Determining whether or not you are making too much money for PSLF can be tricky.
On the one hand, we have the technical rules and limitations that all PSLF borrowers must understand. On the other hand, there are also practical limitations. Even if you’re eligible, that doesn’t necessarily mean it’s a good idea.
However, the analysis here is not particularly complicated. Once you understand the relevant issues, it’s usually not too difficult to decide whether or not PSLF is the best option.
The technical limits of the PSLF
Before starting our analysis, it is good to first understand the rules that limit PSLF.
First, the good news: there is no income cap on PSLF eligibility, and there is no maximum balance. According to the rules that govern PSLF, borrowers will not be excluded because they earn too much money or have too much debt.
Now for the bad news: becoming eligible for the PSLF is not easy. Borrowers should ensure they have qualifying loans, a qualifying repayment plan, and a qualifying employer. While some temporary programs can help borrowers correct previous mistakes, such as updating the IDR count on time, borrowers planning for the future should ensure they follow all fine print on PSLF.
Unfortunately, PSLF eligibility does not end our analysis. It should also make sense for the borrower to pursue PSLF. If PSLF doesn’t save money, it’s not a valid option.
Practical limitations of the PSLF
Not all reimbursement plans are eligible for the PSLF.
Notably, all income-driven repayment plans are eligible. The borrowers who benefit the most from the PSLF are those who can significantly reduce their monthly payments by subscribing to an IDR plan.
Borrowers with higher incomes or smaller balances may find that IDR plans don’t save much — or at all — money.
These borrowers can still qualify for the PSLF if they enroll in the standard 10-year repayment plan. This repayment plan repays the loan in full after ten years. The downside to this approach is that making ten years of payments on this plan means that your balance is fully paid off by the time you earn the PSLF rebate.
Traditionally, if the 10-year plan was the cheapest PSLF-eligible plan, it meant that pursuing the PSLF was not a good option. However, the recent federal student loan payment and interest break complicates this traditional rule.
The federal suspension of student loan and interest payments and the PSLF
Covid-19 relief has come with a huge upside for PSLF borrowers: the time during the break can potentially count towards the forgiveness of the PSLF. Borrowers must still be working in a qualifying job, but many people will have more than three years of qualifying payments even if they haven’t spent a penny.
If you have 40 of 120 certified payments requiredmaking the remaining 80 payments on the standard repayment plan can still result in significant debt cancellation.
That said, while a borrower could get debt forgiveness after six or seven years of standard payments, we don’t know for sure that’s the best option.
The big goal: Many borrowers mistakenly believe that more debt forgiven means more money saved. However, some borrowers spend more money to obtain forgiveness than they would if they had simply paid off their loan as quickly as possible.
Our goal is not forgiveness. The goal is debt elimination. For many public servants, the PSLF is the best route to debt elimination. However, it’s not the only path, and it’s not the best option for everyone.
Explore Aggressive Reimbursement
This is the part where our analysis becomes tricky. Sometimes paying off your federal loans as quickly as possible is the best approach.
For what?
The sooner the debt is eliminated, the more you save on interest. If your student loans have a high interest rate, extending repayment for at least ten years could mean that the additional interest expense will end up being greater than the forgiveness savings.
Opting for aggressive reimbursement when PSLF is available is a complicated decision. You need to consider your current income as well as your future income. You should also consider your job prospects. Could a move to the private sector be the best choice?
Finally, there is the issue of opportunity cost. If you repay your student loans aggressively, it could mean less money set aside for retirement or less money saved to buy a home.
Ultimately, there is no simple equation to make this decision. Borrowers should weigh their priorities and goals and choose the option that best suits their personal circumstances.
How a new repayment plan could change the math
Another variable could alter the analysis for many borderline borrowers.
The Biden administration recently proposed a new federal reimbursement plan. This new repayment plan could halving IDR payments for some borrowers.
Borrowers who did not previously benefit from IDR enrollment may find that the new IDR plan saves money and makes PSLF a better option.
However, the proposed repayment plan actually becoming available is not a certainty. Borrowers may have to wait until 2024 to find out if this will happen or not.
A simple rule for a complicated situation
The simple rule is that if you’re not saving money on an IDR plan, it’s not worth chasing PSLF forgiveness.
However, the possibility of a more affordable IDR plan and the fact that many borrowers have progressed to forgiveness without making a payment complicates matters considerably.
If the 10-year plan is the most affordable plan, but you can’t afford to pay much more for your student loans, and that’s unlikely to change, pursuing the PSLF is probably still the best option.
Borrowers who can afford to pay significantly more have the most complicated analysis. Determine how much you could afford to pay under a aggressive repayment strategy and how long it will take you to fully repay the loan. Then compare that to how much you would spend on PSLF. If PSLF is clearly the more expensive option, it’s probably time to consider an alternative approach.