Should you pay off student loans as quickly as possible or enroll in a student loan forgiveness plan?
Note: This refers to student loan forgiveness in the US, information can be found on the relevant website
As the OP, I will argue first that it is better to enroll in the student loan forgiveness plan, specifically the Pay-as-you-earn (PAYE) plan. This directly contradicts traditional wisdom advising. However, I plan to do so because my charts suggest that it will allow me to reach ERE sooner.
Information on this plan:
- Under the PAYE Plan, your monthly payment is 10 percent of your discretionary income.
- your discretionary income is the difference between your AGI and 150 percent of the U.S. Department of Health and Human Services (HHS) Poverty Guideline amount for your family size and state
- Any loan balance that remains after 20 years will be forgiven
- Under current law the IRS considers loan amounts forgiven under an income-driven repayment plan to be taxable income.
- Interest is not capitalized during the payment period
edit: The graphs represent my taxable account starting balance, return rate, monthly contribution (or withdrawal), and ending balance
Scenario 1: Wait for forgiveness:
Scenario 2:Pay off and then save:
My loan balance is -$50,100.00 @ 6.7% interest.
My current monthly payments are $0/month, and I have 16 more years of this. My income is anywhere from $17,000-$23,000/year with 65-90% savings rate. If payments continue at this level, I estimate owing some $30,000 in income taxes for the loan forgiveness year.
I feel my logic is sound, so I'm mostly worried that I may be missing something, or making an inaccurate assumption. My financial knowledge is nothing substantial, so I ask you all for your own analysis as well as your own perspective.