Should I seek loan forgiveness, or paying off my loan quicker?

Question

A little background: I am a public worker who recently learned about a loan forgiveness program. I have already been paying off this loan (since before the program began) and was not aware of the program until recently (so I could not take advantage of it two and a half years ago at the start of my public service employment). Now I'm wondering if I could try to take advantage of it.

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The issue is, this forgiveness program requires 120 consecutive documented on-time payments towards the loan. This, under any of the loan repayment options I have available, would completely pay off my loan in the time it would take me to qualify for the forgiveness program.

(For those curious: My total loan is $12,250, and I pay off $200 of the principle with each payment)

Should I try to find a way to qualify for this forgiveness program, lengthening the term of my loan in the hopes of having part of it forgiven? Or would it be wiser at this point to simply pay my loan off with standard payments?

As a further note, I'm asking this now because I plan to make a lump sum payment into the loan from my tax refund, but have held off on doing so until I know whether or not it would be wise.

Answer 1

I personally don't think that this program will do anything for you.

120 payments is 10 years. You'll have this loan paid off in about 5 or 6 years, at your current rate of payment. I'd encourage you to pay it off much quicker than that if you can find a way. The longer you take to pay, the more interest you'll pay.

If you tried to refinance to attempt to get some benefit from the program, you'd be increasing the amount of interest you'll pay even more. And I think you'll have a hard time finding a lender that would be willing to refinance this loan for longer than 10 years. And in order for you to see any benefit, it would have to be substantially longer than 10 years.

The program is really designed to benefit those public servants that have extremely large amounts of student loan debt and are looking at much more than 10 years to pay it off. In my opinion, it doesn't usually make sense to try to refinance and extend the terms of a student loan to get it to last long enough for the program to kick in.

Another reason to not do this would be freedom. If you decide to do this, you have committed yourself to your public service job for the next 10 years. What if you decide to do something else 5 years from now?

Instead, see how fast you can knock out this debt and be done with sending interest to the bank each month.

Answer 2

A friend of mine, who works on Wall Street, once asked me, "What do you think is the biggest worry of mortgage lenders - defaults or pre-payments?" Hands down I replied, defaults. And most people would agree with me.

And we would be wrong.

What scared these bankers the most is pre-payments. Why? Because that's lost income. If you got aggressive and paid off your loans in a year (there was a couple on LinkedIn who paid their loans much faster than that and they had a lot more), you would save yourself a huge amount of interest. But the holder wouldn't have an asset producing income!

So who sees student loans as an asset? Bingo. And now you can see why student loan forgiveness exists; like Wall Street bankers, they know how costly it is for students to repay early. So, forgiveness (which sounds good!) is offered so that they get at least a certain number of years of guaranteed income. My friend's point (I had student loans too) was don't be suckered; there is no free lunch or forgiveness, there is only people who can't do math.