Wednesday, December 2, 2009

Public Service Loan Forgiveness Program Not For Me

Back in June I posted that several of my coworkers were looking into applying for the Public Service Loan Forgiveness Program. I didn't think that it was the right thing for me to do but it was too complicated for me to figure out at the time so I promised an update at a later time.

After hearing about the program again, I decided to finally make a decision before too much time has passed.

I knew from hearing a coworker's experience in applying that my job counts as "public service" so that question was resolved.

My next question was "how do I know the loans will really be forgiven after ten years?" Will there be an income cut-off or does my current income qualify me as just broke enough to have the loans forgiven no matter what (after I get married I will have to use our joint income of course). I still can't find an answer to this question, but here's one example I did find:

Example: Jane Justice started out owing $100,000 in qualifying debt at 6.8%
interest and took a full-time public service job with a starting salary of
$40,000 with annual increases of 5%. Jane stayed in public service and paid
$49,132 over 10 years under the IBR plan. The federal government cancels
$118,868, the principal and interest remaining.

From here.

Sounds good, right? Wrong. I pretty much AM Jane Justice...except I make slightly more money, have slightly less "qualifying" debt at a lower interest rate than 6.8%, and anticipate greater salary increases than 5%.

But to qualify for the program you have to pay your loans in one of three ways:

Income Based Repayment (IBR) Plan
Income Contingent Repayment Plan
Standard Repayment Plan
with a 10-year repayment period
Any other Direct Loan Program repayment plan, but only payments that are at least equal to the monthly payment amount that would have been required under the Standard Repayment Plan with a 10-year repayment period may be counted toward the required 120 payments.

From here. I'll let you navigate that mumbo jumbo before I attempt to explain it.

I figured out right away that I didn't qualify for the Income Based Repayment Plan because I made too much money (ha!).

The Income Contingent Repayment Plan was less appealing since it only allows discharge after 25 years and you end up owing taxes on the amount discharged.

I thought maybe the Standard Repayment Plan would work but I still wasn't sure. I tried a few online calculators but it was all confusing and I wanted to hear the news straight from the horse's mouth.

So I called up good old Aunt Sallie Mae and got the skinny:

Yadda yadda you have to apply, yadda yadda we can add your Perkins loan to your payment, yadda yadda.....your payment will increase to $795.30 a month.

Excuse me? I am only paying $406 a month on my federal subsidized and unsubsidized loans. Throw in the $93 a month I am paying towards the Perkins loan (which will be gone SO much faster than 10 years from now) that amount only totals $499.

"Let me get this straight," I said, "you want me to give you $300 more a month so in ten years if maybe I have stayed a humble public servant the federal government may possibly forgive the rest of my loan?"

Click. Goodbye. At least now I know I made the right decision.

The explanation, apparently, is because I am on the level 30 year payment plan (where I pay the same $406 every month for the next 28.5 years) my payment is lower than it would be if I started paying based on the 25 year plan. But paying $300 more a month sounds like a crap gift to me, right?

And yes, I do realize that technically it would have possibly maybe saved me some money in the end but I plan to be rid of these loans in ten years without Uncle Sam's help thank you very much.

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