Take higher debt load for greater IBR-eligible income? Forum

[webbylu87]

I've just been looking at repayment plans and I noticed something interesting regarding IBR. I'm wondering if it means taking out a higher debt level, although counter-intuitive, may allow you to earn a higher income while still qualifying for lower payments.

According to the Federal Student Aid website:

To qualify for IBR, you must have a "partial financial hardship." You have a partial financial hardship if the monthly amount you would be required to pay on your IBR-eligible loans under a Standard Repayment plan with a 10-year repayment period (based on the amount you owed on those loans when they initially entered repayment) is higher than the monthly amount you would be required to pay under IBR.

Let's take a debt scenario between School A and School B. (For the purpose of calculating IBR payments, I am considering an unmarried individual, not in Hawaii or Alaska, with no dependents. I am also using this calculator: --LinkRemoved--)

School A
Total IBR-eligible loan debt:$111,456
Monthly payment based on 10-year plan: $1,282
Highest yearly income (approx.) which would still be eligible for IBR based on the "partial financial hardship" requirement: $130,000

School B
Total IBR-eligible loan debt: $150,336
Monthly payment based on 10-year plan: $1,730
Highest yearly income (approx.) which would still be eligible for IBR based on the "partial financial hardship" requirement: $150,000

The higher debt from School B would make you eligible for IBR up to a higher yearly income threshold than the lower debt from School A. (Bear in mind that your total debt only determines at what income level you no longer qualify for IBR. Your monthly payment is determined based on your yearly income, not debt level. Meaning if you earn $35k/year coming out with either $123k in debt or $150k in debt, your payment would only be $234 either way.)

Does this negate any negative impact of choosing a school which requires higher debt? Isn't this especially the case if you choose to use public service loan forgiveness? Granted, the chances that you would earn more than $150k, let alone $130k, doing PI/gov't work is slim to none but nonetheless. And even if you don't go the PI/gov't route, wouldn't the higher threshold be a positive given that after 25 years your federal loans are forgiven?


Edit: I'm awful with financial stuff (but clearly I'm trying) so feel free to tell me this is incorrect.

[scribelaw]

IBR is a great backstop, but if you bank on that, you could be paying loans for 25 years. This would not only get really old, it would deprive you of signifigant lifetime wealth, as you'd likely be paying loans rather than saving more into your 50s.

I would try to pick a school where you're likely to have an income and debt load that would let you pay it off in 10 years without IBR.

[webbylu87]

IBR is a great backstop, but if you bank on that, you could be paying loans for 25 years. This would not only get really old, it would deprive you of signifigant lifetime wealth, as you'd likely be paying loans rather than saving more into your 50s.

I would try to pick a school where you're likely to have an income and debt load that would let you pay it off in 10 years without IBR.

Very true. Unfortunately my options both present significant debt and while I would certainly love to pay them off within 10 years (provided I get a high enough paying job) that may not be possible. At the moment I am looking to go the loan forgiveness route but we'll see. In the end I'll probably go with the most affordable option I just noticed this and it seemed odd as I was doing calculations.

[scribelaw]

IBR is a great backstop, but if you bank on that, you could be paying loans for 25 years. This would not only get really old, it would deprive you of signifigant lifetime wealth, as you'd likely be paying loans rather than saving more into your 50s.

I would try to pick a school where you're likely to have an income and debt load that would let you pay it off in 10 years without IBR.

Very true. Unfortunately my options both present significant debt and while I would certainly love to pay them off within 10 years (provided I get a high enough paying job) that may not be possible. At the moment I am looking to go the loan forgiveness route but we'll see. In the end I'll probably go with the most affordable option I just noticed this and it seemed odd as I was doing calculations.

Good luck. I think the best thing is trying to parse the employment data -- such as it is -- and use a conservative estimate on what you might make at each school, backing out taxes, and seeing how much debt load is doable. But again, I wouldn't go to a school where the debt load is likely to exceed your ability to pay, just based on IBR. That program will keep you from drowning, but it's still chaining you to a fairly high level of debt to income.

[ozarkhack]

Sure. But just because you're eligible doesn't mean it always makes sense to use IBR. And it wouldn't make a bit of sense if you're making $100K-$150K.

IBR scales with your income. If you're earning near the max, the iBR plan is gonna look mighty similar to the non-IBR route.

In your $150K debt/pay scenario, the standard 10-year payment is only $60/month more costly than the IBR option. That'd just be silly. And expensive: $7,200 over 10 years, not including the interest you wouldn't be paying off so you instead could go out to eat a couple of more times every month.

(Also: I didn't get the same results as you w/the $111,456 debt: Calculator said wouldn't qualify w/$130K salary.)