Author Topic: Public Service Loan Forgiveness  (Read 3548 times)

hoosierstache

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Public Service Loan Forgiveness
« on: November 09, 2016, 06:12:36 AM »
Does anyone have experience with Public Service Loan Forgiveness?  You have to make 120 "qualifying payments" (on time, 1 per month) on your student loans and after those payments are made, the rest of the balance of your loans is forgiven (although you do have to pay taxes on what is forgiven).  I have $28,020 left on my student loans and my monthly payment is $302.20.  So far I have made 38 qualifying payments, which puts me at a little less than 7 years away from my loans being forgiven.  My question is:  Does it make sense to wait for forgiveness or would I save money by paying them off now?  Before I got married, my payment was only $120/month, but after getting married and combining incomes, my payment went way up and I'm not convinced that it makes sense to wait on the forgiveness as I could be paying more overall by waiting.  Thanks!

Field123

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Re: Public Service Loan Forgiveness
« Reply #1 on: November 09, 2016, 07:00:02 AM »
Pay them off.

If your balance was higher then you should have filed your taxes as married, filing separately, which would not have led to an increase in the monthly payments. But unless you plan on earning less than about $30k per year for the next 7 years then absolutely you should pay them off.

hoosierstache

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Re: Public Service Loan Forgiveness
« Reply #2 on: November 09, 2016, 07:17:21 AM »
Ok, I feel like that makes sense as well.  Is there a way to re-file as married/separately this late in the game?  Aren't there drawbacks to filing separately?

Easye418

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Re: Public Service Loan Forgiveness
« Reply #3 on: November 10, 2016, 09:36:12 AM »
My wife is in the same position, with $40k loans, I have decided to pay them off versus have some "golden handcuffs" put on.

Field123

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Re: Public Service Loan Forgiveness
« Reply #4 on: November 10, 2016, 10:45:47 AM »
Ok, I feel like that makes sense as well.  Is there a way to re-file as married/separately this late in the game?  Aren't there drawbacks to filing separately?

Of course there are drawbacks to filing seperately (inability to contribute to an IRA primarily), but the question is whether those drawbacks are outweighed by the student loan savings by filing separately. You just have to run the numbers.

My guess is that with such a low balance you'd be far better served just paying them off.

rhadams1988

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Re: Public Service Loan Forgiveness
« Reply #5 on: November 10, 2016, 08:29:10 PM »
I Ann in a similar situation and I am not paying the loans off. with PSLF, you do not have to pay taxes on the amount forgiven. This is different than other loan forgivement programs. My wife has $80 in student loans with 7 years of PSLF to go and we are going to let it be forgiven.

We file as married filing separately so the payment is only calculated off of her income instead of both of ours. We also make sure to max out her 403b and HSA which brings her taxable income down, which also brings her monthly payment down.

For us, the math overwhelmingly points towards not paying them off and I would guess it would for you too. Not being able to contribute to IRAs sucks but it's worth it to get $80k for free in 7 years.

rhadams1988

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Re: Public Service Loan Forgiveness
« Reply #6 on: November 10, 2016, 08:55:26 PM »
Here's an article that talks about the tax burden of some forgiveness plans but mentions that PSLF is not taxable when it is forgiven.

https://studentloanhero.com/featured/owe-taxes-student-loan-forgiveness/

Proud Foot

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Re: Public Service Loan Forgiveness
« Reply #7 on: November 11, 2016, 08:36:51 AM »
With what you have given, if your payment stays at the $302.20 per month and you have 82 remaining payments until they are forgiven you will pay a total of $24,780.40.  However if your payment will be increasing then chances are you will end up paying the loan off or be close to having it paid off by the end of those 82 payments.  I am guessing you are on IBR since your payment went up when you got married.  For the balance you have I think you would be better off just working to pay them off. Obviously check the numbers yourself but my guess is that when considering it all you would be in the same position or worse off if you did MFS to have the lower monthly payment and get the PSLF.

Also, what kind of effect did the increase in payment put on your budget?

mountains_o_mustaches

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Re: Public Service Loan Forgiveness
« Reply #8 on: November 11, 2016, 08:49:59 AM »
Multiple the amount you're paying *120 to get the total amount you're paying back (including the payments you've already made).  If this is less than or equal to your principle amount it doesn't really matter (and honestly since you've started down this path it might prevent you from paying interest).  If you'd end up paying back all of the principle + a sizable chunk of interest, just pay it off - by extending the time to pay it off you're accruing more interest.

I agree with some other points mentioned already: keep in mind that PSLF payments are based on income, so if you're income is going to increase then your monthly payment will and that will affect the calculations above.  I had a much lower income last year, where 120 monthly payments were about equal to the principle, but then I got a new job (with a much higher income) so that was no longer the case and I just paid off the loan as quickly as possible to avoid accruing additional interest.

Also, you do not pay taxes on the forgiven amount in PSLF.

westtoeast

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Re: Public Service Loan Forgiveness
« Reply #9 on: November 11, 2016, 09:58:00 AM »
I'm in a similar situation, but I'm expecting forgiveness in 3 years for teaching service. I've done the math and dragging out the loan life until forgiveness would save me about 3,000. Dragging the loan out also means I have enough income free to invest starting now. I'd almost be willing to just pay the 3,000 extra to be free from debt sooner but I think the benefits of investing now outweigh the emotional benefits.

hoosierstache

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Re: Public Service Loan Forgiveness
« Reply #10 on: November 11, 2016, 10:12:24 AM »
Thanks everyone!  I think we are going to go the filing separately route and go from there.  The payment estimates were much lower in the meantime and letting them be forgiven gives us the opportunity to use our cash to invest now/have an emergency fund.  I didn't realize that you don't pay taxes on PSLF forgiveness, which definitely makes that option look nice.

We do plan on having children in the near future, though, which brings into question the tax benefits there (which I understand couples who file separately don't qualify for).  There are just so many different avenues here, which is hugely frustrating!

NoStacheOhio

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Re: Public Service Loan Forgiveness
« Reply #11 on: April 09, 2018, 07:26:10 AM »
Bumping this thread for new info:

Apparently, paying any amount other than the billed amount disqualifies those payments from PSLF.

https://nyti.ms/2GDxXVg

brokescientist

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Re: Public Service Loan Forgiveness
« Reply #12 on: April 09, 2018, 08:25:12 AM »
If you have access to 457b, 403b, child care, HSA, you can max all 4, and contribute to your health care.   Your AGI will be very low, resulting in "0$" payments.   If you make the 120 "$0" payments your loans and all associated interest will be payed off for free.

You have to file separately which kind of sucks.   I will be getting a free $50,000 though.

-Matt