Ask Money

Pay down student loan or wait for forgiveness

Chris Farrell Feb 23, 2011

Question: I recently graduated with my Masters Degree and am working as a librarian. I have some substantial student loan debt. I qualify for the Loan Forgiveness for Public Service program, whereby if I continue to pay monthly on my loan the balance will be forgiven after 10 years.

I’ve been considering making extra payments and trying to pay it off in 5-6 years instead of waiting. I’m wondering if I’m better off just paying the minimum and waiting for the loan to be forgiven in 10 years and investing the amount that I would have been using to pay off the loan early, or if I should pay extra on my student loan and get it paid off early. I should say that I do have some concerns that in 10 years somehow the program will have been discarded and my loan will not in fact be forgiven. I currently have all my student loans consolidated with Direct Loans and am paying 5.375% interest on the loan.

Any advice you can give me would be appreciated. Emily, Fenton, MI

Answer: It’s an intriguing question. From a financial calculation point of view, the answer partly depends on you setting up an automatic program so that you do invest the difference over the 10 year period. It also matters how well the investments do over that period of time with a minimum hurdle of beating a 5.375% rate of return.

However, from a financial flexibility point of view the sooner you get rid of the debt the better off you will be and the greater your freedom of choice.

What if 5 years from now you decide what you really want is to take a dream job in the private sector yet you’ve been managing your money under the assumption of meeting the loan forgiveness requirements? Of course, it isn’t a catastrophe for you to shift into a career that makes you ineligible for the program. You’ll still have accumulated a nice pot of savings.

But it’s this kind of scenario that leans me toward favoring financial flexibility. You’re in greater control of your financial and job destiny.

I do share your concern that the student loan public service forgiveness program won’t survive the budget cutting fervor of the next few years. Of course, that’s just a worry. It could continue. Who knows what Congress and the White House will do? I’d rather stay in control than rely on political whims and fashions.

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