I apologize if this is covered in another thread or this is the wrong place to post it, but I have seen very little posted about student loan forgiveness either in the forum or the blog.
Judging mainly by reading every one of MMM's blog posts a few years ago, the prevailing wisdom is that one should pay off student loans as early as possible as it is "hair on fire" debt. I would like to propose an alternative option.
Starting with some background information, I discovered MMM in March of 2017 and have spent the last ~3.5 years working toward FIRE. I'm on track to retire in roughly 5 more years. I have been paying the minimum amount on my student loans since I left school in 2012. They have an interest rate of 4.5%, and I believe it is a more financially sound decision to invest the money than it is to pay the loans off. I was on the "Graduated" repayment plan, and every year or two when the payment went up I would switch repayment plans and then go back to the graduated plan. This obviously has been extending the term of the loans, and the principal amount has barely decreased over the last 8 years (~44k down to 42k). I have been hoping for someone to forgive them at some point lol.
I recently looked into the Income-Driven repayment (IDR) options, and I'm now very disappointed that I didn't make the switch sooner, so I thought I would post this in case there are others in similar situations.
I switched to the IDR option a couple weeks ago, specifically on the REPAYE plan. This results in a monthly payment of 10% of your "discretionary income." Discretionary income is AGI - (US Poverty Level * 150%). Note that my AGI is probably relatively low compared to most people on this site (~54k in 2019). This results in a monthly payment of $232 on my 42k in student loans compared to my payment on the graduated plan of $188/month. At face value, it looks like I have failed in maintaining the lowest possible payment on my student loans.
However, I can also further reduce my AGI. I have now increased my 401k contributions to the maximum, and switched my IRA contributions from ROTH to Traditional (I had legitimate reasons for not doing this before). Once these changes to my income are factored into the REPAYE payment amount, my monthly payment will be reduced significantly as these contributions are subtracted from AGI.
In addition, after I retire my income will barely be above 150% of the poverty line (should actually be below). Based on my projected income after FIRE, this results in a monthly student loan payment of somewhere around $0.
The best part of all of this is that after 20 years on the REPAYE plan, the remaining balance of my student loans will be forgiven. The only caveat is that I will have to pay income tax on the balance that is forgiven. This will not be significantly higher than the current balance because any interest amount above my monthly payment is partially subsidized. So I’m thinking I will pay around 5k in taxes on the balance that is forgiven in 20 years.
All in all, I wish I had switched to the REPAYE plan 3.5 years ago when I started my FIRE journey. I would now only have 16.5 years of “repayment” left.