Help a Reader: Repaying College Debt

Here's an email I recently received from a reader:

I started grad school in 2007 and by the time I finished in 2009, I had about $72,000 in federal loans (6.8% interest) and $4,500 in grad plus loans (8% interest).  I started working at a 501(c)(3) organization shortly after graduating.

I have been slowly chipping away at the federal loan since November 2009 at an income-based rate.  This amount has varied depending on my salary and marital status, but the required payment has never been above $120 month.  I could afford to pay more, but I'm not because supposedly if you make income-based payments for a period of 10 years while working either at a 501(c)(3) or for the government, then your remaining student loans are forgiven. I was discussing this with one of my friends from grad school who is also working for a 501(c)(3) but is not doing income-based repayment because they system has not been tested (the whole 10-year forgiveness thing is relatively new). 

The current balance on my federal loans is about $70,000 and if I wasn't enrolled in the income-based repayment plan my monthly payment would be around $950.  Given my field of work, it is likely that I will continue working with 501(c)(3) orgs or the government for the rest of my career, but nothing is certain.  Should I continue income-based payments, hoping that after 10 years my loans will be forgiven, or should I aim to pay off all my loans?  I went into grad school expecting to have to pay them off, and if they aren't forgiven after 10 years I'll be paying a substantial amount of interest.  I should add that I paid off the grad plus loan because it didn't qualify for the 10 year rule and the interest rate was much higher than any of my investment returns.

What's your advice for her?

Comments

[Michael]

Your ABSOLUTE first step is for you to research whether 10 years of income-based repayments does in fact equal loan forgiveness and not rely on HOPING your loans will be forgiven. If you don't find documented proof from the company that owns the loan, it's simply not true; regardless of what someone else tells you.

Honestly, I find it highly unlikely that it is true and most likely you're still on the hook for the full amount.

[Luis]

Either way you should not prepay your federal loans. 6.8% is still relatively low interest compared to what you could possibly make putting that money on retirement. Remember, money put in retirement compounds, money put into prepaying loans does not compound.

[I Am 1 Percent]

My recommendation would be to continue to the income-based repayment, but set aside the difference (950-120=$830) in a CD or savings account just in case loans are not forgiven or you work elsewhere.

Remember, unlike credit cards, mortgages, and car loans...student loan debt is not forgiven in a bankruptcy. You will owe this money one way or another.

I'm not a financial advisor, but a millionaire by age 34 in terms of net worth.

[Jana@Daily Money Shot]

I agree with the first commenter. From what I understand, the loan repayment program only applies to certain fields (ex., teaching in a high-risk urban area) so if your field doesn't fall into one of the accepted categories, you'll be on the hook for all that interest. If I'm remembering correctly, simply working in a nonprofit does not automatically guarantee you that forgiveness.It would be in your best interest (no pun intended) to get accurate information.

The other thing I suggest is seeing if your budget can handle a $950 payment. While salaries for nonprofit workers are typically lower, if your expenses are low enough, you might be able to handle it. If not, is a part-time job possible to help supplement the payment?

You need to make sure you have all your bases covered in case your field is not one that is part of the repayment program.

[Kim]

I'd like more info if this debt forgiveness is true. Both my husband and i have worked for a non profit for 7-8 years. Student loan forgivness in a few years seems too good to be true, but would be super helpful.

[BD]

It seems the ethical thing to do would be to pay it off yourself. You stated you can afford to "pay more", so it seems that you don't NEED the loan forgiveness. You went in expecting to pay them off, so do so, instead of hoping that the government will do it for you.

[Kathryn]

I am the OP, and thank you for your comments! Here is information on the Public Service Loan Forgiveness Program: http://www.finaid.org/loans/publicservice.phtml and I do indeed qualify as my loans are Stafford and I work in public health. The most I can realistically afford to pay is around $600/month without having to decrease the amount I put towards retirement.

[John]

I agree with BD. The ethical (and I'll say moral) thing to do is to pay the money back yourself.

If you're hoping "the government" will do it for you, well, at least be honest about it and say you're hoping other taxpayers will pay it for you.

You borrowed the money. Now be an adult and pay it back.

[MikeS]

@BD and John
Why is it unethical for Kathryn to use this program to her advantage? By being employed by these organizations maybe she is forgoing other potential benefits she might be able to receive in the private sector. Would either of you turn down the offer if someone agreed to pay off money that you owed? The situation is no different than if it were a parent or grandparent offering to pay off the loan.

Kathryn, I like the idea of trying to set aside some extra money in case the government changes the program or discontinues it before you have your loans paid off. Best case scenario is that they are paid off and you have a nice little cash pile, worst case you have to use the cash pile to pay them down.

[Mark]

I disagree with those stating the ethical thing to do is repay. I believe it is totally ethical to take advantage of the loan forgiveness.

This is just like a tax-break to encourage a specific activity. Would anyone say it is unethical to take the mortgage interest deduction if you could afford not to take it?

The entire purpose of the loan forgiveness program is to encourage people to enter these low-paid jobs AND stay in them for 10 years - which very few people do.

Not only is it ethical to use the program for it's intended purpose, it would be stupid to pay off if not required. On the other hand, it takes a lot of stamina to stay in these jobs for 10 years, so be sure you do, otherwise you have a big debt falling due down the road.

[Sarah]

Agreed with Mark - the whole purpose of the debt forgiveness is to encourage people to go into certain lower-paid service fields. It is 100% ethical to participate in a program like that.

Is it unethical to "take advantage" of a large corporation who pays for a graduate program if you could afford to pay for it yourself? The corporation invests in employees with the hope that they will gain a more knowledgeable employee.

[Kathryn]

@I am 1 Percent and MikeS: Thanks for the suggestion of setting aside/investing the difference-- it's a good idea just in case the program falls through.

As for ethics, I don't see a problem with using a program that is intended for grad students with high amounts of debt working in public service. Now for the hard part: making sure I continue to work in a qualifying position for the next 7.5 years.

[jim]

Yes I'd keep making the income based payments and then set any extra money aside in your emergency fund.

Its perfectly ethical to take advantage of any loan forgiveness program from the government or otherwise. This is not a 'free ride' 'handout' for Kathryn or anyone else. The deal is you work at a specific area where people are needed and pay is usually low and then the government forgives some debt. Plus you're nailed down to a 10 year commitment. Besides the government heavily subsidizers college education at basically every level, so anyone who has a college degree got some government help. (yes that includes private schools which DO get govt. money) This is just another way the government helps pay for college.

[Troy]

If there is a forgiveness program that applies to your situation, of course you should take it. That may in fact be the reason for the career choice or the high student loan incurrence in the first place.

Those that say you borrowed it, you pay it back are wrong. If you qualify, take it. There is a specific reason why loan forgiveness programs exist in the first place. For educators and others in your situation. It is an incentive to take a less lucrative yet public benefitting positition.

[Des]

I would say this is somewhat of a gamble. If it were me, I would sock the money away in savings and try for the forgiveness. 7 years isn't really that long. The real difficulty comes when/if you have the opportunity to take a higher paying job outside your field. Right now, you're getting forgiveness to the tune of about $10k per year. If you can make more than that (after taxes) somewhere else, then you have a values dilemma that only you could answer. For now, though, I would save the money on the side. Keeps your options open.

[Catherine]

I have to echo the sound advice from Des.

I left a gov't/non-profit sector job to take something in high finance. It is a world of difference, such that I no longer thing staying in gov't/non-profit is advisiable for one's entire career. There are benefits for the employer and employee when one moves between the two. That said, you should position yourself to take advantage of all opportunities that come your way.

Good luck and thank you for your public service!

[Easychange]

I could not disagree more with Luis. 6.8 percent is real money. It is balderdash to expect gains in excess of that. Also, it does compound! Any money not paid now will compound negatively for the remainder of the loan. Early payoff avoids this.

That said, if you are sure you will stay, then just bank the money and hope the program exists when your time is up. That said, i think that this is a benefit the government shoud cut now. We cannot afford it. And it fosters an innefficient price of higher ed. If loans were paid back in full at prevailing interest rates in a normal amount of time and could be discharged in bankruptcy, the cost of college would plummet. We should let the market handle this and learn to make better use of community colleges and cheaper, but good quality alternatives. 70k in loans is insane an most people end up as debt slaves. Kids going to college don't know any better. When will pols stop spending money they don't have on systems that don't work? Who do you think will get this money 10 years from now? Ss retirees or graduating college seniors? One guess.

[Joe]

@Easychange, 70k in loans is insane? How about the $300k my wife and I finished grad school with? All that is in spite of my getting $45k in grants thoughout school.

[Jack]

Just be careful. Pretty sure any amount forgiven at the end is taxable as income.

[BD]

Jack: You are 100% right. The amount forgiven is taxable as income.

[STLAttorney]

I agree that it's ethical to take advantage of the program, though I think the negative reaction folks have is due to the reality that you are in effect making the rest of us pay for your schooling. You didn't create this foolish program - it's the government that did. You are just acting rationally in your economic interests. No different than GE paying no income tax because of tax credit programs. I'm sure the folks who support your decision also have no problem with GE's behavior.

Of course it is a silly policy because working for a non-profit has it's own rewards - typically shorter hours and lower expectations for having to work hard. In addition you get help people in need.

I work in private practice law and just got done with 21 hours at the office. Helping businessmen buy a business for $50MM. Hard work, and no self-satisfaction for helping the needy. But I get paid well. These are the trade-offs.

We don't need a government program to effectively encourage people to work less, and be paid for what many of us also volunteer to do. There are enough incentives.

Having said that I wish you the best, and if our gov't wants to reward this (despite it being bad policy), I have no gripe against you taking advantage of it.

Oh yeah, put the money away for your cash reserve.

[Frankly]

WOW. What a collection of really bad advice!

The advice here is SO bad that the whole "Help A Reader" exercise looks like a ship of fools. A bunch of uninformed jack legs spouting complete nonsense.

Examples:

- Michael says: "Honestly, I find it highly unlikely that it [loan foregiveness] is true and most likely you're still on the hook for the full amount.

100% WRONG.

- Jana: "If I'm remembering correctly, simply working in a nonprofit does not automatically guarantee you that forgiveness."

100% WRONG

- BD: "It seems the ethical thing to do would be to pay it off yourself. . . . You went in expecting to pay them off, so do so, instead of hoping that the government will do it for you."

100% STUPID. Encouraging non-profit work is precisely the point of the program.

- EasyChange: "I think that this is a benefit the government should cut now. We cannot afford it. . . . We should let the market handle this."

100% POLITICAL RANT. Save it for Rush Limbaugh.

- BD again: "Jack: You are 100% right. The amount forgiven is taxable as income."

Actually, JACK IS 100% WRONG.

_________

Whew. What a bunch of idiots!

[Easychange]

@frankly, actually i don't think this is political at all. So long as the program exists, this reader should take advantage. I graduated with nearly 45k in loans and it took me nearly a decade of working good jobs and being careful to pay them off. All while i watched other people have a lot of fun and not worry about making a ton of money. I can only imagine what 70k of school debt feels like. Or 100+ like others have said. I feel for these people and I don't think it should be so hard and require a lifetime of sacrifice to get education to make a decent living. If that sentiment is political, so be it. But be aware that these programs can and do change.

[Kathryn]

I'll be honest, when I originally submitted my question I wasn't expecting such a large debate over the ethical issues surrounding the program. Putting those comments aside, the take-home points for me are 1)stay in the Public Service Student Loan Forgiveness program, and 2) to set money aside (probably invest) so that if the program is done away with or I am unable to continue qualifying then I'll be set to pay it back. Also, thanks for mentioning that the forgiven amount would be taxable-- good to know!

[Kathryn]

@SLTAttorney: Working for a nonprofit doesn't mean short hours and no work, and, trust me, no one would volunteer for my job. I'm frequently traveling to Africa or South America, working 10-12 hour days in less-than-secure locations, getting food poisoning and exposing myself to malaria and dengue. But, I love it and it's nothing less than what I was expecting when I started my degree!

[Kathryn]

Also, public service loan forgiveness is not taxable.

[Bobsmith]

My advice is: You are screwed!

[BD]

@ Frankly: I just took a tax class last semester that plainly stated that all loans that are forgiven are 100% taxable as income. I was tested on it, I passed the class with a high A. So why are these college loans the exception? My tax textbook did NOT mention *any* exceptions for any sort of loan forgiveness taxation. Is this something new for this year that the book did not mention? Is the government just deciding to give these people a free pass for everything?

No wonder our country is so highly in debt.

[BD]

Oh, and BTW, Frankly, Your personality has a lot to be desired. Learn how to discuss matters politely instead of just jumping in and calling everyone rude names. People who act like you make everyone's lives a little worse off.

[FMF]

BD --

And notice how he/she only criticized -- and offered no solution/advice?

[Luis]

The loan forgiveness for public sector employees are within a program that is codified into law. Within the law of this program the loans are not taxed when forgiven.

[Easychange]

Kathryn, you are doing good work. I am sure there are somenwho are in non profits who loaf around, but that is probably true of some people across the board. And it doesn't sound lile you do. In general i think that charitable organizations provide important services not handled elsewhere. You're doing good work! That is wonderful.

And you should take advantage of all programs you can. I would save the extra on the side in a safe cd or high yield savings acct. Ing/smartypig/ally bank are 3 options. Also don't forget to invest in your retirement. As you get closer to 10 years and the forgiveness is more certain, increase your contributions to retirement.

And as always, try to avoid debt so that if this happens to be a future issue, you can handle it. Good luck. Hope that helps.

[Joe]

@Easychange: It's a bit nit-picky but I wouldn't call the .8% return on my ING savings account high yield. Though, I guess it's all relative.

@STLattorney: How much debt did you graduate law school with? I ask because you say we don't need incentives to encourage people to work (for) less. I graduated with $130k of law school debt. My wife has $170k. Working for anything in the $30k range would be untenable - thus public service would be out of the question if not for these loan programs. As is, we're now making approx $100k combined (though it took 19 months since graduation to find) and would still be in lots of trouble with income-based repayment programs.

[Frankly]

BD, here are the relevant provisions of the Internal Revenue Code on the non-taxability of this type of loan forgiveness.

"Section 61(a)(12) of the Internal Revenue Code of 1986 (IRC) specifies that gross income includes income from the discharge of indebtedness of $600 or more in any calendar year. However, IRC Section 108(f) specifies conditions under which student loan forgiveness is excluded from income. Specifically, IRC section 108(f)(1) states that

'In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.'"

[BD]

@Frankly: Thanks for the Code section! I'll keep that in mind. (And next time, I'll use RIA Checkpoint to look this stuff up first, rather than relying on what they teach in class - which might not cover everything)