You’ve heard the adage “Choose a job you love and you will never have to work a day in your life” that has been attributed to Confucius. Here at Tuition.io, our passion is helping people conquer their student loans, pay them off and move on with their lives. We love what we do. Our tools, research and blog are all aimed at helping people coping with student loans. But sometimes we’re fortunate enough to be able to help people one on one as happened in a recent discussion on public service loan forgiveness.
When you’re a doctor, people want to show you their mole and ask if you think it’s cancerous. When you’re a lawyer, people want to ask you about their recent car wreck or impending divorce. And when you’re a student loan payoff resource, well, you get the picture… Over lunch recently a family friend laid out her student loan scenario and asked for advice on what to do. I’ve captured that conversation here in hopes it can help others in similar circumstances.
Student Loan Circumstances
Before I relate our Q&A lunch convo, I’ll give you some specifics on my childhood friend’s student loan sitch so you can see how it may apply to you. Marlee (not her real name) is in her late 30s and is in law enforcement in the small town we grew up in. She skipped college and started with the Sheriff’s department without a degree when she was 19. Within the last few years though, bowing to pressure from her sister and me (both college grads), she went back to school to get the degree she had been haphazardly pursuing on a class here, class there basis for the last two decades.
In case you didn’t know, small town cops don’t make a lot of green (although the non-cash benefits are good) so she borrowed to pay for school. At around the same time she went back to school, Marlee’s mom had a stroke and her dad had to quit work to provide 24/7 health care. This meant that her money was even tighter. She borrowed more than she had originally intended in student loans to help offset providing for her parents as well as herself while paying for college.
Marlee graduates this December with about $55,000 (gulp!) in student loans. All of the loans are federal with interest rates ranging from 4%-7%. I’ve talked to her a lot about Tuition.io’s student loan tool and IBR and some of her other options that she can combine with Public Service Loan Forgiveness, but with her graduation looming, we turned a recent lunch into an intense Q&A and full-on strategy session on how she could pay the least and take fullest advantage of student loan forgiveness. Here’s what was said in hopes it can help you:
Marlee: What am I looking at for payments on my student loans with the 55k I owe?
Rachel: (after pulling up a student loan calculator and running a 10 year estimate at 5%) About $585.
Marlee: Holy crap!
Rachel: I know, right?
Marlee: I can’t afford that.
Rachel: That’s okay. You won’t really have to pay that.
Marlee: So how much will I have to pay?
Marlee: Because I’m pretty much broke.
Rachel: Yeah. Got that. Here’s what we’re going to do to figure this out. First you’re going to apply for Pay As You Earn.
Marlee: Okay. What about Income Based Repayment?
Rachel: No, if you can get into Pay As You Earn, it’s a better deal. Your loans started after 2007, right?
Marlee: Yep. I went back to school in summer 2008.
Rachel: Great. Older loans don’t qualify, but you should be good. Now, what’s your adjusted gross income?
Marlee: You think I have that number memorized?
Rachel: I know mine.
Marlee: You have an accounting degree.
Rachel: True. Okay. How about a pay stub?
Marlee: I’m on direct deposit.
Rachel: Fine – a virtual pay stub…
Marlee: (makes mocking face and sounds – we’ve been friends since we were six) Here!
Rachel: (after opening an AGI calculator and a PAYE calculator on my tablet) Let’s estimate it at about $25,000. At that AGI, you’re looking at a Pay As You Earn payment of around $65. If it’s say $30k instead, it would be closer to $100.
Marlee: That’s better. (slumps, sighs and sips sweet tea) What about my loan forgiveness?
Rachel: You’ve been a cop for…
Marlee: I’ve worked for the county for 19 years.
Rachel: That’s insane – and a lot of donuts.
Marlee: Very funny…
Rachel: Couldn’t resist. Okay. Well you have to make 120 qualifying payments while you’re working as a public servant and then you can get your balance forgiven.
Marlee: What’s a qualifying payment?
Rachel: (I launch into an explanation she doesn’t properly appreciate)
Marlee: In English please.
Rachel: Sorry. It’s a payment under a plan that PSLF likes. Income based repayment, pay as you earn and income contingent are all okay. Once you make 120 monthly payments that are on time you can apply for forgiveness.
Marlee: I’ve got almost 20 years in on the force – doesn’t that count?
Rachel: For tax free loan forgiveness – no.
Marlee: That sucks.
Rachel: That’s why we told you 10 years ago to go back and get your degree.
Marlee: Shut it. You remember I have a gun, right?
Rachel: Okay… Moving on. So you make the 10 years of payments and your debt is forgiven tax free. If you take your retirement, you can still make 20 years of payments and have the rest forgiven, but you’ll pay taxes on it.
Marlee: That sucks too.
Rachel: I agree. If Congress would get off their butts and give everyone tax free forgiveness, you could retire next week. (sigh) But if you’re tired of deputy sheriffing…
Marlee: That’s not a verb – you know that.
Rachel: It is now! You could do a career change that keeps you in public service. Maybe teaching law enforcement? Or something else in the government for a change of pace.
Marlee: Teaching might not be bad.
Rachel: The bottom line is that you don’t have to work for the same agency, you just have to be working at some sort of public service position while you’re making those 120 payments to get the tax free loan forgiveness. Even if you were a janitor at the courthouse.
Marlee: When have you ever seen me clean anything?
Rachel: Just saying…
Marlee: So 120 payments… If they’re pretty cheap – around $100 or less – I could afford to pay the 120 payments faster. Can I pay say two payments per month and knock them out in five years?
Rachel: That’s a good question. One I haven’t heard before. Two shakes. (I pull out the trusty tablet while she gets refills on our iced tea) Found it… the answer is nope.
Rachel: I know what you’re going to say: that sucks.
Marlee: Because it does.
Rachel: Granted – but them’s the rules. If you make a payment early it applies to the next payment and then the next payment you make won’t count at all. So yes you can make all the payments you want, but it won’t get you there any faster than 10 years.
Marlee: So what you’re saying is my choice is 10 years of payments and tax free forgiveness or 20 years of payments and taxable forgiveness.
Marlee: Hmm… I’ve got to think about that. What else do I need to know?
Rachel: Well… let’s see. Your student loan interest that you pay will lower your adjusted gross income and if you’re only paying $50-$100 per month, that will likely be 100% interest – it probably won’t even cover all of your monthly interest. That’s okay if you’re going to stick with PSLF. But if you decide to give up public service, it can really screw up your finances later.
Rachel: If you don’t go for PSLF and can’t afford to pay off your loans in 10 years, you’re looking at a 20 year taxable forgiveness plan.
Marlee: Okay – and?
Rachel: The interest alone on that ginormous 55k loan balance you’ve got is around $230 per month. If you’re paying in – say – $100 per month, that’s $130 per month that will add on to the loan balance. The government may protect you from capitalization but then…
Marlee: What’s capitalization – in English please!
Rachel: It’s the ultimate evil in finance. It’s interest that adds on to the principal on your loan that then makes the total bigger that interest is charged on. It gets you in deeper and deeper – it’s financial quicksand.
Marlee: How do I avoid that?
Rachel: Well, there’s two things to consider. First – if you know 100% for sure that you’re sticking with public service, you can make the smallest PAYE payment you can and then just let the interest rack up because you know it’s all going to be forgiven tax free.
Rachel: If you end up not qualifying, you could have a HUGE balance forgiven that is taxable that would cost you tons extra in income taxes. Basically, the unpaid interest – about $130 a month – would be added to the total due. After 20 years, that’s an estimated $31,000 more on your student loans. If any of the interest is capitalized it would be even more. And that’s on top of the original $55k because the small amount you pay would go toward interest instead of principal. You’d be looking at a ballpark of $80-$90,000 written off after 20 years if you bail on PSLF!
Marlee: Holy crap! How much would that cost in taxes?
Rachel: $15,000 minimum – maybe more. If you are still working in 20 years and earning say $50,000, that bumps your income for that year to $140,000, you’re looking at closer to $20,000 in additional taxes from the student loan “forgiveness.”
Marlee: Why is it taxable anyway?
Rachel: Because the IRS loves to tax people. And because they treat debt you don’t have to pay as income. Crazy, right? But if you don’t have to pay that $50k, it’s like you have $50k extra in your budget – even though you couldn’t really afford to ever pay the fifty, that’s how the IRS treats it.
Marlee: So I’m looking at more time at work or a huge tax bill?
Rachel: Yep. But you’re actually lucky.
Rachel: A bunch of people owe that much and don’t have the option for tax-free write off. It may not feel lucky now, but in 10 years you’re going to be feeling great about this.
Marlee: Alright. I’ve got four more months of school and then a six month grace period –
Rachel: You should skip the grace period. The second you graduate, I would apply for PAYE and start making payments as soon as you get your PAYE approval.
Rachel: Because that’s six months earlier you’ll get your 120 payments done and can retire if you want to.
Marlee: Got it. What else?
Rachel: Go now and sign up for Tuition.io’s student loan management tool. This will make sure you have all your loans in one place and can easily track your PAYE payments once you start making them. And then go to the article I just wrote on How to Apply for PAYE and read it and then do what it says.
Marlee: You’re not going to just talk me through it?
Rachel: Ughh. So lazy… No. This is why I research and write the blogs and articles. Just go read them – seriously – they’re good.
Marlee: Pretty proud of yourself, aren’t you?
Rachel: I do good work – and I don’t need a badge to do it…
After arguing over who would pay the check – since I was the pro who looked at her financial mole for an hour, I thought Marlee should pick up the check. She reminded me that she was the one with fifty grand in student loans to pay. After a ribald round of rock-paper-scissors-lizard-Spock, I got stuck with the check. Ah well… I hope our lunch session helps out some of you that are working in public service and deciding what to do about your student loans! We’d love to hear from you!
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