't consider this to be likely. I think that even if the program were to be discontinued, people already in the system would most likely be allowed to complete it. But who knows.

I'm not here to complain as I have a job that I'm really enjoying and life is good. I'm just trying use my paycheck as efficiently as possible. I'm a physician assistant working in abdominal transplant and hepatology for a non-for profit hospital system.

Thanks again to all who've chimed in.
How we plan to do it is move the loans to interest only, transfer the amount we know we can pay in a year to the cc and pay it off over that year.  Any extra, of course, goes on the regular student loans.  It saves a bit, though not too, too much.

RootofGood

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #10 on: April 06, 2014, 11:13:13 AM »
I'd leave the Roth where it is.  You should be able to get over 7.3% long term returns and it will be tax free growth and later tax free income. 

Since you qualify for the PSLF already and your time worked right now counts towards to 10 years, I'd wait a year or three to decide to make additional payments above what's required by the IBR payment.  Go ahead and follow the PSLF guidelines to get your service counted toward the 10 years.

Sure, it will cost you some interest (maybe 3% above the going rate for mortgages these days) over the next few years.  But over the next few years you'll discover whether you love your current spot or you definitely want to move somewhere else to a non-PSLF qualifying position.  At some point in your career, it might make sense to choose a non profit or government employer to run out the clock on your 10 years of PSLF.  If your salary remains constant in real terms, you'll get almost the full $140k balance forgiven in 10 years (tax free).  You might also switch to a different career by then that could still qualify for PSLF (who knows what the future holds for us?). 

I'm under the IBR right now and it will probably result in a part of our student loan debts being forgiven in another 23 (or so) years.  My interest rate is stupid low at 0.75%, so my decision to go on IBR was to prolong the repayment period as long as possible.  Almost free loans with long term fixed interest rates are hard to come by these days.  The forgiveness of indebtedness is just icing on the cake for me. 

But watch out, there are vipers here that will accuse you of abusing the system since you can repay the loan given your high income.  To me, it's clear that anyone who qualifies for these programs are encouraged to do so.  Just read the federal government's own site that gives advice to PSLF eligible people.  It's clear from the language that they _encourage_ you to minimize your payments and suggest applying for the IBR in order to lower your payments and obtain forgiveness of debt.  http://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service 

I've started a mini-flame war here before when discussing these programs, so good luck.  Make your decisions based on what the programs offer right now and let politicians worry about structuring the programs and the various incentives.  Given your well-above average incomes it's clear to me that these programs aren't intended for the poor, indigent unwashed masses, but rather broad swaths of the middle and upper middle classes. 

duck-duck

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #11 on: April 06, 2014, 11:43:39 AM »
RootofGood, thanks so much for a first hand success story. But I would love to know how you got an interest rate of 0.75%? Jealous! And thanks for the words or encouragement about utilizing the PSLF even with a moderate-high income. I'm pretty sure that they look at debt vs AGI in determining repayment amounts, which of course is all relative. I know that I will pay significantly less by not filing jointly with my wife.

As you suggested, I think that I will continue to make the minimum payments and invest heavily into a post-tax Vanguard account. This can serve as a lump payment if I move on to a non-qualifying position in the future, or may be used for a home purchase. I can't imagine leaving this position for at least 3-5 years as I'm getting something of a residency experience and being paid well at the same time.

mlipps

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #12 on: April 06, 2014, 11:59:16 AM »
If you were to throw $50K at it right now, would your minimum payment go down?  It seems like it might be worthwhile if you could reduce the monthly interest payment, and arrive at the 120th payment with a decent chunk of principal that would then be forgiven.

I don't think that putting 50k toward my loans would greatly reduce my monthly payment as it's based on my current salary. I will play with an online calculator though and double check.

Keep in mind that there's a movement afoot to cap PSLF at something like $60k or so.

Interesting. This could definitely be a factor as I would be well about 60k with all the accumulated interest. mlipps, where did you hear this?

http://www.huffingtonpost.com/tim-lowden/public-service-loan-forgiveness_b_4938429.html

duck-duck

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #13 on: April 06, 2014, 12:47:28 PM »

[/quote]
http://www.huffingtonpost.com/tim-lowden/public-service-loan-forgiveness_b_4938429.html
[/quote]

Very interesting. I will be watching this closely, would be a game changer for me.

wtjbatman

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #14 on: April 06, 2014, 01:36:40 PM »
I'm on the path to PSLF myself. With my large student loans compared to my salary (60k loans vs 35k salary), by using Pay As You Earn my payment is kept around $100 a month instead of the $600+ a month that I could barely afford. And, obviously, I will get a huge amount forgiven. I don't feel bad about using the program, and even if I was a high earner (I am so far from that it's funny), it wouldn't bother me. These programs exist for people to use, it's as simple as that.

TrulyStashin

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #15 on: April 06, 2014, 01:48:35 PM »
Another factor to consider:  the amount forgiven under PSLF is taxable income in the year it is forgiven.  That could be enough to push you into another tax bracket.

I have a similar dilemma.  I"m leaning toward paying it off asap.  There is too much uncertainty over a decade to bet the farm (so to speak).

When I turned 30, I was happily married.  Over the next decade, I divorced, survived two floods, moved, and changed professions 180 degrees.  Point being -- the life you anticipate today may look very different in 2024.

RootofGood

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #16 on: April 06, 2014, 03:51:21 PM »
Another factor to consider:  the amount forgiven under PSLF is taxable income in the year it is forgiven.  That could be enough to push you into another tax bracket.


That's not correct.  Debt forgiveness under PSLF is not taxable income.  You might be thinking of debt forgiveness under IBR which is still taxable income in the year forgiven. 

However, I recall seeing a push (I think in the administration's latest proposed budget?) to make IBR debt forgiveness tax free just like PSLF debt forgiveness.  We're far from that being the case today, but I can't imagine taxing the forgiveness of potentially hundreds of thousands of dollars when most of those receiving the largest forgiveness will be the least able to pay the resulting tax bill. 

RootofGood

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #17 on: April 06, 2014, 03:54:28 PM »
RootofGood, thanks so much for a first hand success story. But I would love to know how you got an interest rate of 0.75%? Jealous! And thanks for the words or encouragement about utilizing the PSLF even with a moderate-high income. I'm pretty sure that they look at debt vs AGI in determining repayment amounts, which of course is all relative. I know that I will pay significantly less by not filing jointly with my wife.

As you suggested, I think that I will continue to make the minimum payments and invest heavily into a post-tax Vanguard account. This can serve as a lump payment if I move on to a non-qualifying position in the future, or may be used for a home purchase. I can't imagine leaving this position for at least 3-5 years as I'm getting something of a residency experience and being paid well at the same time.

My loans were all issued back in the early 2000's with rates around 3%.  It was from a local lender (before all loans were Direct Loans).  They offer a 2% rate reduction when you pay on time for 4 years.  And a further 0.25% rate discount when paying by ACH bank draft.  3.0% - 2.25% = 0.75%.  Apparently I won the "go to college while interest rates are low" lottery!  ;)

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #18 on: April 06, 2014, 04:31:14 PM »
RootofGood, thanks so much for a first hand success story. But I would love to know how you got an interest rate of 0.75%? Jealous! And thanks for the words or encouragement about utilizing the PSLF even with a moderate-high income. I'm pretty sure that they look at debt vs AGI in determining repayment amounts, which of course is all relative. I know that I will pay significantly less by not filing jointly with my wife.

As you suggested, I think that I will continue to make the minimum payments and invest heavily into a post-tax Vanguard account. This can serve as a lump payment if I move on to a non-qualifying position in the future, or may be used for a home purchase. I can't imagine leaving this position for at least 3-5 years as I'm getting something of a residency experience and being paid well at the same time.

My loans were all issued back in the early 2000's with rates around 3%.  It was from a local lender (before all loans were Direct Loans).  They offer a 2% rate reduction when you pay on time for 4 years.  And a further 0.25% rate discount when paying by ACH bank draft.  3.0% - 2.25% = 0.75%.  Apparently I won the "go to college while interest rates are low" lottery!  ;)

Wells Fargo offered me similar incentives, but transferred by loans to different servicers before I could reach those payment milestones.  Darn. 

So, I'm in the same boat as OP, super-high student loans (my screen name), super-high interest, but high-ish income.  My plan is to pay them off ASAP, which for me, is within 5 years.

Thegoblinchief

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Re: student loan repayment - Pay ASAP or PSLF?
« Reply #19 on: April 07, 2014, 06:05:56 AM »
I've been on the standard repayment schedule.

My undergrad loans are the low, low rate of 0.1% but by the time I realized that, the balances were ridiculously low. I feel silly doing IBR for a few grand. I'll let them die off at the normal schedule.

Grad loans, on the other hand, are 6.5%.