To start off, you should know a little about me (I’m Bach from AdeptDebt where I write about newlywed finance) and why I choose to write a guest post on student loans. Well, I have about three times the national average in student loans and am determined to pay back the least amount possible as soon as possible!
How did I end up with $76,000 in loans?
I am not a lawyer or a doctor. Then the loans would be okay right?
I did not do anything too stupid really, I didn’t use loans to buy a car or go on spring break. My parents just made too much money for me to get any grants, and not enough to pay for my education. I got some scholarships in undergrad and a partial tuition/fee waiver in grad school and worked 30 hours a week but it but it wasn’t nearly enough to cover the costs.
I went to a flagship state school for a relatively useless (well, it did get me into grad school) social science degree, and then on to an out-of-state ($) state school for a professional degree in the field in which I now work. Grad school was a great decision, and I don’t regret the choice at all, but the combination of my educational choices has left me with about $76,000 in student loan debt, $63,000 in federal and $13,000 in private loans (study abroad in Africa).
I should mention at this point that I currently work in local government, and will likely always work in the public sector…. making me eligible for the public servant forgiveness program. At least for my $63,000 and climbing federal student loans.
Hopefully, if you have federal student loans, and if you work in the public sector or for a non-profit, you have heard about the Income Based Repayment (IBR) plan and the public servant forgiveness plan (more info here) which has been around since 2007. If not, I’ll go over the basics and you can get more information on IRB here.
Basically, if you have enough debt that your income can’t support the standard ten year plan repayment amount for your student loans (ten years for me would be about $700/month and I would pay $14,000 in interest) and work in almost any non-for profit industry doing anything full-time (teachers, local, state or federal government, or 401c3 organizations) for ten years you pay an amount based upon your income and are done. Period. The remaining debt is wiped away, and under recent legislation it looks like you won’t have to pay income tax on the amount which is forgiven (a scary thought!).
Even if you won’t qualify as a public servant for ten years to get the forgiveness, IBR is a great option to switch to if your income is low (you can always switch back to the ten year plan if your finances improve) and any remaining debt will still be wiped away after 25 years.
How does IBR work?
Under IBR, you pay 15% of your adjusted gross income (AGI- will discuss this further) over the poverty line for your family size each month. If you are married, you joint income and joint amount owed in federal loans is calculated into the equation. For my husband and I, we are able to reduce our AGI to about $52,000 a year and we have to pay about $355 a month together. See calculator below. Ouch right? But still better than $700 a month.
This is a big decision.
Choosing this plan over other student loan options is risky. I can’t stop working to stay home with babies, for instance, because I won’t hit ten years of employment. Losing my job or switching to a private sector job will also make switch me to either a huge monthly payment or 25 years on the IBR plan (which would suck). Also, if according to the calculator, our AGI is over $110,000, we don’t have enough debt to qualify for IBR. I think we will hit this at some point (hopefully) before the 7 years I have left are over, but there are ways to get around this too.
Scenarios:
If we make too much money (over $110,000 roughly assuming my student loans and my husband’s combined, but more if we have kiddos to enlarge our family size), the public servant ten years still counts, but I have to go to the standard, or $700+ month payment until I hit ten years.
But… It is pretty easy to lower your AGI drastically by putting money into other productive streams. There is a lot of information on the web on this, but basically you can max out on your 401k/401b/TSP plan (around $15,000 per person) and put money in things like a flex spending plan to lower your AGI. You also get to deduct $2,000 in student loan interest each year, which lowers your AGI. Anything called an above-the-line deduction will lower your AGI.
Other things to consider:
My husband is back in school working on a teaching degree. This means we still pay the total amount based upon our joint income, even though his $30,000 in loans is currently in deferment. He is still taking out loans, and will likely end up at around $40,000 total. In seven years when I manage to hit ten years of repayment as a public servant and my loans are forgiven, he will still have six years to go on his. At that point, he won’t qualify for IBR without my debt, but can switch to the regular plan and still do the public servant forgiveness himself.
If you are still in school and can reasonably expect to be a public servant, some people may actually be encouraged to take out extra loans to qualify for IBR. Especially since relative to income, the payment will be the same whether they owe $50,000 or $500,000 and the difference between what they pay over ten years and what was loaned can be banked. This is of course a gamble and not how the system is supposed to work, but should be mentioned as an unintended consequence of IBR and the forgiveness program.
As our income goes up, we will pay more each month. However, if we average $400 a month in payments over ten years for my original debt of $63,000, we will make $48,000 in total payments which is much more manageable. Is this ethical? I think so. I didn’t take out the loans not expecting to pay them back, and I have to have a graduate degree to do my job, the public sector needs good people, and I’m still paying a good portion of what I make back to the government. I do not agree with the idea that there should be a student loan bailout (something kicked around lately in the media) because student loans are manageable if you stay on top of them and work with the system.
Should universities be limited in how much they can charge? Probably. But this will not change as long as federal student loan limits keep going up and private loans are available at crappy rates and in unbelievable amounts. Higher education institutions will charge what they can get from the market, whether it is right or wrong. The important thing is that everyone considering student loans and paying student loans are as informed as possible and takes advantage of every opportunity out there.
I have a bit over $50,000 or so in student loans. I've heard of the income based repayment plan, but had not heard of the public servant forgiveness. I don't know that I completely understand how it works. If you're on a 10 year repayment plan and you have to make 10 years worth of payments to qualify, how does that equal getting anything forgiven? It almost seems like a clever way of getting everyone to make their payments on time.
Income based is less than the 10 year plan each month, and public servant cuts it down to ten years instead of 25 years.
Woot! I qualify for that!! However, according to the debt repayment plan spreadsheet that I've come up with, I'll be debt free in just a little over four years. I don't know if I could live with myself just making the minimum payments for several more years when I could really just pay them off. It's something I'll definitely need to consider. The option is there for a reason, right? I should take advantage of it. *sigh* Decisions, decisions.
If I could pay it off, I would!
my husband and I have about $100,000 in student loans (aaahhh, as I feel like purging)…and we start paying them back in June. not sure how it's going to pan out though and it makes me quite anxious thinking about it.
It is stressful until you figure it out! Good luck!
I don't have a comment on the exact subject matter, but I wanted to let you know that I linked to this post in my post today.
I've got $20,000 in student loans so far, and am hoping to not increase that. Fortunately, I already planned on working for the federal or a state government, so I'll keep this in mind. Thanks for the information!
Wow. That's a bunch of student loans and you already know you aren't the only one. If you can honestly say grad school was worth it then that's great. Me, I just got about 16k for a State college BA and I paid it off in 10 years on their plan. I will not do grad school b/c of loans especially if I don't think it will boost my income substantially to be worth it. That forgiveness plan is great but it is a bit scary that you must commit to that one path.
It IS a scary path, and I'm lucky everything has worked out so far. The job I wanted required a grad degree, so for me it wasn't about making more money, but the job I wanted. It's a solid but not high paying job with awesome benefits.
I might be the only one that thinks this. But I don't really agree with the whole Public Servant Forgiveness Plan (and I also work for the Gov.) I'm not saying that there shouldn't be programs out there to help people. No matter what those loans are going to be paid by somebody. The initial money for the loan came from investors/taxpayers, to say that they will be forgiven and just go away is not the whole truth. Taxpayers will foot the bill on it, which takes money away from other programs that the money could be used for. I don't think taxpayers should have to pay for students partying expenses (not saying everybody used student loans for that). I guess my thinking is that if I took the loan out I should repay it, and that goes for any loan. If I have to work two or three jobs then I that's what I will have to do. I'm just looking at this from the perspective of someone who is tired of seeing our country go into debt more. Obviously there will be situations where a person cannot repay student loans (medical reasons and the like)and that I am ok with being forgiven.
I tend to agree with you. Even though as you can see in my above comment, I qualify. I'm still going to work on my debt reduction plan and hope to have everything paid off in four years.
I was hoping for a good discussion on that aspect. 🙂 I feel this way about student loan bailouts and people walking away from underwater mortgages they can afford to pay.
@Alice, That is one of the reasons why I read your blog everyday. A lot of your values are in line with mine. @Bach- I just think that people should do as much as they can to pay their debts before they take the forclosure/bankrupsty route. Nobody was forced to sign the loan papers to accept the money.
I might agree with you if student loans could be discharged in bankruptcy, but they can't. Not everyone is capable of working three jobs to pay her loans (of any type) even if she had the best of intentions when she took out the loans.
Thanks Emily. I always PLANNED on paying it all back, but if the cards fall such that I don't, then I don't have guilt not doing so (but will still pay most back). I also work two jobs… I don't think student loans should be discharged in bankruptcy, unless you also give the degree(s) back…
I'm sure you know this and didn't include it, but another way to lower your AGI is to invest in a traditional IRA in conjunction with your 401(k) and other pre-tax retirement accounts.
Omg love this post! My BF did the IBR thing and I always get so confused when he talks about it. I may have to contact you about this if I am still lost later down the line.
Sure! Obviously I have spent a lot of time trying to figure it all out (and it's sooo complicated, thus the longest post ever).
Great article! It really informed about IBR. I am not going into a government job so this is not for me. However, it will benefit other people to be informed. Will link back to this post this week or next week when I talk about financing your education.
I could not find your twitter account on your blog.
Michelle tweets at />And I do not tweet. And thanks for the re-post!
So if I'm understanding this IBR info correctly, after 10 years the remainder of your loan will be forgiven? But you must stay working in a government or non-profit job for those 10 years. And you are locked into paying a certain amount every month for those 10 years. Is that right? I guess my main question is that if you could actually pay off the loans by putting in a little extra every month, would the 10 years be shortened at all? Or you somehow came into a large sum of money, would you be able to just pay off the sum of the loans or would you be locked into paying for 10 years?
Hi, if you are interested in paying extra each month to be done in less than ten years, or think you'll come into a large sum to pay it off, IBR is probably not the plan for you over the ten year standard plan. If you can pay it off earlier, then do it! 🙂
I don't work in public service but this is a great benefit for people that do!My wife and I started with $85,000 in student loans and we still have $43,000 remaining. Hooray, only another gazillion years to go to pay them off. lol. :)In reality I'm hoping they're gone in two years!
Amazing! Keep up the good work! Two years is awesome- I'd do it if I could!
money just sucks… that's all i have to say!
Thank you so much for this post. I've been really debating my options for when I graduate in May. I will have a graduate degree and I am sure I will be working for non-profits for the rest of my life, which is fine with me. The particular population I'm interested in working with has non-profit organizations which work for this population.I think I will definitely have to start out with IBR regardless of other options as I really need experience in my field to get a better job. I have a question about the AGI. Would you be able to file separately to qualify, if you do make $100k together? I guess I'm asking because, if my boyfriend and I got married it is very likely we'd be making more than $100k a year, together, within 5 years. However, I don't want him to feel responsible for paying any of my loans. Is that an option?Thank you again!
Yes, you can file separately! Then you will only have your own income and debts in the equation. However, there are some downsides to filling separately so always run the numbers both ways (I use the IBR calc and the IRS calc) and look into ways to lower your AGI so that you get the best payment and tax situation.
Oh, and good luck anonymous!
You are right that education is becoming expensive. It puts a lot on pressure on youngsters to cover the loans
We are using extra income to pay off debts or purchase things we really "NEED"