Author Topic: Loan Forgiveness Skepticism  (Read 4542 times)

uppy

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Loan Forgiveness Skepticism
« on: September 04, 2016, 07:06:50 AM »
Hi Everyone,

Thought I would put this one to the community. My partner and I are in our late 20s/early 30s and both graduated with some education loan debt. I'm on track to pay off my loans in 5 months, however she went back to grad school and has another $31,000 left. We both make in the 37K-42K per year range, no mortgage, one car loan of $8K (mine). Our savings are minimal as we try to get out of debt.

Because she went to school for and works in social work, she may be eligible for loan forgiveness after 10 years of public service. We are having a disagreement about it. Obviously it's her choice, but I have been encouraging her gently to do what I have been doing, which is to pay around $1,200/month (her graduate loans are about 6.2%) in which time she would pay them off in roughly 2.5 years. I am confident in this method because I was able to pay my $21,000 down to just $5,300 since last May, and it feels AMAZING to know I will be totally debt free in January or February of 2017 (not counting the car loan, which is only 2.9%).

My partner however does not like giving up this much every month, and since she is eligible, she wants to do the loan forgiveness thing. This involves waiting 10 years, making minimum payments that whole time, and then supposedly getting the whole debt forgiven after 10 years is up. I am skeptical of this loan forgiveness, and I have been using the following points to try to convince her this is a risky tactic.

1. Even if she is eligible and is "approved" for it, she will be getting charged interest over the 10 years and may end up paying almost the same amount in the long run vs. paying them off over 2.5 years. She would be doing "income-based" repayment over this time I am guessing...?
2. What if she becomes disabled, or changes careers to something not public service, which she has considered doing. Now she has her original amount plus whatever interest she's accrued over X number of years she's been making minimum payments.
3. What if laws change, or some other FUBAR craziness, over the next 10 years -- in short, what if ANYTHING happens to endanger her eligibility for this forgiveness, she is now screwed because she's been paying so slow for so long.

I realize that most people pay their loans over 10 years and that is totally normal and acceptable, but it's hard to wrap my brain around making the choice to pay them off quickly and forget about it, or have it hanging over my head for 10 years. I will support her in whatever she chooses to do, but I wanted to see if perhaps my logic on this is totally flawed, or if anyone has successfully done this?

Thanks in advance for your thoughts and advice!

abhe8

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Re: Loan Forgiveness Skepticism
« Reply #1 on: September 04, 2016, 07:20:25 AM »
I think the answer is, it depends. :) But start by running the numbers. Figure out how much she will pay over ten yrs vs paying them off in two or three. You do have to be on IBR for the payments to count.

ender

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Re: Loan Forgiveness Skepticism
« Reply #2 on: September 04, 2016, 07:24:31 AM »
I don't know what your FI goals are or whether or not your partner might end up hating their job, but being tied to the same employer (see the terms of your loan forgiveness) is normally a pretty expensive thing to do for "only" $31k. Or less, since you are paying the minimums.

If your goals are to stay where you are living now and keep working for 10 years this is probably an ok thing.

brokescientist

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Re: Loan Forgiveness Skepticism
« Reply #3 on: September 04, 2016, 07:30:19 AM »
Max out your 403b/457b and your loan payments will be 0 dollars.   Make 0 dollar monthly payments for 10 years and you will not have to pay anything back.

So far on my wives education loans we have paid back 0 dollars over 3 years.   7 more to go!    You can find my posts/others posts about this debate by searching my name.

-BrokeScientist

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Re: Loan Forgiveness Skepticism
« Reply #4 on: September 04, 2016, 07:33:21 AM »
By the way if she makes 40k/year she if she can bring that down to ~20k by using tax deductible accounts the payments will be 0.   You may have to file separately which has some positive/negative effects.   Married and filing jointly they will take your salary under consideration.

We decided to do this because... why not?   I am not a big fan of trusting the government, but it was stated that if they removed the program it would be grandfathered in.    People already using the plan will be able to continue it till the end.

-BrokeScientist
« Last Edit: September 04, 2016, 07:35:00 AM by brokescientist »

nereo

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Re: Loan Forgiveness Skepticism
« Reply #5 on: September 04, 2016, 07:56:42 AM »
I'm tempted to side with your wife on this one, but there are a few other factors to consider.

1) as brokescientist pointed out, she could be paying $0 if she reduces her AGI.  Coincidentally, doing this will help you both achieve FI at a fairly young age even with below-median incomes.

2) as ender pointed out, this plan is dependent on her staying in this job (or shifting to another social-worker job) for a full decade.  This is a very long time, particularly for an individual in their 20s.  It also could severely limit mobility.  Does your partener want to stay in this job/field for at least a decade?  ARe you guys willing to be tied to your area for the next 10 years?

3) Congress could always modify the loan-forgiveness program. While I find it unlikely she wouldn't be 'grandfathered' in to any changes made, it's certainly a possibility.

Ultimately, even if she chooses to go down the loan-forgiveness path and something changes I don't think you guys will be truly FUBAR.  After 5 years your partner will have accumulated about $10k in interest at 6.2%.  That's a lot, but certainly not financial-doom-territory.
 
Oh - and yes, many people have successfully gone this route, including my brother (who got his masters in education and then did loan-forgiveness by working for an NGO he loves). It's not a bad option if you are certain you want to stick with the typically low-paying social-work type jobs it requries for 10 years.

ender

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Re: Loan Forgiveness Skepticism
« Reply #6 on: September 04, 2016, 08:08:20 AM »
2) as ender pointed out, this plan is dependent on her staying in this job (or shifting to another social-worker job) for a full decade.  This is a very long time, particularly for an individual in their 20s.  It also could severely limit mobility.  Does your partener want to stay in this job/field for at least a decade?  ARe you guys willing to be tied to your area for the next 10 years?

Also keep in mind that this does not include any potential loss of income resulting from not taking a different job.

If your partner is able to find a job paying $10k/year more that does not have the loan payment program, it's probably a better net financial situation -- but if they start down this route, they won't be seeking or able to take that sort of job.

gaja

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Re: Loan Forgiveness Skepticism
« Reply #7 on: September 04, 2016, 08:17:32 AM »
Could you reach a compromise, where she saves up $31 000 in a bank account while going the loan forgiveness route? That way she can pay it off if she wants to get a different job.

uppy

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Re: Loan Forgiveness Skepticism
« Reply #8 on: September 04, 2016, 08:29:29 AM »
I'm tempted to side with your wife on this one, but there are a few other factors to consider.

1) as brokescientist pointed out, she could be paying $0 if she reduces her AGI.  Coincidentally, doing this will help you both achieve FI at a fairly young age even with below-median incomes.

2) as ender pointed out, this plan is dependent on her staying in this job (or shifting to another social-worker job) for a full decade.  This is a very long time, particularly for an individual in their 20s.  It also could severely limit mobility.  Does your partener want to stay in this job/field for at least a decade?  ARe you guys willing to be tied to your area for the next 10 years?

3) Congress could always modify the loan-forgiveness program. While I find it unlikely she wouldn't be 'grandfathered' in to any changes made, it's certainly a possibility.

Ultimately, even if she chooses to go down the loan-forgiveness path and something changes I don't think you guys will be truly FUBAR.  After 5 years your partner will have accumulated about $10k in interest at 6.2%.  That's a lot, but certainly not financial-doom-territory.
 
Oh - and yes, many people have successfully gone this route, including my brother (who got his masters in education and then did loan-forgiveness by working for an NGO he loves). It's not a bad option if you are certain you want to stick with the typically low-paying social-work type jobs it requries for 10 years.

I'm not sure on how to do the math to figure out how much interest (including compounding) she would end up with after 10 years. If it's $10K after 5 years my dum-dum math would say $20K after 10, but I know that's not right.

 
Max out your 403b/457b and your loan payments will be 0 dollars.   Make 0 dollar monthly payments for 10 years and you will not have to pay anything back.

I'm also not sure I totally understand the "lowering the AGI" tactic. I get that being on IBR and having a low income would mean a $0 payment, but how does one do that without actually having such a low income?

If you mean by maxing out the retirement accounts, how would that bring her income down low enough to have $0 monthly payments?

We do love the area where we live and I could see us being here for 10 years -- it's really more of a question of whether she will want to stay in this field, much less this particular employer, for that long.

I wish there was "some" benefit to being on the loan forgiveness track and then subsequently dropping out, besides just a bunch of extra charged interest.

nereo

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Re: Loan Forgiveness Skepticism
« Reply #9 on: September 04, 2016, 08:35:17 AM »
Could you reach a compromise, where she saves up $31 000 in a bank account while going the loan forgiveness route? That way she can pay it off if she wants to get a different job.
Unfortunately, she accrues interest until her debt is wiped clean by loan forgiveness. In order to qualify for $0 in payments, she will need to put money towards tax-deferred accounts in order to lower her AGI.

This is one aspect where it's best to either commit one way or another and not try to choose some middle-ground.

nereo

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Re: Loan Forgiveness Skepticism
« Reply #10 on: September 04, 2016, 08:42:17 AM »

I'm not sure on how to do the math to figure out how much interest (including compounding) she would end up with after 10 years. If it's $10K after 5 years my dum-dum math would say $20K after 10, but I know that's not right.

After the full 10 years she would owe $56,500, assuming she paid nothing at all each month.  However, at this point she'd owe nothing because of loan forgiveness.  I gave the 5 year mark because it's the midway point, and what she'd owe if she decided to 'bail' halfway through for a different (hopefully better paying) job.

I'm also not sure I totally understand the "lowering the AGI" tactic. I get that being on IBR and having a low income would mean a $0 payment, but how does one do that without actually having such a low income?
Briefly, whatever she contributes to a 403b/tIRA/HSA reduces her AGI, which is what determines what her monthly payment will be.  If she contributes enough, she will have a monthly loan bill of $0 because she has so little take-home pay.  Ten years of paying $0/month (while funding retirement accounts) in exchange for working in a qualifying job doing social work = no payments at all on her loans.

However, ender brings up a great point; it's very easy to earn more in the private sector, and strictly from a financial standpoint her best approach would be to choose a job that gives her the maximum earnings potential and pay off her loan.  BUT, if she's determined to stick with her current job (or seek out only similar jobs) than the loan forgiveness program is a sound option. 

uppy

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Re: Loan Forgiveness Skepticism
« Reply #11 on: September 04, 2016, 09:07:37 AM »

I'm not sure on how to do the math to figure out how much interest (including compounding) she would end up with after 10 years. If it's $10K after 5 years my dum-dum math would say $20K after 10, but I know that's not right.

After the full 10 years she would owe $56,500, assuming she paid nothing at all each month.  However, at this point she'd owe nothing because of loan forgiveness.  I gave the 5 year mark because it's the midway point, and what she'd owe if she decided to 'bail' halfway through for a different (hopefully better paying) job.

I'm also not sure I totally understand the "lowering the AGI" tactic. I get that being on IBR and having a low income would mean a $0 payment, but how does one do that without actually having such a low income?
Briefly, whatever she contributes to a 403b/tIRA/HSA reduces her AGI, which is what determines what her monthly payment will be.  If she contributes enough, she will have a monthly loan bill of $0 because she has so little take-home pay.  Ten years of paying $0/month (while funding retirement accounts) in exchange for working in a qualifying job doing social work = no payments at all on her loans.

However, ender brings up a great point; it's very easy to earn more in the private sector, and strictly from a financial standpoint her best approach would be to choose a job that gives her the maximum earnings potential and pay off her loan.  BUT, if she's determined to stick with her current job (or seek out only similar jobs) than the loan forgiveness program is a sound option.

Thanks for the thorough response. I read through BrokeScientist's threads regarding this topic, and I guess I still feel the same way I did before based on a variety of factors. It helps to know that people do it and it makes sense financially, but based on our particular situation, I still feel paying them off sooner is the way to go.

1. If know her, she will not defer enough to her 401K, because she simply wants the money to spend NOW. So that benefit is out. She would be making minimum payments the whole 10 years.

2. We definitely make enough to afford paying $1,200/month to her loans for 2.5 years, even with our "low" incomes. It is not a huge sacrifice because we live so cheaply. Even if she doesn't pay that much, she will still pay them off much, much sooner than 10 years rather than making the $0 payments. Even then, she could still continue contributing to her 401K.

3. I'm not sure she will stay in this job for 10 years. 5 years, maybe. But it's a high-burnout job.

When I first discovered FIRE I tried to push her to make better decisions, because I wanted to be FI together, but the end result was we separated our finances completely for the benefit of our relationship -- ha. Which we're happier with. So, all I can do is give my recommendation and I wanted to make sure my recommendation was sound. I believe based on her personality and habits that paying more sooner is a better option than staying the course and being on top of everything needed to take advantage of PSLF for 10 years.

Other folks' mileage will definitely vary!

Thanks all for the advice, I am glad to have a better understanding and I will share all of this info with her so she can make her decision one way or the other.

little_brown_dog

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Re: Loan Forgiveness Skepticism
« Reply #12 on: September 04, 2016, 10:20:13 AM »
I would definitely pay them off if you can do it in as little as 2.5 yrs. PSLF is available in my field as well, but when you first get out of school it is hard to understand just how long 10 years really is. A number of things can happen to public service workers during that time – illness, burnout, desire to move to the private sector, changes in the law, children and the desire to go part time or quit for a bit, etc. These risks may be higher for social workers as their jobs are notoriously difficult and prone to burn out. To me the forgiveness makes most sense for people who have a ton in loans, or those who have no real hope of paying it off much earlier than that. But if you can get rid of them in 2.5 years, she will have so many more options available to her. If she wants to move, quit, change jobs, etc she can do that without worry about how it will impact her loans. Not to mention the immense sense of freedom that comes with being free from student debt. So mathematically, yes PSLF can work to your advantage. But you must stick it out for the long haul for that to work, no ifs ands or buts.

We chose to pay off 100k in student loans rather than stick around and hope for PSLF. We were able to totally eradicate them almost exactly 5 years to the day they went into repayment. I would not change a thing. Now I can be a sahm to our baby without worrying about debt or how my time off will impact loan repayment. You cannot put a price on that type of freedom.

I suspect that if you think you can do it in 2.5yrs, if you get crazy motivated or see some income increases, you might be able to eliminate them even sooner than your estimate (that's what happened to us). Why would you want to keep going with loan payments for 8 ADDITIONAL YEARS if you don't absolutely have to?
« Last Edit: September 04, 2016, 10:27:08 AM by little_brown_dog »

abhe8

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Re: Loan Forgiveness Skepticism
« Reply #13 on: September 04, 2016, 10:44:28 AM »
I'm at month 48 or 49 out of 120. One thing dh and I have seen is the interest does accrue, but never capitalize. Maybe it would/will if the program Ends or changes, but this is better then interest capitalizing every month or year. I went straight to IBR after my grace period, not sure if that is a factor or not?

Eta: we ran the numbers many times and using this method, we definitely come out ahead. We don't gamble.... But it is so much money... Decided to this time.

Etaa: that said, if I was op I would pay them off asap. And look for a better job.
« Last Edit: September 04, 2016, 10:51:07 AM by abhe8 »

Goldielocks

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Re: Loan Forgiveness Skepticism
« Reply #14 on: September 04, 2016, 11:14:29 AM »
Could you reach a compromise, where she saves up $31 000 in a bank account while going the loan forgiveness route? That way she can pay it off if she wants to get a different job.

This  +100

mxt0133

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Re: Loan Forgiveness Skepticism
« Reply #15 on: September 04, 2016, 11:20:34 AM »
Are there tax consequences for the loan amount given?  Would you have to fork over a few thousand because the loan forgiveness amount is taxable?

BrendanP

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Re: Loan Forgiveness Skepticism
« Reply #16 on: September 04, 2016, 05:56:28 PM »
I was just reading up on this the other day.

Seems like you can work many different non-profit jobs anywhere in the US so if she became a counselor, therapist, or teacher, she still might be able to take advantage.

It's such a low paying job that it would be tough to save much of the salary. That's precisely why my wife left Social Work to become a teacher.

Del Griffith

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Re: Loan Forgiveness Skepticism
« Reply #17 on: September 04, 2016, 08:08:46 PM »
I am with you on this one. I am also in the social services field and would've been eligible, but chose to pay mine off within 5 years. As others have mentioned, the freedom outweighed any financial savings for me. I wanted the flexibility and figured there was no crystal ball to know what the next ten years would hold. But, your partner may just have a higher tolerance for debt also. Depending on where she is currently employed and in what area of social work, it may be worth exploring her options to get a better idea of if she were to jump ship from her job, how likely it would be that she could find something else that would also qualify to ensure she could remain enrolled.


Rural

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Re: Loan Forgiveness Skepticism
« Reply #18 on: September 04, 2016, 08:19:17 PM »
Are there tax consequences for the loan amount given?  Would you have to fork over a few thousand because the loan forgiveness amount is taxable?


 Amounts Forgiven under the public service loan forgiveness program are not taxable.

Lski'stash

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Re: Loan Forgiveness Skepticism
« Reply #19 on: September 04, 2016, 09:01:10 PM »
Hi Everyone,

Thought I would put this one to the community. My partner and I are in our late 20s/early 30s and both graduated with some education loan debt. I'm on track to pay off my loans in 5 months, however she went back to grad school and has another $31,000 left. We both make in the 37K-42K per year range, no mortgage, one car loan of $8K (mine). Our savings are minimal as we try to get out of debt.

Because she went to school for and works in social work, she may be eligible for loan forgiveness after 10 years of public service. We are having a disagreement about it. Obviously it's her choice, but I have been encouraging her gently to do what I have been doing, which is to pay around $1,200/month (her graduate loans are about 6.2%) in which time she would pay them off in roughly 2.5 years. I am confident in this method because I was able to pay my $21,000 down to just $5,300 since last May, and it feels AMAZING to know I will be totally debt free in January or February of 2017 (not counting the car loan, which is only 2.9%).

My partner however does not like giving up this much every month, and since she is eligible, she wants to do the loan forgiveness thing. This involves waiting 10 years, making minimum payments that whole time, and then supposedly getting the whole debt forgiven after 10 years is up. I am skeptical of this loan forgiveness, and I have been using the following points to try to convince her this is a risky tactic.

1. Even if she is eligible and is "approved" for it, she will be getting charged interest over the 10 years and may end up paying almost the same amount in the long run vs. paying them off over 2.5 years. She would be doing "income-based" repayment over this time I am guessing...?
2. What if she becomes disabled, or changes careers to something not public service, which she has considered doing. Now she has her original amount plus whatever interest she's accrued over X number of years she's been making minimum payments.
3. What if laws change, or some other FUBAR craziness, over the next 10 years -- in short, what if ANYTHING happens to endanger her eligibility for this forgiveness, she is now screwed because she's been paying so slow for so long.

I realize that most people pay their loans over 10 years and that is totally normal and acceptable, but it's hard to wrap my brain around making the choice to pay them off quickly and forget about it, or have it hanging over my head for 10 years. I will support her in whatever she chooses to do, but I wanted to see if perhaps my logic on this is totally flawed, or if anyone has successfully done this?

Thanks in advance for your thoughts and advice!

Teacher here doing the loan forgiveness program. I first chose this route not knowing MMM, so I'm not sure if I would have gone the route at the time knowing what I do now. Four years in though, and things seem to be going just fine. I chose to pay on the income-based plan, which doesn't take into account my husbands income for the AGI they use to calculate the monthly payments.

I pay $282 a month right now, and it pays so little that the balance actually goes UP every month instead of down.

So why go this route? Simply put, as long as everything pans out, my money is MUCH better spent being invested. I can pay into my 457 and 403b, pay down my husbands loans (who doesn't qualify) and work on paying for the construction costs for rehabbing the house we just bought.

As for your concerns, they are all legitimate.

1) As long as you stay in the program, the interest shouldn't matter. As I stated earlier, my own balance goes UP.

2) Becoming disabled will also get your loans forgiven. Changing careers however, will not. I am stuck teaching for at least another 6-7 years. This is something that I will always need to consider in the near future, and it definitely leaves me vulnerable in the workplace.

3)This is also a legitimate concern. We will know in 2017 (when the first of the loans are supposed to be forgiven) how generous the government will stay. My own thinking on this is: if I get screwed over, at least we are in a good financial position to pay them off in a reasonable time. Would it completely suck? Hell, yes. Is it the end of the world for our finances? Certainly not.

Bicycle_B

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Re: Loan Forgiveness Skepticism
« Reply #20 on: September 04, 2016, 09:03:46 PM »

I'm not sure on how to do the math to figure out how much interest (including compounding) she would end up with after 10 years. If it's $10K after 5 years my dum-dum math would say $20K after 10, but I know that's not right.

After the full 10 years she would owe $56,500, assuming she paid nothing at all each month.  However, at this point she'd owe nothing because of loan forgiveness.  I gave the 5 year mark because it's the midway point, and what she'd owe if she decided to 'bail' halfway through for a different (hopefully better paying) job.

I'm also not sure I totally understand the "lowering the AGI" tactic. I get that being on IBR and having a low income would mean a $0 payment, but how does one do that without actually having such a low income?
Briefly, whatever she contributes to a 403b/tIRA/HSA reduces her AGI, which is what determines what her monthly payment will be.  If she contributes enough, she will have a monthly loan bill of $0 because she has so little take-home pay.  Ten years of paying $0/month (while funding retirement accounts) in exchange for working in a qualifying job doing social work = no payments at all on her loans.

However, ender brings up a great point; it's very easy to earn more in the private sector, and strictly from a financial standpoint her best approach would be to choose a job that gives her the maximum earnings potential and pay off her loan.  BUT, if she's determined to stick with her current job (or seek out only similar jobs) than the loan forgiveness program is a sound option.

Thanks for the thorough response. I read through BrokeScientist's threads regarding this topic, and I guess I still feel the same way I did before based on a variety of factors. It helps to know that people do it and it makes sense financially, but based on our particular situation, I still feel paying them off sooner is the way to go.

1. If know her, she will not defer enough to her 401K, because she simply wants the money to spend NOW. So that benefit is out. She would be making minimum payments the whole 10 years.

2. We definitely make enough to afford paying $1,200/month to her loans for 2.5 years, even with our "low" incomes. It is not a huge sacrifice because we live so cheaply. Even if she doesn't pay that much, she will still pay them off much, much sooner than 10 years rather than making the $0 payments. Even then, she could still continue contributing to her 401K.

3. I'm not sure she will stay in this job for 10 years. 5 years, maybe. But it's a high-burnout job.

When I first discovered FIRE I tried to push her to make better decisions, because I wanted to be FI together, but the end result was we separated our finances completely for the benefit of our relationship -- ha. Which we're happier with. So, all I can do is give my recommendation and I wanted to make sure my recommendation was sound. I believe based on her personality and habits that paying more sooner is a better option than staying the course and being on top of everything needed to take advantage of PSLF for 10 years.

Other folks' mileage will definitely vary!

Thanks all for the advice, I am glad to have a better understanding and I will share all of this info with her so she can make her decision one way or the other.

Based on the bolded parts, it sounds like the real issue isn't whether it's financially wiser to pay the loan than to seek forgiveness and invest the difference.  You have already researched enough to understand that forgiveness plus other investment is reasonable.  The issue is that your Significant Other wants to spend the money instead of investing it. 

You've shown in both bolded parts that she and you disagree on this point.  While I and probably everyone in this forum agree that your approach is wiser, she doesn't, so you have to decide what you are going to do.  I personally suspect that arguing her out of spending when she has an external program on her side is not going to be a winning strategy so I would pick a different battle, but you make your own choice. 

The deeper question is what is the future of the relationship.  You yourself have said it's better with separate finances. In my personal observation it's difficult to form a permanent relationship with different values, so your decisions may depend on what you want from the relationship in the future. The most difficult questions on this forum revolve around relationships between people with different desires re spending vs investing, including whether people will change and, if not, whether to pursue the relationship. I think there's a topic such as 50 steps toward leading your SO to FI, maybe that will give you some ideas on how to maintain the relationship while shifting towards investment.

I cannot presume to advise on the perfect solution, just posting in hopes of stimulating clarity.  Forgive me if I have intruded too much.

notactiveanymore

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Re: Loan Forgiveness Skepticism
« Reply #21 on: September 05, 2016, 03:07:06 PM »
If she doesn't bring down her AGI with pre-tax deductions, she's not going to be able to stay on IBR very long with her income. It's not a very high loan amount and she makes decent money. Her 10 year standard repayment would be like $350/month? She's only going to knock maybe $100 off that with IBR. If that.

My point is that she's probably going to pay pretty close to the full amount by the time she reaches 10 years anyway. And she'll definitely limit her career options if she thinks this is her only good option. I'd encourage her to pay it off as quickly as possible if she doesn't know she wants to stay in public sector for 10 years and doesn't plan to game it by lowering her AGI.

But I don't think you can really push for much here unless you guys are planning to marry and/or combine finances.

Lski'stash

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Re: Loan Forgiveness Skepticism
« Reply #22 on: September 10, 2016, 07:42:55 AM »
If she doesn't bring down her AGI with pre-tax deductions, she's not going to be able to stay on IBR very long with her income. It's not a very high loan amount and she makes decent money. Her 10 year standard repayment would be like $350/month? She's only going to knock maybe $100 off that with IBR. If that.

My point is that she's probably going to pay pretty close to the full amount by the time she reaches 10 years anyway. And she'll definitely limit her career options if she thinks this is her only good option. I'd encourage her to pay it off as quickly as possible if she doesn't know she wants to stay in public sector for 10 years and doesn't plan to game it by lowering her AGI.

But I don't think you can really push for much here unless you guys are planning to marry and/or combine finances.

This could also be a major advantage. I keep my AGI low through putting massive amounts into my 457 account. Pay less in loans through more in a retirement account. That's a win-win as far as I am concerned.

rhadams1988

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Re: Loan Forgiveness Skepticism
« Reply #23 on: September 10, 2016, 10:52:32 AM »

I'm not sure on how to do the math to figure out how much interest (including compounding) she would end up with after 10 years. If it's $10K after 5 years my dum-dum math would say $20K after 10, but I know that's not right.

After the full 10 years she would owe $56,500, assuming she paid nothing at all each month.  However, at this point she'd owe nothing because of loan forgiveness.  I gave the 5 year mark because it's the midway point, and what she'd owe if she decided to 'bail' halfway through for a different (hopefully better paying) job.

I'm also not sure I totally understand the "lowering the AGI" tactic. I get that being on IBR and having a low income would mean a $0 payment, but how does one do that without actually having such a low income?
Briefly, whatever she contributes to a 403b/tIRA/HSA reduces her AGI, which is what determines what her monthly payment will be.  If she contributes enough, she will have a monthly loan bill of $0 because she has so little take-home pay.  Ten years of paying $0/month (while funding retirement accounts) in exchange for working in a qualifying job doing social work = no payments at all on her loans.

However, ender brings up a great point; it's very easy to earn more in the private sector, and strictly from a financial standpoint her best approach would be to choose a job that gives her the maximum earnings potential and pay off her loan.  BUT, if she's determined to stick with her current job (or seek out only similar jobs) than the loan forgiveness program is a sound option.

My wife has $80K+ in student loans from getting her masters in education. She is on the IBR track so I've learned a lot about this. The way they calculate your payment is as follows:
Payment = 10% * (AGI - 150%*Poverty_Line) / 12
Let's say the 150% of the poverty line is about $22K, so if you have keep your AGI as close to $22K as possible, you pay almost nothing every month. Let's say my wife makes $50K, she can put a lot towards her 403B and then take her standard deduction and standard exemption, and her AGI drops to ~$25K. That means that she pays $25 per month (10% * $3K)/12. She has to stay in a non-profit/government job and we have to file as married filing separately, but it's not that big of a deal. Over the course of 10 years she will pay a total of about $3,000 and get over $80K forgiven. It's not how I would have written the laws if I were in congress, but that's how it works today.