There are only a few ways to eliminate your student loan debt without actually paying off the entire balance. One method is to die, which is not particularly appealing. A more feasible method is to enter into a program called the Public Service Loan Forgiveness (PSLF) Program.
Public Service Loan Forgiveness Program
Under the PSLF program, if you work for a government or non-profit 501(3)(c) organization, and make 10 years of payments (120 payments) under an Income Driven Repayment Plan, then your remaining debt will be forgiven.
If you have a high debt to income ratio, this could potentially save you hundreds of thousands of dollars.
For example, suppose you have $400,000 worth of loans, and make $250,000 per year. Using the Repayment Estimator, if you work for a non-profit organization for 10 years under the PAYE (Pay as You Earn) income-based repayment plan, you will pay a total of $289,000 over those 10 years, and have $381,000 forgiven at the end of your 10 years of service.
The savings will be even more pronounced if you have a higher loan amount, lower salary, or if you make payments in residency. Most residencies are completed at Universities which are considered government organizations eligible for PSLF. If your residency is 3-5 years long with a salary of $50,000 per year, you will make very small payments during those years. Afterwards, you will only have 5-7 years of income-based payments to make at your higher post-residency salary, which would push the savings up even further.
On the other hand, if you have a low debt-to-income ratio, then there is essentially no advantage to the PSLF program, as seen in the table above.
Should You Go for PSLF?
If you have a very high debt to income ratio (>2:1), or you are planning to work in a government or non-profit organization anyway, then PSLF makes sense.
Conversely, if you have a very low debt to income ratio (<1:1), or you do not think you would be able to find or tolerate a job in the public sector, then cast PSLF aside.
For everyone else in the middle, run the numbers for your particular situation (using the Repayment Estimator ) to determine whether PSLF is worth it.
Why I decided NOT to go for PSLF
When I completed residency, I had over $400,000 worth of student loan debt with a salary of $250,000. Based on the computations above, I could have saved a few hundred thousand dollars by participating in the PSLF program, especially if I was making payments in residency. This money could have been invested in my favorite stock market index funds, and at the end of 10 years, I would probably be better off financially. Yet I decided not participate in the PSLF program. Why not? There are four reasons.
Reason #1: I did not want to be in debt for 10 years
Under the PSLF program, you can not accelerate your service commitment. You will not be able to be debt free any sooner than 10 years. As the Federal Student Aid site states “You can not qualify for PSLF faster by making larger payments”. This was too slow for me. I wanted to be debt free in less than 5 years, and I managed to do it in just under 3 years. There is a psychological benefit to being debt free that cannot necessarily be quantified.
Reason #2: I did not want to limit my employment options
Let’s suppose you found a great 501(3)(c) job immediately after residency that qualified for PSLF. After a few years, the work environment became toxic and you wanted a change, but couldn’t find another non-profit job. Do you suffer through your current job? Or do you abandon your hopes for PSLF? I didn’t want to have to make this choice.
Reason #3: I did not want to rely on the government to keep their promise
The PSLF program was created in 2007, and the first group of PSLF program participants will apply to have their remaining debt forgiven beginning in October 2017. Several articles, including a recent article in the New York Times, questioned whether the government will actually hold up their side of the bargain. Personally, I think there would be riots in the streets if the government advertised this program and then failed to follow through. But still, I didn’t want to take any chances.
Reason #4: I did not want to further burden the taxpayers
If your loans are forgiven at the end of 10 years, it’s not the “government” that is paying off your loans. It’s the taxpayers. In my humble non-politicized opinion, taxes are already too high. When thousands of PSLF participants start getting tens or hundreds of thousands of loans forgiven, this is only going to drive taxes higher. I did not want to contribute to that obscenity.
Making the Choice
The choice of whether to go for PSLF is very personal. I’m happy with my decision NOT to pursue PSLF, but I understand that for many others, PSLF is an excellent choice. For example, I talked to a graduating physical therapist the other day who had $250,000 worth of loans with an expected starting salary of 60-80K. That is a very dire situation, and I encouraged him to seriously consider PSLF.
If you decide to go for PSLF
- Start Making Income-Based Payments in Residency: This will count towards the 10 year requirement and further reduce the total amount that you will need to pay.
- Do NOT refinance your student loans. Only Federal Direct Loans are eligible. If you refinance through any of the private loan companies, you will no longer be able to pursue PSLF. Yes, this means that you will likely have a high interest rate (my loans were at 6.8%), and will accumulate interest faster, but much of this interest will eventually be forgiven.
- Save a large portion of your income. If you’re doing PSLF, then your monthly loan payments will be much less than if you were doing a standard repayment program. Take the money you are saving and park it in a high yield savings account, CD ladder, or short-term bond fund, just in case PSLF implodes. Again, I think this is unlikely, but it’s always good to have a contingency plan. If your loans are forgiven at the end of 10 years, then you will have a chunk of cash to invest in more long-term strategies such as a total stock market index fund.
If you decide NOT to go for PSLF
- Refinance your loans as soon as possible. I refinanced towards the end of residency with Sofi, when I had a contract in hand and could verify my expected income. I believe that some providers such as DRB are now offering refinance options in residency as well.
- Get Intense: If you are willing to get intense, I would recommend refinancing at a 5-year variable rate, which will give you the lowest interest rate, and unless interest rates skyrocket, will save you the most money in interest over the long run.
Summary
The Public Service Loan Forgiveness program is an appealing option for those with high debt to income ratios, or those who already know that they want to work for the government or a non-profit corporation. Just make sure to run the numbers and understand the detailed requirements for the program to make sure the program is right for YOU.
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