I recently read an article on Forbes. The basic premise of the article appeals to the popular generational idea that we ought not pay back all of our student loans. Instead, we should try and get them forgiven. Because…why should we pay them back?
We should. We should all pay back our student loans. As quickly as possible. Period.
I’m not talking you professionals that graduated 10 years ago and were able to finance at fixed rates between 1% and 3%. I’m talking to everyone that graduated after the meltdown in the late 2000s. I’m talking to everyone that has interest rates fixed by the Department of Education at a healthy, competitive 8% give or take.
The idea behind student loan forgiveness is a political ruse at best. Politicians care about students and their plight, so by creating a program to help get those loans forgiven sounds really nice. And in theory, it is really nice.
But the reality for high income professionals is far less nice. Imagine a dental graduate with $350,000 in student loans, entering the workforce planning to make $140,000 in her first year. Making it easy, let’s say she’s not married, no dependents. Simple math shows her interest payment is $2041 for her first payment. Calculating her payment under these forgiveness programs, her monthly amount owed is somewhere around $650-700 per month. (Lots of general assumptions, but very generous in said assumptions)
Her interest alone is over $2,000, but her payments are about a third of that. So what’s going one here? Well, for anyone actually paying the going Dept of Education rate, you are subsidizing her for her first 3 years. That’s really nice of you. But what happens after her payments are no longer subsidized after the 3 year honeymoon period? The interest gets capitalized on to the original principal of her original loan amount. Which means she will earn more and more interest and principal over the life of her loans.
That is a bad deal.
Working backward, she basically needs to make $376,000 a year for the income based system to cover her interest (again, some fairly basic assumptions). That is highly unlikely she will reach that in 3 years, let alone 30. The average dentist makes between $180,000 and $190,000 per year. So the thought that she’ll pay it off using an income-based scheme is a fallacy.
So essentially what will happen is that these borrowers will almost universally end up owing more than they originally were loaned. They will pay interest on that increased capitalized amount.
And here’s the kicker. After dutifully getting screwed for 20 or 25 years, the “forgiveness” is a taxable event. By a taxable event, I mean that forgiveness counts as ordinary income. If you haven’t figured out how to pay of your loans much faster than 20 or 25 years, the chances of you having saved 33% of your now astronomically high, forgiven amount is pretty slim. Good luck!
What is the answer? First, do some reading. Pay off your loans faster. Second, don’t live like the healthcare professional we all aspired to be when we started our journey, at least until you can really afford it.
As an aside PSLF is probably the one program that is actually beneficial for the professional and for society. It is not a bad deal if you are so inclined to choose that route.