To pay federal student loans or not right now

[tacticalteam4]

Quick background:

Wife and I both graduated grad school spring, 2019. Both graduated with ~100k in federal student loan debt per person, and a ~70k private loan from one of her undergrad degrees that we have been paying on. The plan was for both of us to pursue Public Service Loan Forgiveness (PSLF) to have the federal loan balance forgiven in 10 years.

I worked from 2019-2021 in a PSLF eligible position in healthcare (2 years). In August of this month, I took a job in industry and no longer qualify for PSLF. My salary nearly doubled from this jump, though the new role is commission based, but even on a bad year, it should pay ~50% more per year. Because this job is a sales based role, it is not what I would call extremely secure, which is to be expected of any sales position. Additionally, even if I don't get canned after a short tenure, I have a track record of not sticking to anything for longer than 2-3 years before seeking change. With that in mind, I don't think it's wise to assume I will be in this job for longer than a couple years.

My wife is happy in her industry and will continue to pursue PSLF (4 years left after this school year until she gets to the required 10 years on an income based plan). We will continue to max out both of our tax advantaged accounts through employers and IRAs first.

I am seeking advice on what to do with the remaining money we have. The traditional order of investments is thrown off a bit due to the flexibility of the federal student loans. Because there are opportunities for potential forgiveness down the line with the federal student loans, I am not crazy about rushing to pay down my federal SL balance, even with interest rates ~7%.

Which of these approaches is the most logical to you?

• Use all remaining income after tax advantaged space to pay off my federal student loan balance first.
       As of right now, we are saving cash until we reach the entire balance of my federal student loans (~107k). Once we get that much cash, pay the loans off in one swoop. This should take less than a year at current income/expense levels. If there is a market drop of 10% or greater, dump all saved cash into brokerage account and revisit the loans later.
• Save for a cash purchase of a house
       As I mentioned, I seem to only be able to stick to anything (job, city) for 2-3 years at a time. If we buy a house in cash or make a big downpayment, we can lower our housing expense should I end up back at a PSLF eligible job. This is important because our federal student loan payments are based around our AGI, and if we can have low expenses, we can keep our AGI low by maxing out tax advantaged accounts. The only obvious reason this idea might not be the best is because of how low mortgage interest rates are compared to my federal student loan interest of 7%. Also, we have an awful track record of staying put in a given city longer than a few years at a time. This is also appealing because we are paying $2200/month rent for a 3/2 house in an average neighborhood in a MCOL city. We would love to get out of paying this high of rent, and can easily find a similar house for ~$320k.

Or any other options I'm not considering? I really hope I can get some feedback about what makes the most financial sense with a goal of FI. What I am not seeking is any opinions of moral or ethical obligations I may or may not have to repay student federal loans. Thanks!

[cool7hand]

Could you be precise about interest rates and loan amounts? Also, if you overpay, does the surplus go toward interest or principal?

[yachi]

We had lots of small loans that they kept bugging us to consolidate.  But there never seemed to be any benefit to consolidating.  The benefit of keeping them unconsolidated was you could pay off a $5k loan and see your total monthly payment immediately go down.  We paid down a lot of the higher interest ones early in our marriage when I felt the stock market and housing was not offering good deals.

[Peachtea]

Given the flexibilities and potential forgiveness of fed loans why are you not considering paying off your wife's private loans first? Is the interest rate really low? Her private loans aren't eligible for forgiveness and (most likely) never will be. PSLF and any proposed future gov sponsored forgiveness that's been talked about only applies to federal loans not private.

I'm also confused how you're getting to 4 years forgiveness left for your wife if she graduated in 2019. Wouldn't she have seven left after this school year? Either way it sounds like PSLF on her 100k fed loans is a good fit for her. Especially given it would be another couple years before you got to hers if you worked on paying off your fed and her private loans first.

Despite the potential for other loan forgiveness I do think it makes sense to throw money at your 7% fed loans. Random forgiveness is not a guarantee and none of the proposals would wipe out your 100k plus in loans. It's a high interest rate and it sounds like it would be pure hapenchance for you to find yourself with 10 years eligible employment for PSLF. You're already splitting the baby re saving for future vs paying off debt if you're making tax advantaged accounts first. A house doesn't seem worth it for someone who can't commit to a job/location more than a few years. There's transaction.costs to consider. It sounds like renting is a better option right now in your life anyways. And even if you did buy, I'd only do a normal deposit given low interest rates v the high interest on your loans.

[tacticalteam4]

Could you be precise about interest rates and loan amounts? Also, if you overpay, does the surplus go toward interest or principal?

Sure, my federal loans are consolidated at 6.8% with remaining balance of $105,293. I believe overpay can be applied to principal for fed loans, just have to request it.

Wife private loan 4% with remaining balance of $70,416 down from <100k a few years ago, and a bunch of unconsolidated federal loans with a range of interest rates. We cant consolidate these because she started making PSLF eligible payments on them in their current state, and if she were to consolidate now, she would lose all the progress towards PSLF she has already made. 

[tacticalteam4]

We had lots of small loans that they kept bugging us to consolidate.  But there never seemed to be any benefit to consolidating.  The benefit of keeping them unconsolidated was you could pay off a $5k loan and see your total monthly payment immediately go down.  We paid down a lot of the higher interest ones early in our marriage when I felt the stock market and housing was not offering good deals.

It also a strange rule that you can consolidate loans that you have been making payments on under an income based plan in pursuit of PSLF without losing those payments and the progress made. Not sure what the reasoning of that is or if it has changed since the PSLF has gotten some much needed recent attention.

[tacticalteam4]

Given the flexibilities and potential forgiveness of fed loans why are you not considering paying off your wife's private loans first? Is the interest rate really low? Her private loans aren't eligible for forgiveness and (most likely) never will be. PSLF and any proposed future gov sponsored forgiveness that's been talked about only applies to federal loans not private.

I'm also confused how you're getting to 4 years forgiveness left for your wife if she graduated in 2019. Wouldn't she have seven left after this school year? Either way it sounds like PSLF on her 100k fed loans is a good fit for her. Especially given it would be another couple years before you got to hers if you worked on paying off your fed and her private loans first.

Despite the potential for other loan forgiveness I do think it makes sense to throw money at your 7% fed loans. Random forgiveness is not a guarantee and none of the proposals would wipe out your 100k plus in loans. It's a high interest rate and it sounds like it would be pure hapenchance for you to find yourself with 10 years eligible employment for PSLF. You're already splitting the baby re saving for future vs paying off debt if you're making tax advantaged accounts first. A house doesn't seem worth it for someone who can't commit to a job/location more than a few years. There's transaction.costs to consider. It sounds like renting is a better option right now in your life anyways. And even if you did buy, I'd only do a normal deposit given low interest rates v the high interest on your loans.

Good question. Apart from the lowish interest at 4%, there are personal reasons I have avoided prioritizing paying this back. She is a great partner for pursuing FI and an awesome spouse, but she hasn't shown much initiative with paying this specific loan off, so I haven't made it my priority either. We know they aren't PSLF eligible, unfortunately.

The reason she had already made PSLF progress before graduating was because all of her student loan debt comes from her undergrad degrees, and she worked in the public sector while in repayment and paying out of pocket for grad school, so her PSLF clock and grad school graduation are mostly unrelated. She will complete her 6th year of PSLF eligible payments this academic school year (teacher).

I agree with your last statement and it's the path we're currently on. Although the caveat of dumping it all into some investment if things tanked is exciting and what I am hoping for. Regarding renting, it's just a tough pill to swallow paying $2200 in rent when our mortgage payment would be $1600. I agonized over the rent vs own calculators before we bought a house in Dec 2019, and that has been great for us with six figure appreciation, 2.25% interest rate, and long term renters (in-laws that plan to stay there forever) now that we moved away and are renting again.

[Sibley]

Well, don't buy a house until you are ready and want to actually stay put. Just because a mortgage payment would be less than rent doesn't mean buying makes sense. You have to factor in transaction costs as well. Yes, I realize that it worked out the first time - that doesn't mean it will again.

6.8% is pretty high. If you're not going to be eligible for forgiveness in anyway, throw extra money to pay that off.

Overall, why are you jumping around so much? You're not giving yourself time to build community before you move. It matters, especially as you age.

[LightStache]

I was in a similar situation six years before you with $60K in federal SLs. Finished grad school in 2013 into a six figure job, then hopped around for a few years, paying mostly the minimum by choice and banking my extra cash. I'm not debt-averse.

In 2018, five years in to repayment, I had a stable job and knew I wasn't going PSLF. I refi'd to a 5 year term at 1.95%, which drove my min payment almost to $1K/mo, but the plan was to pay it off quickly, which I did in 2.5 years.

When I refi'd there was talk of SL forgiveness and I knew that keeping a longer loan term would result in greater wealth overall. But I was getting tired of the loans and my job. I wanted to create some optionality to take time off and do something interesting.

While I could be sitting on $20K more NW if I had kept the public loans, I don't regret my strategy. Optionality is valuable to me. Even if that difference goes up to $40K because of a forgiveness program that I would have been eligible for, I still wouldn't regret paying that sh*t off.

[tacticalteam4]

Well, don't buy a house until you are ready and want to actually stay put. Just because a mortgage payment would be less than rent doesn't mean buying makes sense. You have to factor in transaction costs as well. Yes, I realize that it worked out the first time - that doesn't mean it will again.

6.8% is pretty high. If you're not going to be eligible for forgiveness in anyway, throw extra money to pay that off.

Overall, why are you jumping around so much? You're not giving yourself time to build community before you move. It matters, especially as you age.

I completely agree about staying put to build community. I'm not sure if it stems from a childhood filled with moves, an unquenchable desire to check out how green the other side of the grass is, some anxiety issues, or a combination of all the above that have resulted in a laughable amount of previous addresses (16 mailing addresses in 7 states) over 14 years of adulthood. Over those 14 years, some moves were from being in the military, some from getting a couple bachelor's degrees from two different universities, some from grad school (and im not even counting the addresses I had while on clinical rotations for months at a time), and now the last two from professional opportunities. My college transcripts paint a similar picture with something like 15 colleges attended. I would love to pick somewhere that we want to live and stay there, but it just seems like opportunities come up that require a move. Im hoping this most recent job change into sales will address whatever this urge is to be on the go. We look forward to FI for one of the primary reasons of choosing where we want to live and staying there.

[tacticalteam4]

I was in a similar situation six years before you with $60K in federal SLs. Finished grad school in 2013 into a six figure job, then hopped around for a few years, paying mostly the minimum by choice and banking my extra cash. I'm not debt-averse.

In 2018, five years in to repayment, I had a stable job and knew I wasn't going PSLF. I refi'd to a 5 year term at 1.95%, which drove my min payment almost to $1K/mo, but the plan was to pay it off quickly, which I did in 2.5 years.

When I refi'd there was talk of SL forgiveness and I knew that keeping a longer loan term would result in greater wealth overall. But I was getting tired of the loans and my job. I wanted to create some optionality to take time off and do something interesting.

While I could be sitting on $20K more NW if I had kept the public loans, I don't regret my strategy. Optionality is valuable to me. Even if that difference goes up to $40K because of a forgiveness program that I would have been eligible for, I still wouldn't regret paying that sh*t off.

I agree that optionality is valuable. It's the reason i'm considering paying the optionality premium of a couple % higher to keep the 6.8% fed loans because of how many options they have for repayment, and the possibility some might even be forgiven. But you're right, it must feel awesome to not have to worry about them ever again vs playing the long, "smart", strategic game of having them compound over the years hoping one day they will be gone.

 It seems like seeing all the risk takers winning bigly recently with crypto, options, meme stocks, NFTs, pokemon cards, etc makes paying down debt seem even less appealing. I'd rather just ride a bubble to the top and get out in time than pay back boring loans. Is that so difficult?