Author Topic: Student Loan Forgiveness vs Paying it all off  (Read 12546 times)

alissanbg

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Student Loan Forgiveness vs Paying it all off
« on: June 18, 2015, 03:44:46 PM »
Hi all,

I'm new to this forum and would love some extra brain-power as I try to figure out how best to pay back my student loans.

Stats:
- Married, one child
- Student Loan debt from master's degree in speech-language pathology: $206,000, interest rate: 6.875% (I know. Believe me, I know.)
- Income: I just had a baby and stay at home part-time, and my husband works full-time. Annual income = $75,000 after taxes
- We have $20,000 invested in index funds and a small amount in 401(k)s (around $15,000 combined)
- 15 year mortgage at around 3% = $1670 monthly mortgage payment

Student Loan Scenarios:
1.) Public Service Loan Forgiveness: We can pay between $200-500 monthly for 15 years and, worse-case scenario, we will pay about $90,000 for my loans and the rest will be forgiven. (I will begin working full-time in 5 years when my son is in kindergarten, qualifying me for public service loan forgiveness. After 10 years of paying 10-15% of your discretionary income while working full time, your loans will be forgiven). This scenario would allow us to invest much much more of our money now, enabling us to get closer to early retirement by the time our mortgage and student loans have been paid off.

2.) Try our hardest to pay it off NOW and pay the full amount + interest that has been accruing ($206,000 +). The plus side to this scenario is that my hair is on fire and we could try to get rid of this debt. However, it wouldn't allow us to invest much in the meantime AND we would actually end up paying much more at the end of the day.

I love this blog and the community it has created. I would love any insight/thoughts from fellow Mustachians out there!

Thanks!



Field123

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #1 on: June 18, 2015, 05:01:47 PM »
Public service loan forgiveness -- it's a total no brainer. The better question is whether you should file seperately and thereby avoid any student loan payments during the next five years. You'd have to do the math on that one as it would eliminate your opportunity to use T IRAs and may cost you money on taxes, but it would be worth investigating.

But to your greater point you should absolutely make use of loan forgiveness. It's a real boon to mustachians!

ShoulderThingThatGoesUp

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #2 on: June 18, 2015, 05:09:28 PM »
I vote pay them off and try to refinance to a better rate. You are making a lot of assumptions about what five years from now will be like. You might have another child, you might not be able to get a job, etc.

Rural

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #3 on: June 18, 2015, 06:23:49 PM »
Public service loan forgiveness is 10 years, not 15.

forummm

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #4 on: June 18, 2015, 06:33:51 PM »
The public service loan forgiveness gives you a pretty wide choice of employers. Anything government and almost any nonprofit. If you're certain you can spend 10 years over your lifetime doing that kind of work, then it's a nice extra bonus. In your case, over a $20k/year raise.

Could you refinance somehow while still retaining the PSLF eligibility and a lower interest rate? Just in case you don't put in the 10 years?

It's hard for me to understand how you racked up that much debt for just a masters. But that's another topic.

ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #5 on: June 19, 2015, 10:56:03 AM »
I am a newly graduated lawyer with $150,000 in debt and only $47,500 income. My girlfriend of almost two years is also a speech language pathologist and graduated with $62,000 in debt, but makes about $68,000 per year now.

In these scenarios, I almost always advise to pay off the loans due to the uncertainty of IBR/PAYE. Here is a post I wrote that I have copy-pasted in other threads (please note that a lot of this analysis does not apply to PSLF, which I'll get to later):

Quote
Stringing out your loans via IBR is not a wise long-term financial strategy if you intend to make significant income in the future, which means that you will pay off your loans anyway (which I imagine you will). I am an attorney that graduated with $150,000 in student loans and weighed the IBR/pay-them-off debate for eight months before I realized IBR/PAYE would cost significantly more money than just paying them off. So here's a (slightly edited) post I wrote several months ago involving math concerning $150,000 in student loans:

First realize that you will be taxed on any amount forgiven when you are done after 20 years. So if you are forgiven $250,000 (which is possible if you make minimum payments), 38% of that is $95,000 in tax liability.

Second, while you are enrolled in PAYE/IBR, the government will only reimburse you for interest on your Subsidized Stafford loans. For me, these are only about 10% of my loans. More importantly, the rest of unpaid interest after three years capitalizes up to 110% of the loan (see here: http://www.ibrinfo.org/what.vp.html). Thus, by not being aggressive early on (and only paying $221 per month), my loan would balloon to over $160,000 easily, despite the forgiveness on my Subsidized Stafford Loans.

Side note: right now, I am enrolled in IBR even though I'm making huge payments. This means for the next three years, I'm barely putting anything towards my Stafford Loans, covering about $10 more than the monthly interest on all other loans (so they don't capitalize), and putting everything else towards my highest interest loans.

Third, PAYE estimates my monthly payment to be $221, meaning there would be almost $600 in interest being added each month. What happens if I get a job paying $100,000 per year in the near future? Now my payment shoots up to $604 and I'm still not gaining ground on the interest. I'll get to the math later on why this is bad.

Fourth, investing instead of paying off debt makes sense only when you can get returns in the market that exceed the interest rates on your loans. I'm a believer in passive investing, which returns 7-8% over the long haul...but what if the economy takes a hit in year 20 when your tax liability is due? Even worse, do you really want to have to guess and switch all your investments to bond index funds a couple years before your tax liability is due and perhaps miss out on huge returns in a bull market? This makes PAYE/IBR a HUGE gamble to me.

And this leads me to my fifth and most important point: I can't risk this plan with the hope that the government will amend the tax bill. This is for two reasons. First, the entire program becomes insolvent if you remove the tax burden. This would lead to even more increased tuition and outcries from a younger generation. Second, and more importantly, the present tax code accounts for people who really can't afford the tax liability. The IRS fact sheet on forgiven debt (http://www.irs.gov/pub/irs-pdf/p4681.pdf) provides, basically, that you are only accountable for forgiven debt to the extent that it exceeds your assets. So say the average Joe is on PAYE and paid for 20 years, thus allowing his loan to balloon to $250,000. Fortunately, because he's an average Joe and not a mustachian, all he has is a $150,000 house and $100,000 in his 401k. That means that his assets are equal to his forgiven debts and he therefore has no tax liability.

Of course, there are a lot of variations to this. But the point is that (1) the tax code already accounts for people who can't pay the tax liability and (2) the "tax bomb" problem people say will happen in 20 years isn't as bad as people think.

In Mustachian terms, however, this tax break wouldn't apply to you because you've been socking away money in a traditional brokerage account for 20 years (i.e., your assets would significantly exceed your forgiven debt). Thus, you would probably be the exception in having to actually pay the full tax liability.

Which leads me to the math.

The government estimates a 5% raise, which I think is fair. They estimate I'll pay $102,000 principal over the life of loan and have $249,000 forgiven.

Since I'll be stocking away money, my assets will dramatically exceed my liabilities, so I'll have to pay the full tax liability. Assuming a 38% tax bracket (which is certain given that the forgiven debt alone is $249,000), that comes to $94,620. So all in all, I'll have paid $196,620 towards the loan, or around the same amount if I just paid this off in 8 years.

But let's go even further. Let's look at everything else.

First, deductions lost because you had to file separately (this isn't negotiable for me...my GF makes substantially more than I do, and if I eventually made $100,000 per year, our incomes together would put me at a $1104 payment, or enough to pay the loan before it's forgiven).

Student loan interest deduction = $2500. Assuming 20 years of this and 25% tax bracket, you've missed out on either a deduction to your tax liability every paycheck or a $625 refund check from the feds every year.

Dependent care credit = $3000 per year per kid. Assume two kids (my plan) so $6,000 per year. Now you've missed out a $6,000 deduction on your taxable income or a $1,500 refund every year.

Married credit = $14,200 per year (compared to $6,200, which only one of you or your spouse can claim if you file separately). That's an $8,000 difference in taxable income per year, or $2,000 in cash.

There are more than these three, but these are the three biggest ones. And putting your spouse in the equation (since he or she is filing separately as well), you're looking at $25,000 in lost deductions per year for 20 years ($500,000!!!). Again, assume a 25% tax bracket, and we're talking $125,000 in income taken out of your paychecks or tax refunds.

So now we're at your $196,020 in paying towards the loan plus $125,000 in lost deductions.

I feel like Billy Mays here--BUT WAIT, THERE'S MORE. Let's go back to the tax liability. Assume you've been throwing what would have been your student loans into an investment account, and now you need to cover your tax liability. Now you actually need to withdraw 16% more than your tax liability to cover capital gains, meaning you'd actually need to withdraw $111,383 to cover the tax liability.

Now we are at $102,000 principal payments + $125,000 in lost deductions + $111,383 to cover tax liability. Total cost is $338,383.

And by this 20th year, you've just substantially depleted your investment account when you are 47. You also haven't been able to contribute to a Roth IRA (since you can't when filing separately).

And I'll end on this: no matter what you guys are saying, IBR and PAYE will make you a slave to your loans more than paying would. Every financial decision you make will revolve around your payment and your tax liability for TWENTY YEARS. You also have no idea what will happen in terms of income--what if you've let interest balloon for ten years, but then you become a member of an incredibly lucrative LLC that nets you $500,000 income per year? Now you might not have a financial hardship and your loan would capitalize. Sure, you can pay off your loans with that much income, but my word, that will be WAY MORE than if you had just taken care of it.

Put most simply, IBR and PAYE are huge gambles due to the unknown tax liability, having to file separately, lost deductions, inability to forecast income, and having to pay capital gains when you pay the tax liability. In the meantime, you CAN start making dents on your loans NOW if you put your mind to it and take control of the situation. If I pay my loans off in 8 years and maintain my lifestyle afterwards, using MMM's chart, I'll be about 7-10 years away from retirement. And that's way more optimal to me than risking everything on IBR/PAYE.

Now, PSLF is a different story. Throw away all of the above about tax liability at the end of the term because, as you likely know, PSLF forgives the entire debt without any tax liability.

That obviously makes it more appealing than IBR/PAYE, but as an SLP, I don't know why you'd work public sector (and therefore intentionally suppress your income) to follow this plan.

To elaborate, I'm not sure which speech therapist track you intend to pursue--acute care, residency (i.e., nursing homes), or in schools. But no matter what, by going PSLF, your career options would be (a) work for a public school, (b) work for a public hospital, or (c) work for a public adult care center. This basically eliminates, what, 50% of SLP jobs right off the start? Of course, because SLP degrees are very expensive, I also imagine there will be a lot of competition in getting these jobs.

Furthermore, and perhaps more importantly, you can make significant money as an SLP if you ever move into the management/corporate side of things. My girlfriend has been an SLP for a little over three years now and already had two job offers to basically travel and train other SLPs that would have paid her almost $85,000 per year plus a bonus. Like I said earlier, do you really want to turn these kinds of jobs down (and intentionally suppress your income) just so you can play the student loan game for a DECADE (minimum)?

Also, there's a bit of a risk in doing PSLF. I have attorney friends that worked in prosecutor's offices (public sector), did PSLF for a couple years, got burnt out, went to private practice, and now are stuck catching up on interest. I imagine something similar could happen as an SLP--school hires you, you work there for three years, life is good...then budget cuts come and you are forced to look for a job. Do you want to bet (a) this won't happen and (b) you can land a public sector job again?

All in all, my advice would be this:

(1) If you can land a public sector job and are willing to stay there for ten years, then by all means, do PSLF. Research how to reduce your adjusted gross income as much as possible (match 403b, max Traditional IRA, open HSA, etc.). But understand that this is risky and contains a lot of unknowns.

(2) If, however, you can't see yourself in the public sector for a decade, then start paying towards your loans as aggressively as possible. If you begin working full time again and stay committed, I bet you can pay these off in 5-6 years.

Whatever you choose, make sure you are committed to it.
« Last Edit: June 19, 2015, 10:58:58 AM by ReadySetMillionaire »

Fuzz

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #6 on: June 20, 2015, 09:34:18 AM »
In these scenarios, I almost always advise to pay off the loans due to the uncertainty of IBR/PAYE. Here is a post I wrote that I have copy-pasted in other threads (please note that a lot of this analysis does not apply to PSLF, which I'll get to later):

...

And I'll end on this: no matter what you guys are saying, IBR and PAYE will make you a slave to your loans more than paying would. Every financial decision you make will revolve around your payment and your tax liability for TWENTY YEARS. You also have no idea what will happen in terms of income--what if you've let interest balloon for ten years, but then you become a member of an incredibly lucrative LLC that nets you $500,000 income per year? Now you might not have a financial hardship and your loan would capitalize. Sure, you can pay off your loans with that much income, but my word, that will be WAY MORE than if you had just taken care of it.

Put most simply, IBR and PAYE are huge gambles due to the unknown tax liability, having to file separately, lost deductions, inability to forecast income, and having to pay capital gains when you pay the tax liability. In the meantime, you CAN start making dents on your loans NOW if you put your mind to it and take control of the situation. If I pay my loans off in 8 years and maintain my lifestyle afterwards, using MMM's chart, I'll be about 7-10 years away from retirement. And that's way more optimal to me than risking everything on IBR/PAYE.

[/quote]

There is a lot of awesome advice in here. Good work, ReadySetMillionaire.

I think you're going to have more stress trying to plan the next 15 years of your life around tax liability than you are going to have if you devote yourself to making money.

Also, I see that you work part time and are home part time. Is there anything you can create to sell while you're at home? I imagine online courses centered around speech pathology could be really lucrative.

Suit

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #7 on: June 20, 2015, 11:31:06 AM »
Public service loan forgiveness is 10 years, not 15.

PSLF requires full time work for 10 years, OP is part time for the next 5 years and will then go to full time, thus the 15 years.

music lover

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #8 on: June 20, 2015, 12:20:28 PM »
Public service loan forgiveness -- it's a total no brainer. The better question is whether you should file seperately and thereby avoid any student loan payments during the next five years. You'd have to do the math on that one as it would eliminate your opportunity to use T IRAs and may cost you money on taxes, but it would be worth investigating.

But to your greater point you should absolutely make use of loan forgiveness. It's a real boon to mustachians!

You call it a boon...others call it not paying your way. What if everyone racked up $200,000 in student debt, then decided to have a kid and work part time?

Rural

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #9 on: June 20, 2015, 06:14:41 PM »
Public service loan forgiveness -- it's a total no brainer. The better question is whether you should file seperately and thereby avoid any student loan payments during the next five years. You'd have to do the math on that one as it would eliminate your opportunity to use T IRAs and may cost you money on taxes, but it would be worth investigating.

But to your greater point you should absolutely make use of loan forgiveness. It's a real boon to mustachians!

You call it a boon...others call it not paying your way. What if everyone racked up $200,000 in student debt, then decided to have a kid and work part time?


Then they'd keep paying on their loans, because part time work doesn't qualify.

Field123

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #10 on: June 25, 2015, 12:59:53 PM »
Public service loan forgiveness -- it's a total no brainer. The better question is whether you should file seperately and thereby avoid any student loan payments during the next five years. You'd have to do the math on that one as it would eliminate your opportunity to use T IRAs and may cost you money on taxes, but it would be worth investigating.

But to your greater point you should absolutely make use of loan forgiveness. It's a real boon to mustachians!

You call it a boon...others call it not paying your way. What if everyone racked up $200,000 in student debt, then decided to have a kid and work part time?

I don't understand this argument. Every semester that you apply for a federal loan you are obligated to sign a "Master Promissory Note". While I imagine that most people don't actually read that note, if they did, they would see that there is an entire section on repayment options. One of these options, which is CONTAINED IN THE CONTRACT, specifies the option of PSLF and the other income based repayment plans.

So how is this in any way unfair or not paying your way?? It's part of the deal and memorialized in the contract. Just because you may think its a bad deal for the government (which it may or may not be), as long as its in the contract why would you have any issue with someone acting rationally and in their best interest to maximize their value under said contract.

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #11 on: June 25, 2015, 02:29:06 PM »
The idea of planning to take out 200K in loans under the PSLF but not work (full time) for five years after school is kind of baffling to me.  The PAYE is 20 years, right?  I would either pay the loan aggressively or just stick with the PAYE and not worry about having to forgo private employment. 

jackiechiles2

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #12 on: June 25, 2015, 02:56:42 PM »
I am a newly graduated lawyer with $150,000 in debt and only $47,500 income. My girlfriend of almost two years is also a speech language pathologist and graduated with $62,000 in debt, but makes about $68,000 per year now.

In these scenarios, I almost always advise to pay off the loans due to the uncertainty of IBR/PAYE. Here is a post I wrote that I have copy-pasted in other threads (please note that a lot of this analysis does not apply to PSLF, which I'll get to later):

Quote
Stringing out your loans via IBR is not a wise long-term financial strategy if you intend to make significant income in the future, which means that you will pay off your loans anyway (which I imagine you will). I am an attorney that graduated with $150,000 in student loans and weighed the IBR/pay-them-off debate for eight months before I realized IBR/PAYE would cost significantly more money than just paying them off. So here's a (slightly edited) post I wrote several months ago involving math concerning $150,000 in student loans:

First realize that you will be taxed on any amount forgiven when you are done after 20 years. So if you are forgiven $250,000 (which is possible if you make minimum payments), 38% of that is $95,000 in tax liability.

Second, while you are enrolled in PAYE/IBR, the government will only reimburse you for interest on your Subsidized Stafford loans. For me, these are only about 10% of my loans. More importantly, the rest of unpaid interest after three years capitalizes up to 110% of the loan (see here: http://www.ibrinfo.org/what.vp.html). Thus, by not being aggressive early on (and only paying $221 per month), my loan would balloon to over $160,000 easily, despite the forgiveness on my Subsidized Stafford Loans.

Side note: right now, I am enrolled in IBR even though I'm making huge payments. This means for the next three years, I'm barely putting anything towards my Stafford Loans, covering about $10 more than the monthly interest on all other loans (so they don't capitalize), and putting everything else towards my highest interest loans.

Third, PAYE estimates my monthly payment to be $221, meaning there would be almost $600 in interest being added each month. What happens if I get a job paying $100,000 per year in the near future? Now my payment shoots up to $604 and I'm still not gaining ground on the interest. I'll get to the math later on why this is bad.

Fourth, investing instead of paying off debt makes sense only when you can get returns in the market that exceed the interest rates on your loans. I'm a believer in passive investing, which returns 7-8% over the long haul...but what if the economy takes a hit in year 20 when your tax liability is due? Even worse, do you really want to have to guess and switch all your investments to bond index funds a couple years before your tax liability is due and perhaps miss out on huge returns in a bull market? This makes PAYE/IBR a HUGE gamble to me.

And this leads me to my fifth and most important point: I can't risk this plan with the hope that the government will amend the tax bill. This is for two reasons. First, the entire program becomes insolvent if you remove the tax burden. This would lead to even more increased tuition and outcries from a younger generation. Second, and more importantly, the present tax code accounts for people who really can't afford the tax liability. The IRS fact sheet on forgiven debt (http://www.irs.gov/pub/irs-pdf/p4681.pdf) provides, basically, that you are only accountable for forgiven debt to the extent that it exceeds your assets. So say the average Joe is on PAYE and paid for 20 years, thus allowing his loan to balloon to $250,000. Fortunately, because he's an average Joe and not a mustachian, all he has is a $150,000 house and $100,000 in his 401k. That means that his assets are equal to his forgiven debts and he therefore has no tax liability.

Of course, there are a lot of variations to this. But the point is that (1) the tax code already accounts for people who can't pay the tax liability and (2) the "tax bomb" problem people say will happen in 20 years isn't as bad as people think.

In Mustachian terms, however, this tax break wouldn't apply to you because you've been socking away money in a traditional brokerage account for 20 years (i.e., your assets would significantly exceed your forgiven debt). Thus, you would probably be the exception in having to actually pay the full tax liability.

Which leads me to the math.

The government estimates a 5% raise, which I think is fair. They estimate I'll pay $102,000 principal over the life of loan and have $249,000 forgiven.

Since I'll be stocking away money, my assets will dramatically exceed my liabilities, so I'll have to pay the full tax liability. Assuming a 38% tax bracket (which is certain given that the forgiven debt alone is $249,000), that comes to $94,620. So all in all, I'll have paid $196,620 towards the loan, or around the same amount if I just paid this off in 8 years.

But let's go even further. Let's look at everything else.

First, deductions lost because you had to file separately (this isn't negotiable for me...my GF makes substantially more than I do, and if I eventually made $100,000 per year, our incomes together would put me at a $1104 payment, or enough to pay the loan before it's forgiven).

Student loan interest deduction = $2500. Assuming 20 years of this and 25% tax bracket, you've missed out on either a deduction to your tax liability every paycheck or a $625 refund check from the feds every year.

Dependent care credit = $3000 per year per kid. Assume two kids (my plan) so $6,000 per year. Now you've missed out a $6,000 deduction on your taxable income or a $1,500 refund every year.

Married credit = $14,200 per year (compared to $6,200, which only one of you or your spouse can claim if you file separately). That's an $8,000 difference in taxable income per year, or $2,000 in cash.

There are more than these three, but these are the three biggest ones. And putting your spouse in the equation (since he or she is filing separately as well), you're looking at $25,000 in lost deductions per year for 20 years ($500,000!!!). Again, assume a 25% tax bracket, and we're talking $125,000 in income taken out of your paychecks or tax refunds.

So now we're at your $196,020 in paying towards the loan plus $125,000 in lost deductions.

I feel like Billy Mays here--BUT WAIT, THERE'S MORE. Let's go back to the tax liability. Assume you've been throwing what would have been your student loans into an investment account, and now you need to cover your tax liability. Now you actually need to withdraw 16% more than your tax liability to cover capital gains, meaning you'd actually need to withdraw $111,383 to cover the tax liability.

Now we are at $102,000 principal payments + $125,000 in lost deductions + $111,383 to cover tax liability. Total cost is $338,383.

And by this 20th year, you've just substantially depleted your investment account when you are 47. You also haven't been able to contribute to a Roth IRA (since you can't when filing separately).

And I'll end on this: no matter what you guys are saying, IBR and PAYE will make you a slave to your loans more than paying would. Every financial decision you make will revolve around your payment and your tax liability for TWENTY YEARS. You also have no idea what will happen in terms of income--what if you've let interest balloon for ten years, but then you become a member of an incredibly lucrative LLC that nets you $500,000 income per year? Now you might not have a financial hardship and your loan would capitalize. Sure, you can pay off your loans with that much income, but my word, that will be WAY MORE than if you had just taken care of it.

Put most simply, IBR and PAYE are huge gambles due to the unknown tax liability, having to file separately, lost deductions, inability to forecast income, and having to pay capital gains when you pay the tax liability. In the meantime, you CAN start making dents on your loans NOW if you put your mind to it and take control of the situation. If I pay my loans off in 8 years and maintain my lifestyle afterwards, using MMM's chart, I'll be about 7-10 years away from retirement. And that's way more optimal to me than risking everything on IBR/PAYE.

Now, PSLF is a different story. Throw away all of the above about tax liability at the end of the term because, as you likely know, PSLF forgives the entire debt without any tax liability.

That obviously makes it more appealing than IBR/PAYE, but as an SLP, I don't know why you'd work public sector (and therefore intentionally suppress your income) to follow this plan.

To elaborate, I'm not sure which speech therapist track you intend to pursue--acute care, residency (i.e., nursing homes), or in schools. But no matter what, by going PSLF, your career options would be (a) work for a public school, (b) work for a public hospital, or (c) work for a public adult care center. This basically eliminates, what, 50% of SLP jobs right off the start? Of course, because SLP degrees are very expensive, I also imagine there will be a lot of competition in getting these jobs.

Furthermore, and perhaps more importantly, you can make significant money as an SLP if you ever move into the management/corporate side of things. My girlfriend has been an SLP for a little over three years now and already had two job offers to basically travel and train other SLPs that would have paid her almost $85,000 per year plus a bonus. Like I said earlier, do you really want to turn these kinds of jobs down (and intentionally suppress your income) just so you can play the student loan game for a DECADE (minimum)?

Also, there's a bit of a risk in doing PSLF. I have attorney friends that worked in prosecutor's offices (public sector), did PSLF for a couple years, got burnt out, went to private practice, and now are stuck catching up on interest. I imagine something similar could happen as an SLP--school hires you, you work there for three years, life is good...then budget cuts come and you are forced to look for a job. Do you want to bet (a) this won't happen and (b) you can land a public sector job again?

All in all, my advice would be this:

(1) If you can land a public sector job and are willing to stay there for ten years, then by all means, do PSLF. Research how to reduce your adjusted gross income as much as possible (match 403b, max Traditional IRA, open HSA, etc.). But understand that this is risky and contains a lot of unknowns.

(2) If, however, you can't see yourself in the public sector for a decade, then start paying towards your loans as aggressively as possible. If you begin working full time again and stay committed, I bet you can pay these off in 5-6 years.

Whatever you choose, make sure you are committed to it.

I don't think you're fully comprehending the tax liability aspect.  You're only liable for taxes to the extent you're not insolvent.  Because this is commonly overstated:

For debt forgiven under the 10-year IBR program (PSLF), there is no tax consequence.

For debt forgiven under the longer program, the tax is calculated as follows:

You're only taxed on forgiven debt to the extent that it exceeds insolvency. (Total of liabilities minus FMV of assets.) Also, the capitalized interest is not taxable to the extent it would be deductible if you paid it.

http://www.irs.gov/pub/irs-pdf/p4681.pdf

So, $200K in principal on loan, $50K in assets, $500K forgiven (principal and interest)...you'd be taxed on $50K.

Also, once you're on IBR, you can't be kicked off, even if you make way more than the standard payment would be and are no longer in financial hardship. 

Also, why would you turn down a job to make more money?  If I make $10k more per year, my payments will go up by maybe $1000 per year, at most.  That's still $9k more.  I don't understand the incentive to not make more money under IBR.

Also, why are you and your wife filing separately if you both have student loans? 

Also, they're changing the rules on PAYE and IBR so that filing separately doesn't count anymore.  So you're not really losing out on the interest deductions.

Also, you're saying that you'd end up paying the same amount back in student loans/taxes than you'd pay if you paid it off early.  Ok......so why pay it off early?  If you're going to pay the same amount back anyways, then you're basically missing out on 8 years of retirement growth. 

Furthermore, let's say 7 years down the road, something happens to where you can't work anymore.  At least you'd have 7 years of retirement money saved up.  If you're only paying off the debt, you're sitting there looking at your retirement account at low levels while wondering what you're going to do for money.  If you've got retirement savings, then at least you've got that.
« Last Edit: June 25, 2015, 03:55:29 PM by jackiechiles2 »

jackiechiles2

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #13 on: June 25, 2015, 02:59:13 PM »
Public service loan forgiveness -- it's a total no brainer. The better question is whether you should file seperately and thereby avoid any student loan payments during the next five years. You'd have to do the math on that one as it would eliminate your opportunity to use T IRAs and may cost you money on taxes, but it would be worth investigating.

But to your greater point you should absolutely make use of loan forgiveness. It's a real boon to mustachians!

You call it a boon...others call it not paying your way. What if everyone racked up $200,000 in student debt, then decided to have a kid and work part time?

Then there'd be a lot of heavily indebted poor people.  Totally not like things today already.

historienne

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #14 on: June 25, 2015, 03:17:09 PM »
All in all, my advice would be this:

(1) If you can land a public sector job and are willing to stay there for ten years, then by all means, do PSLF. Research how to reduce your adjusted gross income as much as possible (match 403b, max Traditional IRA, open HSA, etc.). But understand that this is risky and contains a lot of unknowns.

(2) If, however, you can't see yourself in the public sector for a decade, then start paying towards your loans as aggressively as possible. If you begin working full time again and stay committed, I bet you can pay these off in 5-6 years.

Whatever you choose, make sure you are committed to it. 

PSLF applies to all non-profit work, not just government work.  I don't know anything about SLP career paths specifically, but many hospitals and larger medical groups are non-profit, and still pay their management very well. 

ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #15 on: June 25, 2015, 07:05:40 PM »
I don't think you're fully comprehending the tax liability aspect.  You're only liable for taxes to the extent you're not insolvent.  Because this is commonly overstated:

For debt forgiven under the 10-year IBR program (PSLF), there is no tax consequence.

For debt forgiven under the longer program, the tax is calculated as follows:

You're only taxed on forgiven debt to the extent that it exceeds insolvency. (Total of liabilities minus FMV of assets.) Also, the capitalized interest is not taxable to the extent it would be deductible if you paid it.

http://www.irs.gov/pub/irs-pdf/p4681.pdf

So, $200K in principal on loan, $50K in assets, $500K forgiven (principal and interest)...you'd be taxed on $50K.

I actually discussed exactly this in the post that you quoted. I'm well aware that you are only liable for the amount that your assets exceed your forgiven debt.

But we are on an early retirement/financial independence forum and responding to a couple with potential for very high earnings. If they aren't paying off their loans, then they are going to have a high savings rate. And if they have a high savings rate, their assets will crush their liabilities after year 20 (it's not even close). And, because of this, they will be responsible for the full tax liability.

Also, once you're on IBR, you can't be kicked off, even if you make way more than the standard payment would be and are no longer in financial hardship.

I'm aware of this, also. My point was that if you have a high student loan balance and simply make minimum payments, then your balance is going to grow and grow and grow due to interest. And although your payment will technically never go over the ten year payment, your balance will be huge and thus require you to either (a) make a higher payment than the ten year payment or (b) pay the ten year payment until the loan is paid off--and both of these will result in you paying more towards your loan and receiving no forgiveness.

Also, why would you turn down a job to make more money?  If I make $10k more per year, my payments will go up by maybe $1000 per year, at most.  That's still $9k more.  I don't understand the incentive to not make more money under IBR.

I guess you wouldn't turn down this job, but my point is two fold. First, if you initially make minimum payments, you may receive raises and eventually have to pay a bigger loan balance back anyway.

Second, and more importantly, you'd be way better off getting your loans in order and then using money from raises and promotions to crush your debt ASAP. That is, in my mind, the most motivating factor of getting your loans under control as soon as you graduate--once your career takes off, you'll be able to crush them and get them out of the way quickly if you start aggressively.

Also, why are you and your wife filing separately if you both have student loans?

I'm not married.

Also, they're changing the rules on PAYE and IBR so that filing separately doesn't count anymore.  So you're not really losing out on the interest deductions.
.

I'm not 100% certain, but I believe they are only changing the rules as applied to new enrollees in IBR/PAYE. My IBR contract allows me to file separately.

That said, the fact that the rules change should scare you. I've been reading on student loans for some time now and the rules have changed significantly three times. Any plan you make is subject to the whims of Congress (rather than yourself).

Also, you're saying that you'd end up paying the same amount back in student loans/taxes than you'd pay if you paid it off early.  Ok......so why pay it off early?  If you're going to pay the same amount back anyways, then you're basically missing out on 8 years of retirement growth.

I'm not at all saying they'd pay back the same amount. In my example, doing the minimum payment/PAYE plan for 20 years would result in $313,000 towards my loans. Paying them back in eight years costs $182,000.

In fact, a large portion of my post shows that under most circumstances, the borrower will pay significantly more by stretching out his or her loans.

Furthermore, let's say 7 years down the road, something happens to where you can't work anymore.  At least you'd have 7 years of retirement money saved up.  If you're only paying off the debt, you're sitting there looking at your retirement account at low levels while wondering what you're going to do for money.  If you've got retirement savings, then at least you've got that.

I never advocated for 100% debt payoff aggressiveness. There's a balance to be struck.

Also, not sure whether I posted it here, but I'm enrolled in IBR and targeting my high interest rate loans. So if shit does hit the fan, yes, I'm out the money I paid towards my loans...but I'd also still be eligible for $0 payments until everything was forgiven.

I guess I'll end with this: you seem to have the exact mindset I had back in January and February. I was making minimum payments, stuffing my Roth with money, and pretending like my student loans didn't exist.

Then I realized my balance was growing by $575 per month. That's almost $7000 per year. And if--like I hope--I receive a big promotion after 2-3 years in practice (the most common time to lateral), then I'd have to tackle $21,000 in interest before even making a dent in my loans.

And that's just not for me. I can chip about $13,000 away at these loans each year for now. Then when I make six figures (hopefully), I can crush my loans in no time. Then I can use the money that I was paying towards my loans and put it towards retirement. And then I will be very, very close to FI.

I'll be damned if that doesn't sound better than doing accounting gymnastics with IBR for TWENTY years.
« Last Edit: June 25, 2015, 07:11:18 PM by ReadySetMillionaire »

ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #16 on: June 25, 2015, 08:42:00 PM »
One thing I'll add: there are some great posts about this issue.

I recommend reading this thread: http://forum.mrmoneymustache.com/ask-a-mustachian/in-$150-000-of-student-loan-debt-and-need-some-adviceencouragement/msg570569/#msg570569

In short, the calculation does become a little closer if we're talking PAYE.
« Last Edit: June 26, 2015, 04:41:57 AM by ReadySetMillionaire »

ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #17 on: June 26, 2015, 04:40:47 AM »
...and one more thing haha.

The REPAYE (the new PAYE coming out in October) has different rules: http://askheatherjarvis.com/blog/repaye-targets-benefits

The three negatives:

(1) No cap on payments (i.e., your payment can be more than 10%);

(2) Your spouse's income is considered, regardless of whether you file separately or jointly (meaning that, if you have two decent incomes, you'll likely pay off the loans anyway); and

(3) If you have any graduate loans, forgiveness occurs after 25 years, not 20.

I'm on my phone and can't really do the math on all this now. But my guess is that it would take a lot of clever moves (maxing 401k, traditional IRA, HSA, 529 plans, etc.) to make this plan worth while.

I'm at least intrigued, though, and temporarily waiting to make my June payment to look into all this. For anybody reading this thread, I can't strongly emphasize enough the quality of the discussion in the link I posted earlier.

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #18 on: June 26, 2015, 07:26:11 AM »
RSM, you make a few good points, but the PSLF with the current PAYE (or even the IBR) is so dramatically different from a lot of what you are cautioning against.  She's talking 10 year tax free forgiveness.  In your shoes, yeah, it's pretty clear that paying the loan down is the better way to go.  But for the OP, the pros are much greater.   But I probably wouldn't wait five years to get back to full time work.   And you don't have to file separately.  I see people casually suggest this every time the PSLF/IBR comes up, but it's not necessary if your AGI is low enough anyway (and it helps if both spouses have loans).

jackiechiles2

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #19 on: June 26, 2015, 07:56:28 AM »
...and one more thing haha.

The REPAYE (the new PAYE coming out in October) has different rules: http://askheatherjarvis.com/blog/repaye-targets-benefits

The three negatives:

(1) No cap on payments (i.e., your payment can be more than 10%);

(2) Your spouse's income is considered, regardless of whether you file separately or jointly (meaning that, if you have two decent incomes, you'll likely pay off the loans anyway); and

(3) If you have any graduate loans, forgiveness occurs after 25 years, not 20.

I'm on my phone and can't really do the math on all this now. But my guess is that it would take a lot of clever moves (maxing 401k, traditional IRA, HSA, 529 plans, etc.) to make this plan worth while.

I'm at least intrigued, though, and temporarily waiting to make my June payment to look into all this. For anybody reading this thread, I can't strongly emphasize enough the quality of the discussion in the link I posted earlier.

You forgot to mention one interesting aspect of the REPAYE:

If your payment does not fully cover interest charges, you will be charged only 50 percent of the unpaid interest.

That means that rather than the interest adding up at 7%, it's adding up at 3.5%, which, theoretically, is lower than you'd get on a return on an investment. 

Also, the "no cap" rule doesn't mean your payments can be more than 10%, just that if 10% of your income is eventually more than the payment would be on the standard payment plan, then you'll pay 10% still.  Before, your payment could never be higher than the standard payment, regardless of how much income you earned.

ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #20 on: June 26, 2015, 09:22:14 AM »
You forgot to mention one interesting aspect of the REPAYE:

If your payment does not fully cover interest charges, you will be charged only 50 percent of the unpaid interest.

That means that rather than the interest adding up at 7%, it's adding up at 3.5%, which, theoretically, is lower than you'd get on a return on an investment. 

Also, the "no cap" rule doesn't mean your payments can be more than 10%, just that if 10% of your income is eventually more than the payment would be on the standard payment plan, then you'll pay 10% still.  Before, your payment could never be higher than the standard payment, regardless of how much income you earned.

Really interesting points. You and others have said enough to convince me to hold off paying on my loans for at least the rest of the summer while I consider the REPAYE plan (I'm currently only eligible for IBR, which sucks and isn't worth pursuing).

I also hope I've been helpful in pointing out some of the negatives to IBR/PAYE/REPAYE.

I appreciate your input and would enjoy reading your strategies as to reducing AGI to minimize payments, and how you plan to save for the tax liability. Any thoughts?

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #21 on: June 26, 2015, 09:39:16 AM »
I am almost 5 years in on the IBR and PSLF.  It seems like the REPAYE, depending on the final language, will be a good choice.  I don't qualify for the PAYE and me and my husband already file jointly.  I have only graduate loans, but that is irrelevant in the PSLF context, and in any event the IBR is the same 25 years anyway.  Seems like there would be no reason not to switch. 

jackiechiles2

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #22 on: June 26, 2015, 10:05:14 AM »
I am almost 5 years in on the IBR and PSLF.  It seems like the REPAYE, depending on the final language, will be a good choice.  I don't qualify for the PAYE and me and my husband already file jointly.  I have only graduate loans, but that is irrelevant in the PSLF context, and in any event the IBR is the same 25 years anyway.  Seems like there would be no reason not to switch.

Only question about REPAYE is whether your interest from IBR capitalizes if you switch.

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #23 on: June 26, 2015, 10:25:37 AM »
Only question about REPAYE is whether your interest from IBR capitalizes if you switch.

Which is makes no difference as long as the loans are actually forgiven under the PSLF, correct?

abhe8

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #24 on: June 26, 2015, 10:40:23 AM »
ah, so while you are in IBR the interest never capitalizes? I was wondering about that. I'm 4 yr 8 months into IRB and PSLF. I'm planning to go the entire 10 years. i'm also using money from my employer to make my payments, so seems like a win.

but, will I be required to switch over to the new REPAYE plan?


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ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #25 on: June 26, 2015, 11:03:23 AM »
Interesting discussion guys. I'd love to hear what you think about my situation.

I graduated with about $148,000 in student loans. I've been enrolled in IBR since March but have been making high payments towards my highest interest rate loans. My balance is down to $143,000 so I'm making decent progress. Up until now my goal has been to relentlessly attack these loans and defer retirement savings.

However, I'm only making $47,500 gross income. My girlfriend (hopefully married within a year and a half) makes $67,500 gross. So together we make about $115,000 gross.

If I did do REPAYE, I'd go all out with it--max to 401k, traditional IRA, etc. I'd hopefully convince my GF to do the same.

Breakdown would be as follows:

Me: $47,500 income - $18,500 towards 401k - $5,500 to traditional IRA - $2,500 student loan deduction

Her: $67,500 income - same deductions.

Total AGI = $62,000.

That would put my PAYE payment (even while married and filing jointly) at $318 a month. PAYE calculator estimates $145,000 paid towards loan and $196,000 in forgiveness.

I think I'd then try to make sure I was in the 25% tax bracket to pay that back. So I'd have to come up with $50,000 after year 25.

But by then, I would have maxed out everything until I was 45 (my retirement goal). My assets at 45 would be: $696,000 in 401k and $200,000 in Traditional IRA. Girlfriend would also have same amounts but would want to continue working.

Because she'd still be working, I'd do my best to not pull from those accounts. Balance at $896,000. Compound that for the additional seven years before PAYE tax liability strikes and the balance is $1,438,000. I'm sure I could muster some way to pull from that to pay my tax liability. That, plus my girlfriend/wife's savings, would be significantly more than we needed for retirement.

Have I lost my damn mind or have I just been converted to the REPAYE movement?

PS: sorry if this hijacks the thread. I think I might author my own thread here some time soon.
« Last Edit: June 26, 2015, 11:16:57 AM by ReadySetMillionaire »

frugalfanny

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #26 on: June 26, 2015, 12:34:26 PM »
The whole forgiveness vs. paying it off perplexes me too.

I have $40,000 in federal student loans combined from undergrad and a Master's in Library Science. I work full-time in a library making $50,000 a year. I would qualify for PSLF if I worked another 9.5 years in public service. I didn't sign up for IBR until late last Fall...I had a 25 year consolidation loan and was paying the minimum (which happens to be more than I pay on IBR). If I had signed up when I started working I would already be 5 years in (dumb dumb dumb). I was always skeptical of the program, which was why I didn't switch to IBR/PSLF originally. It seemed like a dangerous gamble to make not knowing what life or the government climate would be like in ten years. Now I'm slightly kicking myself, yet I still feel like I want to pay it off and put it all behind me. Of course that means putting many other dreams on the backburner.

So I am paying over $1,000 a month, on track to pay it off within the original 10 year time frame. 41 months to go til debt freedom.

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #27 on: June 26, 2015, 12:46:03 PM »
My fiance and I are taking advantage of PSLF currently.

She is a teacher and will make 50k to 60k for the next ten years.  Fortunately she has access to both a 403b, 457b, HSA, and tIRA.  That is a total of a possible 43500 dollars that can be put away each year. 

If we can keep her taxable income below 20,000 dollars and file separately for the next 10 years we will have to pay 0 dollars of interest and 0 dollars on the loans.  If she happens to go over 20k a by a few thousand the payments are still ridiculously low, but not 0. 

The only caveat to all this is you need to file separately which has its draw backs.   Like the usage of a tIRA for the other person in the relationship with taxable income.   Also, I believe you have to pay tax on the forgiven amount at the end of the loan.

The government counts "0 dollar payments" as payments towards the total of your 120 payments. 

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #28 on: June 26, 2015, 12:54:11 PM »
My fiance and I are taking advantage of PSLF currently.

She is a teacher and will make 50k to 60k for the next ten years.  Fortunately she has access to both a 403b, 457b, HSA, and tIRA.  That is a total of a possible 43500 dollars that can be put away each year. 

If we can keep her taxable income below 20,000 dollars and file separately for the next 10 years we will have to pay 0 dollars of interest and 0 dollars on the loans.  If she happens to go over 20k a by a few thousand the payments are still ridiculously low, but not 0. 

The only caveat to all this is you need to file separately which has its draw backs.   Like the usage of a tIRA for the other person in the relationship with taxable income.   Also, I believe you have to pay tax on the forgiven amount at the end of the loan.

The government counts "0 dollar payments" as payments towards the total of your 120 payments.

You do not have to file separately - that it just what you are choosing apparently.  And you do not have to pay taxes on the forgiven amount on the PSLF. 

brokescientist

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #29 on: June 30, 2015, 11:45:32 AM »
You don't have to file separately however, if you decide to file jointly you will be taxed on your joint income, which doesn't really make sense if you are trying to keep your payments 0 and your income below 20k.

I have also been reading that you must include the forgiven balance in taxable income and pay income taxes on it.

http://www.irs.gov/publications/p970/ch05.html

Not sure if they mean canceled or forgiven, but it does say forgiven. 

http://www.finaid.org/loans/forgivenesstaxability.phtml

-Matt

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #30 on: June 30, 2015, 12:17:51 PM »
You don't have to file separately however, if you decide to file jointly you will be taxed on your joint income, which doesn't really make sense if you are trying to keep your payments 0 and your income below 20k.

I have also been reading that you must include the forgiven balance in taxable income and pay income taxes on it.

http://www.irs.gov/publications/p970/ch05.html

Not sure if they mean canceled or forgiven, but it does say forgiven. 

http://www.finaid.org/loans/forgivenesstaxability.phtml

-Matt

The second link you posted specifically says that loans forgiven under the PSLF are not taxable.  And see 26 U.S. Code 108(f).

I am aware that all income is considered when you file jointly, as I said, I have been on the program for almost 5 years.  But I am willing to not forgo the tax benefits of marriage filing jointly, which outweigh having a $0 loan payment (especially when I am expecting to have the loans forgiven in 10 years anyway).   

brokescientist

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #31 on: November 29, 2015, 09:08:03 PM »
What tax benefits are you not willing to forgo?  If you don't mind me asking Jezebel?

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #32 on: November 30, 2015, 05:51:37 AM »
The ones (contributions/deductions) that are phased out at a low income if we did not file jointly. 

Making Cents

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #33 on: November 30, 2015, 06:03:26 AM »

1.) Public Service Loan Forgiveness: We can pay between $200-500 monthly for 15 years and, worse-case scenario, we will pay about $90,000 for my loans and the rest will be forgiven. (I will begin working full-time in 5 years when my son is in kindergarten, qualifying me for public service loan forgiveness. After 10 years of paying 10-15% of your discretionary income while working full time, your loans will be forgiven). This scenario would allow us to invest much much more of our money now, enabling us to get closer to early retirement by the time our mortgage and student loans have been paid off.


That is awesome that you can take advantage of this. I work for a state university so am eligible, but my loans are the standard default of 10 years, so there would be nothing left forgive if I were approved. I also have your high interest rate and so would encourage you to do the math on interest if you have not already. In my case, even if PSLF forgave the remainder after 5 years, it would be a wash between participating and paying it all off myself today because of the interest. Prepaying lump sums to knock down interest can also throw a wrench in the PSLF gears and disqualify you. What is the total you will be paying in interest plus the tax you'll pay on the forgiven portion vs the remainder of the forgiveness payoff?

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #34 on: November 30, 2015, 08:58:54 AM »

1.) Public Service Loan Forgiveness: We can pay between $200-500 monthly for 15 years and, worse-case scenario, we will pay about $90,000 for my loans and the rest will be forgiven. (I will begin working full-time in 5 years when my son is in kindergarten, qualifying me for public service loan forgiveness. After 10 years of paying 10-15% of your discretionary income while working full time, your loans will be forgiven). This scenario would allow us to invest much much more of our money now, enabling us to get closer to early retirement by the time our mortgage and student loans have been paid off.


That is awesome that you can take advantage of this. I work for a state university so am eligible, but my loans are the standard default of 10 years, so there would be nothing left forgive if I were approved. I also have your high interest rate and so would encourage you to do the math on interest if you have not already. In my case, even if PSLF forgave the remainder after 5 years, it would be a wash between participating and paying it all off myself today because of the interest. Prepaying lump sums to knock down interest can also throw a wrench in the PSLF gears and disqualify you. What is the total you will be paying in interest plus the tax you'll pay on the forgiven portion vs the remainder of the forgiveness payoff?

I can't imagine that anyone on the standard 10 year would benefit from the PSLF, it really has to be an income-based plan for the math to work.  There is a student loan forgiveness calculator online (I don't know the link but you can google it) that do the math and help determine whether a borrower can save money.   The other benefit to remember that is not included in the calculator is being on an income-based plan frees up cash for retirement accounts - you can't get those contribution years back - plus deduction qualified contributions lower AGI, which thus lowers the SL payment.

ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #35 on: November 30, 2015, 09:18:10 AM »

1.) Public Service Loan Forgiveness: We can pay between $200-500 monthly for 15 years and, worse-case scenario, we will pay about $90,000 for my loans and the rest will be forgiven. (I will begin working full-time in 5 years when my son is in kindergarten, qualifying me for public service loan forgiveness. After 10 years of paying 10-15% of your discretionary income while working full time, your loans will be forgiven). This scenario would allow us to invest much much more of our money now, enabling us to get closer to early retirement by the time our mortgage and student loans have been paid off.


That is awesome that you can take advantage of this. I work for a state university so am eligible, but my loans are the standard default of 10 years, so there would be nothing left forgive if I were approved. I also have your high interest rate and so would encourage you to do the math on interest if you have not already. In my case, even if PSLF forgave the remainder after 5 years, it would be a wash between participating and paying it all off myself today because of the interest. Prepaying lump sums to knock down interest can also throw a wrench in the PSLF gears and disqualify you. What is the total you will be paying in interest plus the tax you'll pay on the forgiven portion vs the remainder of the forgiveness payoff?

I can't imagine that anyone on the standard 10 year would benefit from the PSLF, it really has to be an income-based plan for the math to work.  There is a student loan forgiveness calculator online (I don't know the link but you can google it) that do the math and help determine whether a borrower can save money.   The other benefit to remember that is not included in the calculator is being on an income-based plan frees up cash for retirement accounts - you can't get those contribution years back - plus deduction qualified contributions lower AGI, which thus lowers the SL payment.

I read his/her post as well and thought the same thing. But his/her post history indicates he/she started with $33k in loans and has it down to $11k. In that case, pay them off, but like you said, don't neglect the retirement accounts.

Making Cents

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #36 on: November 30, 2015, 09:25:33 AM »

1.) Public Service Loan Forgiveness: We can pay between $200-500 monthly for 15 years and, worse-case scenario, we will pay about $90,000 for my loans and the rest will be forgiven. (I will begin working full-time in 5 years when my son is in kindergarten, qualifying me for public service loan forgiveness. After 10 years of paying 10-15% of your discretionary income while working full time, your loans will be forgiven). This scenario would allow us to invest much much more of our money now, enabling us to get closer to early retirement by the time our mortgage and student loans have been paid off.


That is awesome that you can take advantage of this. I work for a state university so am eligible, but my loans are the standard default of 10 years, so there would be nothing left forgive if I were approved. I also have your high interest rate and so would encourage you to do the math on interest if you have not already. In my case, even if PSLF forgave the remainder after 5 years, it would be a wash between participating and paying it all off myself today because of the interest. Prepaying lump sums to knock down interest can also throw a wrench in the PSLF gears and disqualify you. What is the total you will be paying in interest plus the tax you'll pay on the forgiven portion vs the remainder of the forgiveness payoff?

I can't imagine that anyone on the standard 10 year would benefit from the PSLF, it really has to be an income-based plan for the math to work.  There is a student loan forgiveness calculator online (I don't know the link but you can google it) that do the math and help determine whether a borrower can save money.   The other benefit to remember that is not included in the calculator is being on an income-based plan frees up cash for retirement accounts - you can't get those contribution years back - plus deduction qualified contributions lower AGI, which thus lowers the SL payment.

Yeah, that was my point. I'm glad to see someone who can actually use it. For me and for most of my friends/colleagues, PSLF is utterly pointless. It seems to have been designed not to cover most folks and to disproportionately benefit lawyers and MDs with much higher balances and longer terms.

ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #37 on: November 30, 2015, 09:30:20 AM »
Yeah, that was my point. I'm glad to see someone who can actually use it. For me and for most of my friends/colleagues, PSLF is utterly pointless. It seems to have been designed not to cover most folks and to disproportionately benefit lawyers and MDs with much higher balances and longer terms.
I still don't get why you're hung up on the terms of loans, but yes, it is much more beneficial for those with graduate degrees.

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #38 on: November 30, 2015, 09:55:35 AM »

1.) Public Service Loan Forgiveness: We can pay between $200-500 monthly for 15 years and, worse-case scenario, we will pay about $90,000 for my loans and the rest will be forgiven. (I will begin working full-time in 5 years when my son is in kindergarten, qualifying me for public service loan forgiveness. After 10 years of paying 10-15% of your discretionary income while working full time, your loans will be forgiven). This scenario would allow us to invest much much more of our money now, enabling us to get closer to early retirement by the time our mortgage and student loans have been paid off.


That is awesome that you can take advantage of this. I work for a state university so am eligible, but my loans are the standard default of 10 years, so there would be nothing left forgive if I were approved. I also have your high interest rate and so would encourage you to do the math on interest if you have not already. In my case, even if PSLF forgave the remainder after 5 years, it would be a wash between participating and paying it all off myself today because of the interest. Prepaying lump sums to knock down interest can also throw a wrench in the PSLF gears and disqualify you. What is the total you will be paying in interest plus the tax you'll pay on the forgiven portion vs the remainder of the forgiveness payoff?

I can't imagine that anyone on the standard 10 year would benefit from the PSLF, it really has to be an income-based plan for the math to work.  There is a student loan forgiveness calculator online (I don't know the link but you can google it) that do the math and help determine whether a borrower can save money.   The other benefit to remember that is not included in the calculator is being on an income-based plan frees up cash for retirement accounts - you can't get those contribution years back - plus deduction qualified contributions lower AGI, which thus lowers the SL payment.

Yeah, that was my point. I'm glad to see someone who can actually use it. For me and for most of my friends/colleagues, PSLF is utterly pointless. It seems to have been designed not to cover most folks and to disproportionately benefit lawyers and MDs with much higher balances and longer terms.

I guess my point was, why would you choose a 10 year standard plan if you were even considering the PSLF?

ReadySetMillionaire

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #39 on: November 30, 2015, 10:00:18 AM »
I guess my point was, why would you choose a 10 year standard plan if you were even considering the PSLF?

I'm wondering this as well. I'd bet Making Cents' remaining student loan balance that, if he/she were eligible, PSLF would have been a financially better move than paying off his/her loans.

Making Cents

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #40 on: November 30, 2015, 02:40:25 PM »

1.) Public Service Loan Forgiveness: We can pay between $200-500 monthly for 15 years and, worse-case scenario, we will pay about $90,000 for my loans and the rest will be forgiven. (I will begin working full-time in 5 years when my son is in kindergarten, qualifying me for public service loan forgiveness. After 10 years of paying 10-15% of your discretionary income while working full time, your loans will be forgiven). This scenario would allow us to invest much much more of our money now, enabling us to get closer to early retirement by the time our mortgage and student loans have been paid off.


That is awesome that you can take advantage of this. I work for a state university so am eligible, but my loans are the standard default of 10 years, so there would be nothing left forgive if I were approved. I also have your high interest rate and so would encourage you to do the math on interest if you have not already. In my case, even if PSLF forgave the remainder after 5 years, it would be a wash between participating and paying it all off myself today because of the interest. Prepaying lump sums to knock down interest can also throw a wrench in the PSLF gears and disqualify you. What is the total you will be paying in interest plus the tax you'll pay on the forgiven portion vs the remainder of the forgiveness payoff?

I can't imagine that anyone on the standard 10 year would benefit from the PSLF, it really has to be an income-based plan for the math to work.  There is a student loan forgiveness calculator online (I don't know the link but you can google it) that do the math and help determine whether a borrower can save money.   The other benefit to remember that is not included in the calculator is being on an income-based plan frees up cash for retirement accounts - you can't get those contribution years back - plus deduction qualified contributions lower AGI, which thus lowers the SL payment.

Yeah, that was my point. I'm glad to see someone who can actually use it. For me and for most of my friends/colleagues, PSLF is utterly pointless. It seems to have been designed not to cover most folks and to disproportionately benefit lawyers and MDs with much higher balances and longer terms.

I guess my point was, why would you choose a 10 year standard plan if you were even considering the PSLF?

I wasn't considering PSLF when I made the decision to take out the loan (right after the act creating PSLF was passed). I didn't know until I started paying it back that it could apply to any state-funded institution employee rather than just public service jobs. But in any case, I would never (as an academic) have had any control over whether I would end up working for a private or public institution-- you take the job offer you get, so it wouldn't have been something I would take into account when taking out the loan. But of course when I found out after getting a state position that I would be eligible I checked into the particulars and was disappointed, as were colleagues of mine.

charis

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #41 on: December 01, 2015, 05:25:50 AM »
Just to clear this point up for anyone reading along, it won't matter whether you, as an academic, were at a private or public education institution to qualify for the PSLF as long as it was a nonprofit, not a for-profit, institution.  Plus it never hurts to start out on a IBR and then switch to another plan if you don't end up working in a position that is PSLF qualified.

Making Cents

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #42 on: December 01, 2015, 08:20:05 PM »
Interesting. Thanks for correcting me on that. I had no idea private universities were covered here but now I see it's just tax exempt status that counts. I'm wondering why the heck junior faculty (at least where I work) aren't widely aware of this at all. In fact I was the first person aware we qualified for PSLF even given my misconception that we were eligible as state employees. I'll certainly be spreading the word. Given this, I wish I had known about PSLF when I took out my second round of loans (my MA loans predate this). I don't recall being presented with options for other terms (maybe because I only took out 11k?) but had I known more about this program then I certainly would have done the math and perhaps made a different choice on repayment terms. My fault entirely though for not following that legislation more closely. I'm two thirds of the way to payoff though, so will focus on that positive.

abhe8

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #43 on: December 01, 2015, 08:42:41 PM »

1.) Public Service Loan Forgiveness: We can pay between $200-500 monthly for 15 years and, worse-case scenario, we will pay about $90,000 for my loans and the rest will be forgiven. (I will begin working full-time in 5 years when my son is in kindergarten, qualifying me for public service loan forgiveness. After 10 years of paying 10-15% of your discretionary income while working full time, your loans will be forgiven). This scenario would allow us to invest much much more of our money now, enabling us to get closer to early retirement by the time our mortgage and student loans have been paid off.


That is awesome that you can take advantage of this. I work for a state university so am eligible, but my loans are the standard default of 10 years, so there would be nothing left forgive if I were approved. I also have your high interest rate and so would encourage you to do the math on interest if you have not already. In my case, even if PSLF forgave the remainder after 5 years, it would be a wash between participating and paying it all off myself today because of the interest. Prepaying lump sums to knock down interest can also throw a wrench in the PSLF gears and disqualify you. What is the total you will be paying in interest plus the tax you'll pay on the forgiven portion vs the remainder of the forgiveness payoff?

I can't imagine that anyone on the standard 10 year would benefit from the PSLF, it really has to be an income-based plan for the math to work.  There is a student loan forgiveness calculator online (I don't know the link but you can google it) that do the math and help determine whether a borrower can save money.   The other benefit to remember that is not included in the calculator is being on an income-based plan frees up cash for retirement accounts - you can't get those contribution years back - plus deduction qualified contributions lower AGI, which thus lowers the SL payment.

Yeah, that was my point. I'm glad to see someone who can actually use it. For me and for most of my friends/colleagues, PSLF is utterly pointless. It seems to have been designed not to cover most folks and to disproportionately benefit lawyers and MDs with much higher balances and longer terms.

You must be on an income based repayment plan, in order to still have outstanding loan balance after 10 years. if you are on a 10 year plan, there will be nothing to forgive after 10years. the PSLF plan IS designed for those who have very high educational debt burdens AND chose to work in low paying jobs. Otherwise, you are correct, the loan balance will be completely paid off in 10 years or less, thus nothing to forgive after 10 years.

abhe8

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Re: Student Loan Forgiveness vs Paying it all off
« Reply #44 on: December 01, 2015, 08:48:40 PM »
I feel like there is a lot of misinformation and misunderstanding of the PSLF program, in this thread. Just for anyone reading who might also be confused, this link gives all the info.

https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service