Should I go for Public Service Loan Forgiveness?

[izzy0316]

Hello. I'm new to MMM and FI generally, but very motivated. We've been using YNAB for several months and take it very seriously and we've cut down our expenses considerably so far. We also live in a very HCOL area (NYC), but are reluctant to stray too far because both our families are here and we are all very close, plus my wife and I have a young child who is our first.

My wife and I have about $180k in Federal Student Loans (mine is $100k, hers $80k) and I have another $10k in private loans. My wife's been shooting for Public Service Loan Forgiveness for the past couple years and I recently decided to plan for PSLF for myself too and I would love the feedback of this forum in terms of that decision in light of our plans for FI in 10-15 years.

Here are our other numbers:

Ages: I'm 32, my wife is 30.

We have 1 baby and 1 dog.

FI Plan: I would love to be FI in 10-15 years.

Combined income: $160,000/year gross (this may go up by $5-15k if my wife gets a raise, which we will find out over the next few months). Although we are both in PSLF-eligible jobs, neither of us gets a true pension (Defined Benefit Plan).

Retirement Savings (401k, 457, IRAs): $50,000

Cash Savings: $50,000 earning about 3.5% (combination of high-yield savings, checking, and CDs).

No other debt

1 car, fully owned

Monthly expenses: $7,800 up until now, but see below. Big-ticket items are Rent, Childcare, and Student Loans.

Current rent: $1,700/month

Anticipated rent beginning this summer: $2,000/month (we are struggling as it is with 1 child in a small 1-bedroom and we will likely have another kid in the next couple of years, so we want a 2-bedroom).

Childcare: $1,560/month (this will likely decrease over the next few months since we are planning to move and will start a hopefully cheaper childcare arrangement).

Student Loans: $1,560/month but which will be reduced to about $710/month beginning in March as a result of PSLF plans.

At the moment, I feel very behind on a 10-15 year FI plan and I'd like to fully max out IRAs ($11,000/year) and 401ks ($37,000/year). If we do that, we can maybe save $10,000 additional each year in cash with our current/planned expenses.

I know that the conventional wisdom among Mustachians is that debt is a toxic emergency and should be paid off as aggressively as humanly possible. And indeed, our interest rates on the loans are awful (6.5-7.5%).

However, because we both work in PSLF-eligible employment, I've decided that PSLF might save me more money in the long run. Do you agree?

I'm not sure how to perfectly run the numbers. It just seems to me that if I can keep my payments "low" at around $700-800 per month all the while maxing out retirement accounts and saving another $10k per year on top of that, and have a HUGE chunk of the loan forgiven (ballpark, $100,000) in 8-9 years, I'm better off.

Keep in mind, I think this needs to be an all-or-nothing decision because when both spouses have eligible loans on the type of Income Drive Repayment plan we're on, their monthly payments are calculated taking into account one another's loans, which yields much lower payments. Furthermore, because the monthly payments are based on AGI, I can keep our AGI a lot lower by maxing out pre-tax 401k and so pay less on the loans. So I think we should either both plan for PSLF or both pay off loans ASAP.

I think at the most aggressive we could maybe pay off the loans in 3-4 years, including with a little Loan Repayment Assistance from my university (which I'm not eligible for if I'm on an income-drive plan pursuing PSLF). But that would include not paying a dime to retirement accounts and potentially even liquidating principal in existing Roth IRAs. So in 4 years I would be debt free but not have a penny in savings, other than a few thousand in pre-tax 401k and Roth earnings. Versus 8-9 years of dragging debt that sucks and hurts our cash flow by $8,500 or more per year, but all the while allowing us to bulk up tax-advantaged contributions and then some, including saving for a home purchase or real estate investment. And it kills me to have paid $100,000 that would have otherwise been forgiven, albeit in a longer timeframe.

What is the smart move if FI is the goal?

[Sibley]

What I'm hearing is that you could get the majority or all of your loans forgiven in 8-9 years through PSLF. Or you could pay off your loans in 3-4 years, but not have anything in savings (and don't liquidate retirement savings).

3rd option: Pay off your loans in 8-9 years and still have savings. Which is also the more ethical option to me, because otherwise I'm paying for your loans.

[Dr Kidstache]

I'm a little fuzzy on your loan specifics. Are your federal loans already consolidated with Direct Loans? If not, will you lose any benefits/incentives if you move them to Direct Loan? If they're already through Direct Loans, are your prior payments already eligible to be counted towards PSLF? There's no magic start date for PSLF - just any qualifying payment made to Direct Loan. You can submit employment verification forms to certify the years that you've already been working at a PSLF-eligible employer if that's the case. What payment plan are you currently in and what are you planning on changing to?
If it helps, I have zero problem with people taking advantage of PSLF. The program exists for a reason - no shaming people who use it. I cheered when I read about the first people having their loans discharged recently.

[izzy0316]

What I'm hearing is that you could get the majority or all of your loans forgiven in 8-9 years through PSLF. Or you could pay off your loans in 3-4 years, but not have anything in savings (and don't liquidate retirement savings).

3rd option: Pay off your loans in 8-9 years and still have savings. Which is also the more ethical option to me, because otherwise I'm paying for your loans.

Thanks for your response. I disagree. Incentivizing me to take a job that pays less than half of what I could make in the private sector but that helps reinvest in communities is a sound use of taxpayer dollars. I also was not incentivized to take on a lot of debt by the program; I didn't even know about PSLF. I was just financially dimwitted and signed all the loan documents put in front of me without thinking about it.

[izzy0316]

I'm a little fuzzy on your loan specifics. Are your federal loans already consolidated with Direct Loans? If not, will you lose any benefits/incentives if you move them to Direct Loan? If they're already through Direct Loans, are your prior payments already eligible to be counted towards PSLF? There's no magic start date for PSLF - just any qualifying payment made to Direct Loan. You can submit employment verification forms to certify the years that you've already been working at a PSLF-eligible employer if that's the case. What payment plan are you currently in and what are you planning on changing to?
If it helps, I have zero problem with people taking advantage of PSLF. The program exists for a reason - no shaming people who use it. I cheered when I read about the first people having their loans discharged recently.

Thanks for responding. My loans were eligible direct loans from the start, so no consolidation needed. I've only been in a qualifying job for 1.5 years. I was on the standard repayment plan (10-year term) which is eligible for PSLF but wasteful because it reduces how much will be forgiven (because I'm paying it). I switched to the PAYE plan. And I've been on top of my employer certifications since I started the job. I like to re-submit at least every year.

[Saving in Austin]

You should be careful about trusting the government to honor their side of the bargain.

Look online for some examples of people not getting their loans forgiven after putting in the time.

I remember reading about it, but i don't remember where.

[reformingSucka]

if you can manage paying off the debt sooner by being mustashian - then do it. Because it doesn't look like you are accounting for the OUTRAGEOUS interest rates on Fed Loans that are eligible for forgiveness.

If you do decide to go the forgiveness route - I HIGHLY recommend that you immediately get you and your wife's employment certified: https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf

There's been some issues with borrowers who's non-profit job didn't "qualify" as a qualifying job...

[ReadySetMillionaire]

OP: I post pretty regularly about student loans.  This is a good thread here (you might have to copy paste into your browser): https://forum.mrmoneymustache.com/ask-a-mustachian/gaming-repaye-and-the-student-loan-system-($148-000-debt)-to-achieve-fire-at-45/

Some thoughts, in no particular order:

(1) Don't let people bother you about "cheating the system" or screwing over taxpayers.  The PSLF program was part of the promissory note you signed when you borrowed.  It's a term of the loan that you are utilizing.  Nothing more, nothing less.

(2) Aggressively paying off debt when you have the option not to is dangerous.  Once you put money towards a student loan, it's gone into the ether. Think twice before doing this.

(3) My understanding of the PSLF payment formula is as follows: AGI minus 150% of the poverty level (for your family size) x 10%, and that 10% is divided into twelve monthly payments.  Your goal is thus to reduce AGI as much as possible in order to get the lowest payment possible.

(4) The only AGI deductions I see for you are 401k/403b ($37k combined) and student loan interest ($2.5k).  You make too much money to deduct traditional IRA contributions, although you could still contribute to a Roth IRA I believe.

(5) My guess at your payment: AGI = $120,500 ($37k 401k contributions, 2.5k student loan deduction); 150% of poverty level for a family of 3 = $31k. This equals $89,500.  Multiply that by 10% and then divide that by 12 and your monthly payments are about $746 per month.

(6) With that said, you really need to look into how payments are calculated for each of you.  I *think* this payment amount is joint, but I could be wrong.  You should call your loan provider.

(7) Then next thing you need to keep in mind, and I'm not sure about this, is that I think new PSLF enrollees have to pay income tax on the forgiven debt above a certain amount (I can't remember whether this was proposed or actually passed into law).  I think this amount is $57k.  So if you string all this out and then have $100k in loans forgiven, then you'd owe income taxes on $43k.  You would then need to be thinking over the next ten years how you'd want to save for this (Roth IRA or brokerage accounts likely be the best solution).  Again, I'm not sure about this, so look into it.

(8) As others have indicated, you need to be damn sure you are in a PSLF eligible job every single year you apply.

(9) I certainly think PSLF is the way to go, and that it's not even close. But double and triple check all of the above issues I've raised.

[sixup]

It appears that PSLF is not taxable: http://www.finaid.org/loans/forgivenesstaxability.phtml

"Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable. Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income. The forgiveness of the remaining balance under income-contingent repayment and income-based repayment after 25 years in repayment is considered taxable income."

[Dr Kidstache]

Great! Sounds like you and your wife are well on track to PSLF should your work/income conditions remain the same over the next 8.5 years.

An interview with someone who just had their loans discharged through PSLF:
https://www.biglawinvestor.com/interview-with-a-person-who-received-pslf-forgiveness/

[izzy0316]

OP: I post pretty regularly about student loans.  This is a good thread here (you might have to copy paste into your browser): https://forum.mrmoneymustache.com/ask-a-mustachian/gaming-repaye-and-the-student-loan-system-($148-000-debt)-to-achieve-fire-at-45/

Some thoughts, in no particular order:

(1) Don't let people bother you about "cheating the system" or screwing over taxpayers.  The PSLF program was part of the promissory note you signed when you borrowed.  It's a term of the loan that you are utilizing.  Nothing more, nothing less.

(2) Aggressively paying off debt when you have the option not to is dangerous.  Once you put money towards a student loan, it's gone into the ether. Think twice before doing this.

(3) My understanding of the PSLF payment formula is as follows: AGI minus 150% of the poverty level (for your family size) x 10%, and that 10% is divided into twelve monthly payments.  Your goal is thus to reduce AGI as much as possible in order to get the lowest payment possible.

(4) The only AGI deductions I see for you are 401k/403b ($37k combined) and student loan interest ($2.5k).  You make too much money to deduct traditional IRA contributions, although you could still contribute to a Roth IRA I believe.

(5) My guess at your payment: AGI = $120,500 ($37k 401k contributions, 2.5k student loan deduction); 150% of poverty level for a family of 3 = $31k. This equals $89,500.  Multiply that by 10% and then divide that by 12 and your monthly payments are about $746 per month.

(6) With that said, you really need to look into how payments are calculated for each of you.  I *think* this payment amount is joint, but I could be wrong.  You should call your loan provider.

(7) Then next thing you need to keep in mind, and I'm not sure about this, is that I think new PSLF enrollees have to pay income tax on the forgiven debt above a certain amount (I can't remember whether this was proposed or actually passed into law).  I think this amount is $57k.  So if you string all this out and then have $100k in loans forgiven, then you'd owe income taxes on $43k.  You would then need to be thinking over the next ten years how you'd want to save for this (Roth IRA or brokerage accounts likely be the best solution).  Again, I'm not sure about this, so look into it.

(8) As others have indicated, you need to be damn sure you are in a PSLF eligible job every single year you apply.

(9) I certainly think PSLF is the way to go, and that it's not even close. But double and triple check all of the above issues I've raised.

Thanks very much, I will check out that thread. And thanks for the encouraging advice. You're almost spot on in your calculation of our payment. And I'll definitely be focused on minimizing AGI in the coming years. And yes, payments are "joint" because we both have eligible loans, which is a huge plus. I'm fairly certain that PSLF if entirely tax-free, but if you have a source you can link to suggesting otherwise I'd be very curious. Thank you for responding!

[izzy0316]

If you do decide to go the forgiveness route - I HIGHLY recommend that you immediately get you and your wife's employment certified: https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf

There's been some issues with borrowers who's non-profit job didn't "qualify" as a qualifying job...

Yes thanks, I'm totally on top of our employment certifications.

[izzy0316]

Great! Sounds like you and your wife are well on track to PSLF should your work/income conditions remain the same over the next 8.5 years.

An interview with someone who just had their loans discharged through PSLF:
https://www.biglawinvestor.com/interview-with-a-person-who-received-pslf-forgiveness/

Thanks so much! I'll check out that interview.

[thingamabobs]

Www.studentlanplanner.com has a calculator to help decide if pslf is the best option for you.

[LightStache]

Yes, hands down do PSLF. If you were going to take a paycut to switch into a PSLF-eligible job, then there would be more to weigh. Since you are already there and it's only a ten year horizon, go for it.

[FINate]

Yes, hands down do PSLF. If you were going to take a paycut to switch into a PSLF-eligible job, then there would be more to weigh. Since you are already there and it's only a ten year horizon, go for it.

I would consider the inverse situation as well. Would you be able to make more and/or have better career growth potential in a non-PSLF-eligible job? It may seem like $180k is a lot, but if your goal is FIRE in 10-15 years then you're talking about saving at least $600k, probably $1M or more, which puts it in a different perspective. You still have to make payments over 10 years, and whatever balance at the end is forgiven. Let's speculate $150k forgiven (no idea, just a wild guess), which would mean a value of about $15k/year. Taxes and interest complicate the equation, but the idea is to compare what you can make outside the program vs. the savings of staying in the program. If you can make significantly more elsewhere then you may be better off maximizing your earnings and plowing through loans ASAP.

I'll add, I don't have any issue, moral or otherwise, with people maximizing their interests within the law. I was (and still am) anti-ACA, but more than happy to take full advantage of the healthcare subsidies the law affords. Talk of subsidies being abused by people they were not intended for...this way lies capricious governance. There is nothing intended, only law. If people are unhappy with the ACA subsidies (or PSLF) then their issue is with the elected representatives. If it makes financial sense to stay in PSLF then go for it.