What You Must Know About Public Service Loan Forgiveness

by Repayable | May 30, 2016 | Money Matters

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.

https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service

https://studentaid.ed.gov/sa/glossary#Qualifying_Public_Services

https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven`

Check out the Repayable YouTube series: 5 Fast Facts, Three Things to Consider, and Three Ways PSLF Could Change.

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!

Student Loan Refinancing: A Millennial’s Guide to Earnest

by Repayable | May 16, 2016 | Money Matters

“Hello, my name is Jeni and I have a mountain of student loan debt.” “Hello Jeni.” reply the millions of millennials drowning in debt.

I know my education was an investment in my future and this post isn’t here to whine about the high cost or to dictate what ought to change about rising costs and increasing debt. Today’s post is here to show you how to break free from student loan interest rates that are bankrupting you.

Let me take you back to January 2016 when I was filing my taxes. It was my first entire year making pharmacist pay and really taking it to my student loans. Ha! I’ll show you student loans! I shouted victoriously as I chucked thousands of dollars per month at the formidable loans. As I filed on Turbo Tax I pulled up my 1098-E and this is what I saw.

Do you see how much interest I paid Navient in 2015? Nearly $14,000 !?! Oh well I thought to myself At least the government is going to owe me a bunch of my tax money back… Haha oh how delusional was I? Turns out there’s an $80,000 cutoff for individual income. If you make over that, you can’t deduct your student loan interest… Now I was livid.

I was gonna find a way to fight this injustice. My federal loans were sitting pretty at 6.55% interest. I spent so much money on this debt and still owed six figures!

So I started looking around at refinancing options. They all seemed kinda sketchy and unreliable to me. I checked out a few options which had specific terms of repayment, fees for transferring loans, and early repayment fees all for a measly 1% interest rate discount and just weren’t worth it for me.

Then a friend (thanks Travis!) recommended I check out SoFi. Which I immediately did. I put in my income information and got quoted at about 5.4% for a fixed rate and about 4% for a variable rate… Now I was on to something. While these were lower rates they still weren’t good enough to entice me.

Then it happened. I was listening to Grammar Girl (one of my fav podcasts!) and she started talking about student loan refinancing through Earnest. So I decided to check it out and it’s the best financial decision I’ve made in a long time!

How to Refinance Student Loans w/ Earnest

(Use these links and we both get $200 when you refinance)

Step One: Get an Estimate

You want to make sure that refinancing makes sense for you so go to earnest.com using this link (so we both get $200). And right away on the home screen click the 2 min get your rate box.

When you click the button you’ll have to fill out this form with identifying information (name address), income information, student loan balance, assets, rent/mortgage, college information (name of college, degree, and graduation date). You’ll also have to create an account using your email address and provide your social security number so they can do a soft check of your credit (soft means it won’t show up on a credit report).

After that you click “get your rate”. Soon you’ll have an estimated interest rate. Mine was 3.36% variable and 4.7% fixed.

Step Two: Ask Their Friendly Customer Service Anything

So, you’ve got your rate estimate and have decided that it makes sense for your to refinance. But now you’ve got a million questions… well at least I did. I immediately contacted their customer service via email. Amazingly they responded to me that day! And multiple times. I exchanged at least 10 emails with a variety of questions about early repayment, penalities, transfer fees, how to make extra payments, fixed vs variable interest rates.

Step Three: Fill Out Your Profile

There are four main areas of your profile (aka your loan application). In your profile you will provide information about your education, employment, finances, and personal (DOB, address, etc). I was required to upload a picture of my driver’s license but otherwise it was super easy.

**A quick note for any other pharmacy folks out there. I had to do something non-intuitive when entering my education. I only completed two years of pharmacy pre-requisites in undergrad and never obtained a degree because I got into pharmacy school right away. That meant I had to list the University of Iowa as a bachelor’s degree and then select “transferred” instead of completed. Then select the University of Iowa again and enter my Pharm.D. If you get stuck just open up a chat or send a quick email. The customer service at Earnest helped me figure out why I couldn’t enter my education and solved the problem for me.

Step Four: Submit Your Application and Wait for Approval

Earnest will turn your application around quickly. For me it took just over 24 hours. They gave me final rate estimates for fixed vs variable and then it was time to decide to move forward with refinancing.

Step Five: Choose Your Payment Amount

One of the coolest things about Earnest is it’s flexibility. After you’re approved you can see the effect of changing your monthly payment on interest and duration of repayment. There’s a cool slider that you move to change your monthly payment and it will show you the estimated interest rate along with the time ’til payoff. It’s a super handy real-time way to see the financial impact of increasing or decreasing your monthly payment amount. Not my slider below, though I wish it was… add a zero on the end of the payment amount and that’s what mine looked like 🙂

Step Five: Choose Fixed or Variable Interest Rate

This can be a personal decision and may be based on your personal risk tolerance. There’s a handy FAQ which has a ton of helpful information about the application process. There is a specific FAQ about choosing variable vs fixed rate which I found very helpful. Essentially it tells you that the variable interest rate is determined by the 1-month LIBOR index (see link for historical rates). I’ll walk you through my thought process behind choosing a variable rate but you should make the decision that’s best for you.

I plan to repay my student loans by the end of 2018 (lofty goal I know since I have ~$98K left). The LIBOR index has been <1% since late 2008. It continues to approach 0%. Interest rates like these are based on inflation. Which right now is also very low. So in terms of market stability I think the risk of my variable interest rate shooting up to the capped 9.95% is low.

My variable interest rate is 3.36% vs 4.7% fixed rate. So that means every month on a variable rate I’ll have to pay about $275 in interest and if I choose the fixed rate I would pay about $385. As more time passes I will save more money so if the variable rate increases it would have to increase a lot for me to have made an unwise choice. Another thing I considered was in order for refinancing to have been a bad choice my variable interest rate would have to nearly double…

Final Steps: Link Your Accounts,Upload Statements, Sign

Your last steps will be entering the account and a routing number for the checking account your monthly payments will be made from. Then you enter your existing loan servicers and determine the 10-day payoff amounts for your loans. Then you upload your most recent loan statement, even screenshots are good enough as long as they have current balance, interest rate, account number, and date.

Then if everything looks good to you all that’s left is to review the terms of your loan agreement, electronically sign the document, and submit it.

That’s it! You just halved your student loan interest rates! Way to take control of your financial security 🙂 Tell me what you’re going to do with the thousands of dollars you no longer have to spend on interest in the comments below or in the Millennial Maxims Facebook Group.