Personal Finance & Money Asked by user8701090 on August 3, 2021
I am trying to decide between paying off my student loans in 5 years vs attempting to quality for Public Service Loan Forgiveness (PSLF), which I could conceivably do in 5 years. My options are to 1) pay down the loan over a 5 year period or 2) pay the minimum payments every month and save enough to pay down the loan in a personal account. This way if PSLF doesn’t work out, I have enough saved to pay it. If it does work out, I get to keep the savings. I used dummy numbers for the current value and monthly payment.
I want to make sure I’m doing the math correctly so that my decision is based on accurate assumptions. I wrote this in R, but it’s fairly language-agnostic.
library(FinCal)
# Initial Values
current.loan.value = -115000
annual.loan.rate = 0.06875
years = 5
current.monthly.payment = 500
PSLF.balance = $125,935
PSLF.balance = fv(
r = annual.loan.rate,
n = years,
pv = current.loan.value,
pmt = current.monthly.payment * 12,
type = 0
)
Edit: An important consideration that I have not included in this model is refinancing my loan to a private loan with a lower interest rate. That rate would be used in this location instead of annual.loan.rate.
payoff.monthly.pmt = $2,329.469
payoff.annual.pmt = pmt(
r = annual.loan.rate,
n = years,
pv = current.loan.value,
fv = 0,
type = 0
)
payoff.monthly.pmt = payoff.annual.pmt / (12)
payoff.monthly.self = $2,829.469
payoff.monthly.self = payoff.monthly.pmt + current.monthly.payment
self.payoff – (payoff.annual.pmt * 5) = $30,000
PSLF.balance = $125,935
self.payoff = payoff.monthly.self * 12 * 5
self.payoff - (payoff.annual.pmt * 5)
PSLF.balance
Based on this math, I conclude that the “gamble” would end up costing $30,000 for a potential savings of ~$126,000.
Did I make any major errors? Thank you in advance!
Your math is a bit off, I have your payment to pay off at 2270.36 at 60 months it comes out to a total of 136,222. I did that using a simple loan calculator, which most likely does a simple TVM calculation. Also if you go for PSF, your payments should be at least the interest charges for a total 686/month, a total of 41,400 over 60 months.
So your choice comes down to gambling on PSF and paying 41.4K or working private sector and paying 136.2k over 5 years. Can you make 19K more per year at a different job? Your post suggest you can.
I like that you are thinking that the PSF may not workout. Many people feel that the PSF is a magic wand, and while it may work for some my experience is that most are disappointed by the results. The found, instead, that they moved backwards (because interest charges were higher than payments). This is why I suggest making payment of at least 690/month. You would be hard pressed to find an investment that can beat 6.9% so if it does not work out, you don't want to have to pay more than the current 115K.
My opinion is that it is better to take matters in your own hands, make as much money as you can, and pay this off as fast as you can. Some will disagree. That is fine, but at the bare minimum I would ask that anyone like you do two things:
It seems like you have #2 in had, and that you would be willing to do #1.
Good luck to you.
Answered by Pete B. on August 3, 2021
One other variable to consider is that most PSLF plans that I've seen require you to work in under-served (and typically underpaid) areas. So while your loan may be forgiven, it's offset by the fact that you're not making what you could make in other areas. Socially, that's a great thing, since it directs resources to areas that might not get it under a pure capitalistic system, and it may be good for you personally, but it's something to consider if you're doing a purely financial analysis.
Answered by D Stanley on August 3, 2021
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