So last time I was talking about why I am not currently enrolled in the Public Service Loan Forgiveness program, even though I am eligible.
The biggest reason for me not to do the PSLF program is that the math doesn’t work for me. One reason say not to pay off your student loans is the tax deduction your receive. Every year, as most people do, I take the student interest tax deduction of $2500. I have heard some of my friends say they don’t want to give up that deduction at tax time (another reason why some don’t want to pay off their house in a short period of time). That doesn’t make sense to me.
For example, let’s say you have $75000 in student loan debt. You make $50000 in gross income and your payment per month on one of the income programs is $300. Most of that payment is just keeping up with interest. So you will be eligible for the $2500 tax deduction. That tax deduction, after your other deductions of contributions to your retirement, insurance, etc would take $2500 off your Adjusted Gross income, which for arguments sake here is $45000. So that deduction would lower your AGI to $42,500, which saves you, in a 15% tax bracket, $375. That is $375 you don’t owe the government or could get back in a refund.
In other words, I would basically, in this scenario, save a lousy $400 per year for 10 years (only $4000) to stay eligible for a loan program. So the tax deduction math, for me, doesn’t work.
In addition, the loan forgiveness in general for me doesn’t necessarily work. So let’s take the following scenario and chain it out for 10 years. We know we are saving about $4000 in tax payments/refunds over 10 years.
However, over those 10 years you are most likely going to get a raise (referencing our $50,000 salary from yesterday) and if that raise is 3% by the end of those 10 years you have just over $67000. Now it is not necessarily probable, particularly in this environment and working in public service, that you would get a raise for 10 straight years, but for argument’s sake let’s say you do.
During that 10 years your student loan payment might increase (based upon your income) to say $350 per month, which on loans of $75000 at 6% interest is barely keeping up with the interest payments. Over the past 10 years you would have paid almost $40000 in student loan payments and maybe you paid down the loan to $60000, which means you will get a forgiveness of $60000. Sounds great right?
Well, not so fast. First of all, those loan payments don’t take into account changes in your life. In essence, over those ten years for this to work you basically can’t get married and have a working spouse because if you do your spouse’s income are calculated into your adjusted gross income, which might raise your payments significantly or make you ineligible for the program.
In other words, there is a disincentive to work. There is a disincentive to create a joint household with a partner. Unless you have a ton of student loan debt you, in essence, get penalized for having dual-income households or making more money in your profession. That sounds a bit twisted to me.
Additionally, if you were to take the time over the next three years or four years to pay off that debt you would save yourself thousands of dollars in interest and,for me, peace of mind. I don’t have to wait 10 years to get a benefit from a program. Ten years is a long time. Things change. That is especially true for people who go on for higher degrees.
The average Ph.D. received in the United States is at the age of 34. If you then start paying back student loans at that age you would have to wait until your mid-40s to be eligible for student loan forgiveness and make sure that your paycheck doesn’t go up significantly (or take out a ton of student loans in graduate school) to remain eligible. To me, that sounds like indentured servitude to a federal loan program. No thank you.
Lastly, the faster I pay off my student loans the more money I have in my budget to do the things I want to do. I can use that extra money to put into a Roth IRA, pay off my mortgage, save for college, travel, etc. Let’s say I invested that money. Here is a good calculator to test your math. If I were to take my $500 loan payment per month and put it into a good mutual fund and did that consistently for let’s just say 5 years. The average return in the stock market for the past 80 years has been 12% and 10% for the past 200. If I were to take that money, put it into a good growth stock mutual fund and just leave it sit for 30 years, even when I stop contributing after 5, I would have over $700,000. If the average return is just 10% I have over $400,000. In other words, am I going to stay in debt to have a student loan forgiven and that debt forgiveness might be say $50000 or get out of debt faster, pay extra, and then take that payment invest it, and possibly have ¾ of a million dollars? You tell me which is better and makes more sense for your family.
To be truly transparent, if I were to do the PSLF program I would probably be able to get some of my loans forgiven. But again that requires me to stay in debt for another 10 years. It requires me to not increase my income. It requires me to not be able to have extra money to invest or to pay off my mortgage or whatever it might be.
For some, the PSLF program is great and I think there should be even more incentives for student loan debt to be forgiven. I have great sympathy for people who went to school and didn’t have the ability to have their education paid for.
However, my sympathy wanes for people, including myself, who got our education paid for, but we made the decision to take out student loans to live on. Now I know there are extenuating circumstances for some people. Some people had families and couldn’t afford to go back to work or their spouses were ill or could not work. I am not talking about those people.
I am certainly also not talking about my adjunct friends out there who are just trying to make ends meet and would love a full-time faculty position, but don’t have one. Frankly, I think we should pass Senator Dick Durbin’s bill which would create student loan forgiveness (even partial forgiveness) for people who work an equivalent of full-time, but maybe do it at two or three different jobs (aka MRS. ROB).
Ultimately, the PSLF program can be a wonderful thing. However, the math just doesn’t work for me to do it. Maybe, also I don’t think I deserve loan forgiveness. I knew what I was doing. I was just stupid and sometimes you just have to pay stupid tax.