The Public Service Loan Forgiveness Dilemma

[GradMinus]

Hello fellow Mustachians,

I have something of a dilemma:
I'm about to begin the Public Service Loan Forgiveness program in January with a forgivable student loan debt of $160k. In order for this to be written off, I have to work full-time (at least 30 hours/week) for a government agency, non-profit, etc. I'm currently working for a qualifying state agency.

My full-time job pays about $80k/year gross, and I just started a 20hr/week second job that will pay around $36k/year gross. Working 60 hours a week will earn me about $116k/year. Now, it becomes complicated.

I'm on the Income Based Repayment program. Essentially that mean I pay 15% of my income over the poverty line of about $17k toward this federal debt. At $80k, that results in a student loan payment of about $787/month. At $116k, I'm paying $1238/month.

My current expenses are about $17k/year (ha! right at the poverty line) excluding the student loan payment. So, early retirement could be possible at  $425k. I'm currently able to save about $4600/month, so at 7% compounding I could potentially retire in about six years (if I can continue the 60 hour weeks). However, six years from now, I'll still be required to work full-time to satisfy my public service obligation. Any suggestions as to how I could walk away at six years without forfeiting a potential $250k write-off?
 
Thanks!

[dragoncar]

Relevant recent discussions:

https://forum.mrmoneymustache.com/welcome-to-the-forum/student-loan-forgiveness/
https://forum.mrmoneymustache.com/welcome-to-the-forum/question-about-a-student-loan-gamble/

Edit: You can get the 25 year IBR forgiveness regardless of public service, right?  So if you keep your income under 150% of poverty level, you make no payments for 25 years and then the debt is forgiven.  Unfortunately, it would be really scary to watch the balance grow for 25 years.

[ZiziPB]

Sorry to say this, but I think you should plan on working the minimum 10 years required.  It may be a "write off" for you but all the rest of us are paying for it through higher taxes.... Including the countless Mustachians who pay their astronomical student loans in full!

[hoodedfalcon]

I'm on the Income Based Repayment program. Essentially that mean I pay 15% of my income over the poverty line of about $17k toward this federal debt.

To be clear, the payment is 15% of discretionary income, which is defined as the difference between AGI and 150% of the FPL. $17235 is 150% of the FPL, not the poverty line. Also, AGI and income/gross income are not the same. There are things you can do to decrease your AGI while not changing your gross income, which of course could then change your IBR payment (contributing to 401K, for instance).

Have you calculated how much of your principal you will have paid after 6 years? 10 years? I am not sure where you get the $250K write-off number.

So, congratulations on the well paying job and the well paying second job. Clearly you aren't afraid of work. However, I personally would have a problem gaming or using a system that is supposed to encourage public service as a way into early retirement. I say this as someone who may count on PSLF for my federal student loans. You are lucky that all of your debt is federal, because only a portion of mine is. Also, as someone who works for a non-profit and makes about half what you do, I pay about what you pay towards my loans each month (private and federal). But I am sacrificing a lot (including early retirement) in the process, because I feel obligated to pay as much as I can towards my debt.  You could easily pay off your debts with your income without taking advantage of PSLF. Your "dilemma" is one that I wouldn't be proud of, personally. Just my .02.

[GradMinus]

Edit: You can get the 25 year IBR forgiveness regardless of public service, right?  So if you keep your income under 150% of poverty level, you make no payments for 25 years and then the debt is forgiven.  Unfortunately, it would be really scary to watch the balance grow for 25 years.

Thank you for the links! With regard to the 25 year IBR, watching it grow would indeed be scary. The other scary part is that the write off is taxable in the 25 year plan whereas it is not taxable under the 10 year plan.

[GradMinus]

I'm on the Income Based Repayment program. Essentially that mean I pay 15% of my income over the poverty line of about $17k toward this federal debt.

To be clear, the payment is 15% of discretionary income, which is defined as the difference between AGI and 150% of the FPL. $17235 is 150% of the FPL, not the poverty line. Also, AGI and income/gross income are not the same. There are things you can do to decrease your AGI while not changing your gross income, which of course could then change your IBR payment (contributing to 401K, for instance).

Have you calculated how much of your principal you will have paid after 6 years? 10 years? I am not sure where you get the $250K write-off number.

So, congratulations on the well paying job and the well paying second job. Clearly you aren't afraid of work. However, I personally would have a problem gaming or using a system that is supposed to encourage public service as a way into early retirement. I say this as someone who may count on PSLF for my federal student loans. You are lucky that all of your debt is federal, because only a portion of mine is. Also, as someone who works for a non-profit and makes about half what you do, I pay about what you pay towards my loans each month (private and federal). But I am sacrificing a lot (including early retirement) in the process, because I feel obligated to pay as much as I can towards my debt.  You could easily pay off your debts with your income without taking advantage of PSLF. Your "dilemma" is one that I wouldn't be proud of, personally. Just my .02.

My number is a very rough estimate of interest accruing on the student loans, and the amount of principal I would be paying off over ten years making the IBR payment.
I can sympathize with your private/federal student loan mix. The reason I took the second job was to eliminate my private loans as quickly as possible ($50K). I had originally intended to quit once those were paid. I'm still considering doing so.
I respect your sacrifice. Are you saying that, under the IBR program, you would pay more than would be required of you?

[hoodedfalcon]

Are you saying that, under the IBR program, you would pay more than would be required of you?

I am not sure I follow this question. Could you rephrase?

[GradMinus]

I am not sure I follow this question. Could you rephrase?

Sure. If, for example, your income is around $36k and you owe $100k your payment would be about $235/month under IBR 15. If you were under the IBR program and planning on using PSLF, would you pay more that the required monthly payment of $235 in order to feel as though you were not taking advantage of tax payer money?

[willn]

With the stated numbers 116K and 20K expenses I'd just pay the damn thing off in 2 years and get on with my debt free life.  May not be mathmatically optimal re: investment return etc but if math was how you made decisions I doubt you'd have ended up with that much debt to begin with...

[lackofstache]

I'm w/ willn on this one; if you can save that much of a great salary, just pay the things off. Be happy you did so & move on.

[dragoncar]

With the stated numbers 116K and 20K expenses I'd just pay the damn thing off in 2 years and get on with my debt free life.  May not be mathmatically optimal re: investment return etc but if math was how you made decisions I doubt you'd have ended up with that much debt to begin with...

This is the credited answer :-)

[hoodedfalcon]

I am not sure I follow this question. Could you rephrase?

Sure. If, for example, your income is around $36k and you owe $100k your payment would be about $235/month under IBR 15. If you were under the IBR program and planning on using PSLF, would you pay more that the required monthly payment of $235 in order to feel as though you were not taking advantage of tax payer money?

If I thought it was feasible to pay off the debt, yes. Unfortunately, I am not in that position currently.

I am not filling my retirement accounts to the gills while paying the minimum on my debt obligations with the hope the obligation will be forgiven. I am throwing everything I can towards my loans, and I will be until they are gone.

[StarryC]

The answer to your question is no.  You cannot work only 6 years and still get your loans forgiven under PSLF. 

I would pay off more than the PSLF amount even if I were planning on using for many reasons. 6.8% interest, right?  There is basically no reason to believe the market will return substantially more than that consistently after inflation. 

1) You plan on working in public interest for 120 payment periods.  But, people get fired, take time off, get laid off, budgets cut, hate their job, become stay at home parents. etc.  If you work in public service for 119 months you get 0% forgiveness.  So, there is no guarantee.  Congress could get rid of that tomorrow if they wanted to show up to work to do it.  If you can afford to pay more, you reduce the interest you'll pay in the case where your plan doesn't happen for some reason.

2) If your plan goes exactly right and you work 10 years, then you get $250,000 forgiven.  My understanding is this was income that is taxable, though maybe that is different between IBR and PSLF.  If it is taxable, the tax on it is like $60,000 if your income is already $110,000 a year.  If by waiting and paying slower you pay $57,000  payments (mostly interest), and $60,000 in taxes, you might not be saving as much as you think when compared with your ability to right now just pay the $160,000 off.

3) I am going to assume you are young, single, and childless.  One of those is guaranteed to change, and the other two probably will.  If, right now, by working hard you can be debt free in 2 years, you might find that you would prefer to work only 40 hours a week for 9 years instead of 60 hours for 6 years in order to spend time with a spouse or child or even the couch!  You might find that you can't retire in 6 years anyway because you now need more than $17,000 a year to support your family.  Once you don't have the loan, you have a lot of freedom. 

4) In your specific situation you are asking us if you should work an additional 4 years of your life to save approximately $90,000 on your loans.  In 1 additional year of working, you could fully pay off the loan.  Therefore, if your goal is to work as few years as possible, you should pay of the loan and work 7 years instead of 6 v. working 10 years and not paying off the loan.  I guess if your primary goal is to not pay for school then working 4 years to avoid paying the remaining $90,000 in loans at the end is fine.  But that's a dumb goal. 

[GradMinus]

Thanks for the analysis StarryC. I looked into the tax on the PSLF write off. Under IBR, the amount written off is taxable. Under PSLF, the write off is not taxed.

[Nords]

So, congratulations on the well paying job and the well paying second job. Clearly you aren't afraid of work. However, I personally would have a problem gaming or using a system that is supposed to encourage public service as a way into early retirement. I say this as someone who may count on PSLF for my federal student loans. You are lucky that all of your debt is federal, because only a portion of mine is. Also, as someone who works for a non-profit and makes about half what you do, I pay about what you pay towards my loans each month (private and federal). But I am sacrificing a lot (including early retirement) in the process, because I feel obligated to pay as much as I can towards my debt.  You could easily pay off your debts with your income without taking advantage of PSLF. Your "dilemma" is one that I wouldn't be proud of, personally. Just my .02.

Instead of shaming the people who are playing by the clearly-stated rules, perhaps it would be more productive to shame the people who wrote the rules with such large loopholes.  Then they could decide how much it's costing them and whether it's worth closing the holes.

Of course, another perspective might be that the rules give plenty of incentives without stifling initiative, and early retirement is an entirely appropriate reward for someone with that much initiative.  It's also possible that you're restricting yourself with your self-imposed obligations, but I doubt that gives you the right to impose those restrictions on others.  It just gives you the right to live your life by your own standards. 

Justin, are you there?  Didn't you run an outstanding thread on IBR somewhere on this forum or E-R.org?  Didn't you also get flame-sprayed by the ethics debaters?

[hoodedfalcon]

So, congratulations on the well paying job and the well paying second job. Clearly you aren't afraid of work. However, I personally would have a problem gaming or using a system that is supposed to encourage public service as a way into early retirement. I say this as someone who may count on PSLF for my federal student loans. You are lucky that all of your debt is federal, because only a portion of mine is. Also, as someone who works for a non-profit and makes about half what you do, I pay about what you pay towards my loans each month (private and federal). But I am sacrificing a lot (including early retirement) in the process, because I feel obligated to pay as much as I can towards my debt.  You could easily pay off your debts with your income without taking advantage of PSLF. Your "dilemma" is one that I wouldn't be proud of, personally. Just my .02.

Instead of shaming the people who are playing by the clearly-stated rules, perhaps it would be more productive to shame the people who wrote the rules with such large loopholes.  Then they could decide how much it's costing them and whether it's worth closing the holes.

Of course, another perspective might be that the rules give plenty of incentives without stifling initiative, and early retirement is an entirely appropriate reward for someone with that much initiative.  It's also possible that you're restricting yourself with your self-imposed obligations, but I doubt that gives you the right to impose those restrictions on others.  It just gives you the right to live your life by your own standards. 

Justin, are you there?  Didn't you run an outstanding thread on IBR somewhere on this forum or E-R.org?  Didn't you also get flame-sprayed by the ethics debaters?

OP wanted to walk away at 6 years and still have the full benefit of the PSLF program. That is not in the "clearly-stated" rules. As far as my self-imposed obligations - I signed many sheets of paper promising to repay my debts. I don't believe either IBR or PSLF existed when I was in school. I am certainly glad they exist now though, for me and for many other people.

My professional license requires that I meet certain ethical standards, and my personal financial health (or lack thereof) could cost me my license. So, please forgive me if I live my life in accordance to how I am most comfortable, even if it lacks what you call initiative. Could I do it differently? Most definitely. I am going to follow the rules in this case.

Shaming? Isn't that another word for a facepunch?

[Nords]

So, congratulations on the well paying job and the well paying second job. Clearly you aren't afraid of work. However, I personally would have a problem gaming or using a system that is supposed to encourage public service as a way into early retirement. I say this as someone who may count on PSLF for my federal student loans. You are lucky that all of your debt is federal, because only a portion of mine is. Also, as someone who works for a non-profit and makes about half what you do, I pay about what you pay towards my loans each month (private and federal). But I am sacrificing a lot (including early retirement) in the process, because I feel obligated to pay as much as I can towards my debt.  You could easily pay off your debts with your income without taking advantage of PSLF. Your "dilemma" is one that I wouldn't be proud of, personally. Just my .02.

Instead of shaming the people who are playing by the clearly-stated rules, perhaps it would be more productive to shame the people who wrote the rules with such large loopholes.  Then they could decide how much it's costing them and whether it's worth closing the holes.

Of course, another perspective might be that the rules give plenty of incentives without stifling initiative, and early retirement is an entirely appropriate reward for someone with that much initiative.  It's also possible that you're restricting yourself with your self-imposed obligations, but I doubt that gives you the right to impose those restrictions on others.  It just gives you the right to live your life by your own standards. 

Justin, are you there?  Didn't you run an outstanding thread on IBR somewhere on this forum or E-R.org?  Didn't you also get flame-sprayed by the ethics debaters?

OP wanted to walk away at 6 years and still have the full benefit of the PSLF program. That is not in the "clearly-stated" rules. As far as my self-imposed obligations - I signed many sheets of paper promising to repay my debts. I don't believe either IBR or PSLF existed when I was in school. I am certainly glad they exist now though, for me and for many other people.

My professional license requires that I meet certain ethical standards, and my personal financial health (or lack thereof) could cost me my license. So, please forgive me if I live my life in accordance to how I am most comfortable, even if it lacks what you call initiative. Could I do it differently? Most definitely. I am going to follow the rules in this case.

Shaming? Isn't that another word for a facepunch?

I thought OP was asking for an interpretation of the rule book instead of an ethics lecture.  Nobody's questioning your high ethical standards-- I'm just objecting to your attempt to transfer them to others.  You're certainly entitled to live your life as you choose, and so is OP.

[hoodedfalcon]

So, congratulations on the well paying job and the well paying second job. Clearly you aren't afraid of work. However, I personally would have a problem gaming or using a system that is supposed to encourage public service as a way into early retirement. I say this as someone who may count on PSLF for my federal student loans. You are lucky that all of your debt is federal, because only a portion of mine is. Also, as someone who works for a non-profit and makes about half what you do, I pay about what you pay towards my loans each month (private and federal). But I am sacrificing a lot (including early retirement) in the process, because I feel obligated to pay as much as I can towards my debt.  You could easily pay off your debts with your income without taking advantage of PSLF. Your "dilemma" is one that I wouldn't be proud of, personally. Just my .02.

Instead of shaming the people who are playing by the clearly-stated rules, perhaps it would be more productive to shame the people who wrote the rules with such large loopholes.  Then they could decide how much it's costing them and whether it's worth closing the holes.

Of course, another perspective might be that the rules give plenty of incentives without stifling initiative, and early retirement is an entirely appropriate reward for someone with that much initiative.  It's also possible that you're restricting yourself with your self-imposed obligations, but I doubt that gives you the right to impose those restrictions on others.  It just gives you the right to live your life by your own standards. 

Justin, are you there?  Didn't you run an outstanding thread on IBR somewhere on this forum or E-R.org?  Didn't you also get flame-sprayed by the ethics debaters?

OP wanted to walk away at 6 years and still have the full benefit of the PSLF program. That is not in the "clearly-stated" rules. As far as my self-imposed obligations - I signed many sheets of paper promising to repay my debts. I don't believe either IBR or PSLF existed when I was in school. I am certainly glad they exist now though, for me and for many other people.

My professional license requires that I meet certain ethical standards, and my personal financial health (or lack thereof) could cost me my license. So, please forgive me if I live my life in accordance to how I am most comfortable, even if it lacks what you call initiative. Could I do it differently? Most definitely. I am going to follow the rules in this case.

Shaming? Isn't that another word for a facepunch?

I thought OP was asking for an interpretation of the rule book instead of an ethics lecture.  Nobody's questioning your high ethical standards-- I'm just objecting to your attempt to transfer them to others.  You're certainly entitled to live your life as you choose, and so is OP.

Welp. I was just giving OP my opinion. Rules and ethics are not mutually exclusive.

[mm1970]

With $116k income, and your low needs, I would think that you could actually retire earlier if you pay the loan off instead of using the system.

But I haven't done the math.