How to approach student loans

**GoodThyming** · 03-20-2011, 04:54 PM

Hi there,

I am new to this forum. I recently read The Total Money Makeover. I am current on all bills and have my $1,000 emergency fund.

I am now looking for some advice regarding what to do about the debt snowball as it relates to my student loan debt.

I have about $130,000 in student loan debt. I know Dave says in the book to pay off all debts other than a mortgage using the snowball, but I wonder if that is the best path in my case.

There is the possibility that 10 years from now, I could have any remaining student loan debt forgiven tax-free based on public service loan forgiveness (PSLF). I won't go into the details of PSLF, but will say that my current employment and payments qualify for PSLF.

It has always been my goal to work in public interest either in government or non-profit, and I feel lucky that I am doing just that. I could potentially save a good chunk of money if I continue working for a government or non-profit for the next 10 years.

At the same time, I recognize that life happens and maybe I will not be able to work in the government or non-profit world in the future. PSLF is all-or-none. I could make qualifying payments for 9 years and 11 months, but if I never made one more qualifying payment, I would not be eligible for the program. Also, who knows if the government will pull the rug out when people start to benefit from the program (earliest will be 2017, I believe, since the law that brought PSLF about was enacted in 2007).

I am trying to figure out what the best strategy is here.

I am thinking I should first pay off all my debts but the student loan (I have no mortgage). Then, I should start saving 15% of income toward retirement, but also start putting some percentage into an account that I could use to pay off the student loan if, for some reason, PSLF does not work out. If PSLF does work out, I could then use that savings toward the purchase of a home.

Would this be a good plan? Anyone have a different suggestion?

If it is a good plan, how should I calculate what percentage I should put toward the "if PSLF doesn't work" savings account?

Thank you very much!!

**mateosbaby** · 03-20-2011, 08:06 PM

Well......

Consider this: Those of us who don't work for the gov't don't get to have our loans forgiven. Also, where did that gov't student loan come from in the first place? We, the taxpayers.... So in my viewpoint, I see it as the gov't wasting my hard-earned money throwing it away for someone else, and I get no benefit from it.

Not to be harsh... But it is the way I see things.

So if I were you, I'd pay it off just like all the other debt you have. Even if you end up qualifying for the forgiveness, you will at least have saved us our tax dollars. And if you don't end up qualifying, you won't have paid tons of interest for nothing, kwim?

**GoodThyming** · 03-20-2011, 08:44 PM

Look, I'm not here to argue public policy. If you want to understand how the scheme of student loans works in the US and the merits of subsidizing students versus private lenders, you can look into it. Also, I will end up paying back the principal so I am not sure what dollars are being wasted, but thanks for deciding I am some kind of leech on society without having the facts.

**Luckybustert** · 03-21-2011, 12:29 AM

Originally Posted by GoodThyming

There is the possibility that 10 years from now, I could have any remaining student loan debt forgiven tax-free based on public service loan forgiveness (PSLF). I won't go into the details of PSLF, but will say that my current employment and payments qualify for PSLF.

It has always been my goal to work in public interest either in government or non-profit, and I feel lucky that I am doing just that. I could potentially save a good chunk of money if I continue working for a government or non-profit for the next 10 years.

The problem with this particular "benefit",as I understand it, is that most loans are structured so you'll have them paid back within 10 years. Your loan balance is particularly high, so perhaps you will be one of the exceptions. I am also eager to hear advice on the student loans.

**GoodThyming** · 03-21-2011, 06:41 AM

Originally Posted by Luckybustert

The problem with this particular "benefit",as I understand it, is that most loans are structured so you'll have them paid back within 10 years. Your loan balance is particularly high, so perhaps you will be one of the exceptions. I am also eager to hear advice on the student loans.

That is the case under the Standard Repayment plan, but there are other repayment plans. Most notably, about the same as PSLF came into being, income-based repayment came into being.

Income-based has forgiveness after 25 years of payments for anyone, but, as the law stands now, is not tax-free in the end. Note, these programs only apply to loans the originated with or that were consolidated with Federal Direct. More info is at a site called IBR Info. I am not able to post the URL.

There are a couple of other types of repayment plans, but I don't know anyone who uses them.

Hope that helps. I also hope this thread can be a safe space for discussing how to tackle student loans.

**Greebo** · 03-21-2011, 08:34 AM

The big question here is - how long would it take you to pay off your SL debt if you are truly gazelle intense and live on as little as possible?

Gazelle intensity is intended to be a relatively short term program - 2 years to 3 years on the outside. I actually have heard Dave tell people that if it was going to take much longer than that to complete BS2 to move such debt to BS6.

This isn't to say if it's gonna take 2 years and 1 month to move your debt to BS6 - but if it's gonna take 3+ years, it's worth considering.

**GoodThyming** · 03-21-2011, 08:47 AM

It will take more than 3 years. Even if I put 100% of my income towards it, that would be the case.

**Greebo** · 03-21-2011, 08:58 AM

Dare I ask what career you chose that was worth accumulating $130,000 worth of debt?

With that amount and that time frame - I'd go ahead and move the debt to BS6. You don't want to delay retirement investing for 3+ years.

BUT - don't slack off on this debt - remember - it's NOT bankruptable and federal student loans can garnish wages WITHOUT a court order. You still need these things gone as fast as reasonable can be done.

**GoodThyming** · 03-21-2011, 09:18 AM

Originally Posted by Greebo

Dare I ask what career you chose that was worth accumulating $130,000 worth of debt?

No, because it is not relevant to strategizing how to work on the debt. I also do not want to open myself up to getting berated on my career choice. Not saying you would do that, but since the first reponse I got on my question was entirely a moral judgment, I remain cautious.

However, I appreciate the thoughtful feedback you have provided.

**Greebo** · 03-21-2011, 09:45 AM

True, but it's relevant to the recurring topic that comes up here about people getting deeply into debt for an education that 50% won't finish and who knows how many will find a burden for decades.

I'm guessing school teacher - since the only two programs like you describe that I know of are teaching and medicine...

But that's just a guess.

Personally I don't have a beef with anyone who takes advantage of a program the Gov't puts out. I have a beef with *the program* - but it's the Gov't who put it out there, and it's not like you won't be paying taxes on that income for the next 10 years as well as making payments.

**grneyegrl** · 03-21-2011, 11:49 AM

i have no problem with the program as i lived in an underserved area(the bronx) as a young child and know first hand its hard to get help..if she is a school teacher im glad she wants to do this..

130,000 in student loans = 4 years at a private school and 2 years of grad school(masters)..im just glad she wants to pay back her student loans ,,,i dont feel like the only one paying them back and i have no regret for taking them out

**GoodThyming** · 03-21-2011, 12:40 PM

I wish to amend my prior statement that I will pay back all the principal. I calculated incorrectly because basically I have mostly principal because my interest capitalized and then I consolidated with Federal Direct (my prior loans were with private companies that are basically middle men through the FFEL program). I guess it costs taxpayers in the sense that there is a reduced return on investment. There is no appropriation for PLSF because it is offset by profits made on loans that pay back principal and interest. Basically, think of it this way: If I loan 10 people $10 at 10% interest and at the end of the year, 9 people pay me $11 and one person pays me $9 and I forgive that person $2, have I lost money? I have received less profit, but have lost nothing.

**panda999** · 03-21-2011, 01:32 PM

I have several classmates (law school) who pursued public interest/government jobs at least partially due to the PLSF program. There is no way that some public service/legal jobs could attract decent candidates given the law school debtload most students accumluate absent this program. I view it kind of like an ROTC of sorts - you do the time, you get the benefit and so does the public.

That said, I would do all of the research necessary to ensure that you would qualify for the PLSF program. I would weigh this with how long you intend or want to stay at your current position. And how long you have been in your current position. If you've been there 2 years or less, and are 50-60% or less certain that you will stay in qualifying employment, I'd put the pedal to the metal and assume you will be paying the entire amount - the compounding interest on that sum of student loans will be staggering.

Also, not sure if you are married or not, but I understand that one has to establish an income below a certain threshold to maintain eligibility. I know several classmates who file their taxes "married filing separately" for just this reason. So, they end up with a higher tax obligation on a year to year basis, but the benefit (of loan forgiveness) makes that worth it in the long run

**GoodThyming** · 03-21-2011, 05:54 PM

Originally Posted by panda999

Also, not sure if you are married or not, but I understand that one has to establish an income below a certain threshold to maintain eligibility. I know several classmates who file their taxes "married filing separately" for just this reason. So, they end up with a higher tax obligation on a year to year basis, but the benefit (of loan forgiveness) makes that worth it in the long run

I do not believe there is an income limit for eligibility under PSLF. Of course, if you made a very high income, you would likely end up paying it off under any repayment program within the 10 years anyway.

You do have to qualify for income-based repayment (IBR) and I am not sure how it is calculated (I know your current student debt load and your current income are used in the calculation). As I understand it, the eligibility only has to be determined once (basically once you are in, you are in), but will be subject to adjustments when your income changes. I believe the max it can adjust up to is the amount it would be under standard repayment, but don't quote me on that.

I'm not married and I had forgotten there was an issue with IBR and marriage, but I believe you are right on that front. Guess I better hire a tax advisor if I ever get married!

**scottp999** · 03-21-2011, 10:34 PM

Originally Posted by GoodThyming

Basically, think of it this way: If I loan 10 people $10 at 10% interest and at the end of the year, 9 people pay me $11 and one person pays me $9 and I forgive that person $2, have I lost money? I have received less profit, but have lost nothing.

Just want to say good luck to you and

On the example above, it depends on whether you are talking in nominal or real terms. The dollars value for some time has done nothing but depreciate in terms of purchasing power, especially since 1913.

In terms of certain commodities that have been used as money in the past, the dollar has lost 81% and 95% of it's value in just the last 12 years. Then again, that's good for long term fixed payment debtors, if you have wage inflation as well, but unfortunately that hasn't happened for most folks.

I wish you the best of luck in getting your debt down! I would recommend paying it all off asap.

"Everyone's has a plan 'til they get punched in the mouth"- Mike Tyson. Life throws quite a lot of punches, and debt can only slow you down.