New student loan payment calculations given 25th year forgiveness?
February 8, 2009 6:49 PM   Subscribe

New student loan regulations mean that govt consolidated student loans will be forgiven after 25 years but the balance may be taxed as income. Seems that's being debated but stands as taxable at this point. I work public service = make little cash. How to calculate how little I can pay through income-sensitive payment ($165/month currently on 48K at 6.875%) without getting slammed too much at 25 years? Want to see my options for cash flow/403b money now vs. balance later. Thanks!
posted by warsawjude to Work & Money (5 answers total) 9 users marked this as a favorite
Look, this isn't the kind of question anyone here is going to be able to answer with the level of detail you're looking for. The only people that are going to be able to answer this for you definitively are at the Dept. of Educ. in DC, and given the way regulations and statutes are changing these days there's no way to tell what's going to happen five years from now, much less twenty-five.

Furthermore, as far as I can tell, eligible loans are forgiven after ten years, not twenty-five. But only consolidated Direct loans, i.e. money loaned directly to you by the government, not merely guaranteed by it, can be forgiven in this way. Without knowing that detail it's impossible to say whether you're eligible for loan forgiveness at all.

Get your information together and call the Federal Student Aid Information Center at 1-800-433-3243.
posted by valkyryn at 7:34 PM on February 8, 2009

Response by poster:

Income Contingent Repayment (ICR) Plan

...Under this plan, it is possible a borrower will not make payments large enough to pay off his or her loans in 25 years. If loans are not fully repaid after 25 years of repayment, any unpaid amount will be forgiven. The maximum 25-year repayment period may include prior periods of repayment under certain other repayment plans, and certain periods of economic hardship deferment. The forgiven amount may be considered taxable income.

This is the forgiveness I'm referring to, not public service 10-year forgiveness.

Yes, I do have consolidated direct loans.

Must be some calculator. I would like to be able to calculate myself instead of deal with student loan servicing people.
posted by warsawjude at 7:53 PM on February 8, 2009

Use a mortgage calculator. Or make up a spreadsheet. I just plugged your numbers into a mortgage calculator, and got a payment of $335. You are paying half, so I would expect that you'd have more than half the original value left since you pay mostly interest at the beginning.
posted by gjc at 8:55 PM on February 8, 2009

Frankly, it seems to me that you should probably pay off your loans now as best you can assuming it won't be forgiven in 25 years . . . at the current rate you're going, you're not even paying down the interest on a monthly basis, which means that when you hit that 25 year mark (assuming nothing changes) the principal is going to be 2-3x what it currently is and you'll be looking at $100k+ income bump, which might end up looking like 30k in taxes by the time you're done.

Granted, if you're still making the same amount in 25 years you probably have bigger problems than your student loan principal, so you should probably sit down with a financial planner or something.
posted by toomuchpete at 9:56 PM on February 8, 2009 [1 favorite]

Best answer: Piling on to my own and others' comments- the longer you hold interest charging debt, the more it costs. Now, at the moment, you probably don't want to have to pay more than you must. Not the best time in the world to be getting better jobs and asking for raises. But you'll likely save money in the end by committing to paying off that debt as soon as possible. For two reasons:

1- Costs you less in the long run.
2- You might want or need to start paying for other debts.

But you said you are in the public sector- if that means government work, I've found that most government employees can expect fairly regular raises. Might not be great raises, but they do count. What I'd do if I were you (and I did for myself*) is to devote a portion of any raise you get toward the student loans.

* I did this for funding my 401k plan. I started many moons ago at the absolute minimum. I think it was 2% of my income got diverted to the plan. Any time I got a raise, half of that raise went toward the 401k. So a year later, I got a 10% raise, let's say. I upped my contribution to 7%, and kept the remaining 5% of the raise for booze and smokes.

Here's an example of the horrors of compound interest when applied to debts. I have a crappy condo, the mortgage was I think $70,000. At the time, I had a 30 year fixed at 6 something percent. The payment was something like $600 a month. At the end of the 30 years, I would have paid back the principal PLUS another $140,000 in interest. So what I did was refinance to a 15 year fixed at 5something %. The effect was that my payment went up to $800. BUT, that extra $200 went directly to paying down the principal. Not only did I get the benefit of increasing my equity more quickly, I got the added benefit of reducing the total cost of the mortgage to more like principal plus $50,000. I spent an extra $36,000 ($200 a month for 15 years) to save myself almost $100,000. With the added benefit that in 15 years, I'll have an asset paid for free and clear.

Now in your case, the asset is the education, which hopefully is paying, or will eventually pay, similar dividends. The choices you have to make really boil down to how much you are willing (or can) pay for it.

These calculators should do the trick
. That site shows how they calculate your payments and interest. Looks like if you don't pay the full interest, your balance does go up, but not directly. Seems like there is a 10% cap in how much your loan can go up. Still, if you aren't paying the full cost of the interest, the balance does go up every year. So, it's most likely in your best interest (ha!) to figure out a way to up your payments so you don't end up with a giant bill at the end.
posted by gjc at 8:13 AM on February 9, 2009 [1 favorite]

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