Question: Should I structure my payments under the income-based program or not?

Are you weighed down by student debt?

Four years ago I lost my job, and decided to go back to school. I recently graduated with a BS in Geography, and ~$36,000 in student loan debt, between 3.4 and 8% interest. I have also recently been hired in a limited duration, 1-2 years, public sector job with strong potential to secure a permanent position, but no guarantees. There are many options for structuring my repayments. My intention is to work in the public sector, but given the recent budget history that may not end up being my final track. My question is, should I structure my payments under the income based programs, assuming I'll be able to write off the balance of my loans in 10 years as a public servant, or should I pay them off as soon as I can to avoid all the extra interest if that plan doesn't work out?

Response:

My bias is for you to get rid of the student loan debt on your own as fast as you can. Nevertheless, I would pick the income-based repayment plan option as you start your new job. It will keep your monthly payments relatively low, a financial safety net when you don’t know how long the contract will last and whether it will lead to a full-time permanent position.

The program you mention is the U.S. government will pay the remaining interest and principal on federally backed student loans for employees that have worked for the government for 10 years. You must be in good standing with your student loans and you had to have made 120 payments. The benefit extends to a lengthy list of public service jobs, including law enforcement, public defender, public health worker and early childhood education (such as Head Start). The goal of the program is to reassure young talent with lots of student loan debt that even if they earn a low income in a public sector and public service job it’s a practical choice.

However, there is no loan forgiveness if you make 118 payments in your public sector job and then leave for a private sector one. Borrowers who haven’t borrowed all that much and enjoy a relatively high income will do better focusing on paying off the loan. So, see how your job and income prospects evolve over the next year or two. I don’t know what your income will be, but running some quick numbers it appears that you’ll come out ahead getting rid of the loan as early as possible on your own.

But why decide now? Take the income-based repayment option, get your finances in good shape, gain some experience on the job and then make an informed decision.

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