Remembering TCPaul, 2016-2019

Making extra loan payments while pursuing PSLF

I am planning to pursue public service loan forgiveness (PSL bigboy03/01/19
Putting any extra money in on PSLF seems like a really bad m superttthero03/01/19
Your analysis is different from what I presented, but it sou bigboy03/01/19
So invest the extra. But the plan of throwing money away to superttthero03/01/19
Being that PSLF is starting to pay out now, you're going to thirdtierlaw03/01/19
Are you using a retirement account or just a regular mutual bigboy03/01/19
I misspoke, it's an investment fund. It's separate and apart thirdtierlaw03/01/19
Not in a Roth IRA. You can take out your contributions penal superttthero03/01/19
An early withdrawal from a Roth IRA is not taxed, because yo bigboy03/01/19
You can w/d up to the amount you contributed without penalty wutwutwut03/02/19
I think tossing extra money at PSLF would be a terrible wast jd4hire03/02/19
I rely on the prospect that my loan will be forgiven through samfriedlander203/02/19
Agree with all those who say invest any extra money on the s wutwutwut03/02/19
I appreciate the responses. With all due respect, I’m not bigboy03/03/19
It sounds like your mind is made up. I'm not trying to dissu thirdtierlaw03/03/19
Those are good points. You are right that debt could be bigboy03/03/19
OP, you have a good handle on PSLF. Better than most. You kn posthocergoproptrhoc03/04/19
What do you mean by saying overpaying can potentially be use bigboy03/05/19
Pay ahead status. Sometimes loan service providers will tell posthocergoproptrhoc03/05/19
This thread shows why lawyers suck with money. OP, good j triplesix03/06/19
bigboy (Mar 1, 2019 - 9:14 am)

I am planning to pursue public service loan forgiveness (PSLF). I have a little over four years’ worth of qualifying payments. My current debt balance is around $160,000. I believe PSLF is a better option than pursuing private practice, as private practice would make me responsible for my entire debt balance and I likely wouldn’t earn a large enough salary to make it worthwhile.

My concern is how to mitigate the risk that PSLF won’t work out. I’m not overly concerned with PSLF being abolished retroactively; that is unlikely and I would happily join a class-action lawsuit if they did. My concern is that I might not last the full 10 years in public service. My interests could change after doing 8 years or so in public service. I may decide I am just fed-up with working for somebody else and want to go into solo practice. I may be in a situation where I like the city I am living in and don’t want to have to change cities in order to get a public service job. I have already changed cities more than once. Basically, I like the idea of having some career flexibility and don’t want to be a slave to the public service industry.

And unfortunately PSLF is all or nothing. They don’t forgive 95% of my debt for working in public service for 9.5 years. You must last all 10 years or none of it gets forgiven. So it is kind of risky. Some law schools will help you with the payments during the first 10 years, but unfortunately my law school is now refusing to help me with that.

Most of today's mainstream financial advice says one should avoid debt and do everything you can to get out of it. This strikes me as misguided, as most of these advisers fail to consider PSLF. On the other hand, I have seen some people act as if you should just live it up and not worry about debt because you’re pursuing PSLF. I have seen people say that you should not make extra payments toward the debt when it’s going to be forgiven. The problem is that how do you know the public service career will work out? It’s not like you just sit and coast for 10 years and public service jobs are just easy and wonderful. I have already been through multiple stints of unemployment and it takes a while to get a decent public service job lined up. Competition is stiff. Then when you find a public service job, you might not like it very much. Should people just buy big screen TVs and boats and fancy cars and country club memberships since they’ll have their loans forgiven through public service?

So my thinking is that I should hedge by planning on the 10 full years of public service, but also by paying extra toward my loan balance just in case the public service career doesn’t work out the way I want. I wouldn’t strain to pay off the entire balance, but I would also make some decent-size payments to make sure the interest doesn’t accumulate and the balance doesn’t get too bloated. I am thinking paying off more than the required amount is the way to go.

There is something called “Paid ahead” status that can potentially mess with people’s PSLF if they pay extra, but I think I can tell the loan servicer to remove me from “paid ahead” status, or make sure I am paying an appropriate amount each month.

I have heard some people advise investing in a mutual fund or index fund or something like that. That way if the PSLF doesn’t work out, one can use that money to pay off the balance. The problem with that is the return on such an investment will be significantly less than the interest rate on the student loan. The return might be about 3% while the loan interest rate is about 7%, unless you are a genius investor. So it is probably better to put a lot more money toward the loan balance than to investing.

Another option would be to just make minimum payments while pursuing PSLF, and if for some reason public service doesn’t work out, I could seek the 25-year loan forgiveness. I am not convinced that is a good plan. That would not be fun to be a debt slave for that long and pay all that money. However, I haven’t done detailed math calculations on that yet. Another problem with the 25-year loan forgiveness is that they could abolish it and possibly apply that retroactively. It would be much harder to argue detrimental reliance or a due process violation, while I would have a decent argument if they did that with PSLF.

On the other hand, some people think that Congress might abolish the tax bomb on 25-year loan forgiveness, or even bail out debtors altogether.

I think the best option right now is to pursue PSLF, but try to make extra toward the student loan balance. The options don’t have to be aggressively pay off all debts vs. assume PSLF will work out. It doesn’t have to be an “either-or” proposition. It may be best to follow a middle course. What do you all think? Surely someone has been in similar circumstances.

superttthero (Mar 1, 2019 - 10:30 am)

Putting any extra money in on PSLF seems like a really bad move if there is a real chance you'll get the forgiveness.

In your post you talk about losing out on net 3-4% points on that extra money, but if you pay that extra and end up getting PSLF then you've lost 100% of that extra (plus investment income).

Note, it's not easy to get PSLF. It's very hard.. and financial planning that includes joining litigation against the government or factors in possible legislative action is not sound imo.

Determine your chances of PSLF and make a more solid decision.

bigboy (Mar 1, 2019 - 2:24 pm)

Your analysis is different from what I presented, but it sounds like you get to the same result. It's uncertain and there's a need to hedge in some way or another.

I think there is a fair probability I will get PSLF, but I need to have a plan in case that doesn't work out.

superttthero (Mar 1, 2019 - 3:25 pm)

So invest the extra. But the plan of throwing money away to debt-likely-to-be-discharged seems like the worst option.

thirdtierlaw (Mar 1, 2019 - 11:21 am)

Being that PSLF is starting to pay out now, you're going to have a lot of advanced warning about whether or not the program is going to be repealed and whether it'll be retroactive. There isn't an official "right" answer. However, I would not scoff at putting the money in a safe retirement account. As super3 points out if PSLF does happen, you flushed all that money down the drain. If you get to year 10 and you do not get loan forgiveness, you can fall back on the regular loan forgiveness. Even with the tax bomb in place, depending on what income bracket you're in and where your debt load is at the time, you'll only be paying a percentage of the remaining amount in taxes. I strongly suggest you fire up an excel spreadsheet and map out an estimate of what your tax burden will look like at that time. Sure it won't be a perfect guarantee and if you end up making substantially more late in your career, it can make the numbers a bit wonky, but it'll help you make a better decision.

That is why I'm personally putting the difference between my REPAYE payment and what I can afford into a retirement account. If I have to pay the tax bomb, I'm covered. If the tax bomb disappears, I get a really nice windfall. If I decide I'm sick of private practice at the 10-11 year mark, PSLF is still a thing, and I go work for a PD or AG's office for the next 10 years and get PSLF, then I'm also coming out extremely far ahead.

But do not get me wrong, some people get great psychological relief by not having large amounts of debt hanging over their heads. So if you're one of those people, paying off the loans ASAP may make the most sense for you, even if mathematically it isn't the right play.

bigboy (Mar 1, 2019 - 2:21 pm)

Are you using a retirement account or just a regular mutual fund? If you are putting it in a retirement account you would pay a stiff penalty for withdrawing the money, unless you wait until retirement age. I think it is about a 20% penalty.

thirdtierlaw (Mar 1, 2019 - 2:22 pm)

I misspoke, it's an investment fund. It's separate and apart from my retirement accounts. I just refer to it as a retirement account because I'm not actively managing it and neither the wife nor I are going to withdraw from it unless it is to pay off the tax bomb or we retire.

But hypothetically if there were a tragic series of events, we could get to the money, without penalty if there was an emergency. But we have a separate "emergency fund" as well.

superttthero (Mar 1, 2019 - 3:27 pm)

Not in a Roth IRA. You can take out your contributions penalty free (and tax "free" in the sense that the contributions are already post-pax).

bigboy (Mar 1, 2019 - 8:02 pm)

An early withdrawal from a Roth IRA is not taxed, because you already paid taxes on it. But I thought you still pay a penalty for early withdrawal.

wutwutwut (Mar 2, 2019 - 7:46 pm)

You can w/d up to the amount you contributed without penalty or tax. Gains if pulled early would be subject to both.

jd4hire (Mar 2, 2019 - 11:38 am)

I think tossing extra money at PSLF would be a terrible waste. I'd take what you were going to put as an extra payment and just invest.

I was out with a colleague last night who is in private practice making 50k and has 330k in debt. He's convinced Congress will forgive all debt. Relying on Congress to get rid of the tax bomb or forgive debt is absolutely idiotic, IMO. It's possible but not probable. I also can't imagine that any forgiveness would be applicable to all debtors regardless of amount.

You need to make a decision - stick with PSLF or not. Given you are 40% of the way in, I think you stay that course. Six years is not that long. The qualifying work is broad enough where you aren't truly limited. There are plenty of decent paying non-profit/ governmental jobs out there. It may not be your number one choice, but I'd think to be debt free after ten years and to have the ability to do whatever at that point would be far better than jumping ship to make moderately more money while significantly increasing your repayments/ tax liabilities.

My wife is in the same position. She's at 300k. She knows she has to get it forgiven and has no other choice. She could leave her current job and maybe get a 20k salary bump, but that makes no sense as she'd never repay the full 300k and the amount will constantly grow with 7.8% compounding interest. Then, when she hit 25 years, she'd be looking at nearly 150k in tax liability (which coincidentally is close to her original debt amount when leaving law school).

If I were you, I'd try and excel in your job, get the debt forgiven and then leverage your experience to transition when you hit 10 years or be in a spot to head an agency, be an ED or chief legal counsel. People who serve in government can make some big bucks when they leave if they climbed high enough. Contacts made and knowledge of the inner workings of agencies while in government have real value.

samfriedlander2 (Mar 2, 2019 - 5:31 pm)

I rely on the prospect that my loan will be forgiven through PLSF but I don't obsess about it for one simple reason - I'm not paying off the loan. The balance is too high and its not happening. Maybe I'll continue to lose 10% income until retirement? Thats possible but not the end of the world. Find ANY WAY to reduce your income on your taxes (owning property, work related deductions, etc.) and just pay what you have to. I make a good salary though so maybe I'm in a more unique position.

To those who live on ramen noodles / rent / maintain little to no expenses for 10 years to pay off the debt? Congrats. Not doing it, got a mortgage, I have a decent car, baby on the way and enjoying life. Not gonna let student loan debt depress me into oblivion.

wutwutwut (Mar 2, 2019 - 7:57 pm)

Agree with all those who say invest any extra money on the side.

If you do get forgiveness in 6 years, so much the better and you have this saved money and its gains. If for some reason you don't reach forgiveness, you'll still have that money. As you say, it may not grow at 7% like your loan interest rate, but you have to balance that against the likelihood pslf doesn't work out for you.

I would only put the extra money against the loans if I were pretty sure I wasn't going to complete the 120 on pslf.

bigboy (Mar 3, 2019 - 3:03 am)

I appreciate the responses. With all due respect, I’m not fully convinced I should just pay the minimum payment and invest the rest.

I’m not saying I should aggressively try to pay off all of the loan. I’m saying I shouldn’t just make the minimum payment. I would be paying mostly interest to keep the balance from blowing out of control.

Part of it may be just personal reasons, based on my personality and level of confidence that I would last the full 10 years in public service. I don’t really like working for someone else. I might say that I am about 80% confident I would last the full 10 years in public service. Imagine in a few years having a debt-load of $330,000 or so. You have no career flexibility at all. Basically public service employers can make you their slave and I don’t like the idea of being in that position. They will understand that debtors are totally dependent on them. I am already in a pretty bad position with $160,000 in debt, and PSLF does seem to be the way to go, but I don’t like the idea of being boxed into that plan 100% with no other option and no way out.

I can’t expect to be done with my PSLF plan in just 6 years. It’s probably about 7 years, because I have had stints of unemployment, and would likely have more, and that will not count as public service.

I’m not totally optimistic about investing in the stock market, as it seems like a bubble that could burst, given our consumer-ridden and debt-ridden society. Investing in a home and a university education were once touted as a good way to invest your money, and it turns out that wasn’t correct. Now I am told I should invest in the stock market; I don’t see why I’m supposed to believe the stock market would be different from the housing or education market.

Basically if I make some extra payments on the student loan, that is a 7% gain, and it is a gain that is 100% guaranteed. If I am investing on my own, it is probably about a 3-4% gain, and it is not guaranteed. I could actually lose money.

If I obtain forgiveness after making extra payments, I suppose that is money lost, but I would be debt-free and that is a nice position to be in. I either have a moderate loan balance or no debt. I will be okay either way. If I just make the minimum payment and my loan balance grows to $350,000, and I don’t reach PSLF, I am screwed. Even if I have invested the money, it could still be over $100,000 that I lost by investing instead of just taking a 7% gain by controlling the loan balance.

thirdtierlaw (Mar 3, 2019 - 7:21 am)

It sounds like your mind is made up. I'm not trying to dissuade you, but your logic is wrong.

You are not getting a 7% gain if you get PSLF, that is a 100% loss. You're just shrugging that off.

Hypothetically, let's say after 9 years with the government you do not get any raises so you aren't even covering interest on the loan so you get to year 25 with $350k in debt. Let's assume that tax brackets aren't adjusted. Let's also assume that you've bought a house and have a retirement account so you have enough equity that you're solvent up to the whole tax bomb amount. At a 37% tax bracket you're paying $130,610 on the tax bomb. So you're about where you are today.

But that isn't the full picture, I always leave inflation out because it is hard to accurately predict. That being said, using an inflation calculator $100 in 1993 was the equivalent of $173.78 in 2018. Like I said, the inflation rate is a tricky thing to predict, but no matter how it shakes out, it is almost guaranteed that the $160k you owe now is more costly to you than the $130k you'd owe at the 25 year mark.

You're also looking at being beholden to the government the wrong way, and the risk of unemployment as well.

PSLF does not care if you're an attorney, a park ranger, or a janitor. So if you're fired from your government job (much less likely than in private practice) at year 9 and you can't find a similar job, you can go work as a janitor for a year and still have your loans forgiven. You'd be the highest paid janitor that your state has ever seen after that tax free forgiveness kicks in.

You're also ignoring a really important fact about unemployment, if that happens, you'll be making $0 payments during that time. You said you aren't trying to aggressively pay down your loans, just make sure that you're covering the interest. So do the math and figure out if those higher payments you are making will actually be anything more than a drop in the bucket if you find yourself unemployed for 6 months with a $0 payment.

Looking at it even further, if you're that concerned with being unemployed, wouldn't an investment account be the better choice by far? If you find yourself unemployed the investment account is a possible source of emergency funds to buy food, pay the mortgage, etc. Whereas once that money goes to your loan, it is gone forever. You can get a $0/month qualifying student loan payment, you can't get a $0 grocery bill due to being unemployed.

Like I said above, if you'll get a better psychological return from paying a bit more each month, you should do that even if it isn't the "right" financial choice. Also, don't misunderstand where I'm coming from. I am not a PSLF or bust guy. I passed on 2 fed and 1 state job for private practice. (though I still might switch around year 10 for that forgiveness). Non PSLF jobs can many times make sense. But you just need to look at all the angles when making decisions like this.

bigboy (Mar 3, 2019 - 2:03 pm)

Those are good points.

You are right that debt could be a hedge against inflation; if inflation continues, the real amount of my debt can diminish. If major inflation occurs, that could even pay off my debt.

One loophole I have noticed with IBR plans is that you can often get a $0 monthly payment even if you are employed. Here is how it works: If you become unemployed, they reduce your required payment to $0. Then two weeks later you get a full-time job, but they don’t require you to re-certify until months, or sometimes even a year later. I have had multiple stints of unemployment and have noticed that happening. So I have spent a significant part of my working life actually working with only a $0/month required payment. When you are paying $0/month, your loan balance can really get bloated. During my last stint of unemployment, I just kept making some modest loan payments for a few months, for the reasons I have discussed above.

So it is possible the loan balance could go well above $350,000, maybe more than $550,000. That is quite scary. There is a psychological benefit to not having a lot of debt, but the real reason is that I do not want to have that amount of actual debt that I would have to pay off, either by paying it off completely or paying it through a huge tax bomb.

I have lived in both large cities and small cities. I am currently in a very small city, because this is where my career took me. But I don’t intend to stay here long-term. I would like to be able to set up a practice in a large city. So one potential dilemma would be I move back to a big city, and I am at Year 9 in public service, and I get fired or pressured into leaving. Then I could be in a position where I have to move to a rural area to get a public service job and get the loan forgiveness, or I stay in the big city, where I have spent a couple of years developing relationships, and try to set up a practice there. I don’t want to be in a position where I have to move to North Dakota or northern Alaska just to knock out that loan forgiveness. It would be nice to have the option of setting up the private practice in a bigger city, where I would already be.

I have considered the possibility of a non-law job in public service, as you discussed. That wouldn’t be the optimal career plan though. If I spent a year as a janitor just to get the public service loan forgiveness, it would be difficult to get back into law after that.

Another thing I considered was working in a public service law job in a volunteer capacity. If I work 9 years in public service and then get fired, and I am desperate for a public service job, I could just offer to work for free, for a government entity or a 501(c)(3) entity. I would be getting $0 salary, but at the end of the year, I’d have a huge loan balance knocked out.

posthocergoproptrhoc (Mar 4, 2019 - 5:04 pm)

OP, you have a good handle on PSLF. Better than most. You know there is never a consensus for handling things like this. With debts so large there are psychological factors involved which may be as important as the financial ones.

Having said that, I’m siding with the minimum PSLF monthly payments and the hedge investing the extra money just in case.

Another point: I don’t think PSLF really traps people because public service/government is really pretty broad. A lot of people bounce around and have 4 jobs in the public sector over those 10 years. Tied down is overstating it a bit.

Lastly, I also don’t want to give them any ammunition against making PSLF work after 10 years. The sheer stupidity of how it’s been implemented is ridiculous. If overpaying can potentially be used against you, it may not be worth the risk either.

Just my 2 Lincolns.

bigboy (Mar 5, 2019 - 5:04 am)

What do you mean by saying overpaying can potentially be used against you? Doesn't the 99.5% rejection rate of PSLF applications weigh against trusting PSLF to work out?

I will admit I am definitely rethinking the matter. It may be that I have been too influenced by the mainstream financial advisers. It may not be best to think of this debt as debt in the classical sense, but as more of a social welfare program that I should avail myself of.

posthocergoproptrhoc (Mar 5, 2019 - 11:31 am)

Pay ahead status. Sometimes loan service providers will tell you that you’re not in pay ahead status, but not change it correctly.

triplesix (Mar 6, 2019 - 4:09 pm)

This thread shows why lawyers suck with money.

OP, good job mooching off taxpayers. But as others have said, if you are gonna do it at least do right jfc.

God willing King Trump abolishes the money drain in his second term to "balance the budget"

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