One of the biggest perks of having federal student loans is student loan forgiveness. The most common forms of forgiveness are Public Service Student Loan Forgiveness and forgiveness as part of an income based repayment plan such as IBR or PAYE.
No matter what sort of forgiveness you are considering, there are risks with each option. Today we will be discussing the risks of waiting, the risks of not waiting, and the best way to protect your options.
The Dangers of Chasing Forgiveness
The biggest problem with chasing student loan forgiveness is that nobody can tell the future. If you are working towards public service forgiveness, you might not stay in public service for the required 10 years. If you are on IBR or PAYE, you might get a big raise and your required monthly payments could become large enough that there is nothing left to forgive by the end.
Worst of all, the government could discontinue these programs. For the programs to be discontinued, it would require an act of Congress and Presidential approval. Even if the programs in question were discontinued, odds are pretty good that existing participants would be grandfathered in. While these safeguards and assurances may help, there is no absolute certainty.
Finally, one danger that people often ignore is that they may actually spend more chasing forgiveness. You read that correctly. Sometimes just paying the minimum to reach forgiveness can cost more than just paying off the loans when you have the money. Here is an example.
The Dangers of Not Waiting for Forgiveness
This one is the most obvious. If you play your cards wrong, you could end up spending way more on your loans than necessary. Nobody wants to end up in that situation.
Not waiting can also be devastating to your monthly budget. An aggressive payoff means tight finances. Each month you put everything towards your student loans, and you leave yourself very little room to spare. In many cases this frugal approach is a necessity, but if that money could be better spent, be it saving for retirement or a house, you don’t want to miss an opportunity.
Finding the Middle Ground
There are major risks no matter what option you choose. For many, the next 10 to 20 years are wide open and much could change. First, do the math. A few spreadsheets could make it very clear what the best route is. Second, think about your many options. If you think through the different possibilities, your best route may become obvious.
Unfortunately, there is no clear answer for many others. If you find yourself in this gray area, unclear of which route to take, there is a middle ground.
With your lenders, act like you are chasing forgiveness. Pay the minimums, get enrolled in the right programs, and keep your paperwork in order. You are not committing to anything, just making sure you have the option.
With your personal finances, act like you are aggressively paying off your loans. However, instead of sending the extra money each month to your lender, you put it in a bank account that you will never touch.
If you reach the point where it is clear you are better off not chasing forgiveness, you will have a big chunk of money sitting in the bank ready to attack your debt. Should you reach the point that you decide you are all in on forgiveness, you will have money set aside for potential tax consequences of forgiveness, or for whatever else you want.
The problem with the middle ground approach is the interest. The money that sits in your bank account generates little if any interest. The student loan interest rates are much higher. The extra money you spend each month on interest is the cost of sitting in the middle ground. If you truly don’t know which direction you are going, it is money well spent.