Student loan debt in the United States continues to grow by $2,726.03 every second. Right now the running tally is about 1.35 trillion dollars (comapared to 13.8 trillion in outstanding mortgage debt) as of March 2016. (Click here to watch our generation get buried in student loan debt). When your student loan debt is crushing you, any opportunity for reprieve is welcome. Today’s article will provide an in-depth review of one existing loan forgiveness option, Public Service Loan Forgiveness (PSLF). Or, as you may know it, 10 year loan forgiveness.
What is PSLF?
Public Service Loan Forgiveness (PSLF) was signed into law as part of the College Cost Reduction and Access Act of 2007.
Who is PSLF for?
PSLF is for anyone employed by a government or not-for-profit organization.
When did PSLF start and when will the first payout be?
PSLF started in Oct 2007, that means the first eligible borrowers can officially apply for forgiveness in Oct 2017.
Why did PSLF start?
PSLF was started to relieve the pressure of high student loan debt for borrowers working in public service where pay is often lower than private sector work.
How does PSLF work?
After 120 payments on an eligible payment plan are made (10 years worth) the remaining balance is forgiven (tax free).
Those are the basics of PSLF but you’re not after the basics because you know the devil is in the details. You might be wondering How do I know if my employer qualifies? What if I change jobs? What if I’m in deferment? How many people are doing this? Can PSLF go away? Who does PSLF make financial sense for?
There are no short answers to any of these questions but stick with me because a financial decision this big is worth some thought.
Qualifying employers
Government organizations including federal, state, local, or tribal organizations qualify. Not-for profit tax exempt organizations under 501(c)(3) and private not-for-profit organizations that provide a public service (not religious, labor union, or partisan political group) qualify.
Changing jobs and periods of no payments (deferment, grace periods, in school status, forbearance)
Changing jobs is no big deal when it comes to PSLF. The requirements are straightforward. You need to make 120 payments while employed by a qualifying organization and then you’re eligible for forgiveness. The 120 payments don’t have to be consecutive, so if you’re between jobs any payments you make won’t count toward your 120 total. The same is true during any time your’e not required to make a payment. Any payments made during these periods don’t count toward your 120 total until you enroll in an income-driven payment plan.
Enrollment by the numbers
As of June 2015 there were about 335,520 individuals enrolled in PSLF.
Unfortunately of the enrolled borrowers 17% were currently signed up for a 10 year standard repayment plan. DON’T DO THIS! That completely mitigates the entire point of the loan forgiveness because you will have paid your loan off in 10 years.
How PSLF can disappear
“The Department [of education] cannot make any guarantees regarding the future availability of PSLF. The PSLF Program was created by Congress, and, while not likely, Congress could change or end the PSLF Program.” Yep it’s really that straightforward. Congress could vote and repeal PSLF. Some folks have suggested that there could be a class action lawsuit by borrowers against the government but I don’t think so. Technically no one in this program is eligible for anything until 120 payments have been made. So there’s nothing being promised and then not delivered…
In 2015 President Obama proposed capping the amount of loan forgiveness at $57,000. The republican party has proposed stopping the program all together. However the cap and cancelling the program have been quiet for a little while so I think you’re safe from both… for now.
Deciding if PSLF makes sense for you
Objectively:
Financially, deciding if PSLF is right for you is relatively straight forward but requires making a few assumptions. Calculate the amount you’re going to pay over 10 years like this: Monthly payment (in your income-driven repayment plan of choice) X 120 = the total amount you will pay over 10 years. Huge assumption number one is that you will make the same income and therefore payment. This is unlikely because you will probably get raises over 10 years and your payments will slowly increase. The second assumption is that you will be continuously working full-time for an eligible employer. If you take breaks between jobs or work a stretch for an ineligible employer you could seriously reduce the amount of loans forgiven because payments made during that time won’t count toward your 120.
If the amount you calculate is significantly less than the amount you owe, for example if you owe $150K and you calculate you’ll repay $110K on an income-based plan then it might make financial sense for you to do it.
Other considerations:
Can you get out of debt faster on your own? If your income enables you to pay enough each month to shorten your repayment period by years then I propose that’s the route you take.
Nothing in this payment plan is a guarantee and holding onto debt comes at it’s own cost. It leads to the cliche’d stuff like delaying marriage, first home, and kids. But it also leads to more subtle entrapment. You may feel trapped in a certain type of employment or at a specific job or employer. Even if your job isn’t meeting your needs you may stay for the sake of loan forgiveness.
If this gets revoked you essentially handed yourself a bunch of interest. All it takes is a vote by the old, rich Americans in congress who have a track record for not caring a whole lot about the cost of education (if you don’t believe me see rising costs of tuition, outrageous federal interest rates, and the student debt doomsday clock). You could hope that existing participants would be grandfathered in. However, 10 years is a long time to make payments. If this were to be revoked you would end up paying a lot more than if you went after it early.
If you have private loans you need to carefully examine what loan amount will actually be paid off. The only loans that qualify are Direct Loans. Not Perkins, FFEL, or health professionals loans. IF you want those loans to qualify consolidate them into a Direct Consolidation Loan early. You will then have to make 120 payments on that consolidation loan to be eligible for forgiveness and any previous payments made wouldn’t count.
Social vs fiscal responsibility:
If you can afford to make your student loan payments, even at a sacrifice, and pay your debt off it seems like your social responsibility to do so. The PSLF program was designed for folks who would take low-paying jobs that benefit society. Jobs that could almost certainly never generate the income needed to pay back student loans.
As a pharmacist I ended up with $132K in student loan debt. Yea it was a lot and yea I still get crabbed making massive payments and dumping money into interest. But I took out these loans and I have the means to pay them back. If all goes well I’ll have them paid off by the end of 2018. Sure I could’ve hung on to my loans for 10 years and saved myself $20-25K but at what cost to our society? Higher interest rates for future students? Additional government debt? Delaying big expenses 10 years? Guilt and worry about what might happen if they cancel the program? No thanks! I’ll just go all out and pay it off. I would suggest refinancing if you’re of a similar mindset and trying to knock down your debt. Check out this walk through of refinancing with Earnest.
From a purely financial point of view PSLF would’ve made sense. My month to month would have been more comfortable because I would have been making income-based payments. And at the end of the 10 years my balance would have been forgiven. I would’ve come out ahead and perhaps I would even have more socked away in my 401K.
In the end you need to do what feels best for you. For more information check out these resources.
Share your questions, worries, and experience in the comments below or head over to the Millennial Maxims Facebook group to join the discussion already underway!
Congratulations!!! You’ve taken your last exam, written your last essay, and taken out your last student loan. Now that you’ve graduated, the logistical questions of paying back those student loans are starting to come up. No worries! In today’s post you’ll learn how to handle your student loans now that you’re finished with college.
Estimated read time ~8 min. Estimated watch time at 1.5x ~6 min.
What to expect right after graduation.
Federal loans and private loans might be treated differently. Federal student loans have a six month “grace period”. During this period you don’t have to make payments on your student loans. If you haven’t found work yet, this period is designed for you. If you’re already working, you may want to start making payments; if you’re planning to work toward loan forgiveness, you may want to apply for a Direct Consolidation Loan to remove your loans from the grace period so your early payments count toward the number needed for forgiveness.
Different lenders handle private student loans differently. Yours may offer a grace period or they may start collecting payments soon after graduation. Be sure to contact your lender to find out which it is so you don’t miss any payments.
Take an honest look at your debt and know your loans.
Student loans invoke fear of the unknown like nothing else. I mean, we all know that 70% of today’s graduates have debt, but how many of your friends have you actually discussed real numbers and real repayment strategies with? I bet it’s almost zero. There’s a real sense of shame that accompanies student loan debt, which contributes to fear and leads to avoidance.
Don’t follow that path. Look your loans right in the eye, know exactly how much you owe and who your servicers are. Learn which types of loans you have, federal or private and differentiate among federal loan types (Pell, FFEL, Direct, Grad PLUS) then proceed to the next section. Repayable’s Roadmap to Understanding Your Student Loans has everything you need.
Choose your repayment plan.
Exit counseling for student loans is…. lacking in depth at best. That means you may leave college with no real understand of your options and the advantages or disadvantages of each plan. I recommend checking out this post Picking the Right Repayment Plan for an in-depth review of your options.
In general, income-driven plans are best for anyone seeking Public Service Loan Forgiveness (PSLF), Income-Driven Loan Forgiveness (IDLF), or who can’t afford a higher monthly payment. The biggest downside to these repayment plans is that lower payments lead to longer repayment terms which means you’ll pay significantly more interest.
If your goal is to repay your debt quickly, the 10 year standard plan is a solid option. This plan will help you pay off your loans quickly and with the least amount of interest. The biggest drawback to this plan is that the monthly payment can be incredibly high, to the point of being unaffordable for some borrowers.
When it comes to the Graduated Repayment plan or Extended Repayment plan, I tend not to recommend either of these options. Under both plans you will pay more interest than another plan. The graduated repayment plan has payment increases every two years which often become unaffordable for borrowers. And because payments start low under this plan, sometimes the payments only cover the interest on the loan and don’t actually reduce the balance until the payment increases. One of the four income-driven plans is likely a better fit for a borrower struggling to afford monthly payments.
Consider your loan forgiveness options.
Some borrowers are interested in pursuing loan forgiveness after graduation, but for others the path to loan forgiveness is too far away. I suggest starting your exploration by reading Three Major Types of Loan Forgiveness.
Here’s a quick overview of the three largest federal student loan forgiveness programs.
Public Service Loan Forgiveness (PSLF). Forgives the entire remaining balance of student loan debt tax free after 120 months of eligible payments while working full-time for an eligible employer.
Teacher Loan Forgiveness (TLF). Forgives either $5,000 or $17,500 of undergraduate student loan debt tax free after five consecutive years of serving as a high quality teacher in a qualifying low-income school district.
Income-Driven Loan Forgiveness (IDLF). Forgives the remaining balance of student loan debt after 20-25 years of income-driven repayment. The forgiven amount is taxable.
What about refinancing?
With all the podcast ads you’ve probably listened to the siren song of refinancing companies promising to save you thousands of dollars. Refinancing can be a good option for some borrowers and detrimental to others. If you’re considering refinancing I recommend starting with the Refinancing Strategy Guide.
A couple of quick points about refinancing.
It’s the only way to lower your interest rate.
Best suited to borrowers with good to excellent credit (which you may not have yet had a chance to build).
Best for borrowers with high income relative to debt.
Best for borrowers with predictable income.
Privatizes federal student loans so not for borrowers pursuing one of the three federal loan forgiveness programs.
Can be particularly advantageous for lowering the interest rate on private student loans.
Take a moment to congratulate yourself.
You’ve done something awesome and finished your college education. You’ve mastered exam taking and you’re going to master student loan repayment too. Repayable is all about empowerment with clear actionable information you can use.
Now that you’ve made it through the starter guide to approaching your student loan repayment after graduation you’re set to take charge of your debt. If you have any questions, don’t hesitate to reach out. Join the community on Instagram, YouTube, and the Repayable Facebook Page.
What do you need to know about the two most common types of federal student loans? Today we’re going to talk about the differences between Direct subsidized and unsubsidized loans. Read on for more.
Estimated read time ~ 5 min. Estimated watch time at 1.5x ~3 min.
They’re both federal student loans
Both subsidized and unsubsidized student loans are made by the department of education. Both types of student loans qualify for Public Service Loan Forgiveness (PSLF) and Income-Driven Loan Forgiveness (IDLF). While they both qualify for Teacher Loan Forgiveness (TLF), remember that only student loans used for undergraduate education are eligible for TLF.
Interest is handled differently
Let’s start by talking about how interest is handled for Direct subsidized student loans. During certain times interest that accumulates is paid for by the Department of Education. Here are some examples of when you won’t be responsible for paying the interest on your subsidized student loans:
You’re enrolled in courses at least half time
You’re in the grace period (the first six months after graduation) and not a Direct Loan borrower between July 1, 2012, and July 1, 2014
You’re in deferment (a postponement of loan payments)
If you have Direct Unsubsidized student loans, you’re always responsible for paying the interest. That means if you choose not to pay, such as when you’re actively in school or in the grace period, the interest will capitalize. Capitalization means any interest you haven’t paid gets added to your principal balance and you pay interest on the new, larger, balance.
Once you’re actively in student loan repayment, interest is treated the same between subsidized and unsubsidized student loans and capitalizes on itself.
There are different maximum borrowing limits
The maximum total (lifetime) amount of subsidized student loans you can borrow is $23,000 for undergraduate students and up to $65,000 for independent graduate/professional students or dependent students whose parents are unable to get PLUS loans*. It should be noted that graduate and professional students are no longer eligible for Direct subsidized student loans after July 1 2012, so the graduate limits are including previous courses of study.
Unsubsidized student loans are available according to remaining aggregate limits. You can find out more details about those limits here.
Demonstrating financial need
In order to get a Direct subsidized loan, you must demonstrate financial need. Unsubsidized loans are available regardless of financial need. Remember, in order to get any type of federal aid, including federal student loans such as these, you have to complete the FAFSA.
What type of student loans have you borrowed to attend college? Let me know in the comments below or on the Repayable Facebook Page.
Paying off your student loans is one of those things you want to do as efficiently as possible. No one wants to spend one extra penny or one extra day paying off their loans because they took an approach that wasn’t right for them. In today’s post I’ll talk about how to decide which student loans to pay off first. Estimated read & watch time ~3.5 minutes.
Extra payments mean decisions
The only way to pay off specific student loans early is by making extra payments. Making your minimum monthly payment only sets you up to pay off your student loans according to the terms of your repayment plan (federal loans) or loan agreement (private loans). While reading this article, it’s important to note that these instructions are about what to do with your extra payments each month.
Start with your end goal
What is the final outcome you want for your student loans? Is it that you pay them off as quickly as possible, get student loan forgiveness, or pay them off gradually over time so you don’t have as much financial pressure day to day?
Your goal is important in determining which loans you tackle first. For example, if you’re working toward PSLF, but have private student loans, you’ll want to pay off your private student loans first.
If you’re paying off quickly
If you’re a borrower who wants to pay back your student loans as quickly as possible you’ll want to target your highest interest, highest balance loan first. It’s the most expensive loan you have, with the highest interest rate, so tackling it first with extra payments will make the most significant financial impact.
If you’re counting on loan forgiveness
If you’re counting on any of the three big federal student loan forgiveness plans (PSLF, Teacher Loan Forgiveness, or Income-driven Loan Forgiveness), pay off private student loans first. These loans aren’t eligible for loan forgiveness so you’ll want to pay them off as quickly as you can on your own to minimize the interest you’ll pay.
If you’re planning on Teacher Loan Forgiveness, you’ll want to pay private student loans first, then any graduate student loans you may have. These student loans aren’t eligible for forgiveness under Teacher Loan Forgiveness.
If you want small achievable goals
Another strategy is to use the “snowball method” to pay back your loans. With this strategy you would pay off the smallest student loan first to give yourself an early victory, then target the next smallest, and so on and so forth. Some borrowers find this strategy to help keep them motivated to make extra payments and tackle their loans.
This isn’t my favorite strategy because it’s not the most efficient use of your extra payments, but I definitely understand the desire to keep the motivation coming and get some wins early. My compromise for this strategy is to still target your highest interest loans first, but to pick the smallest of those higher interest loans to start with.
Private student loans are good early targets
Private student loans often have the highest interest rates that are sometimes variable. That makes private student loans good early targets for extra payments. Private student loans also don’t carry the same federal borrower protections, access to flexible repayment plans, and access to the three major federal loan forgiveness options. There’s nothing to lose and only interest savings to gain by paying private student loans back early.
Refinancing is an important consideration for borrowers with private student loans. If you’re hoping to lower your interest rate and pay of your student loan debt sooner refinancing may be a good option for you because the student loans are already private so there’s no risk of losing federal benefits. If you want to learn more about refinancing you can read more here.
Are you targeting specific student loans on your repayment journey? Let me know in the comments below or on the Repayable Facebook Page.
Whether you’re the kind of person who likes to make resolutions starting the first of the year or not, now is a good time to re-evaluate your student loan repayment strategy. It’s easy to pick a strategy and let it sit on autopilot. Today’s post is going to cover the basic student loan repayment options and help you evaluate your current strategy.
Estimated read time ~ 6 minutes. Estimated watch time at 1.5x ~4 minutes.
Evaluate Your Repayment Strategy
There are three things to consider when assessing if your repayment strategy is right for you.
How affordable is your current strategy?
Are your monthly payments easy to make, sometimes easy sometimes a stretch, or difficult to afford?
Does your current strategy match your student loan goals?
Are you wanting to pursue loan forgiveness, pay off your loans as quickly as possible, or pay as little as possible each month?
How do you feel about your current strategy?
Do you feel indifferent, empowered, or stressed out about your current strategy?
If your current strategy isn’t affordable for you and is stressing you out, it’s obvious it’s time to make a change. But if your payments are easy to make and you’re feeling indifferent it’s just as important to make a change.
Repayment Plans
The right repayment plan is the very first step to assess. You have the most control over your repayment plan choice when you have federal student loans. All of the repayment plan choices discussed below are for federal student loans. You can choose from income-driven plans to make your monthly payment more affordable and as one part of making eligible payments toward PSLF or Income-driven loan forgiveness.
If your payments are unaffordable, an income-driven plan can lower your monthly payment. The downside of an income-driven plan is that the longer you take to repay your student loans, the more interest you’ll pay. Ultimately if you can’t afford your monthly payments, that may be a worthwhile tradeoff.
However if you can easily afford your monthly payments, it makes sense to be on an aggressive repayment strategy such as the 10-year standard repayment plan. Under that plan you’ll make a fixed monthly payment and repay the entire balance of your student loans after 10 years. You’ll pay the least amount of interest under this plan.
For some borrowers student loan forgiveness is a very appealing opportunity. Right now, the most talked about loan forgiveness option is Public Service Loan Forgiveness (PSLF). In general student loan forgiveness programs are very specific in their eligibility criteria and the three federal programs only forgive federal student loans.
Here’s a quick breakdown of the three major federal student loan forgiveness options.
First up is PSLF, this program is designed to forgive the remaining student loan balance for borrowers working in public service jobs or at non-profit, government, or tribal organizations after 120 eligible payments are made (10 years minimum).
Next is Teacher Loan Forgiveness, designed to forgive up to $17,500 for specific highly qualified teachers in low-income school districts after 5 years of teaching.
Lastly is income-driven loan forgiveness, an option available to potentially everyone with federal student loans. This option forgives the remaining balance of student loans after 20-25 years of income-driven monthly payments.
You can read more about the different loan forgiveness options here.
Student Loan Refinancing
Finally, an option that suits the repayers with private student loans, federal student loans, or a mix of both. Refinancing is the only option that can potentially lower a borrowers interest rate. Here are a few situations to keep in mind.
If you have federal student loans, refinancing your student loans makes them private loans and ineligible for federal loan forgiveness programs and federal student loan benefits forever. You can’t make refinanced student loans federal loans ever again.
If you have private student loans, refinancing doesn’t carry much risk. If you can get a lower interest rate on the student loans, especially if you can get a fixed interest rate that’s lower, you’ve got the green light. You won’t give up borrower protections because you didn’t really have many to start with.
If you have a mix of student loan types, you may want to consider refinancing only the private student loans and leaving the federal student loans as they are. It all depends on your unique situation.
After looking at your student loans do you need a new repayment strategy this year or are you on track smashing out your goals? Let me know in the comments below or on the Repayable Facebook Page.
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