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How to Calculate When it is Time to Give Up on Public Service Loan Forgiveness

When is chasing PSLF more expensive than refinancing and paying off your loan aggressively? Where is the break-even point?

Written By: Michael P. Lux, Esq.

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Over the years we have heard from many physicians, dentists, orthodontists, and eye doctors with complicated Public Service Loan Forgiveness questions. Many jobs in the medical field pay quite well, but they require a great deal of education.

A young doctor with hundreds of thousands in student loan debt faces a very difficult decision: At what salary should I rely upon PSLF and when should I ditch PSLF, refinance, and aggressively pay off my student loans.

Today we will discuss a couple of different ways of looking at the “break-even” point and go through the calculations for student loan borrowers with $50,000, $100,000, $200,000, and $300,000 in student debt.

Tools Needed:

Assumptions Made in our Calculations

Before we jump into the calculations and look at our table of results, it is important to point out a few assumptions.

Job Stability – For purposes of this analysis, we assume that you are in a position with high job security. If you lose your job, we assume that you will be able to find a job at a similar salary. If you have limited job security, you may want to be conservative and keep your loans federal. Alternatively, if will have trouble finding another job with a PSLF employer, but you can find other jobs with a similar income, you may want to opt for an aggressive repayment option. Job security will have a big impact on your final decision, but it is something that varies for each borrower.

Salary Increases – The federal repayment estimator assumes that borrowers will get a 5% raise each year. For some that will grossly overestimate their future earnings. For others, it is a huge underestimation. The Department of Education uses the 5% projected yearly raise to help people plan, so we will go forward with their projections.

Family Size of One – These calculations were all done for a single person. If you have children, your federal monthly payments will be smaller, so the break-even salary will be higher. Alternatively, if you have a spouse with income, your break-even salary could be lower. However, if your spouse has student loans, your break-even income again changes. We will keep things simple in this article, but explain the steps so that you can do the analysis for any family situation.

Federal Interest Rate of 7.5% – For many borrowers, this rate might be a little on the high side. However, for borrowers with lots of federal debt, most of the debt is likely Graduate PLUS loans with high interest rates. For these borrowers, 7.5% is probably a realistic assumption.

PSLF Eligibility – We will assume that there are no issues with PSLF eligibility and that the program still exists 10 years from now.

Calculations for someone with $100,000 in student debt

The first break-even point that we will look at is the point at which there is no debt left to be forgiven after 10 years of payments. To do this we will look at the Revised Pay As You Earn Plan. For most borrowers, this is the repayment plan that will have the lowest monthly payments.

Entering our information into the Repayment Estimator, it tells us that with a salary of $133,000 per year, there will not be any debt left to forgive after ten years of payments. Thus, with federal loans of $100,000 at 7.5% interest, a single borrower with a starting salary of $133,000 will not have any debt left at the end to forgive. This borrower will also spend $47,069 in interest over the life of the loan.

However, this break-even point is very conservative. At present interest rates, a borrower can get a 10-year fixed-rate loan with LendKey at 4.25% interest. Rather than going with REPAYE for 10 years, by refinancing the loan at the lower interest rate, our loan calculator tells us that we will spend $22,925 in interest. For someone making $133,000 per year, this is a savings of nearly $25,000 by refinancing.

The next question becomes, at what point is the total spending on REPAYE equal to the 4.25% refinance option. Put another way, how low does my salary have to be in order to spend less than what I would by refinancing. Playing around with the Repayment Estimator, we find that a yearly salary of $113,000 will result in total spending of just over $122,000. Thus, if your salary is $113k and you have $100,000 in student loans, whether you refinance on the private market, or make minimum payments on REPAYE chasing PSLF, you will pretty much break even.

What about Aggressive Repayment?

Up to this point, our analysis has examined someone who is making the minimum payment for 10 years. What if you could pay more than the minimum due? How much could you save?

For this analysis, we will consider refinancing our federal loans on a 5-year repayment plan at 3.00% interest. Many lenders offer variable-rate loans that start well below 3%, while fixed-rate loans start around 3%, so we will be conservative and use 3.00% on the nose.

The downside with the 5-year aggressive repayment plan is that monthly payments are now $1797 per month, which is over $750 per month more than the 10-year option. However, by knocking out the loan in 5 years, we limit our total interest spending to $7,812. This represents a savings of over $15,000 in interest over the 10-year repayment option.

Therefore, if you are at or around the break-even salary of $113,000 per year and think you can manage the higher monthly payments, going aggressive could save you over $15,000. If your salary is below our break-even number of $113,000, the potential savings of aggressive repayment drops.

Step By Step Directions

To do the break-even and aggressive repayment analysis with your own student loans, follow these simple steps:

  1. Enter your student loan information into the Federal Student Loan Repayment Estimator. Pay special attention to the total amount spent.
  2. Check your interest rates and repayment plan options with the various student loan refinancing companies. If you know the loan length and type that you want, we have sorted out the lenders according to who has the best rates on our best student loan refinance rates page.
  3. Calculate your total spending using the loan repayment calculator.
  4. The objective is to minimize total spending in a realistic manner. If the most aggressive repayment that you can manage will only save you a few hundred dollars, it is probably best to just stick with federal loans. However, if you can manage aggressive repayment and dramatically reduce your total spending, it might be time to ditch PSLF.

Repayment Strategies for $50,000, $100,000, $200,000, and $300,000 in federal debt

Using the procedure described above, we get the following results:

Total Federal DebtConservative Break Even SalaryTotal Spending Break Even SalaryAggressive Repayment Monthly PaymentAggressive Repayment Interest Savings

The conservative break-even salary is the salary at which enrolling in PSLF results in $0 forgiven. The total break-even salary is the salary when you spend exactly the same amount of money over the life of the loan whether you refinance at a fixed rate for 10 years or stick with PSLF for 10 years. The Aggressive Repayment numbers are for a refinanced 5-year repayment plan. Aggressive Savings are comparing the total 5-year aggressive repayment to the 10-year total spending.

Final Thoughts

We made a lot of assumptions. For many, not all of the assumptions will be fair assumptions.

The important takeaway is the procedure for doing this analysis. Be sure to adjust your calculations to fit your individual circumstances.

In some cases, the numbers will make it very clear which option is best. For others, it will be important to give consideration to different possibilities that the future might hold and plan accordingly.

Your objective is not to maximize the amount of debt forgiven. Your goal should be to spend as little as possible on your student debt.

If you have questions or concerns about this analysis, please let us know in the comments.

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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