Way OT: Paying off student loans

[DozenRoses]

Drag it out as long as you can. Make the min payment- especially at that rate and with forgiveness terms. You would be a fool to pay it off any faster than necessary.

I have been hearing this a lot. Can this concept be explained to me. I was always taught to repay debt ASAP. I don't have a credit card but does the same thinking apply to credit cards?

Well, if he makes the minimum payment at that relatively low rate, he will be forgiven nearly one third of the entire debt in ten years. You aren't getting that deal from any bank or individual... only Uncle Sam. You take it and don't think about it. Why pay it off now? Save that money and invest it every month in something else, or buy more house (you can afford a larger mortgage payment if you make the min) , which is sure to be worth more in ten years.

If he is forgiven , say $14k.. he essentially got that $50k interest free over all that time.

This is what I was thinking. However, I am risking that this program stays in place (gotta put faith in Uncle Sam!), AND that I keep a job in this same field for the next 10 years.

[DozenRoses]

I was just hired at a public agency that qualifies myself for "Public Safety Loan Forgiveness." Essentially, the way I understand it, is I can make the minimum monthly payment (10% gross income) for 10 years on my loan, and the rest is forgiven.

It seems a bit risky trusting the government to follow through with this. My starting salary right now is right around $40k.

Should I risk it on this "loan forgiveness" plan for 10 years, or just try and pay this off ASAP? I have around 15k stashed away at the moment.

I would only pay the minimum if you can ensure you get the forgiveness no matter what. If you quit this job, do you still get forgiveness? If this is a perk of your job then it seems like that likely is not be the case.

If the answer is no, then I will say the odds of you being there for 10 years seem very small, and you should treat this like normal debt and just pay it off sooner.

Also when doing the math, you have to factor in expected salary growth. I don't know what your estimated salary growth would be, but if you are at a position that gets standardized raises or a position you could have significant salary growth in then the 10% value could change considerably.

If you can't grow your salary considerably at this position then you are likely better off working somewhere else with more salary growth even if you have to pay back the full loan.

Exactly. I am going to have a bigger salary in the future. The program isn't very standardized. You apply for the loan forgiveness AFTER 10 years and they either approve or deny your entry. It is not tracked by the government. This makes me very wary.

[Fl_Flash]

I have been hearing this a lot. Can this concept be explained to me. I was always taught to repay debt ASAP. I don't have a credit card but does the same thinking apply to credit cards?

Well, if he makes the minimum payment at that relatively low rate, he will be forgiven nearly one third of the entire debt in ten years. You aren't getting that deal from any bank or individual... only Uncle Sam. You take it and don't think about it. Why pay it off now? Save that money and invest it every month in something else, or buy more house (you can afford a larger mortgage payment if you make the min) , which is sure to be worth more in ten years.

If he is forgiven , say $14k.. he essentially got that $50k interest free over all that time.

This is what I was thinking. However, I am risking that this program stays in place (gotta put faith in Uncle Sam!), AND that I keep a job in this same field for the next 10 years.

This isn't accurate. If you amortize a 50K debt at 5.5% and have $300/month payments - it will take around 26 or so years to pay off. After 10 years you would have cut down about 10,000 in principle and paid roughly 26,000 in interest. You will be forgiven $40,000 in 10 years which will likely result in a $40,000 bump in your income in the year you exercise that option. Whatever the $40,000 bump does to your marginal tax rate is what you're going to owe in taxes - let's say $11,200 in additional taxes at a 28% marginal tax rate.

I can all but guarantee you that the Gov't (or any other lender) isn't going to take your payments and apply them all to principle as part of this debt forgiveness program. They're going to split each payment between principle and interest with the bulk of your interest to be paid in the early part of the loan as that is when you have the greatest amount of principle outstanding.

Now, if the Gov't won't 1099 you at the exercising of this option, then by all means pay the minimum. That will make it, in essence, an interest free loan. You will have paid $36,000 for $50,000 "worth" of education.

You have all the other concerns down. Do you have to work with this Organization for 10 years? That's a long time. Is there a minimum amount of time you must be there to qualify? What are your future plans? etc, etc, etc...

[chifan1798]

Be careful, and try to save, because from what I've been told, at least for the income based repayment process, at the end of that 10 years, you have to pay taxes on the part that was forgiven because it's considered as monetary a gift. But again, I'm just going off of what someone told me just a few days ago, and haven't gotten around to research it myself. I know when I was first told about IBR, I don't recall hearing about the taxes at the end. I have a looooooooooot of student loans, so it would be a big hit for me with that tax situation. So it's definitely something you should investigate further. It's still a probably a good idea, as long as you can estimate how much taxes you would have to pay at once at the end, and just save up for it.....which is probably what I'll be doing, so I can handle the tax hit

[chifan1798]

Well, if he makes the minimum payment at that relatively low rate, he will be forgiven nearly one third of the entire debt in ten years. You aren't getting that deal from any bank or individual... only Uncle Sam. You take it and don't think about it. Why pay it off now? Save that money and invest it every month in something else, or buy more house (you can afford a larger mortgage payment if you make the min) , which is sure to be worth more in ten years.

If he is forgiven , say $14k.. he essentially got that $50k interest free over all that time.

This is what I was thinking. However, I am risking that this program stays in place (gotta put faith in Uncle Sam!), AND that I keep a job in this same field for the next 10 years.

This isn't accurate. If you amortize a 50K debt at 5.5% and have $300/month payments - it will take around 26 or so years to pay off. After 10 years you would have cut down about 10,000 in principle and paid roughly 26,000 in interest. You will be forgiven $40,000 in 10 years which will likely result in a $40,000 bump in your income in the year you exercise that option. Whatever the $40,000 bump does to your marginal tax rate is what you're going to owe in taxes - let's say $11,200 in additional taxes at a 28% marginal tax rate.

I can all but guarantee you that the Gov't (or any other lender) isn't going to take your payments and apply them all to principle as part of this debt forgiveness program. They're going to split each payment between principle and interest with the bulk of your interest to be paid in the early part of the loan as that is when you have the greatest amount of principle outstanding.

Now, if the Gov't won't 1099 you at the exercising of this option, then by all means pay the minimum. That will make it, in essence, an interest free loan. You will have paid $36,000 for $50,000 "worth" of education.

You have all the other concerns down. Do you have to work with this Organization for 10 years? That's a long time. Is there a minimum amount of time you must be there to qualify? What are your future plans? etc, etc, etc...

Guess I should have read the second page before I made my comments. This is what I was concerned about since I owe a lot more than 50k. They might be forgiving so much by the time that 10 years is up, it would be an insane amount of money that I'd owe in taxes. I've been hearing conflicting things about it though.

[johnnyvann840]

Taxability of Student Loan Forgiveness


Some loan forgiveness programs are taxable and some are not. Under current law, the amount forgiven generally represents taxable income for income tax purposes in the year it is written off. There are, however, a few exceptions. Generally, student loan forgiveness is excluded from income if the forgiveness is contingent upon the student working for a specific number of years in certain professions.

Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable. Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income. The forgiveness of the remaining balance under income-contingent repayment and income-based repayment after 25 years in repayment is considered taxable income.

Federal Income Tax Treatment

Section 61(a)(12) of the Internal Revenue Code of 1986 (IRC) specifies that gross income includes income from the discharge of indebtedness of $600 or more in any calendar year. However, IRC Section 108(f) specifies conditions under which student loan forgiveness is excluded from income. Specifically, IRC section 108(f)(1) states that

In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

[Tenchi Ryu]

When I get unknown number calls and I get paranoid its about my college loan debt

[chifan1798]

Taxability of Student Loan Forgiveness


Some loan forgiveness programs are taxable and some are not. Under current law, the amount forgiven generally represents taxable income for income tax purposes in the year it is written off. There are, however, a few exceptions. Generally, student loan forgiveness is excluded from income if the forgiveness is contingent upon the student working for a specific number of years in certain professions.

Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs and the National Health Service Corps Loan Repayment Program are not taxable. Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income. The forgiveness of the remaining balance under income-contingent repayment and income-based repayment after 25 years in repayment is considered taxable income.

Federal Income Tax Treatment

Section 61(a)(12) of the Internal Revenue Code of 1986 (IRC) specifies that gross income includes income from the discharge of indebtedness of $600 or more in any calendar year. However, IRC Section 108(f) specifies conditions under which student loan forgiveness is excluded from income. Specifically, IRC section 108(f)(1) states that

In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

Well, that seems like it includes me if I choose to work in particular places.....guess I'll have to look at that when I start looking for jobs

[CousinOfDeath]

It's a crime against humanity that education isn't universally subsidized.

[tedwilliams1999]

I also have a ton of student federal loans that I'll have to eventually pay back, so I've looked into public loan forgiveness as well. I think the biggest thing you need to ask yourself is, can you see yourself honestly working in the public sector for 10 years or more? If this is a no brainer, then I think you should most likely sign up for Income Based Repayments, and just make the smallest payments each year. There also may be a form you need to fill out, to let the government know that you're working in the public sector and that you're working towards public loan forgiveness. I would look into this, to make sure that each payment you make does indeed count towards the program.

One thing to keep in mind: PSLF is a program that was implemented in 2007; currently, there is no cap to how much money exactly can be forgiven, but the 2015 Budget Proposal that Obama came up with capped the amount of money that can be forgiven to about 57,000. You'll fall well under this cap, so all your debt should be forgiven, but just keep an eye out for that. You also might want to look into doing the math as well; if you end up getting about 10 grand forgiven, this will be considered taxable income for that one year. The people on reddit.com/r/personalfinance may know a little more about the specifics.

[DozenRoses]

I also have a ton of student federal loans that I'll have to eventually pay back, so I've looked into public loan forgiveness as well. I think the biggest thing you need to ask yourself is, can you see yourself honestly working in the public sector for 10 years or more? If this is a no brainer, then I think you should most likely sign up for Income Based Repayments, and just make the smallest payments each year. There also may be a form you need to fill out, to let the government know that you're working in the public sector and that you're working towards public loan forgiveness. I would look into this, to make sure that each payment you make does indeed count towards the program.

One thing to keep in mind: PSLF is a program that was implemented in 2007; currently, there is no cap to how much money exactly can be forgiven, but the 2015 Budget Proposal that Obama came up with capped the amount of money that can be forgiven to about 57,000. You'll fall well under this cap, so all your debt should be forgiven, but just keep an eye out for that. You also might want to look into doing the math as well; if you end up getting about 10 grand forgiven, this will be considered taxable income for that one year. The people on reddit.com/r/personalfinance may know a little more about the specifics.

I'm going to ask around on there. If I only get $10k forgiven and have to pay taxes on it, the risk well outplays the reward I'd say.