The Plan: Law School Debt, Marriage, PSLF and Picking the Right Repayment Plan

Michael Lux Blog, Student Loan Plan, Student Loans 0 Comments

In this edition of the student loan plan, we take a look at Anthony’s law school debt.  He has a bunch, but the good news is that the fiancé is debt free.  He wants to find the best repayment plan and is thinking about Public Service Loan Forgiveness.  If you want tips for dealing with your student loans, contact us.

Anthony writes:

I’m preparing to graduate from law school and between my private undergrad and law school I carry $189,000 of student loan debt (so much, I know…)  Luckily, my fiancé is debt free so at least we have that going for us.  Anyway, I’m in the process of figuring out what my best debt repayment plan is.  The first two years of my career will be spent at an appellate clerkship (making around $60,000) so pursuing the public interest forgiveness is a possibility.

If I pursue the public interest forgiveness option is it best to do an extended repayment plan?  spreading my debt out over 25 years?  Or is there a better repayment option to choose (like the Pay As You Earn plan?) .  Regardless of the plan, after 10 years and the remainder is forgiven, do you have to pay taxes on the forgiven amount?

The Plan

The first step in any student loan plan is to figure out exactly how much debt you have and what type of debt it is.  The first stop should be to visit the Department of Education’s Federal Student Loan Database.  A quick check of your credit report should show any other student loans that you have.  If a loan appears on the credit report, but not the federal database, it is a private loan.

Student loan strategy is completely different for federal loans and private loans.

Private Loans

Unlike federal loans which have great repayment plans and programs like loan forgiveness, the private lenders offer no such perks.  The one possible benefit to a private loan is that sometimes the rates are very low.  One of the big downsides is that the rates can also be very high.  It all really depends upon the individual loan.

For someone like Anthony, who is early on in his student loan repayment, we recommend attacking the high interest private loans first.  There are two ways of doing this.  Option one is to aggressively repay the loan with every available penny.  Option two is to refinance the loan with a private lender.  If you are thinking about refinancing any loans, also call consolidation, be sure to check out our page on consolidation companies and strategy.  There you will find a list of lenders, tips for finding the best deal, and warnings to help avoid major blunders.

Federal Loans

While federal loans do have more perks, managing them can be a little more complicated.  A big target for Anthony will be working towards Public Service Student Loan Forgiveness (PSLF).  This will require selecting the right repayment plan and making sure his debt is eligible.  Some federal debt, such as FFEL loans, are not eligible for PSLF, but they can be included in a direct consolidation loan and become eligible.  Other loans, such as Parent PLUS loans are not eligible and if they are consolidated into a federal direct consolidation loan, the entire loan becomes ineligible.  This means that federal direct consolidation may be essential for your student loan debt, or it could be a catastrophic mistake.  Work with you loan servicer to figure out the consequences of federal direct consolidation to determine if it is the right move for you.

As far as repayment plans go, it is important to pick the right one in order for your monthly payments to count towards PSLF.  For example, the extended repayment plan that Anthony suggests would be a mistake.  That particular repayment plan is not eligible for PSLF, so the payments will not count.  For most borrowers, an income driven repayment plan is typically the way to get the lowest payments that are also eligible for PSLF.

The most popular income driven repayment plans are Income Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).  All three of these plans can be used towards PSLF.  These plans require borrowers to pay a portion of their discretionary income towards their student loans.  IBR requires 15% while PAYE and REPAYE require 10%.  REPAYE has the most favorable treatment for accrued interest, but it will include spousal income, regardless of how you file your taxes.  PAYE and IBR can be based upon Anthony’s income alone, if he and his soon to be wife file their taxes as married filing separately.  Anthony may want to start on one repayment plan and then change once he gets married, but the downside of going this route is that the interest on the loan will capitalize each time he changes plans.  The federal repayment estimator is a great way to look at the different repayment options and how much they would cost.

Some things to consider when deciding between IBR, PAYE, and REPAYE:

  • If you are married – IBR and PAYE allow you to file separately on your tax return, it increases your yearly taxes but reduces your monthly student loan bill.  REPAYE will use both incomes regardless of filing status.  For further reading check out our article on income driven repayment plans and marriage.
  • Capitalized Interest – This issue will only apply if your monthly student loan payment is less than the interest that accrues each month.  With Anthony’s large debt, his income driven payments will likely not pay off all of the monthly interest.  If he signs up for REPAYE, half of that additional interest will not be counted against him.  IBR and PAYE do not have this perk.
  • Age of Loans – If you have older student loans, meaning federal loans from October 2007 or earlier, you are likely not eligible for PAYE.  That means you will have to decide between REPAYE and IBR.

Finally, once Anthony has started work on his clerkship, he should submit the employer certification form for his federal student loans.  This document is the only way to definitively know that you are on the right repayment plan and that your payments are counting towards PSLF.  For further reading on Public Service Loan Forgiveness be sure to check out our article on PSLF basics and fine print.  This article also discusses the tax implications of loans being forgiven (spoiler alert: PSLF is tax free unlike other debt forgiveness).

The Future

Anthony’s situation has two upcoming major changes.  First, he will be getting married.  Second, his clerkship has a defined end date.  When you get married or change jobs, it could impact your student loan plan.  For this reason it is critical to revisit the student loan plan to account for these major life events.  We suggest you use tax time as a checkup on your student loan progress and planning.