PSLF + (IBR, ICR, or PAYE)=Awesome!

In my previous post, I presented the general requirements of PSLF (type of repayment plans that qualify, qualifying employment, etc.).  In this post, I will illustrate how awesome PSLF can be for those under IBR, ICR, or PAYE. Payments made under the Standard Repayment plan also count towards PSLF for one reason: some people on IBR or PAYE might one day make lots of money (yea for them!). With a high income, they might no longer have a “partial financial hardship” as defined by the government. If they no longer have a “partial financial hardship,” they will be put back on the Standard Plan. PSLF allows Standard payments to qualify so these people don’t miss out on the forgiveness after 120 qualifying payments.

Here’s an example. Let’s say that I spend the next seven years earning a salary that leaves me with a partial financial hardship in relation to my loan balance. During those seven years, I’ve made payments under IBR and worked at a job that qualifies for PSLF. Then, in my eighth year, I get a wonderful new job (still one that qualifies for PSLF) with a high salary. This new salary no longer leaves me with a partial financial hardship, so I’d get placed on Standard Repayment. After three more years of payments, I’d qualify for loan forgiveness under PSLF. Nice! Now, if I were on the Standard Repayment plan for all 120 qualifying payments, technically there would be no balance left to forgive.

So, here are some numbers! If I have $100,000.00 in student loans (with a 6.8% interest rate), file my taxes singly, have a family size of 1, and a starting AGI of $45,000.00, here is the breakdown:

*Standard Repayment: $1,151.00 per month for 120 months, ending balance of zero (no forgiveness)

*Income-Based Repayment: $334.00 per month to start. Let’s say, for the purposes of easy math, that my income and monthly payments stay the same for 10 years. I’d pay a total of $40,080.00 over the course of 10 years. The remaining balance (plus any accrued interest) would be forgiven tax-free if I had worked at a qualifying public service job for the entire 10 years.

Damn, that is some good stuff. People who qualify for PAYE would save even more money than under IBR. Currently, there is no cap on the amount that is forgiven under PSLF. Some legislators want to change this for future borrowers. Bah.

If you feel depressed about your student loan balance, I suggest going to the repayment calculator here and pretending you qualify for PSLF immediately. It’s better than drinking a bottle of wine, in my opinion.