This is a difficult question to answer due to there are so many different variables that go into the equation. Yet many borrowers are facing this same question, wondering if they should be taking advantage of the Public Service Loan Forgiveness program or aggressively seek to pay of that student loan debt plaguing them.
The easiest way to describe the Public Service Forgiveness plan is you will work for a public interest employer, enroll in an eligible repayment plan, and then get your loans forgiven after 10 years.
Working the numbers
combining the principal and the interest. You could end up spending more money in the long run trying for forgiveness, than if you were to just get the loan paid off right away.
Here is how you figure it out, simply use any loan repayment calculator. Enter the interest rate, length of the repayment, and total value of the loan. If you multiply the calculated monthly payment, but the length of the loan, you get the total cost of the loan. If you subtract the principal balance from the total cost of the loan you get the total interest.
Once you have figured out how the math works, you can make some hypothetical adjustments for different interest rates, repayment lengths and other options. Look at projected monthly payments and total costs. How are they going to impact your long-term financial goals? Especially is you want to buy a home, or start your retirement planning. Finding the right solution requires doing the math, but it also makes you have to take an honest look at your career prospects and implementing your desired financial goals.
The eligible repayment pans are the Income-Driven Plans which include Income-Based Repayment (IBR) and Pay As You Earn (PAYE). Under IBR you will be expected to pay 15% of your discretionary income towards any Federal student loans. PAYE drops that down to a 10%.
Then there is the Standard 10-year repayment plan. Let's say you are on the 10-years plan for the entire time. Did you know your loan will be paid in full by time you qualify for forgiveness? In essence, the only people who benefit from the program are those who qualify for an Income-driven plan.
The Public Service Student Loan Forgiveness plan is a good strategy for those committed to a career in public service (or at least 10 years of public service). But unless you’re completely committed to working for the government or a nonprofit through your thirties, don’t pass up the opportunity to take a higher-paying job outside the public service sector simply because you want your student loans to be forgiven in ten years. Before signing up for the Public Service Student Loan Forgiveness plan, be sure you’ve evaluated and explored your career choices – not just your student loan repayment options
Founder of The Empowered Dollar
The 120 payment countdown
The final consideration is the fine print on the Public Student Loan Forgiveness Program, which sometimes gets overlooked but can have some pretty serious consequences:
- A full monthly payment (not a partial or lump sum payment)
- Made on time (or within 15 days of due date)
- Made under a qualifying payment plan Made while you are working full time at a qualifying public service position
- Made while you are in good standing (i.e. not in default)
- You must make 120 “qualifying payments” to have the balance of your loans forgiven.
Think of the 120 PSLF payments as a countdown. If your countdown stops for any reason at all the count will resume where it left off once you return to a qualifying full time position. This is an important point to consider as it can seriously delay the forgiveness terms by what is on your 120 payment clock. If you have already made a number of payments on your loans that count toward your 120 benchmark, avoid a consolidation.
If your loan payment are so far out of reach and seem too unrealistic to even attempt payments, pursue getting them all placed on either ICR or IBR plans then they will be way more affordable.
If you are still in the six month grace period window before you start making payments, think about reconsolidating now if you can get overall lower payments by doing so. Then once you have made this step, the next step is to pursue ICR or IBR to minimize your payments and maximize the benefit of PSLF! This becomes a true win-win situation.