Determining whether or not you make too much money for PSLF can be tricky.
On the one hand, we have the rules and technical limitations that all PSLF borrowers should understand. On the other hand, there are also practical limitations. Even if you are eligible, it doesn’t necessarily mean it is a good idea.
However, the analysis here isn’t particularly complicated. Once you understand the relevant questions, it usually isn’t too hard to decide whether or not PSLF is the best option.
The Technical Limitations on PSLF
Before we start our analysis, it is a good idea first to understand the rules that limit PSLF.
First, the good news: There isn’t an income cap on PSLF eligibility, and there isn’t a maximum balance. Under the rules that govern PSLF, borrowers won’t be excluded because they make too much money or have too much debt.
Now for the bad news: Becoming eligible for PSLF isn’t easy. Borrowers must ensure they have eligible loans, an eligible repayment plan, and an eligible employer. While some temporary programs can help borrowers correct previous mistakes, such as the one-time IDR count update, borrowers planning for the future must ensure they follow all of the fine print on PSLF.
Sadly, PSLF eligibility does not end our analysis. It should also make sense for the borrower to pursue PSLF. If PSLF doesn’t save any money, it isn’t a worthwhile option.
Practical Limitations on PSLF
Not all repayment plans are eligible for PSLF.
Notably, all of the income-driven repayment plans are eligible. The borrowers who benefit the most from PSLF are the ones who can lower their monthly payments considerably by signing up for an IDR plan.
Borrowers with larger incomes or smaller balances may find that the IDR plans don’t save much — or any — money.
These borrowers can still qualify for PSLF if they enroll in the 10-year standard repayment plan. This repayment plan pays off the loan in full after ten years. The downside to this approach is that making ten years worth of payments on this plan means your balance is paid off in full by the time you earn PSLF forgiveness.
Traditionally, if the 10-year plan was the least expensive PSLF-eligible plan, it meant that chasing PSLF wasn’t a good option. However, the recent federal student loan payment and interest pause complicates this traditional rule.
The Federal Student Loan Payment and Interest Pause and PSLF
The Covid-19 relief came with a massive perk for PSLF borrowers: the time during the pause can potentially count toward PSLF forgiveness. Borrowers still have to work in an eligible job, but many people will have over three years worth of eligible payments despite not spending a dime.
If you have 40 of the 120 required certified payments, making the remaining 80 payments on the standard repayment plan can still result in some significant debt getting forgiven.
That said, even if a borrower could have some debt forgiven after six or seven years of standard payments, we don’t know for certain that this is the best option.
The Big Objective: Many borrowers mistakenly think that more debt forgiven means more money saved. However, some borrowers spend more money chasing forgiveness than they would have if they had just paid off their loan as quickly as possible.
Our goal isn’t forgiveness. The goal is debt elimination. For many public servants, PSLF is the best path to debt elimination. However, it isn’t the only path, and it isn’t the best option for everyone.
Exploring Aggressive Repayment
This is the part where our analysis gets tricky. Sometimes, paying off your federal loans as quickly as possible is the best approach.
The sooner the debt gets eliminated, the more money you save on interest. If your student loans have a high interest rate, prolonging repayment for at least ten years could mean the extra interest spending ends up being larger than the forgiveness savings.
Opting for aggressive repayment when PSLF is available is a complicated decision. You need to consider your current income as well as your future income. You also need to consider your employment prospects. Could a shift to the private sector be the better choice?
Finally, there is the opportunity cost issue. If you aggressively pay off your student loans, that could mean less money set aside for retirement or less money saved to buy a home.
Ultimately, there isn’t a simple equation to make this decision. Borrowers have to weigh their priorities and goals and pick the option that makes the most sense for their personal circumstances.
How a New Repayment Plan Could Change the Math
One other variable could change the analysis for many of the borderline borrowers.
Borrowers who previously didn’t benefit from IDR enrollment may find the new IDR plan saves money and makes PSLF a better option.
However, the proposed repayment plan actually becoming available isn’t a certainty. Borrowers may have to wait until 2024 to know whether or not it will happen.
A Simple Rule for a Complicated Situation
The simple rule is that if you don’t save money on an IDR plan, it isn’t worthwhile to chase after PSLF forgiveness.
However, the possibility of a more affordable IDR plan and the fact that many borrowers earned progress towards forgiveness without making any payments complicates things considerably.
If the 10-year plan is the most affordable plan, but you can’t afford to pay much more towards your student loans, and that is unlikely to change, chasing PSLF is probably still the best option.
The borrowers who can afford to pay significantly more have the most complicated analysis. Figure out how much you could afford to pay as part of an aggressive repayment strategy and how long it will take you to pay off the loan completely. Then compare that to how much you would spend chasing PSLF. If PSLF is clearly the more expensive option, it’s probably time to consider an alternative approach.