Author Topic: Student loan debt/Public service forgiveness: Help me with math  (Read 2802 times)

SmallTownDA

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Long time lurker, first time poster.

Here's the situation, I have about $50,000 in student loan debt at 6.5% interest. I work for local government, so I'm eligible for public service loan forgiveness after 10 years. I'm 2 years in and on income based repayment of $75/month. This is well below the monthly interest accrual. My payments will max out at $625/month as my income increases. They calculate income based on your previous years tax returns.

Here's my dilemma:
Scenario 1: I throw everything at the debt. Our post tax income is about $4500/month and our expenses about $3k. So putting $1500 towards the loans would pay them off in about 3 years. I'll be getting raises every 6 months for the next few years, so we could probably do it a bit faster. From there, we start investing the loan payment money.

Scenario 2: I put the $1500 into pre-tax retirement accounts, try to minimize my taxable income, and then take advantage of loan forgiveness in 8 years. My employer doesn't have a 401k (they have a mandatory defined benefit pension plan), but I can contribute to a pre-tax 457 plan up to $17,500 plus $5,500 to a traditional IRA. My salary will top out at $110k in about 5 years, so even with maxing my pre-tax retirement savings, I'll end up paying the full $625 on the student loans for a few years, but I would likely be able to pay significantly less than that for the next 2-3 years.

The current plan would be to stop working full time in ~18 years. The pension would pay about $3k a month if I retired with 20 years of service. Which option puts me in the best position to realize my goal?

Related question: How should I factor in the pension when determining what my FI number is?

MDM

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Re: Student loan debt/Public service forgiveness: Help me with math
« Reply #1 on: March 29, 2015, 11:44:01 PM »
Related question: How should I factor in the pension when determining what my FI number is?
A non-inflation-adjusted annuity doesn't quite fit into the framework assumed by the Trinity Study folks, due precisely to the lack of inflation adjustment.

Taking a deduction from annual spending and using 25-30 times (actual spending minus annuity) isn't exactly correct because the annuity becomes a smaller fraction over time.
Treating it as part of net worth isn't exactly correct because it won't appreciate in value as a stock & bond portfolio would.

One can always make some approximations, e.g., use (expenses minus "annuity payment discounted by 10 years of inflation") or "use a lower assumption for total stash growth" in the pertinent equation:

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Return on invested retirement funds.
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions.

Or go whole hog and stick everything into www.cfiresim.com and let it handle the inflation effects.  Just know that whatever calculation one does is likely to be wrong, so treat these as "guidelines" not "rules".


As for the primary question, I'd guess that not having to repay much of the loan would be financially better than having to repay it.  You might throw the scenarios into Excel, however, to verify that - it's possible that delaying payments would cause you to pay enough more in interest to make that worse.

Donovan

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Re: Student loan debt/Public service forgiveness: Help me with math
« Reply #2 on: March 30, 2015, 05:58:29 AM »
My wife is looking at this same loan forgiveness (although with a much higher balance).  The basic drawbacks are of course that it ties you to a small subset of jobs for 10 years, and at the moment the forgiveness is 'all or nothing'.  In my own calculations, we tend to come out way ahead if we use the loan forgiveness. However, I should point out that I have heard rumblings that the program may change in the next few years, especially after or around the next big election.  The biggest changes I have seen proposed are limiting the forgiveness to $57K and allowing for incremental forgiveness every 2 years rather than whole hog after 10. You might want to figure out how changes like this would affect your approach to the payoff.

ShoulderThingThatGoesUp

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Re: Student loan debt/Public service forgiveness: Help me with math
« Reply #3 on: March 30, 2015, 06:15:26 AM »
Being free to leave that job might have some value to you.

ohioswimmer

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Re: Student loan debt/Public service forgiveness: Help me with math
« Reply #4 on: March 30, 2015, 06:16:08 AM »
Thanks for the formula!  Very helpful; I had to juggle the same math earlier last year.  In my situation, PSLF is a good option.  My estimate is that I'll end up repaying less $500 more than I originally borrowed (58K).  Even if the plan changes, I really feel that many of us will be grandfathered. 

I already max out my 403 (b), but does anyone have any thoughts on a Roth vs. Traditional IRA for people in my/this position?  Ultimately, I decided to go with a standard IRA during my repayment in order to keep my AGI lower.  What have the rest of you done?

charis

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Re: Student loan debt/Public service forgiveness: Help me with math
« Reply #5 on: March 30, 2015, 08:17:50 AM »
I have less than 6 years left under the PSLF plan with 66K @ 5.9% currently owed.  I have never done the math, but I paid about $3,967, all interest, in 2014 (less than that during the preceding years because my salary has increased).  $2500 of which has always been tax deductible for me.  We have been maxing our IRAs and HSA with money we could be using to pay down the student loans. 

Does anyone have a formula or know of an online calculator that calculates how much you would save under the PSLF? I found a calculator.  It doesn't account for certain variables, but pretty useful nonetheless.

The biggest drawback, of course, for most people is locking themselves into non-profit work.   I have only ever wanted to do government work, so the PSLF is carrying out its intent as an incentive for me to continue doing the work that I want to do.  I went to a state university and lived relatively frugally without parental support.
« Last Edit: March 30, 2015, 09:21:01 AM by jezebel »