College can be a GREAT thing.
Seriously, being able to receive an education in a field that you enjoy and can feasibly make a living doing is a fantastic opportunity.
This being said, as great of a thing that college can be, it can also be very BAD. How can it be bad? Well, if it puts you so far in the red on your balance sheet that you’ll have to make more money than anyone in your new job has ever made than that can be a bad thing.
The average student loan debt continues to rise every year. For the class of 2016 graduate, the average is $37,172, up 6% from the previous year. These numbers put many in the position of having to spend the next decade or more to rid themselves of just their student loan debt. Not to mention the debt accumulated on credit cards for things like books and housing during their college career.
No matter who you are, you can’t just run away from student loan debt. Most lenders offer a grace period of 6 months or more before you’re required to begin repayment, but the monthly payments will inevitably follow.
Also, the amount you owe nor your financial situation can allow your student loan debt to be normally discharged in bankruptcy. For most, the only way toward the light at the end of the tunnel is to get on a payment plan and keep chipping away – whether it’s something you want to do or not.
With all this said, student loans aren’t all doom and gloom and I’ve never been one to see the negative but try to pull out the positives.
So, before your mountain of student loans get you down, let me help show you how to climb and conquer those mountains.
Public Service Loan Forgiveness
Federal employees have some truly outstanding benefits.
You receive a 5% match into your TSP.
You’re offered Basic Life Insurance at a pretty reasonable rate.
Your health insurance is some of the best available.
AND, you qualify for the Public Student Loan Forgiveness program!
For the majority of federal employees, certainly not all, the Public Student Loan Forgiveness (PSLF) program is most likely your best option for paying down your student loans.
The Public Service Loan Forgiveness (PSLF) program forgives the remaining balance on your student loans after you make 120 timely payments while working for a “qualifying employer” for ten years.
This program is offered by the federal government, and once you meet the repayment requirements, your loans will be “forgiven.”
In order to use the PSLF program, you’ll have to work for a qualifying employer. According to the U.S. Department of Education, the qualifying employers for the PSLF program are:
- Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code.
- Other types of not-for-profit organizations that provide certain types of qualifying public services.
- And, (drumroll please) government agencies at any level (federal, state, local, or tribal.)
If you’re reading this, it is highly likely that you qualify for the Public Service Loan Forgiveness program. Congratulations!
Now, the bad news. Choosing to work in a career in public service although highly rewarding and full of benefits, is typically comes with a lower salary. So, not to be a debbie-downer, but while your student loans will ultimately be forgiven, you’ll probably be sacrificing higher earnings that you could have gotten elsewhere.
But, I will be the first to tell you, your career should be viewed as much more than just a way to cash a paycheck.
What are the Public Student Loan Forgiveness qualifications?
Okay, you’re a federal employee, but that’s not all that’s required to be in the program. Here are some basic requirements:
- Full-time federal, state, local, or tribal employee including firefighters, teachers, military personnel, postal workers, nurses, and more.
- Have qualifying loans (Direct Subsidized / Unsubsidized, Direct Consolidated Loans, Direct PLUS, and Direct Stafford Subsidized / Unsubsidized.)
- Meaning the loans must be federal loans. However you can consolidate other loans.
- Make 120 qualifying payments as part of the Income Based Repayment Plan, Income Contingent Repayment, or Pay As You Earn Plan.
- These payments give you an amount calculated based on your income and family size.
- There is currently no maximum loan amount, although that could change in the future.
The next question to ask is, although student loan forgiveness is available for public service personnel, is it right for you?
Is Public Student Loan Forgiveness the right option for YOU?
Student loan forgiveness sounds almost too good to be true at first, and unfortunately for some it is.
Before you decide to jump all into the PSLF program, be sure to consider how much in student loans you’ll actually have left to be forgiven after 10 years of repayment. There’s little reason to use the program if you won’t actually have any money left over after the 10 years to be forgiven.
The program is without a doubt the most valuable if you have high loan balances relative to your salary. For instance, I’ve had clients whose salary was less than 1/3rd of their student loans; they are prime candidates for PSLF.
If your loan balances are low, then it could be unlikely that you’ll have much of your loans remaining to be forgiven after 10 years of payments. This isn’t necessarily a bad thing, it just means the program wasn’t designed for you.
Also, if you earn quite a bit, you might not even qualify for reduced payments. This could result in you having to pay off large amounts of your student loan balance in 10 years. Possibly more than you’d even want to pay.
Student Loan Hero has a helpful PSLF calculator that I would recommend checking out to figure out what your remaining balance would be after 120 payments.
Public Service Loan Forgiveness Example
It’s often great to think about all of the possibilities of PSLF, but it can be difficult to fully grasp the concept unless a real-life example is shown.
The borrower is earning $40,000/year.
Their loan balance is $48,000
Their interest rate of 6.875%.
The borrower could qualify for an income-based payment of $52/month.
After making 120 qualifying payments, borrower would have paid $6,240 in student loan paments, and the balance of $41,760 would be forgiven ($48,000-$6,240.) This however does not include the interest that would also be forgiven, and assumes that the personal income and family size will not change over the course of ten years.
What are my other options?
While the Public Service Loan Forgiveness program may be an excellent idea for many people in debt up to their eyeballs, others have no desire to make student loan payments for decades.
Many individuals with student loan debt may find some much-needed relief from crushing student loan debt simply by refinancing their student loans into a new loan that offers lower interest rates and better terms. The best part when it comes to refinancing your loans is not having to spend your discretionary income for decades. With refinancing, you remain in control of both your life and career.
Many companies offer student loan refinancing services so be sure to do your research before making a choice.
Not only does refinancing allow you to secure a lower interest rate, but here are some other reasons it may be your best bet to refinance:
- Your loans have a variable interest rate – If you ever worry how a variable rate could affect your loan in the future, refinancing to a fixed-rate loan with monthly payments that don’t change may be worth your time to research.
- You have multiple loans at different interest rates – Just like when it comes to investing, it’s difficult to know all you have going on when you’re working with five companies. If you find yourself paying several payments each time a new month rolls around, it can be beneficial to refinance all your loans into one produce that has a low rate and more favorable terms.
- You earn too much to qualify for income-driven repayment plans – If you earn too much to qualify for a loan forgiveness program or the PSLF program isn’t something you want to utilize, refinancing or consolidating at a lower interest rate may not just be your best option, it could be your only option.
How to Apply for Public Service Loan Forgiveness
Once you’ve figured out that you qualify for the PSLF program, and you’ve decided it’s right for you, the last step is to begin making the 120 qualifying payments.
Unfortunately, you do no automatically receive PSLF. To know that you’re on the right track, you can submit the Employment Certification for Public Service Loan Forgiveness form periodically to FedLoan Servicing.
This form is not required but is encouraged to be sent in at least yearly or whenever you change jobs.
Once you make your 120th qualifying monthly payment, you’ll need to submit the PSLF application to receive loan forgiveness. The application itself is still under development but is planned to be available before October 2017. I will update this article when it is available.
It’s important to remember that refinancing federal loans through private companies can result in a loss of certain protections provided by the federal government, such as deferment and forbearance. Refinancing federal loans also means you cannot take advantage of loan forgiveness programs in the future, even if your situation changes in the future. Another thing to be aware of is if your credit is poor, getting student loans without a cosigner will be very difficult if not impossible. This could keep you from even having the opportunity to refinance.
Debt Avalanche or Debt Snowball?
If you choose to utilize the Public Service Loan Forgiveness program then this section of the guide is not quite as important for you. At least when it comes to your student loans; it can still be immensely helpful for any other debt you may have.
Let’s say you’ve decided to forgo utilizing PSLF for whatever reason and have decided to refinance your loans. Once you’re happy with the terms of your loan as well as your interest rate, you have the option to pay your loans down MUCH faster than the typical 10 to 15 years. At this time you should go on an all out assault on your loans until they are no more. Throw everything you can afford to put towards the loans while still maintaining your emergency funds and 5% TSP contribution.
If you have just one loan, your strategy is simple; all out war. Throw as much money as you can towards the loan payment each month in order to:
- reduce the principal on your loan as quickly as possible
- get out of debt faster
- save money on interest
However, if you’re like many and have multiple loans to service, your choice becomes a little bit trickier. While there isn’t necessarily a “wrong” way to pay down debt, most people choose one of two strategies:
Debt Avalanche Method – The debt avalanche method for paying down debt is my favorite as well as the most effective. It takes 4 steps to follow and is really quite simple. All you really need to know is the amount of debt you owe, as well as the interest rates.
Step One: Order debts from highest interest rate to lowest
Step Two: Pay the Minimum to all debts every month
Step Three: To your debt with the highest interest, send all extra available cash
Step Four: Repeat every month, eliminating the loans you owe
|Priority||Balance||APR||Minimum Payment||Paid Off In|
|Credit Card 1||$9,000||19.5%||$270||22 months|
|Credit Card 2||$8,400||13.0%||$252||28 months|
|Auto Loan||$21,200||9.8%||$520||36 months|
|Student Loan||$4,900||4.0%||$120||37 months|
Debt Snowball Method – The debt snowball method was popularized by financial guru Dave Ramsey although it’s been around for some time. Rather than going after the highest interest loans, you go after the smallest loan. So, list your loans from smallest to largest balance, and in order to gain more “psychological wins,” you’ll pay the minimum payments on all of your biggest loans and throw all of your extra money towards your smallest balance until it’s eliminated.
This method is the best for people who want to minimize the number of payments they’re making altogether and could really be helped by the small wins.
|Priority||Balance||APR||Minimum Payment||Paid Off In|
|Credit Card 1||$9,000||19.5%||$270||25 months|
|Credit Card 2||$8,400||13.0%||$252||31 months|
|Auto Loan||$21,200||9.8%||$520||38 months|
|Student Loan||$4,900||4.0%||$120||15 months|
As evidenced by the two tables, choosing the Debt Snowball option will ultimately save you over $1,000 in interest payments. This is the reason I most often recommend the Debt Avalanche to my clients.
Graduating college with thousands of dollars in student loan debt is not idea, there’s no doubt about it. But, that doesn’t mean you need to be overwhelmed by the situation – there are options.
Most of the time, a solution such as refinancing or loan forgiveness can help ease the burden of carrying so much debt – or at the very least make the experience a whole lot less painful.
It’s important as with anything to research all of your options and making sure you’re choosing the optimal solution based upon your debt levels as well as your personal goals. There’s not necessarily any “wrong” ways to pay down debt, but there are ways that pay debt down the fastest and with the lowest cost.
As always, the decision is on your shoulders although a financial planner could certainly help in making decisions. No matter what, the decision on how to pay down debt is a big one and should not be taken lightly.
– Cooper Mitchell