Public Service Loan Forgiveness: Everything You Need to Know About PSLF

The Public Service Loan Forgiveness (or PSLF) program forgives any of your student loans remaining after making 120 qualifying payments while working full time for a qualifying employer. While the income driven repayment options also offer forgiveness after 20 or 25 years of qualifying payments, forgiveness under these plans is counted as taxable income. Forgiveness under PSLF is completely tax free. Win-win!

Qualifying Employment

Contrary to popular opinion, employment qualifying for PSLF has nothing to do with what you do. It only matters who you work for. If you work full time for any of the following employers (defined as 30 hours per week or more), your employment will qualify for PSLF:

Any government organizations. This includes state, federal, and local governments.
Non-profit organizations that qualify for tax exempt treatment under 501(c)(3).
Other types of non-profit organizations that provide certain types of public services.

There are a few exceptions too. Labor unions and political organizations do not qualify for PSLF. But, qualifying employment reaches much farther than only teachers and social workers. Anyone working full time for the government or a 501(c)(3) non-profit can qualify:

Lawyers working as prosecutors and public defenders
Physicians working in teaching hospitals & medical schools
Firemen & Police Officers
Soldiers

Some estimates count 33 million public service employees who could qualify for PSLF. As of June, 2015, only 335,520 people were enrolled in the program, or barely more than 1%.

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Federal Student Loan Consolidation: What It Is & When You Should Use It

Financing college and grad school these days is no small task. With tuition costs rising every single year, graduates today are exiting school with laundry lists of student loans. Each one with a different rate, a different servicer, and often with different terms. Sounds confusing, no?

The Federal Direct Consolidation Loan repays your existing federal student loans and replaces them with one loan at a fixed rate. This can be beneficial for a few reasons. It reduces the number of loan servicers you’ll need to deal with, replaces variable interest rates with fixed, and helps you qualify for flexible repayment options your original loans may not have been eligible for.

How it Works

The direct consolidation loan replaces your outstanding federal loans with one combined loan at a fixed rate. This can be very convenient. Loan servicers are prone to making clerical errors, so dealing with only one will probably make your life a whole heck of a lot easier.

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REPAYE: Revised Pay As You Earn Student Loan Repayment

What is REPAYE Student Loan Repayment?

After making the Pay As You Earn (PAYE) student loan repayment system available to borrowers in 2012, President Obama expanded the program by enacting the Revised Pay As You Earn (REPAYE) repayment plan in December of 2015.

While REPAYE has many of the same features as PAYE, the updated plan has several key improvements. Not the least of which is that it’s available to any borrower with qualifying loans – which opens the plan up to an estimated 5 million additional borrowers. This is a huge step up from PAYE, which is essentially only available to the class of 2012 and later.

How it Works:

Monthly payments under REPAYE work basically the same as Pay As You Earn and Income Based Repayment. Your monthly payments are 10% of your discretionary income, which is calculated using the difference between your AGI and 150% of the poverty line in your area. There are also a few key improvements and differences though.

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PAYE: Pay As You Earn Student Loan Repayment

What is Pay As You Earn Student Loan Repayment?

The Pay As You Earn (or PAYE) student loan repayment program was passed in December of 2012, and is President Obama’s spin on income driven repayment. Understanding that student borrowers faced significant challenges once they entered repayment, the President used PAYE to improve on the preexisting Income Based Repayment in several different ways.

Although it has rather strict qualification standards (only the classes of 2012 and later qualify), PAYE is a terrific option for those who can use it.

How it Works

Pay As You Earn is just like Income Based Repayment in how your monthly payments are calculated. Monthly payments under PAYE are 10% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty line in your area.

Again, poverty guidelines are set by the Department of Health and Human Services, and are updated annually. You can look up the poverty line in your area here.

Like IBR, PAYE has an interest subsidy component and forgiveness of any remaining balances after 20 years of qualifying payments. But, remember that any amount forgiven is taxable as income unless under the public service loan forgiveness program. If you’re counting on forgiveness outside of PSLF, it’s best to plan for the resulting tax bill.

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ICR: Income Contingent Student Loan Repayment

What is Income Contingent Student Loan Repayment?

Income contingent repayment (or ICR) is the oldest of the four income driven student loan repayment options. Originally passed by Congress in 1994, ICR was the government’s first attempt to reduce the burden of student loans by tying monthly payments to borrowers’ adjusted gross income.

While helpful when it was first introduced, ICR has been overshadowed by the other four options rolled out since then. Today, ICR is all but obsolete unless there is a Parent PLUS Loan involved.

How it Works

ICR gives borrowers another option if the monthly payments from the 10 year standard repayment plan are too costly. When borrowers enter ICR, their monthly payment is calculated based on their adjusted gross income and the amount they’d otherwise pay over a 12 year repayment plan.

More specifically, monthly payments under ICR are the lower of:

20% of your discretionary income, or
the amount you’d pay under a standard 12-year repayment plan, multiplied by an income percentage factor

This income percentage factor ranges from 55% to 200% based on adjusted gross income: the lower your AGI, the lower the income factor and the lower the output. It’s updated each July 1st by the Department of Education, and can be found with a quick Google search.

An interesting point to note here is that the income percentage factor ranges all the way up to 200%. It’s possible (whether using 20% of discretionary income or the second calculation) for your monthly payment under ICR to exceed what it would be under a standard 10 year repayment plan. This differs from IBR and PAYE, where your payment is capped when this happens (at what it would have been under the standard 10-year plan).

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IBR: Income Based Student Loan Repayment

Income based student loan repayment (or IBR) is one of the four income based repayment options that the federal government offers to help borrowers reduce monthly payments on their debt. IBR is a great option if you don’t qualify for the Pay as You Earn (PAYE) program, and aren’t a good fit for the Revised Pay as You Earn (REPAYE) program. While only available on certain federal student loans, the program is a wonderful benefit to many lower income borrowers.

What is Income Based Student Loan Repayment?

The income based repayment option (IBR) was originally passed by Congress in 2007, but didn’t become effective until 2009. It’s objective was to provide a more affordable student loan repayment option to low income borrowers. The plan improved on the preexisting income contingent repayment option (ICR) by lowering minimum monthly payments from 20% of discretionary income to 15%.

Then in 2014, IBR was revised. For new borrowers as of July 1st, 2014, monthly minimum payments were reduced from 15% of discretionary income to 10%, and the forgiveness period was shortened from 25 years to 20.

IBR was a significant improvement over the ICR repayment option. But today, there are two additional income driven repayment options (REPAYE and PAYE) that are a better choice for most borrowers. But due to PAYE‘s qualification standards and REPAYE’s mandatory inclusion of spousal income, IBR remains a viable option for many others.

How it Works

Like all income based repayment options, IBR gives borrowers an alternative if the minimum monthly payment on the 10 year repayment plan is too much. For example, let’s say you’re a new graduate and have accumulated $100,000 in federal student loan debt. You’re about to start work at job that pays $50,000 per year, and the interest rate on your loans is 6%.

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Adventures in Estate Planning: The Educational Trust Fund

Helping loved ones finance the cost of education is a wonderful & long lasting gift. But when you build this type of gift into your estate planning aspirations, the more traditional vehicles can be limiting in many ways.

529 plans and Coverdell ESAs are two of the most popular options, but the accounts can be rigid and limiting. If your objectives are more unique, say you want to help multiple beneficiaries or include other requirements for access, you’ll need a more customized solution.

Enter the educational trust fund. Educational trust funds give you complete control over how your gift is to be managed and distributed. If your gifting strategy is even marginally complex, an educational trust fund might be your best option.

How They Work

When contributing to the 529 or Coverdell account of a loved one, you’re faced with numerous and rigid restrictions. There are contribution limits, there are limitations on what the funds can be used for, and there are restrictions on portability and who may use the funds. They provide a great way to save for college on a tax advantaged basis, but there’s not much room to customize.

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Health Insurance for Retirees Under 65: How to Cope Until Medicare Kicks In

If you’re planning to retire early, you might be wondering what you’ll do for health insurance coverage. Medicare won’t kick in until you turn 65, and the rising cost of healthcare each year could translate to unknown monthly premiums and out of pocket costs. This leaves you in a precarious situation if you don’t have another form of benefits.

Fortunately, the Affordable Care Act includes several rules designed to limit your costs. For example, insurance companies may charge a 64 year old premiums of no more than three times those of a 21 year old. The ACA also outlaws rejecting applications or charging more for preexisting conditions, and limits out of pocket costs to $6700 per year.

I’m not taking a stance on Obamacare here, but if you’re looking to retire early the road to health coverage is easier now than it was a few years back. But despite the improvements, a major illness or injury could still take a big chunk out of your retirement savings. And as you probably know, the worst possible time to deplete your nest egg is immediately after you stop working.

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Sequence of Returns: The Biggest Risk to Financial Independence & Successful Retirement

When you think about your retirement & financial independence, what keeps you up at night? Is it the possibility that a market crash depletes your nest egg? Is it inflation? What about the cost of health care, or living too long and running out of money?

These are all common concerns I hear from people approaching their leap into financial independence.

Every now and then someone will ask me what they should be concerned about. “What would you be concerned about if you were in my shoes? What are my biggest risks?”

Average Returns & Volatility

Most of us approach retirement planning with expectations about the average returns we’ll see throughout retirement. You’ve probably heard (maybe even from me) that the S&P 500 averages between 7.5% and 9% in annual returns – depending on the exact data set and who you talk to. Over a 30+ year retirement, if we were to invest only in the S&P 500, we could expect an average annual return between 7.5% and 9%. I’m confident this is true, based on the last 150 or so years of historical data in the financial markets.

As you know, this doesn’t mean that the stock market will gain 7.5% each and every year. There will be years like 2001 and 2009 where the market falls 25%-30%. There will also be years where it gains 25% or more. The markets are volatile. But on average, the S&P 500 will see somewhere between 7.5% and 9% returns per year.

One of the statistical measures of volatility is called standard deviation, which is used to measure just how volatile a data set is around an average. Since 1926, the standard deviation of the S&P 500 is about 18.5%.

Now, the image below is something you’ve seen before. It’s a bell curve based on a normal distribution. The simple explanation of a a normal distribution is that the results occur randomly around the mean. In a normal distribution:

68.2% of the results will fall within one standard deviation of the mean
95.4% of the results will fall within two standard deviations of the mean
99.6% of the results will fall within three standard deviations of the mean
99.8% of the results will fall within four standard deviations of the mean

What does this mean for the S&P 500? If the S&P 500 is normally distributed and resembles a typical bell curve, annual returns will fall between:

-11% and 26.5% 68.2% of the time (7.5% – 18.5% & 7.5% + 18.5%)
-29.5% and 45% 95.4% of the time
-48% and 63.5% 99.6% of the time

I should note that many have argued the returns of the S&P 500 are not normally distributed, including William Egan and Nassim Nicholas Taleb. And for the most part I don’t disagree with them. This argument is beside the point of this post though, so for this discussion and the following examples we’ll assume a normal distribution fits the S&P 500 just fine.

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The 17 Biggest Retirement Mistakes

I’m guessing that over the years you’ve read at least 1000 posts, articles, and ebooks on what to do before you retire. Good retirement checklists are about a dime a dozen in the online world. And even though most of them contain great information, you probably don’t need to review the same to-do’s for the umpteenth time.

So in this post I’ll spare you from a list of regurgitated tips you’ve seen before. Instead, here’s a list of the 17 biggest retirement mistakes I see in my practice. If you can avoid these issues after you stop working, you’ll be in much better shape than most retirees.

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