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Should I Refinance or Wait for Public Service Loan Forgiveness (PSLF)?

Tax-free student loan forgiveness sounds like a great deal, but there are times quickly paying off your student debt is the best approach.

Written By: Michael P. Lux, Esq.

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It is hard to overstate the importance of deciding between aggressively paying off your student loans through refinancing or waiting for student loan forgiveness. Doctors, lawyers, and many other professionals with graduate degrees often have well over $100,000 in federal student loans, and the wrong decision could cost thousands of dollars. How does a borrower know when to refinance or when to stick with Public Service Loan Forgiveness?

The borrowers who worry that they may not ever pay off their loans should usually stick with chasing loan forgiveness. Borrowers who can comfortably afford to pay off their student loans may find that the math says aggressive repayment and refinancing is the preferred route.

Making forgiveness vs. refinancing decision requires comparing possible spending, but this is not strictly a math question. Borrowers should also consider their plans for the future as well as the risks to each strategy.

Aggressive Repayment and Refinancing vs. Public Service Loan Forgiveness (PSLF)

For borrowers with federal student loans, Public Service Loan Forgiveness provides a great opportunity to wipe the slate of student debt clean, provided you work for a non-profit or the government. If you make 120 certified public service payments, you earn forgiveness.

The other option is to refinance and aggressively pay off your student loans. With each passing day, loan balances grow due to interest. Refinancing enables borrowers to save money on interest. The sooner you pay off your student loans, the less money you spend in total.

These two routes are often ideal ways to eliminate student debt. Unfortunately, they are polar opposite approaches. Chasing PSLF requires a borrower to sign up for an income-driven repayment plan and to pay as little as possible in hopes that the debt is wiped away after ten years. Aggressive repayment means attacking your debt with every spare penny you have.

Because these two approaches are opposites, the sooner you make an informed choice, the more money you will save in the long run. Making a smart decision requires considering several different factors.

How much debt can I have forgiven under PSLF?

There is no cap on the amount of forgiveness under PSLF, but that doesn’t mean that the program is not without risk.

Depending upon your income and debt balance, paying the minimum and waiting for public service loan forgiveness can be the more expensive option.

To estimate how much you will spend on public service loan forgiveness and how much will be forgiven at the end, use the federal government’s repayment estimator. (Note: the repayment estimator assumes 5% raises during repayment. If your salary will be going up faster or staying the same, be sure to adjust accordingly).

Another big advantage of Public Service Loan Forgiveness is that the debt forgiven is not taxed. This is significant, as most forms of student loan forgiveness result in a large tax bill.

Is there a risk to Public Service Loan Forgiveness being eliminated?

One possible risk of chasing PSLF is the chance that the program will not exist. We think the program is likely to continue unchanged for the foreseeable future. If changed, we would expect current borrowers to be grandfathered in under the current rules.

However, there is no guarantee that the program will continue. Additionally, no matter how sure you are about staying in your current job, ten years is a long time. Sometimes life has other plans. As a result, it is vital to account for the fact that you might not be in public service long enough to qualify.

Getting rejected from Public Service Loan Forgiveness

There have been numerous media reports that the rejection rate for Public Service Loan Forgiveness is 99%.

This should be a concern to borrowers, but it shouldn’t scare people away from PSLF. Qualifying for Public Service Loan Forgiveness is not as hard as the news makes it sound.

The most important thing for any borrower considering PSLF is to send in an employer certification form (ECF). The ECF causes the loan servicer to review the borrower’s employer, the borrower’s loans, and the borrower’s repayment plan. By completing an ECF, the borrower will get an up to date tally on the number of eligible payments the borrower has made towards the required 120. An employer certification form is the best way to track progress towards forgiveness.

Though not required by the government, completing an ECF should be done by all public service employees every year.

How much can I save by refinancing my student loans?

Refinancing is typically the first step in implementing an aggressive repayment strategy. Refinancing can mean significantly lower interest rates. Lower rates mean a larger percentage of each monthly payment counts towards principal.

Projecting how much it would cost to pay off your student loans aggressively requires some guess-work as well. In addition to your future income being a variable, future expenses are as well. You might be in a position to pay off all of your student loans in five years, but buying a house, having a baby, or changing jobs, could throw your calculations way off.

To figure out how much you can save by refinancing, it is important to shop around to compare the rates you qualify for with the many different student loan refinance companies. You can compare the repayment estimates from the private lenders to potential savings from loan forgiveness to see what your monthly costs would look like and how long it would take you to pay off the debt. Most lenders will disclose the total spent on the loan. You can compare this number to the results from the federal repayment estimator.

Borrowers wishing to do some quick math without applying can consult our monthly report on the lowest student loan refinance rates.

At present, the lowest possible refinance rates for a 5-year loan are:

RankLenderLowest Rate
T-1Splash Financial5.28%*
3Laurel Road5.49%

Refinancing comes with serious risks

All borrowers should understand that private refinancing comes with a couple of risks.

The first concern is that refinancing your federal loans with a private lender wipes away all of the perks that go with federal loans. That means no public service loan forgiveness and no income-driven repayments if you lose your job or have your salary cut.

The second concern is that there is no way to undo a loan refinance or consolidation. Once processed, the refinance is permanent. You cannot change your new private loan back into a federal loan. If you decide to refinance, you better be sure about your decision.

The Best of Both Worlds

Even though aggressive repayment and waiting for PSLF are polar opposite strategies, borrowers on the fence can split the difference.

Spitting the difference is pretty simple:

  • Sign up for an income-driven repayment plan and work towards PSLF.
  • Set aside money for future student loan payments in a savings account or conservative investment.
  • If PSLF ends up working out, the money set aside can be for retirement or a house down payment.
  • If forgiveness doesn’t work out, the money set aside can put a big dent in the debt.

However, if you reach a point where it is clear you will come out ahead by aggressively paying down your debt, reach out to the refinance lenders, lock in a lower interest rate, and aggressively attack your student loans. Events that might trigger this shift would include changing jobs to the private sector or getting a big raise that would mean there is little left to have forgiven on PSLF.

Making Your Decision

In some cases, the numbers will dictate that opting for PSLF is the better alternative. For others, the best route will be just to pay off the loans as fast as possible. Things get complicated when the numbers appear relatively close.

As you evaluate your circumstances, there are several questions you should ask yourself:

  • How certain am I that I will be in public service for ten years?
  • What will my income look like over the next decade?
  • How disciplined can I be with my finances?

Bottom Line: Refinance vs PSLF

Deciding between PSLF and aggressive repayment through refinancing requires an honest assessment of your finances, both present and future, and comparing the cost of federal repayment to the potential savings from loan consolidation.

Making the right decision can save a ton of money, so it is critical to take the time necessary to evaluate your options thoroughly.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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