Author Topic: Loan forgiveness forecasting  (Read 2241 times)

Donovan

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Loan forgiveness forecasting
« on: March 18, 2015, 08:41:26 PM »
Let me know if I'm crazy.  My wife is close to finishing her Master's degree and we are starting to consider her student loan repayment options.  She currently has $103k in loans (60k is grad school alone >.<), weighted average interest rate comes in at about 6% across all of them.  She is getting her degree in Psychology and is going into mental health counseling, which requires 2 years to get her license. She can command probably ~35k/year salary during this time, and after that she will see a significant increase (max ~60-70k at first).

Obviously this is rather low compared to her debt. However, I make 75k and we live in a very low COL area, so even before her salary has started to come in we are around a 50% savings rate.  I still have ~30k in student loans as well, but have refinanced them to a 3.5% interest rate and am now paying minimum on them for the remaining 5 year term.

Just today, though, I learned that her current 'employer' (she's an intern during school, but has already been offered the job on graduation) is a non-profit, which would qualify her for the 10 year service industry loan federal loan forgiveness program.  I am now heavily considering a plan where we take the fullest advantage of income based repayment for the next 10 years, pay as little of her loans as possible, and then have a substantial majority forgiven in 10 years.  However, I am trying to decide if this could be too dangerous in it's most extreme form. For example, if we maxed out her 403b + IRA for the first two years, she would pay $0 on an IBR plan, but of course her loans would continue growing.  Even after her salary increase, IBR would probably just barely cover interest if we continued keeping her AGI as low as possible with retirement accounts.  Because of this, the loans would likely end up growing substantially over the 10 year timeframe.

Does this sound like a viable plan if we use an increase in taxable account contributions to hedge for the fact that her loans will likely be growing over time in case she ends up not being eligible for forgiveness (program is abolished, or she stops wanting to work for a non-profit)?  I do not think that abolishment of the program is likely, and her specific field (counseling of children and adolescents) leaves a large number of non-profits and state run schools open to her outside of her current employer.  However, if something like this did happen and we have purposely been reducing her payments and allowing her loans to grow, this would put us in an even worse financial situation.  Assuming 7% return on the taxable investments, we would definitely not come out ahead in this situation vs paying of the loans early on our own (~3 years probably at the most accelerated rate), but the potential return of following through with the 10 year plan is so astronomical in her situation that I can't help but think that it is well worth the small risk.

Back of the envelope math justifying this in my head:

10 year plan:
$235k+ contributed to her retirement accounts (current 403b+IRA maxes * 10 + more for new yearly limits)
$300k+ contributed to taxable accounts (remainder of her salary every year, considering we already live on less than mine alone)
Very small amount paid into loans (one estimation tool suggested just ~$6-$12k total over the 10 years)
Giant bulk of loans then forgiven (up to 90% of the current balance)

We pay quickly plan:
We pay ~120k into student loans quickly over 3 years
$165k+ contributed to her retirement accounts (current 403b+IRA maxes * 7 + more, not maxing or contributing during super repayment)
~$200K contributed to taxable accounts (remainder of her salary every year after repayment is done)
No loans forgiven

College Stash

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Re: Loan forgiveness forecasting
« Reply #1 on: March 18, 2015, 09:45:00 PM »
One thing to keep in mind is that often the amount forgiven is a taxable event. Could make for one serious tax bill. That being said, in theory, by your analysis it would be beneficial to take the forgiveness approach assuming she stays with the same company the entire 10 years.

Mazzinator

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Re: Loan forgiveness forecasting
« Reply #2 on: March 19, 2015, 12:46:32 AM »
One thing to keep in mind is that often the amount forgiven is a taxable event. Could make for one serious tax bill. That being said, in theory, by your analysis it would be beneficial to take the forgiveness approach assuming she stays with the same company the entire 10 years.

These loans, public service, the anount forgiven will not be taxed.

Keep in mind you will have to file seperatly at tax time, so you should add in any tax benefits you'd lose.

Also, for the first three years, the gov will forgive the unpaid interest on the Subsidized loans. So, those at least won't go up. It gives you guys a few years to try it and see without the loans growing to quickly in the beginning.

Good luck!

Blonde Lawyer

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Re: Loan forgiveness forecasting
« Reply #3 on: March 19, 2015, 08:09:02 AM »
If she can commit to staying within the guidelines of the public service forgiveness program then I think it is worth doing.  I have a few concerns for you but I think you have already thought of them.  I have a friend that is a prosecutor doing the same program.  He is really getting burned out and wants to move private sector but he really can't until he completes the program.  There is no half in half out. If you "fail out" of the program you really are screwed because your loans have ballooned.  Another prosecutor friend, eligible for the program, is doing standard repayment because he doesn't want the golden handcuffs.  (Odd to call it that in this situation but it is what it is).

Some other blogs I follow have talked about unique problems for women under the program.  In particular, maternity leaves. You have to be employed full time when you make each of your payments.  No coming back part time.  The FAQ say sick leave and vacation time count as full time employment as well as FMLA.  If you work for a small employer and don't qualify for FMLA, I don't know if any unpaid leave would count as full time employment.

The biggest concern is that they can't guarantee that the program will be in place when you finally qualify for forgiveness.  Right from their website:

Q5
Can I be certain that the PSLF Program will exist by the time I have made my 120 qualifying payments?
A5
The U. S. Department of Education (ED) cannot make any guarantees regarding the future availability of PSLF. The PSLF Program was created by Congress, and, while not likely, Congress could change or end the PSLF Program.

With an upcoming election, that is a big concern.

The requirements are also very specific so you have to know them inside and out.  Like you have to remain in public service not just for the 120 payments but for the time you apply for forgiveness and when you receive forgiveness.  No indication of how long this process takes.

I'm not in public service so I didn't have to make that decision.  I went with the refinance and pay off aggressively route.  I'm still working on it.  It is definitely a tough choice to make.  I'd lean towards making it work since it is "just" 10 years.