Managing Income-Driven Repayments PSLF Booster #3

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Managing Income-Driven Repayments PSLF Booster #3

Another easy way to potentially boost PSLF benefits for married, dual-income households is by analyzing the tax and student loan implications of filing separately vs. jointly. Filing separately often brings negative tax implications and positive PSLF benefits. The key is the NET benefit of this ple: a couple might pay $1,000 in additional income taxes by filing separately, however, by doing this, they reduce income-driven payments by $6,000 in the following year. This reduced payment results in pure savings when going for PSLF. Therefore, their net benefit from filing separately is $5,000. You must perform this analysis every year before filing taxes to determine how it shakes out.

It’s surprisingly common to see that filing separately provides much more net value when considering both taxes and PSLF. You can play with the numbers using the Federal Student Aid’s repayment estimator it allows you to input filing separately or filing jointly. At a minimum, it’s well worth your time or the cost of paying for help to run these numbers each year!

To further make a point, let’s say instead that this person used a credit card to pay the IBR payments for those 6 months

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Understanding how they verify income is KEY. You are required to verify income annually under income-driven repayment. However, you can also choose to re-certify income whenever you’d like (typically if your income decreases). Let’s say, for instance, that your income ount. Most people would wait until their annual request to re-certify income, but if you want to maximize PSLF, you should be proactively requesting that income be re-certified ASAP. In most cases, you can use AGI to verify income. Examples of exceptions would be if your income changed significantly from the prior year OR if you haven’t filed taxes for the prior two years. When you are unable to use AGI, you must verify current income another way.

This credit card charges 30% interest this may be over the legal limit but I’ll assume it isn’t

Timing is also KEY as you can control (to some extent) when you apply for income-driven payments. Typically, for the medical professional, filing for repayment ASAP is a good strategy because your income stair-steps upward. For example, the medical school graduate may want to file for income-driven repayment before they officially start earning their residency income so they can claim no income (this strategy is becoming harder than it used to be). Waiting too long to file could force you into higher monthly payments if your income increases and/or you file a new tax return. Maybe you are getting married to someone with a much higher income in August it’s probably a good idea to file for income-driven repayment in July before you are officially married.

Avoid forbearance and missed payments like the plague. Knocking out your 120 payments to qualify for PSLF asap is key. You can only qualify for 1 payment per month if you miss a month you can never get it back. The lower your payment each month, the more impactful PSLF will ultimately be for you. People usually file for Forbearance during one of the best possible times for maximizing PSLF (when income is really low). Often, they don’t realize they can re-certify their new lower guaranteed approval payday loans Avon Lake income or that payments would be lower under PAYE.

Let’s say someone is paying $400/mo during medical residency under IBR. They cannot handle the payments and choose forbearance for 6 months. Fast-forward 7 years and they are in practice finishing up the last year of PSLF qualification. Their income is much higher so they are paying the maximum payments at $3,000/mo. Because of their decision to forbear a total of $2,400 in payments, they now must pay an additional $18,000 in payments to qualify for PSLF.

(DON’T EVER DO THIS I AM SIMPLY MAKING A POINT OF HOW IMPACTFUL THIS IS). This unpaid credit card balance with interest over the 7 year period ultimately ends up being $17,972 at the beginning of the 84th month.

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