In this edition of the Student Loan Sherpa Mailbag, we take a look at Steve’s Public Service Loan Forgiveness dilemma. Steve is just a few years away from qualifying for Public Service Loan Forgiveness (PSLF). A big jump in salary, however, has him questioning whether PSLF has an income limit and whether pursuing PSLF is the right path for him.
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Am I Making too Much Money to Qualify for PSLF?
Thanks for your time. I’m curious what your thoughts are on whether I should bank on PSLF and continue IBR vs. aggressively paying down my loans now.
- Loans: my own only, Direct un/subsidized consolidated loans (disbursed in 2013), 6.5% interest
- Principal: $200,250
- Interest: $39,400
- Currently, on IBR, 79 payments left of my 120 for PSLF
- I make about 73k a year, wife makes 120k, so I’ve been filing taxes separately
In 22 months, I will be making 300k+ annually (physician), and my wife will be making 150k, so our combined income will be 400k just to be on the conservative side. My understanding is that at that time, I will no longer be eligible for income-based repayments and, therefore, no longer eligible for PSLF? Is that right?
If this is the case, should I be changing my payment strategy by refinancing my loans now with a lower interest rate and pay down as much as I can aggressively now?
The Sherpa Perspective
Steve’s first question asks whether there is an income limit to PSLF. The short answer is that it is impossible to make too much money for PSLF. Instead, high earners like Steve need to worry about whether or not they will pay off their loans in full before qualifying for PSLF.
The real question is whether or not pursuing PSLF is a good idea. In some circumstances, chasing loan forgiveness can be the more expensive route.
Making Too Much for Public Service Loan Forgiveness
Steve has the enviable problem of having an income so large that he is ineligible for the Income-Based Repayment Plan, better known as IBR. Enrolling in IBR or Pay As You Earn (PAYE) requires showing a “partial financial hardship.” Rather than getting into the math of a partial financial hardship, we will jump right to the bottom line. If IBR or PAYE would save money over the standard repayment plan, you have a partial financial hardship. If these plans result in higher monthly payments than the standard repayment plan, you are ineligible to sign up.
This could create a significant problem for borrowers working their way towards PSLF because not all repayment plans qualify for PSLF. For example, someone could theoretically make 100 of the necessary 120 payments and then lose IBR or PAYE eligibility. Fortunately, Congress contemplated this exact issue when it created the PSLF program. For this reason, the standard repayment plan is also a PSLF eligible repayment plan. Borrowers such as Steve can switch from IBR to the standard repayment plan and continue working towards PSLF.
We should also note that the Revised Pay As You Earn (REPAYE) Repayment plan does not have the partial financial hardship requirement. Enrolled borrowers pay 10% of their discretionary income, regardless of whether the plan saves them money. REPAYE is another repayment plan that is eligible for PSLF.
Even if someone like Steve can find an eligible repayment plan to chase after PSLF, it may not always be a good idea…
No Longer Chasing Public Service Loan Forgiveness
It might sound strange, but tax-free forgiveness isn’t always the best way to eliminate student loans.
Steve’s case presents a good example of where PSLF might not be the best idea. By chasing after PSLF instead of paying down his loans, Steve will potentially spend more money on interest over the life of his student loans. Additionally, by filing his taxes separately from his wife, he could be spending more each year at tax time. As a result, he might be better off by refinancing his student loans at the lowest possible interest rate and aggressively paying them off as fast as he can.
Deciding which route is best requires a bit of guesswork. Steve should look at his finances for the upcoming years to determine how much he can reasonably afford to pay towards his loans. Determining this number gives Steve an approximate cost of aggressive repayment.
Steve must then compare that number with the cost of chasing PSLF. This cost likely includes spending more each year on interest and possibly higher income taxes (due to not filing as married). However, the perk of PSLF is forgiveness of the remaining balance after ten years of qualified payments. The loan repayment simulator from the Department of Education is a useful tool to start this calculation.
Making the Decision
Deciding between PSLF and aggressive repayment requires more than just running two calculations. Steve must also factor in his aversion to risk. There is a risk that Steve’s salary drops or that he loses his job. For a physician, this might be a low-risk event. Someone in another profession earning a large income (from overtime, for example) might be more worried.
The benefit of aggressive repayment utilizing loan refinancing is that it can save a lot on interest. The danger is that refinancing the loan makes it a private loan that loses federal perks like PSLF and income-driven repayment plans.
If Steve can save money by aggressive repayment, that route is likely the preferred option. However, if the numbers are close, he might be better off keeping the federal protections in place.
If Steve still hasn’t answered several questions, such as job placement or high upcoming costs like a new house or child, it might make sense to put the decision on hold for a year or two. Steve could continue with his plan towards PSLF and also set aside money each month for aggressive repayment. If Steve decides to continue pursuing PSLF, he could use the money he set aside for anything he wants or needs. If he opts for aggressive repayment, he has a large chunk of change to start his attack.
Forgiveness Isn’t Free: Do the Math First
There isn’t a job where employees get paid too much to qualify for Public Service Loan Forgiveness. However, there are many situations where chasing PSLF might not be the best alternative.
The only way to know for sure is to run the numbers.