In this edition of the Student Loan Sherpa Mailbag, we take a look at Steve’s Public Service Loan Forgiveness (PSLF) dilemma. He is just a few years away from qualifying for Public Service Loan Forgiveness, but a big jump in salary has him thinking it might be making too much money for PSLF to be an option. If you have a question for the Student Loan Sherpa, feel free to ask us.
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
The short answer to Steve’s first question is that it is impossible to make too much money for PSLF. It is conceivable that the loans will be paid off in full before PSLF kicks in, but this would be exceedingly rare.
The real question is whether or not staying on 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 not eligible to sign up.
This could create a significant problem for borrowers working their way towards PSLF. Theoretically, someone could make over 100 of the necessary 120 payments and then lose IBR or PAYE eligibility. Fortunately, this exact issue was contemplated when the PSLF program was created. 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 recently created 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 or not 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
Even though PSLF can forgive student debt tax-free after ten years, it 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 will 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 will have to take a 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.
That number most be compared to the cost of chasing PSLF. The PSLF cost likely includes more interest spending each year, and possibly higher income taxes, but has the perk of forgiving the remaining balance after ten years. The loan repayment estimator from the Department of Education is a useful tool to help get started on 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 and the possibility that his salary drops or he loses his job. For a physician, this might be a low-risk event. Someone earning a large income in a commission-based sales job might be more worried.
The benefit of aggressive repayment utilizing loan refinancing is that it can save a ton on interest. The danger is that the loan becomes a private loan that loses federal perks like PSLF and income-driven repayment plans.
If Steve can save a ton by aggressive repayment, that route is likely the preferred option. If the numbers are close, he might be better off keeping the federal protections in place.
If there are a lot of questions that haven’t yet been answered, 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 he ends up sticking with PSLF, the money saved can be used for anything. 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.