It is hard to overstate the importance of making the decision between aggressively paying off your student loans 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. If you choose the right path, and it could save tens of thousands of dollars.
Aggressive Repayment 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, the debt is forgiven completely.
The other option is to aggressively pay off your student loans. With each passing day, loan balances grow due to interest. The sooner you pay off your student loans, the less money you spend.
These two routes are the 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 10 years. Aggressive repayment means attacking your debt with every spare penny you have.
Because these two approaches are so dramatically different, the sooner you make an informed choice, the more money you will save in the long run. Making the smart decision requires considering a number of different factors.
How much debt can I have forgiven under PSLF?
There is no cap on the amount of money that can be forgiven 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 actually 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 incremental raises during repayment… if your salary will be going up faster, or staying the same, be sure to adjust accordingly).
The other risk with chasing PSLF is the chance that the program will not exist or that you will not qualify. We think the program is likely to continue unchanged for the foreseeable future, and if changed, we would expect current borrowers to be grandfathered in under the current rules. However, there is no absolute 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 and sometimes life has other plans. As a result, it is important to account for the fact that you might not be in public service long enough to qualify.
How much can I save with aggressive repayment?
Projecting how much it would cost to aggressively pay off your student loans 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 things like buying a house, having a baby, or changing jobs could throw your calculations way off.
Another important consideration with aggressive repayment is that you have the option to consolidate you student loans. Consolidation of your student loans allows you to lower your interest rates significantly. This means a higher portion of your payments are being applied to the principal balance rather than the interest. To figure out how much you can save by going the consolidation route, it is important to shop around to compare the rates you qualify for with a number of different student loan consolidation companies. You can compare the repayment estimates from the private lenders to the estimates you generated with the federal government to see what your monthly costs would look like and how long it would take you to pay off the debt.
It should be noted that consolidation comes with a couple risks that borrowers should understand before opting for the private sector option.
The first concern is that consolidating 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 consolidation. Once it is processed, it is permanent. You cannot change your new private loan back into a federal loan. If you decide to consolidate, 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 who are on the fence can split the difference.
As far as your federal loans are concerned, they stay federal, you enroll in an income-driven repayment plan, make minimum payments, and you get your payments certified for PSLF. While you are chasing Public Service Loan Forgiveness with the federal government, you also set aside money each month for your student loans. This money can be put in a separate savings account, or conservatively invested. During this time you save what you can for your student loans knowing that PSLF might not work out, or be the best option for you. If PSLF does end up happening, you have a nice chunk of money to use towards your retirement or a down payment on a house.
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 consolidation companies, 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 clearly the better alternative. For others, the best route will definitely be to just pay off the loans as fast as possible. Things get complicated when the numbers appear to be fairly close and there isn’t a clear best option.
As you evaluate your options, there are a number of questions you should ask yourself:
- How certain am I that I will be in public service for 10 years?
- What will my income look like over the next decade?
- How disciplined can I be with my finances?
Deciding between PSLF and aggressive repayment 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.