Public Service Loan Forgiveness for Student Loans

[pianopeep]

Summary: Will this PSLF/PAYE plan work? BTW, please keep any judgmental political/ethical views at a minimum.

I owe about $150K in Direct Stafford Loans. I'm a pharmacist at a state hospital that pays me about $100K. I've been there 6 months and I really like my position so I wouldn't mind staying. Apparently, I qualify for the Pay as You Earn plan (PAYE) and it lets me pay about $700/month.

I plan on utilizing the Public Service Loan Forgiveness (PSLF) program after 10 years. Basically, if I work for any government or non-profit for 10 years full time while making the above monthly payments, the rest of my student loans are forgiven tax free. I checked with my hospital's HR and they filled out a form that said they qualify as non-profit *and* government. Since most hospitals are non-profit, I don't think I'd have a problem meeting the requirements if I ever wanted to branch out elsewhere. After 10 years, I'd have paid $84K and the rest would be forgiven tax free.

Let me know your thoughts about my plan if it's correct and feasible. My biggest concern is if the loan forgiveness program will still be in place 10 years from now. Gonna see what happens in 2017 when the first batch of student loans are eligible to be forgiven (law was enacted in 2007). If the PSLF doesn't work out, I was thinking plan B could be the 20 year forgiveness on the PAYE. And if I go that route, I'm not limited to non-profits. Even with the PAYE 20 year forgiveness, I'd still pay about $168K vs the $200K+ I'd owe total if you calculate interest. The loan forgiveness amount is not tax free though but it still is a great deal. However, the thought of that much debt hanging over your head for 20 years can be scary.

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[BMBiology]

PSLF is the best deal if you can get it. Ten years and your loans are forgiven, tax free. Just keep in mind that your monthly repayment is not set. It can go up or down. For example, if your salary goes up, so does your monthly repayment. If your spouse makes a good income and doesn't have much student loan, then your monthly repayment would also go up.

150 k in student loan is not too bad but your salary is a bit on the low end. If you pick up an extra shift here and there, you can pay it off in 5 years.

 

[BMBiology]

Even with the PAYE 20 year forgiveness, I'd still pay about $168K vs the $200K+ I'd owe total if you calculate interest. The loan forgiveness amount is not tax free though but it still is a great deal. However, the thought of that much debt hanging over your head for 20 years can be scary.

http://www.finaid.org/calculators/ibr10.phtml

Are you sure this is correct? I punched in 150 k in student loans, 100 k in AGI + 2% annual salary increase, 6.8% interest rate:

(1) total amount paid under PAYE (20 years): 197 k
(2) total forgiveness: 154 k so if you need to pay income tax on it then that's about 154 k x 28% tax rate = 43 k

So you end up paying 197 k + 43 k = 240 k under PAYE

 

[Sparda29]

Hmm, my current employer is not-for-profit too. I gotta ask my HR about this.

 

[Gombrich12]

I believe PSLF will be repealed for high earners in the future, though I imagine you would be granfathered in if you were already enrolled. It will only take a few doctors getting $300,000 discharged for this to happen. Also, will you be able to stay in a PSLF eligible job for the required 10 years? It's a great deal if everything works out fine. Even PAYE is a good deal as pharmacists should not expect any income growth above inflation, if not income decline.

 

[Gombrich12]

http://www.finaid.org/calculators/ibr10.phtml

Are you sure this is correct? I punched in 150 k in student loans, 100 k in AGI + 2% annual salary increase, 6.8% interest rate:

(1) total amount paid under PAYE (20 years): 197 k
(2) total forgiveness: 154 k so if you need to pay income tax on it then that's about 154 k x 28% tax rate = 43 k

So you end up paying 197 k + 43 k = 240 k under PAYE

You forgot to discount 197K in 20 years to the present. The calculator uses a default rate of 5.8% which seems a little high to me, but that comes out to $114K. Also, if they have 2 kids the total amount paid goes down to $166K. There is also 401k or other pre-tax deductions. PAYE is categorically a good deal, so much so that there are think tanks that have recommended lessening the benefits.

 

[bacillus1]

PAYE lists that a disadvantage is "You may have to pay taxes on any loan amount that is forgiven after 20 years."...Exactly how much tax would this be?

 

[Gombrich12]

PAYE lists that a disadvantage is "You may have to pay taxes on any loan amount that is forgiven after 20 years."...Exactly how much tax would this be?

Run your numbers at http://www.finaid.org/calculators/ibr10.phtml

The amount forgiven after 20 years is taxed as income. So If you have $200,000 forgiven multiply that 25-40% as an estimate of your future tax bracket.

 

[Momus]

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Remaining forgiven loan balance = income

So you $100k salary (follows the tax bracket) + forgiven loan (@150-200k balance, will at minimum falls on 28-33% bracket) = will push your income 250-300k the year your loan is forgiven. I remember when I made close to 250k, I paid a total of 80k in taxes that year between state and the fed -_-; so good luck. At the end, you are going to shift your loan to owing IRS instead, on top of getting rip off 20 years of astronomical interest payment LOL.

 

[sakigt]

I bet you could figure out how much will be forgiven and plug it in to TurboTax this year just to see what would happen and at least you would have a ballpark figure to work with.

 

[rph3664]

I would recommend that you sign up for the program, but live as frugally as you can and get those loans paid off, for all the reasons stated above.

 

[pianopeep]

@BMBiology, good point. I just did a simple calculation not factoring income increases. But using a 2% income increase, I would be paid almost $150/year at 20 years as a hospital pharmacist which seems pretty high. I honestly expected to max out at 125K here is Texas. Here's hoping the PSLF plan works. $43k on top of my regular taxes during one year will be hard to stomach.

@Gombrich12, I could see myself at a PSLF job for 10 years especially if I'd stay in hospital pharmacy. Most hospitals are either non-profit and/or government. The only other field I could see myself in is consulting pharmacy (but that's usually never non-profit/government).

The AGI would actually be lower than 100K too. I can probably get it down to 85K with all the above-the-line deductions like student loan interest, retirement, FSA, etc.

 

[kvl1027]

Am I correct in understanding that the portion of taxes you would pay in the forgiven amount after 20years PAYE or 25 years IBR cannot exceed your net worth?

 

[Gombrich12]

Am I correct in understanding that the portion of taxes you would pay in the forgiven amount after 20years PAYE or 25 years IBR cannot exceed your net worth?

Correct, you are only taxed on the amount to the extent that you are solvent. I don't know the exact calculation or rules but that is true.

 

[homeslice]

Correct, you are only taxed on the amount to the extent that you are solvent. I don't know the exact calculation or rules but that is true.

I think I would be seriously concerned if the tax on the amount forgiven after 20-25 years was greater than my net worth at that point.

 

[type b pharmD]

I think I would be seriously concerned if the tax on the amount forgiven after 20-25 years was greater than my net worth at that point.

The tax exclusion applies when the value forgiven itself exceeds your net worth.

Haha I would also be very concerned if the tax exceeded my net worth.

 

[kvl1027]

The tax exclusion applies when the value forgiven itself exceeds your net worth.

Haha I would also be very concerned if the tax exceeded my net worth.

I'm not necessarily saying it's smart, but lets say you forked all your cash into your spouses saving, retirement, etc. Then took out a HELOC to eat up the equity in your home. If you filed you taxes separately could you then avoid taxation on the foregiven amount if your net worth was essentially zero? I'm not saying I would do it, but I could see it as a loop hole. The risk would be your spouse leaves you for the gardener with all your cash.

 

[BMBiology]

There is no practicality to plan for something like this. Who knows what is going to happen within the next 25 years? Laws change. Loopholes close.

In the 70s you can declare bankruptcy and avoid paying your student loans. Lawyers and doctors did it and the law was changed. Now student loan is virtually impossible to discharge. Laws changed. Loopholes closed.

 

[kvl1027]

There is no practicality to plan for something like this. Who knows what is going to happen within the next 25 years? Laws change. Loopholes close.

In the 70s you can declare bankruptcy and avoid paying your student loans. Lawyers and doctors did it and the law was changed. Now student loan is virtually impossible to discharge. Laws changed. Loopholes closed.

But in theory, assuming nothing was changed to prevent this, then .....

 

[BMBiology]

You are already too late in the game. Starting 2017 some student loans will be forgiven via PSLF. The public is not going to be happy to hear how some surgeon got his 300 k student loan forgiven.

 

[kvl1027]

Yeah, probably not. I guess we will see what happens. I'm all down for it, no better way to stimulate the economy then free up some discretionary income for the middle class.

 

[BMBiology]

Too bad the public doesn't think doctors, dentists and pharmacists as "middle class"

My guess is that there will be a limit to amount that is "forgiven" and/or exclude high income earners.

 

[type b pharmD]

I'm not necessarily saying it's smart, but lets say you forked all your cash into your spouses saving, retirement, etc. Then took out a HELOC to eat up the equity in your home. If you filed you taxes separately could you then avoid taxation on the foregiven amount if your net worth was essentially zero? I'm not saying I would do it, but I could see it as a loop hole. The risk would be your spouse leaves you for the gardener with all your cash.

I would do it. But not without an accountant. I think as confettiflyer states (one of the most knowledgeable accounting peeps on here) though, it would be good to do it a few years before.
Also a good choice would be selling things for cash and leasing things for a while.

This was actually my plan but I am leaning towards a lower paying public service job now and PSLF

 

[type b pharmD]

Too bad the public doesn't think doctors, dentists and pharmacists as "middle class"

My guess is that there will be a limit to amount that is "forgiven" and/or exclude high income earners.

Would they average your income over 10 years? Otherwise this would just be a perverse incentive which would make people just take a lower paying job the year of forgiveness , their salary would be more than offset by forgiveness benefit

 

[homeslice]

The tax exclusion applies when the value forgiven itself exceeds your net worth.

Haha I would also be very concerned if the tax exceeded my net worth.

Ah yes, I suppose that's a bit more reasonable. Although unless you are doing some clever accounting with your assets, I'd still be uncomfortable with just about any (realistic) forgiven amount exceeding my net worth when I'm pushing 50 years old.

I'm mostly with you though. If you have <120k or so in loans pay them down ASAP. Greater than that, PSLF or bust.

 

[xiphoid2010]

Ah yes, I suppose that's a bit more reasonable. Although unless you are doing some clever accounting with your assets, I'd still be uncomfortable with just about any (realistic) forgiven amount exceeding my net worth when I'm pushing 50 years old.

Well, suppose you invest in rental properties, live in one unit as "office", depreciated the properties down to zero, I can imagine how you can have almost zero networth on paper but a ton of positive cash flow and real wealth when you eventually sell those properties.

 

[kvl1027]

I graduated with 147K and after 3.5 years is 168K, its finally going the other way but its a little discouraging. I plan to use IBR to keep a lower minimum payment and then hope I can get to a point where I can pay extra and get that crap down fast. We will see I guess.

 

[trailerpark]

I graduated with 147K and after 3.5 years is 168K, its finally going the other way but its a little discouraging. I plan to use IBR to keep a lower minimum payment and then hope I can get to a point where I can pay extra and get that crap down fast. We will see I guess.

How the heck did it go up from 147k to 168k, what were your payments for those 3.5 years?

 

[kvl1027]

I was on IBR, so for the first year is was like $300-400, then it jumped to $700ish, now I'm in the $900ish range. I know it sucks, but with two kids and a stay at home mom to take care of...

 

[BMBiology]

I was on IBR, so for the first year is was like $300-400, then it jumped to $700ish, now I'm in the $900ish range. I know it sucks, but with two kids and a stay at home mom to take care of...

That is the magic of IBR. Pay less per month but then your interest accumulates and is added to the principle. 25 years to pay off your student loans? Death by a thousand payments is more like it.

 

[kvl1027]

That's what it feels like, but hopefully things are on the up and up with this new venture I have going. We shall see....

 

[owlegrad]

That is the magic of IBR. Pay less per month but then your interest accumulates and is added to the principle. 25 years to pay off your student loans? Death by a thousand payments is more like it.

The evil IBR strikes again!

 

[BMBiology]

The evil IBR strikes again!

Why pay 6.8% annual interest for the next 25 years? I will lend you my money for just 4.8%

 

[confettiflyer]

So the trick about claiming insolvency at the end of this PAYE thing is that it's going to be very difficult to do.

Claiming Insolvency
Unlike bk's, your retirement accounts are taken into account and you can't exactly just transfer them over to a spouse or anything. You CAN drain them out and stuff it under your mattress, but you'd pay a 10% penalty AND lose market appreciation for that period of time...unless you gave it to a relative/friend. Good
luck wiring six figures worth of $$$ and not have someone take a closer look, your friend will probably have to pay taxes for the transfer, and I hope you're 100% sure your friend won't flee the country with that money burning a hole in the pocket.

Maxing out a HELOC to encumber your other big asset might work. But it's a net of zero....you encumber the property, but you take an equal amount as cash...so it's time to hand this over to your friend as well (see above).

Political Reality
I'm repeating myself from before....but IBR/PSLF/PAYE/etc... are not subject to the same annual appropriation and budgeting process the way federal agencies like HHS, DOD, etc... have their money meted out. Meaning, there's not actually some lawmaker pumping money into this program on an annual basis, they can't be "defunded" or messed with thorough budgetary process (the highly political circus you see on TV).

Further, the actual law (CCRA of 2007) that authorized this whole thing (signed by a republican, mind you) actually GENERATES revenue for the federal government. Further, it doesn't physically "cost" the government anything (well it does, but...not in the traditional way, see next paragraph). Really, it's Treasury that writes off your debt...it doesn't send anyone a check.

It's like if your friend owed you $100 from 10 years ago, and has been buying you random beers through the years and keeps saying he'll pay you back. At some point you said "eh that jerk will never pay me back" but you kind of don't care cuz it was 10 years ago and he's your friend, so you forgive the debt...but you don't actually reach into your wallet to pull out money, you weren't counting on that money to do anything, you don't "feel" any poorer.

A congresswoman in Alaska isn't going to have to cancel a bridge project because you got your loan forgiven.

Now...Congress being Congress, it can happen, but it would require a full act of congress (house + senate) & presidential approval to fly through. Given the abject failure of even mainline republicans from cutting spending (did you SEE the latest budget? bananas...), and the fact there's there more political risk going after meaningless "savings" vs. going after actual expenses (hence the focus on discretionary spending and not entitlement programs in the last round), I'm putting my money on the idea that these programs will be more or less around as they are.

Plus, it's exceedingly difficult to write such a targeted law to affect high earning health care workers. Want to punish physicians? You're probably better off cutting Medicare reimbursements.

Our Reality
So our reality is...there's just not going to be that much loan balance to forgive in the end. It's a combination of:
1) Your income starts high and remains high
2) Loan balances aren't that high to begin with, for most of you. The highest starting loan balance would be for someone who did 4 years private undergrad in addition to Rx school, but unscientifically I think most of you are sitting on between $150k-$250k
3) Most of you will marry equally smart people and practically double your income.
4) Most of you work at CVS/Wags/some random chain.

So really, for pharmacists, IBR/PSLF/PAYE will really only work for non-profit hospital pharmacists who did 1-2 years of low paying residency AND borrowed an insane amount of money in school AND either stay single or marry someone with substantially lower income/no income.

 

[BMBiology]

Declare insolvency? You need to declare your assets and they include checking and saving account balances, retirement account balances, home, car, furniture, art work, jewelry. I think type b pharmD needs to hire another accountant!

Plus, it's exceedingly difficult to write such a targeted law to affect high earning health care workers. Want to punish physicians? You're probably better off cutting Medicare reimbursements.

Not as hard as you think. Congress can limit "loan forgiveness" via PSLF to 50 k and the rest will be taxed as regular income tax. Simple enough.

I agreed with what you said tho. For most pharmacists, after 20-25 years of paying your loans, there won't be anything left to be "forgiven". Uncle Sam will not only get back his principle but also 20-25 years of interest.

 

[confettiflyer]

Not as hard as you think. Congress can limit "loan forgiveness" via PSLF to 50 k and the rest will be taxed as regular income tax. Simple enough.

I think you have too much faith in government being able to pass things. I just made the argument that there's no political benefit to messing with CCRA.

There's just no benefit to a right wing nut job to cut PSLF. The GAO analysis won't pan out in their favor...even their own constituents won't be impressed.

People in Congress do things to keep themselves in office, this would just be a waste of time.

 

[cdhoward]

Why pay 6.8% annual interest for the next 25 years? I will lend you my money for just 4.8%

If you are serious, I'll take that offer.

 

[BMBiology]

I think you have too much faith in government being able to pass things. I just made the argument that there's no political benefit to messing with CCRA.

There's just no benefit to a right wing nut job to cut PSLF. The GAO analysis won't pan out in their favor...even their own constituents won't be impressed.

People in Congress do things to keep themselves in office, this would just be a waste of time.

You are lumping us with the general public. Congress doesn't care about "well off" healthcare providers.

They protect the very rich and the poor. Physicians? Pharmacists? No way. Look at how they cut subsidize graduate student loan. Now all graduate student loans are unsubsidize.

 

[TheWeeIceMan]

By April 5, 2014, Congress will vote on whether to cap the amount of direct student loans eligible for the Public Interest Loan Forgiveness program (also known as the Public Service Loan Forgiveness program) to $57, 500. Many students and loan recipients that currently work in public service and hope to take advantage of the program’s benefits have direct loans that exceed this limit significantly. However, if 10,000 signatures are collected by the April 5th deadline, then the cap will not be added. Please take the time to sign in to Whitehouse.gov and sign the petition – IT IS A VERY SHORT AND EASY PROCESS TO CREATE AN ACCOUNT AND SIGN. The link to the petition (@Whitehouse.gov) is:

https://petitions.whitehouse.gov/pe...orm-forgiving-all-qualifying-student/wkqnqBCH

PLEASE PASS THIS INFORMATION ALONG ON OTHER SCHOOL BOARDS AND SOCIAL MEDIA SITES TO GET THE WORD OUT – THERE ARE ONLY A COUPLE OF WEEKS LEFT!!!

For more information about the Public Service Loan Forgiveness program, go to:

http://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service

I'm pretty sure that's not how it works....

 

[type b pharmD]

This program is not going to pass wholesale on april 5th regardless. Its connected with a budget proposal if I remember correctly? Which means months and months at the very earliest.

 

[BMBiology]

My guess is that there will be a limit to amount that is "forgiven" and/or exclude high income earners.

Not as hard as you think. Congress can limit "loan forgiveness" via PSLF to 50 k and the rest will be taxed as regular income tax. Simple enough.

Wow! I got it right! What the hell am I doing in pharmacy? I should be working as a psychic!

 

[BMBiology]

I actually don't feel too bad for people who depend on PSLF. The people who will be affected by the 57.5 k cap are mostly professionals with 6 figure student loans like physicians, dentists, pharmacists, and laywers. They may not be able to live a comfortable life but I am sure they can afford it.

Guess what would happen if the government actually forgives 6 figure student loan debt? The interest rate would jump for everybody else.

If it's not changed today, it will be changed tomorrow. It's just a matter of time.

 

[confettiflyer]

I hear you, but every little bit helps.

Yah, it's not even factually correct with how government functions in the United States.

The proposal is in the WH FY2015 budget and I don't even think any of this has gone through appropriate committee hearings yet, and there are no pending senate or house bills addressing the issue.

The petition requires a response (which will be generic and non-binding) at 100,000 (not 10,000), not necessarily any congressional action.

DOE has already stated the cap would take effect after July 1, 2015 so if you have already made your decisions regarding any existing PSLF programs you're protected. If you're a student entering school, you have ample time to adjust your borrowing and career choices.

That post has about as much fact in it as a Nigerian 529 scam email.

 

[Vatic]

So is this what they are going to do with all the graduating pharmD's? A pound of flesh?



113th CONGRESS

2d Session

S. 2826

IN THE SENATE OF THE UNITED STATES

September 16, 2014

Mr. Blumenthal (for himself and Ms. Warren) introduced the following bill; which was read twice and referred to theCommittee on Health, Education, Labor, and Pensions

A BILL

To amend the Higher Education Act of 1965 to provide for a percentage of student loan forgiveness for public service employment, and for other purposes.

1.
Short title

This Act may be cited as the Strengthening Forgiveness for Public Servants Act .

2.
Public service loan forgiveness program

Section 455(m) of the Higher Education Act of 1965 ( 20 U.S.C. 1087e(m) ) is amended—

(1)
in paragraph (1), in the matter preceding subparagraph (A), by inserting , except as provided in paragraph (5), after on any eligible Federal Direct Loan not in default; and

(2)
by adding at the end the following:

(5)
Loan cancellation for new loans

(A)
In general

Beginning after the date of enactment of the Strengthening Forgiveness for Public Servants Act , after the conclusion of each employment period in a public service job, as described in subparagraph (B), the Secretary shall cancel the percent specified in such subparagraph of the total amount due on any eligible Federal Direct Loan made after the date of enactment of the Strengthening Forgiveness for Public Servants Act for a borrower who is employed in such public service job and submits an employment certification form described in subparagraph (C).

(B)
Percent amount

The percent of a loan that shall be canceled under subparagraph (A) is as follows:

(i)
In the case of a borrower who completes 2 years of employment in a public service job, 15 percent of the total amount due on the eligible Federal Direct Loan on the date the borrower commenced employment in such public service job.

(ii)
In the case of a borrower who completes 4 years of employment in a public service job, 15 percent of the total amount due on the eligible Federal Direct Loan on the date the borrower commenced employment in such public service job.

(iii)
In the case of a borrower who completes 6 years of employment in a public service job, 20 percent of the total amount due on the eligible Federal Direct Loan on the date the borrower commenced employment in such public service job.

(iv)
In the case of a borrower who completes 8 years of employment in a public service job, 20 percent of the total amount due on the eligible Federal Direct Loan on the date the borrower commenced employment in such public service job.

(v)
In the case of a borrower who completes 10 years of employment in a public service job, 30 percent of the total amount due on the eligible Federal Direct Loan on the date the borrower commenced employment in such public service job.

(C)
Employment certification form

(i)
In general

In order to receive loan cancellation under this paragraph, a borrower shall submit to the Secretary an employment certification form that is developed by theSecretary and includes self-certification of employment and a separate part for employer certification that indicates the dates of employment.

(ii)
Deferment

If a borrower submits to the Secretary the employment certification form described in clause (i), during the period in which the borrower is employed in a public service job for which loan cancellation is eligible under this paragraph, the borrower's eligible Federal Direct Loan shall be placed in deferment.

(D)
Interest cancelled

If a portion of a loan is canceled under this paragraph for any year, the entire amount of interest on such loan that accrues for such year shall be canceled.

 

[confettiflyer]

So is this what they are going to do with all the graduating pharmD's? A pound of flesh?



113th CONGRESS

2d Session

S. 2826

This legislation sounds awesome...it removes the "all or nothing" provision of PSLF.

But who are we kidding...The House would never ever ever ever pass anything with Elizabeth Warren's name on it...even if they plastered a picture of Ronald Reagan on the front and called it the "F**k Yeah America! Act of 2014."

 

[MatCauthon]

I think many of you guys would be far better off refinancing the interest rate and paying off the loan as quickly as possible. All my student loans have now been refinanced with DRB at 3.5% fixed rate for 5-years. 10 year rates and beyond are also available. You could consider refinancing just a part of your loans if you can't afford the 5-10 year payment. Other banking options are available now, explore the terms.

 

[confettiflyer]

I think many of you guys would be far better off refinancing the interest rate and paying off the loan as quickly as possible. All my student loans have now been refinanced with DRB at 3.5% fixed rate for 5-years. 10 year rates and beyond are also available. You could consider refinancing just a part of your loans if you can't afford the 5-10 year payment. Other banking options are available now, explore the terms.

I did the math and analyzed the potential for legislative disruption for the PSLF program as well as my job security in a 501(c)(3) non-profit/government position and concluded that I'm personally better off waiting for loan discharge in 8 years.

YMMV of course, everyone's situation is different.