I have seen many people state that if your student loans have an interest rate of (for example) 6.8%, then your return is 6.8% as you pay down the principal on that loan. However, under the REPAYE plan the government subsidizes half of the interest that accrues, so the return would be half that (3.4% in this case).
Therefore, your opportunity cost of paying off a student loan instead of investing in a pre-tax 401k would really be higher in comparison [I am thinking: your marginal tax rate + the total interest you expect the money to accrue in a retirement account (for the same period as you will carry that part of the loan) - the total interest that you expect to capitalize on the money if you paid off the loan].
Even better, if your loans are considered subsidized loans (the government paid all the interest while you were in school), then the government will cover all of the accruing interest for the first 3 years after you graduate.
If you can get your loan payment down to $208.34/month (all towards interest most likely), then you can take a deduction for the full $2500 that you are allowed to deduct for student loan interest without losing out on any deductions. Ideally, you could get it lower. Meanwhile, you can max out your retirement accounts (which reduces your AGI for purposes of lowering your tax liability and your REPAYE loan amount as noted above).
If you are paid low enough that you can keep this going for 25 years, then your loans get discharged (and you just have to pay taxes on the amount discharged). Otherwise, if you work in a job for 10 years (really a bit longer technically) that makes you eligible for Public Student Loan Forgiveness, you may be able to get the balance forgiven without any tax liability.
This whole question makes me uncomfortable because it somehow strikes me as both immoral and anti-mustachian. If this were me, for purely emotional reasons, I would likely try to pay off the loans as quickly as possible. However, the math of the REPAYE system (or PAYE OR IBR based on your individual situation) should definitely be considered.
Does anyone else have any thoughts on this or on calculating the break-even point?
