Public Service Loan Forgiveness- Is it a Trap?
Why is it easier to manage life and death decisions than pay off debt?
After graduating from PA school I was hit in the face with two terrifying realities:
(1) I was going to have to manage life and death decisions and
(2) I was going to have to pay back $170k in student loans.
My loan repayment story started off super rocky.
I didn’t get my first PA job until 5 months after I graduated and ended up taking a low paying primary care job just to have an income. After 6 months of struggling to make the minimum payment on the income-based repayment plan, about $950/mo, I left for a higher paying and more exciting ER job.
As my income went up, my monthly payments went up. When I finally noticed how much money I was paying every month in interest, it was physically painful. Especially after I realized how little money I actually had in my savings. I thought about refinancing but was too nervous to lose the safety net of deferment and my income-based repayment plan.
After 3 years, I realized I was in way over my head financially and knew I had to get serious. I left the stressful ER job, took a job in the middle-of-nowhere (again), bought a reasonably priced, low maintenance condo and went to work on getting financially free.
I also applied for both state and federal loan repayment programs.
I cried with relief when I found out I was selected for the state program which paid out $75k over a 3-year commitment. It made me realize just how stressed and anxious I really was about my loan debt and how much control it had over my life.
During those 3 years I continued to make my normal monthly payment. In retrospect I wish I had doubled up on my payments but I didn’t. Instead, at the end of the 3 years I refinanced the loan balance to a lower interest rate and then increased my monthly payments.
It can be hard to imagine the money you spend in interest because it’s just part of the monthly payment. If you have automatic payment, which most of us do, you probably don’t even look at your monthly statements.
I challenge you to start looking at those statements and take notice how much of your payment is going towards interest and how much is actually going towards your principal.
Let me show you how 10 years of high interest rate payments look.
Erin graduates with a total loan balance of $150,000, annual interest rate of 7% and a plan to pay it back over 10 years. At the end of 10 years she has paid $58,995.60 in interest. Keep in mind, this is only because she paid the full amount due every month and didn’t use any income-based repayment plans or deferments over the life of the loan. In the life of the loan, her total payments (including interest) total $208,995.
On the other hand, Sami paid off that same loan in 5 years, paid only $28,210.80 in interest, and saved over $30k! Her total payments (including interest) total $178,210.
I have heard a lot of new grads say they’re not worried about their debt because they plan to apply for Public Service Loan Forgiveness.
Unfortunately, that’s like planning on winning the lottery to pay for your retirement. Which is to say, not a great idea.
What is Public Service Loan Forgiveness?
PSLF is a federal program designed to encourage new graduates to enter a low-paying career in public service (ie: medicine, law, military, or government) in exchange for loan forgiveness.
To qualify for PSLF, you have to:
- Have qualifying loans that are part of the federal Direct Loan Program. Private loans are not eligible, refinanced loans are not eligible either.
- Work full time for a qualifying employer (usually government or not-for-profit)
- Make payments using the income driven repayment plan
- Make 10 years worth of payments (totaling 120 payments) on time, every time, while working for a qualifying employer)
It’s pretty clear that the intention of the PSLF program is not to provide financial assistance to student loan borrowers.
Instead, it provides the illusion of assistance, all the while enforcing a strict repayment plan with the intention of minimizing loan defaults and government losses. In other words, it’s a con. It keeps student borrowers poor and paying off long-term, high interest rates loans to the government while working in “qualifying” jobs that typically have limited earning potential.
Keep in mind that less than 1% of applications who applied in 2017 were approved and less than 2% in November 2020 were approved. In other words, 98% of borrowers who applied for PSLF were rejected. The average loan balance amount forgiven for people who were approved was $75,000 in 2020.