Does debt really matter with IBR? Forum

[swc65]

I keep trying to figure out what happens to your loan payments under IBR if you become unemployed at some point? 15% of nothing is nothing.

Also, it seems like I've heard that if you can't get a job out of law school, then you will have to pay back your loans outside of IBR until you do find a job. Anyone know specifics around that?

This is why hardship deferrals exist. If you have no income you will file for a deferral and not have to make any payments. Interest will still accrue on unsubsidized loans, however.

[swc65]

I have heard many people talk about law school debt as crushing, or an unforgiving ball and chain that ties you to do biglaw, else you'd go bankrupt. But I get the impression many of these people who claim this are not considering the benefits of IBR.

If, under income based repayment, I am paying only 15% of my income, with the debt forgivable after 25 years or 10 years if you are in public interest, does debt really even matter? So what if I go into $200,000 in debt and only get a job that pays $60,000 per year? I'd only be paying 15% of my income? Hell, it would be 10% if Obama passes the bill.

I have a free ride offer to a t25 versus a 50% tuition (33% total COA) scholarship offer at a t-14 school. If I want to do public interest anyway isn't a HUGE advantage to ignore the debt and go to the better school to get the better job opportunities and national portability?

I would really like to hear people's thoughts on this because I am finding this to be a rather difficult part of my law school decision.

If your are doing PI and expect to have a low salary, I think the best thing is to consider the LRAP at each school. If the higher ranked school gives better job prospects and a better LRAP, it might more than make up for the difference in how much debt you incur at the higher ranked school.

[PoliticalJunkie]

IBR isn't just for PI jobs. If you have 300K of debt (college/law) and making 100K+, you may still qualify.

IBR is not income based, but based on your debt:income ratio.

[Interminable_Waiting]

There are so many ways to defer gov't loans/ use IBR/ use LRAP to minimize the financial hardship.

The only scenarios where debt becomes a crazy burden are:

1) You have a lot of private loans for some reason, and are not making a lot of money.
2) You have a lot of public loans, are working privately, and are not making a lot of money (for example shitlaw, or not working in law at all). Even this one isn't terrible, but you are basically taking a 12 to 15% (maybe soon 9% or 10%) pay cut for decades.

[swc65]

IBR isn't just for PI jobs. If you have 300K of debt (college/law) and making 100K+, you may still qualify.

IBR is not income based, but based on your debt:income ratio.

This is true. However, I have noticed that other payment plans give you a lower monthly payment than IBR at higher income levels. Which makes sense given that the % of income you pay rises as your income rises with IBR (not the nominal % but the total % since a chunk of your income is deducted- I think 150% of the poverty line based on family size).

[nol607]

Great thread. Good arguments being made.

[ggocat]

I keep trying to figure out what happens to your loan payments under IBR if you become unemployed at some point? 15% of nothing is nothing.

Also, it seems like I've heard that if you can't get a job out of law school, then you will have to pay back your loans outside of IBR until you do find a job. Anyone know specifics around that?

Defer or forbear the loan for up to three years.
http://lmgtfy.com/?q=student+loans+unemployed&l=1

[shepdawg]

Does IBR work for those who work in JAG?

[legalease9]

It is true that with Federal Loans you will unlikely go bankrupt or live on the streets, (in fact you aren't allowed to bankrupt out of student loans). There are lots of deferment/forgiveness options, discussed above. However, the increasing debt will become a problem if you want to buy anything on credit (car, house, etc.) So that is an important thing to consider especially if you are going the 25 year route (non public service forgiveness).

[beesknees]

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[fewds320]

The way I've heard it, it's not "impossible" to discharge student loan debt with bankruptcy. It's just not.. the norm. Or very likely. I believe you have to prove you've made "good faith" attempts to repay the debt, and it's simply impossible for you to do so. I think I should specialize in bankruptcy law, then represent myself in my own chapter 7 hearing to discharge my own law school debt.

[cavebat2000]

Debt matters, IBR or not. I'm not a doomsday person saying that the program will be cut, but its still a possibility worth considering. At the end of the day, you are obligated to pay the debt that you took out.

And the whole thing about federal loans and bankruptcy is that you cannot discharge education debt with bankruptcy... meaning that even if you file chapter 11 and all of your other debt is cleared, you will always owe student loans. Meaning that if you were irresponsible and took out car loans, home loans, and went on credit card sprees, you'd be less screwed than taking out education debt because you can never ever have it written off.

I think IBR is a good program to have as a fall back option for those who find themselves in a tough situation after graduation. But seriously, paying 10% of your income for 25 years (the necessary time to have non-PI qualifying jobs to have it forgiven) is A LOT! Will it keep your head above water? Yes. But your debt-to-income ratio will be awful. It will affect your credit worthiness and, subsequently, your future ability to finance a car, a home, whatever you might want to enjoy out of your salary.
I guess, I just wanted to put my $.02 in to say that we shouldn't be looking at IBR as our golden ticket to borrow as much money as we can because the debt will be exploding until its forgiven. Its a decent safety net, but it shouldn't be the gameplan!

Some facts (http://www.ibrinfo.org/faq.vp.html#_How_does_IBR_)

"Will IBR hurt my credit rating?

No. The only information lenders provide to FICO, the company that determines your credit score, is the status of your payments. That is, if you are paying on time, are past due, or are in default. The Department of Education will work with the consumer reporting organizations to ensure that any amounts of debt forgiven under IBR or PSLF are not viewed as negative reporting codes."

Also, its not 10% of your income... or actually 15% of your income...

"Specifically, the maximum annual amount you are required to repay under IBR during any period when you have a “partial financial hardship” is 15 percent of 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. This annual repayment amount is then divided by 12 to determine your monthly IBR repayment amount.

For example, 150 percent of the 2009 HHS poverty guideline amount for a family of three is $27,465. If your AGI was $40,000, the difference would be $12,535. Fifteen percent of that is $1,880; dividing this amount by 12 results in a monthly IBR payment amount of $157."

Lots of other good info on that website, as as the Department of Ed website (http://studentaid.ed.gov/students/attac ... _FINAL.pdf)

[cavebat2000]

Relying on IBR and LRAP for PI is fine.

But replying on IBR for working in shit law is a horrible plan. You'll be paying 15% for 25 years. But during that 25 years interests compounds and your 150K loan turns into 400K. Lets say 15 years down the road you and your wife start making good cash, you'll actually have to pay that 400K back.

Do not rely on IBR to pay off your loans for private sector work. Its really a last resort type of thing.

Right.. but is anyone graduating from a t-14 really gonna do shitlaw for 25 years? If so, that sounds like pure stupidity to me. If you plan on doing shitlaw GTFO out of t-14.

[vanwinkle]

Relying on IBR and LRAP for PI is fine.

But replying on IBR for working in shit law is a horrible plan. You'll be paying 15% for 25 years. But during that 25 years interests compounds and your 150K loan turns into 400K. Lets say 15 years down the road you and your wife start making good cash, you'll actually have to pay that 400K back.

Do not rely on IBR to pay off your loans for private sector work. Its really a last resort type of thing.

With $180K in debt at 8.5% and a $160K/yr job, under IBR your debt would be completely eliminated in 11.4 years according to an online IBR calculator. The thing is that the IBR-calculated repayment amount is still really high when you're making law firm money (you'd be repaying about $1,800/mo under IBR) so at that point you'd actually still be paying off more than you accrue in interest each month. That doesn't even take into consideration the fact that your income should keep going up for several years.

Even if you get booted out after five to seven years, by then you've made an enormous reduction in your debt load and the remaining IBR payments can continue to work down your amount owed instead of just repaying interest.

It's all in how you work it.

[jh60405]

There are a few things that have not come up that I think everyone needs to understand

First: The 15% is 15% of your income over 150% of the poverty line (about $16,000).

Second: The forgivness comes at the end of 10 years (or 25 depending on the route you go). Your not on a standard 10 or 25 year payment plan with the government kicking in the $amount you couldn't pay. Instead you pay whatever amount the formula says you pay and at the end of 10 years its forgiven. What that means for public interest folk is that if you want to leave PI after 7 years you'll likely be stuck with more debt than you started (the amount you pay each year may not even cover the interest on the loans). So that's the catch. For the 25 year plan its highly likely that you'll make enough over time that you'll pay it all off anyways and that no government forgivness will be necessary. The 25 year plan is mainly just a good stop-gap solution for those who get stuck in a really low paying job for a while.

Third: Be sure to check into your schools LRAP plan's. Most (even within the T14) are relatively worthless. Yale's is incredible. Harvard, Stanford, Columbia, and NYU's are good. Michigan's is ok. UVA and Penn's aren't very good. Chicago, Northwestern, Duke, Cornell, G'town, and so on are not worth much at all. That's jut my oppinion. Ask for the full info on whatever school you look at.

[vanwinkle]

What that means for public interest folk is that if you want to leave PI after 7 years you'll likely be stuck with more debt than you started (the amount you pay each year may not even cover the interest on the loans).

This is technically true, but not a historically normal move. There are typically two scenarios for people moving in and out of PI:

1) Someone starts out at a law firm to pay off/pay down their student loans for a few years and then goes to PI.

2) Someone works in PI for several years and builds litigation experience, and then gets hired by a law firm as a partner or a high-level associate that makes significantly more than the starting $160K/yr pay that fresh grads are offered.

#2 has historically been a lot less common (people who start out in PI work typically do so because they're dedicated to the PI mission). However, that's a pre-ITE assumption based on broad availability of law firm jobs, which is no longer true. People are probably going to PI work now because it's the only paying work they can find upon graduation, so we may start seeing more people trying to lateral to law firms as they pick up hiring again.

The truth is, though, that nobody plans on starting out in PI and then moving to private practice after just a couple years. For those who do make the #2 move, they're usually doing so to move up very significantly in income. A fifth-year associate, for example, typically makes $230K/year plus bonuses. That kind of income would allow them to service the debt they've deferred and the extra interest that's accrued. Even if their total debt has climbed over the $200K mark by then they can still defeat that in 4 years or so and have plenty of income to spare.

[beef wellington]

IBR isn't just for PI jobs. If you have 300K of debt (college/law) and making 100K+, you may still qualify.

IBR is not income based, but based on your debt:income ratio.

IBR is indeed income-based. Hence the name income-based repayment. Anyone can do IBR regardless of debt or income. What you may be trying to get at is that your minimum payment under IBR will never exceed what your minimum payment would be under a standard repayment plan.

[vanwinkle]

Does IBR work for those who work in JAG?

This document from the Army says that it is available to those who work in JAG:

http://www.jag.navy.mil/documents/Caree ... ograms.pdf

[09042014]

Relying on IBR and LRAP for PI is fine.

But replying on IBR for working in shit law is a horrible plan. You'll be paying 15% for 25 years. But during that 25 years interests compounds and your 150K loan turns into 400K. Lets say 15 years down the road you and your wife start making good cash, you'll actually have to pay that 400K back.

Do not rely on IBR to pay off your loans for private sector work. Its really a last resort type of thing.

With $180K in debt at 8.5% and a $160K/yr job, under IBR your debt would be completely eliminated in 11.4 years according to an online IBR calculator. The thing is that the IBR-calculated repayment amount is still really high when you're making law firm money (you'd be repaying about $1,800/mo under IBR) so at that point you'd actually still be paying off more than you accrue in interest each month. That doesn't even take into consideration the fact that your income should keep going up for several years.

Even if you get booted out after five to seven years, by then you've made an enormous reduction in your debt load and the remaining IBR payments can continue to work down your amount owed instead of just repaying interest.

It's all in how you work it.

You are talking best case, I'm talking about what happens to the 30% of the people in your class who don't make big law, clerkships, or a government job. They have 200K in debt and a 50K a year job. Those people are going to compound some serious debt.

[BaiAilian2013]

What happens to IBR if you get married? I know some schools factor your spouse's income into LRAP.

[Anonymous Loser]

And the whole thing about federal loans and bankruptcy is that you cannot discharge education debt with bankruptcy... meaning that even if you file chapter 11 and all of your other debt is cleared, you will always owe student loans. Meaning that if you were irresponsible and took out car loans, home loans, and went on credit card sprees, you'd be less screwed than taking out education debt because you can never ever have it written off.

I'm not sure why this myth that student loan debt is not dischargeable in bankruptcy is so persistent. I've long since learned that TLS posters will not bother to make even the most cursory investigation to determine if what they are saying is accurate, but for God's sake, just this week the Supreme Court ruled in favor of an individual seeking to discharge student loan debt through bankruptcy. See United Student Aid Funds, Inc. v. Espinosa, No. 08–1134 (Mar. 23, 2010), available at http://www.supremecourt.gov/opinions/09pdf/08-1134.pdf

[swc65]

And the whole thing about federal loans and bankruptcy is that you cannot discharge education debt with bankruptcy... meaning that even if you file chapter 11 and all of your other debt is cleared, you will always owe student loans. Meaning that if you were irresponsible and took out car loans, home loans, and went on credit card sprees, you'd be less screwed than taking out education debt because you can never ever have it written off.

I'm not sure why this myth that student loan debt is not dischargeable in bankruptcy is so persistent. I've long since learned that TLS posters will not bother to make even the most cursory investigation to determine if what they are saying is accurate, but for God's sake, just this week the Supreme Court ruled in favor of an individual seeking to discharge student loan debt through bankruptcy. See United Student Aid Funds, Inc. v. Espinosa, No. 08–1134 (Mar. 23, 2010), available at http://www.supremecourt.gov/opinions/09pdf/08-1134.pdf

Have you read this case? It is an extremely narrow ruling. It is mostly a ruling about a technicality. The previous court ruled and the Dept of Ed agreed (read did not object properly) that the student's INTEREST would be discharged in bankruptcy if the student paid the the principal. The student paid the principal and then the Dept. of Ed. tried to go after him for the interest again because there had never been an undue hardship ruling (something that is generally required to discharge student loans in bankruptcy). The Court ruled that the Dept. of Ed. could not go back to get the interest after the agreement was made. Anyway, this is not a case that makes it significantly easier to discharge student loans in bankruptcy court. These things are in the first paragraph of the ruling.

Also, student loans are not IMPOSSIBLE to discharge in bankruptcy. They are just more difficult to discharge than many other types of debt.

[FeuerFrei]

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[vanwinkle]

I'm not sure why this myth that student loan debt is not dischargeable in bankruptcy is so persistent. I've long since learned that TLS posters will not bother to make even the most cursory investigation to determine if what they are saying is accurate, but for God's sake, just this week the Supreme Court ruled in favor of an individual seeking to discharge student loan debt through bankruptcy. See United Student Aid Funds, Inc. v. Espinosa, No. 08–1134 (Mar. 23, 2010), available at http://www.supremecourt.gov/opinions/09pdf/08-1134.pdf

Have you read this case? It is an extremely narrow ruling. It is mostly a ruling about a technicality. The previous court ruled and the Dept of Ed agreed (read did not object properly) that the student's INTEREST would be discharged in bankruptcy if the student paid the the principal. The student paid the principal and then the Dept. of Ed. tried to go after him for the interest again because there had never been an undue hardship ruling (something that is generally required to discharge student loans in bankruptcy). The Court ruled that the Dept. of Ed. could not go back to get the interest after the agreement was made. Anyway, this is not a case that makes it significantly easier to discharge student loans in bankruptcy court. These things are in the first paragraph of the ruling.

Also, student loans are not IMPOSSIBLE to discharge in bankruptcy. They are just more difficult to discharge than many other types of debt.

All of this is correct. My first LRW assignment involved a hypo of a formerly graduated law student who was working a $40K/yr PI job and couldn't service her student loans anymore. It was pretty sobering research to discover just how difficult the "undue hardship" burden really is. It's possible, it's just really freaking hard and not something you should ever anticipate doing because courts frown on it as much as they can. The "undue hardship" burden applies a three-part test that essentially look at past, present, and potential future loan repayment and try to determine whether you've really tried as hard as you can to repay these loans and whether you have a shot in the future of repaying them.

They've even made rulings that the potential to repay them is enough to prevent discharge. In one case a man got a graduate degree and then became a pastor and only made $20K/yr or so, and the court ruled that with his degree he could be making a lot more money, and since it's his personal choice to pursue a low-income career he has no right to discharge his student loans. That's how strict they are, they really dig into your life and require a showing you can't possibly repay those loans before they'll discharge them.

This is the reason why the Espinosa ruling is so limited. The majority wanted to find a way to avoid penalizing this one individual after he kept his side of an agreement with the DoE, but without lifting or softening the "undue hardship" requirement. They made damn sure with that case that it's not any easier now for anyone to discharge student loan debt than it was except in that somewhat unique circumstance.

[vanwinkle]

You are talking best case, I'm talking about what happens to the 30% of the people in your class who don't make big law, clerkships, or a government job. They have 200K in debt and a 50K a year job. Those people are going to compound some serious debt.

A 50K/yr job is most likely going to be at a place that qualifies for the PI program. They can just ride out the ten years and discharge their debt, worst case scenario.

Also, fun fact about IBR: If your repayment amount is not large enough to cover accruing interest, then interest accrues but does not compound. You keep piling up 8.5% on what you owe, but not 8.5% on that 8.5%. That will greatly lessen the impact of interest over time. Source: http://www.ibrinfo.org/faq.vp.html#_How_does_IBR_

I'm sure this will have an effect on your analysis since it removes the exponential nature of compounding over time.