Using a combination of investments, savings, and equity in our home, my wife and I could pay off all of our student loans.
But we won’t.
This may sound odd. After all, who wouldn’t want to be done with student loan debt forever?
It’s a fair question, but pulling tens of thousands of dollars out of the stock market, raiding our savings, or even selling our home to pay off the debt would be a mistake.
In fact, it could be a six figure mistake.
To help you understand why we won’t pay off our student loan debt, let me first give you some background on our student loan situation.
Our Student Loans
We currently have six figures of student loan debt.
When my wife and I finished undergrad we had approximately $100k in student loan debt between the two of us. We both went to private schools in the Minneapolis-St. Paul metro area, and to be quite frank we were lucky we didn’t leave with more.
Both of us value our experiences at our respective colleges. We both are lucky enough to work full-time in what we went to school for. But $100k, or about $50k each, felt like a lot.
My wife and I met and dated throughout college. We both knew for years that she had to at minimum get a masters degree, if not a phd, to do the work she wanted to do in psychology.
My wife got her masters in counseling, which isn’t cheap considering the relatively low wages that therapists in the United States get paid. Lots of lip service about mental health from people, especially politicians, but as the saying goes “show me the money!” They haven’t yet. But I digress…
Over the years we have been making regular payments towards the student loans on my undergrad, but never more than the minimum required payment. I got a variety of rate quotes from Credible, but ultimately refinanced with SoFi. I waited a bit too long, though, and should have refinanced as soon as I was able to after undergrad.
We also made payments towards my wife’s student loan debt, but again only the minimum required payment under the standard ten-year repayment plan. Her loans went into deferment when she started grad school, and we also took out loans when she was in grad school.
Long story short, we started with $100k of undergrad debt and now have six figures of undergrad + graduate debt.
Why We Aren’t Getting Rid of our Student Loan Debt
While everyone wants to be debt free, I recommend people prioritize building an emergency fund and paying off credit card debt before they put anything extra towards their student loans.
We never had credit card debt, but instead of putting extra money towards student loans we built a healthy emergency fund. And we invested.
Which brings us to where we are today: we have enough assets to pay off our student loan debt. But we won’t.
Why not???
Because we are strategically repaying our student loans to maximize Public Service Loan Forgiveness.
You may have heard of Public Service Loan Forgiveness, or PSLF. If you aren’t familiar, though, it’s a program for tax-free federal loan forgiveness of Direct student loans after 120 qualified monthly payments.
A qualified monthly payment is…
- …made while working full-time for a 501(c)(3) nonprofit or the government (local, federal, state, etc.)
- …while on a qualified repayment plan (income-driven repayment plan or standard ten-year repayment plan)
- …on a qualified loan
This program is the most advantageous loan forgiveness because of the relatively short time-frame of ten years and the fact that forgiven debt is tax-free. What I mean by tax-free is that you don’t have to pay income taxes on the forgiven amount. In some other forms of loan forgiveness, notably income-driven loan forgiveness, you need to pay taxes on the forgiven amount. Not so with PSLF. With PSLF you could have $50k, $100k, or a million dollars forgiven. No tax implications.
My wife is a therapist who reasonably expects to be employed by a nonprofit or the government for at least the next ten years, if not her entire career. NOT looking into whether PSLF would benefit us would be a mistake.
My wife’s loans are currently on the REPAYE income-driven repayment plan. This plan takes into consideration my income regardless of how we file taxes.
Income-driven repayment plans take your Adjusted Gross Income (AGI) less the national poverty rate for your family size to calculate your discretionary income. If you plug your student loan information into our free student loan spreadsheet and use the income-driven repayment calculator (also within the spreadsheet) you will quickly see that many people could benefit from income-driven repayment. It’s even a more attractive proposition when you have an opportunity for PSLF.
There are opportunities to lower your AGI. For example, every dollar you put into a 401k or 403b will lower your AGI. Or an HSA. Or Standard IRA. Basically any dollar you put into a tax-deferred account will lower your AGI, which will in turn lower your required monthly student loan payment, which in turn will maximize the amount forgiven under PSLF.
I go into more detail on how to maximize PSLF in this post.
So why don’t we just off our loans? Because it would be a dumb financial decision. Instead we can shove money into tax-deferred accounts while letting our investments continue to compound interest year-after-year.
The worst case scenario would be our incomes increasing so much that our required monthly payments towards our debt would start to quickly knock out our student loan debt, even after maximizing every tax advantage.
If that happened, you won’t find me complaining!
But I thought Public Service Loan Forgiveness Didn’t Work?
A few months ago I saw one of the most well-known personal finance experts give absolutely terrible advice about Public Service Loan Forgiveness. He told someone they shouldn’t trust the program and that it doesn’t work.
This is misleading advice that could cost some individuals hundreds of thousands of dollars, if not their life. I don’t want to be dramatic, but we do have people today committing suicide over student loan debt. PSLF and, more broadly, strategically repaying student loan debt, can be a lifeline for student loan borrowers.
If you are in a position to benefit from student loan forgiveness, you absolutely should look into and take full advantage of the program. I explain in this post why fears about PSLF are completely overblown.
The reality is that there are popular personal finance “experts” that think you should suffer if you have student loan debt.
Think sharing a one-bedroom apartment with a roommate (or living in your parent’s basement to save money) while eating raamen for every meal and never doing anything fun (and god forbid you ever spent money on travel!).
This is a completely unrealistic approach at best and a bad financial move at worst.
Think of a social worker with $100k+ in debt who makes $40k a year. One option is making close to $1k a month in payments for a decade while working two or three jobs for years with a lifestyle that likely will negatively impact their health.
The alternative is paying $100-$200 a month on an income-driven repayment plan for ten years and receive Public Service Loan Forgiveness at the end of the decade. Option two also gives them the cash flow to only work one job while building up their savings and investments.
Please don’t listen to an expert – or anyone, for that matter – who wants you to suffer unnecessarily.
If you have student loans and you like what I’m saying, or you know someone who could benefit from strategically repaying their student loans, please check out my book Student Loan Solution: 5 Steps to Take Control of Your Student Loans and Financial Life.
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