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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

How much will be paid off if PSLF works (the remaining balance in 5 years is forgiven)?

PSLF.balance = $125,935

PSLF.balance = fv(
    r = annual.loan.rate,
    n = years,
    pv = current.loan.value,
    pmt = current.monthly.payment * 12,
    type = 0
)

Monthly payments required to pay off loan in 5 years

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)

Monthly payments required to pay myself and minimum loan payments

payoff.monthly.self = $2,829.469

payoff.monthly.self = payoff.monthly.pmt + current.monthly.payment

How much extra will PSLF cost (How much extra do I have to spend on the gamble) I will pay (self.payoff - payoff) in order to save PSLF.balance

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!

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  • 2
    Are you already 5 years into an income-based repayment plan? Are you factoring income growth over the next 5 years into your calculation?
    – Hart CO
    Commented Nov 4, 2018 at 22:06
  • Yes, I'm 5 years in with another 5 years to go. I haven't planned income growth; that's a good point. If the variables are set up correctly, I should just be able to modify the monthly payment variable and rerun the calculations.
    – user8701090
    Commented Nov 5, 2018 at 16:56
  • 1
    You are right, except with PSLF the forgiven debt is not taxed. That is one difference between IBR and PSLF.
    – user8701090
    Commented Nov 6, 2018 at 18:55
  • 4
    There are stories that 90+% of the people who thought they would get loan forgiveness had their application rejected. There are a number of critical things that must be done, before the 10 year clock can start. Do them out of order, and you have to start over.
    – mhoran_psprep
    Commented Nov 6, 2018 at 19:24
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    For future readers, note that the last available data I can find from Sep 2018 states that only 96 out of 30,000 PSLF applicants have been approved so far. In short, promises of loan forgiveness are currently largely unfulfilled, so this needs to be considered as an additional risk that even if you should be able to have the debt forgiven it may simply not be: cnbc.com/2018/09/21/…
    – BrianH
    Commented Dec 8, 2018 at 0:13

2 Answers 2

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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.

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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:

  1. Make payments in excess of the interest charge per month
  2. Make contingency plans for the PLF not working out.

It seems like you have #2 in had, and that you would be willing to do #1.

Good luck to you.

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  • Thank you for our input. Were you able to find the error in how I set up the problem? Most of the employers I'm looking at would qualify for PSLF, so the public/private sector doesn't enter into the decision quite as much. What I'm trying to do is learn how to make a numeric decision, particularly with the opportunity cost of a 5-year paydown.
    – user8701090
    Commented Nov 5, 2018 at 16:59

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