When developing a student loan repayment strategy, often the first consideration is determining whether your employment will qualify your loans for PSLF at some point in the future. Those who wish to take full advantage of PSLF should usually seek to minimize their scheduled repayments with income-driven repayments, which will then leave the maximum amount to be forgiven after ten years.
- If you want to qualify for Public Service Loan Forgiveness, complete and submit the following Employment Certification form: https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf. You should continue to submit this form annually and every time you switch employers.
Individuals who won’t qualify for PSLF can have a tougher decision to make, depending on their expected earnings, expenses, and resulting cash flow surplus in a typical month.
- If monthly cash flow is tight, then an income-driven or extended/graduated plan likely makes the most sense. Monthly payments will be smaller, at least initially, but total payments over the life of the loan can be much larger.
- On the other hand, if monthly cashflow allows for a more abundant surplus, then it may make sense to accelerate payments as quickly as is reasonably possible, perhaps even faster than the Standard ten-year repayment window. This approach would require larger monthly payments, but far less during the life of the loan.
- Consolidating your loans with a private lender can often allow for a lower interest rate, further enhancing this strategy. Also be mindful of the opportunity cost of accelerating payments (i.e., it may be better to invest the extra payment amount if the expected net investment return is larger than the interest rate you’re being charged).
One additional measure that can reduce your overall payments is to begin your formal repayment plan early, even though your loans may still be eligible for deferment or in their grace periods. Doing so will “start the clock” that much sooner, which provides significant benefits for income-driven plans: (i)forgiveness can occur at an earlier date, and (ii) earnings during deferment or grace periods tend to be relatively low, resulting in a much lower monthly payment during those years. Beginning early can also benefit Standard, Graduated, or Extended repayments as well, since there will be less time for additional interest to accumulate.
Finally, review your tax filing status with your CPA or tax advisor. A married borrower who files separately instead of jointly may exclude the other spouse’s earnings from IBR, PAYE, or ICR repayment calculations (but not REPAYE), which can then reduce the resulting monthly payment. The effectiveness of this approach is dependent on the other spouse’s earnings potential and could be offset – perhaps drastically – by the other benefits that joint filing may provide (lower tax brackets and access to certain credits, exemptions, and deductions).
To wrap up, every situation is unique, and it is important to have a repayment strategy in place.