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Down and dirty with public service loan forgiveness.

PSLF or public service loan forgiveness inauguration in 2007 was created under President Obama’s leadership as a way to ease the student loan crisis for millions of borrowers.  Basically how it works is this: A borrower will need to enter re-payment under a qualifying re-payment plan.  The borrow must also work for a non-profit organization in full time status.  They must then make 120 on-time payments (over ten years) under one of these plans.  After all 120 payments are made, they can then have the remaining balance of their student loans forgiven or wiped out completely. The qualifying plans include:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

The first recipients of loan forgiveness was in the fall of 2017.  I am still searching for anyone who has had a balance forgiven.  There are several considerations to be concerned about here.  First of all, there has been government talks about cancellation of the program altogether.  Obviously they did not anticipate this plan for high student loan borrowers such as myself who can potentially have hundreds of thousands of dollars forgiven. Secondly, there is also the potential that any amount forgiven will be handled by the IRS as taxable income.  Lastly, there is also the potential that they will cap the forgiveness balance to $57,500.

Here’s my opinion on PSLF.  It depends.  The higher amount of debt you have, the more appealing the program but also the more risky.  I will use my own loans to break down my points:

At $500,000 in student loans using this calculator:

Screen Shot 2018-01-28 at 6.38.29 PM
These are my monthly payment estimates for 120 (10 years) under each of the qualifying re-payment plans.
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This is the potential loan amount forgiven after the 120 qualifying payments under each re-payment plan. Seen in green. Under PAYE a whopping $670,002 could potentially be erased.

If I were to have have a crazy $670k completely erased, this will be subject to 25-30% in taxes.  The total taxes owed at 30% will be approx. $201,000 to uncle sam. Now, if you look at how much you would have paid out of pocket to the loans over the ten years using the same calculator as above you can see that the amount you are paying might not be saving you as much as you think.

Screen Shot 2018-01-28 at 6.47.00 PM
If I were under IBR plan, I would be paying $288,922 + $201,000 in taxes totaling $489,922 in total out of pocket to get out of debt.

The big factor that I should also mention here is that you can clearly see that while $670,000 will be forgiven, the loan balance has gone up by $170,000.  You see, at my income level and at my loan balance/interest rate entering into PAYE will actually add interest to the balance of my loan over the ten years.  In other words, the monthly payments are not even covering the accrued interest!  This is a scary thought if you consider the concerning considerations mentioned at the beginning of this article. For example, if I make it to year 8 and suddenly with a quick vote by congress the whole program becomes obsolete, I will not only be at square one, but I will actually be in a worse position than when I started.  Total nightmare.  The less risky choice would be the ICR plan which you could do the math on that.

Now which plan did I ultimately choose?  I am in an Income-Based Repayment plan.  The caveat is that I pay much more than what the payment book says to pay to avoid the balance of my loan going up.  I am actually not working in public service so some may wonder why I am in this plan at all. This plan also will allow for forgiveness of the student loan balance after 20 years of payments even if you are not working in public service.  I will hope that my loan will be paid by then but just in case…  More on re-payment plans for future posts.

– Dr. J

Update 2.12.18- I did place a call to FedLoan servicing because of another question I had on my account. While I had the agent on the phone I inquired about taxation of the debt forgiven. They deny this as a taxable income at this time. Keep in mind that at the forgiveness of any student loan debt you receive a 1099-C for the IRS. You would file this along with your taxes. Apparently at this time, this form is in vain and has no meaning but I consider this as just a set up for future taxation laws. My opinion on this matter still remains pessimistic.

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