Will IBR Really Be A Safety Net For Those Borrowing 100K+?

[bgdddymtty]

From here:

Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

So. If you do end up in a position later in your life where they're forgiving an amount of debt that is massively more than what you have, it *won't* all become taxable. That does not, however, preclude the possibility of having to mortgage/sell major assets in order to become more liquid to cover your taxes.

Just FYI, for anybody who wasn't aware of that provision of the debt forgiveness tax rules.

(This is not tax advice for your personal situation, I am not your tax preparer, etc, etc, etc, etc.)

Um, this isn't about IBR at all. It's about mortgage debt cancellation. The article also specifically defines debt cancellation as involving commercial lenders.

Does anyone have an official (federal) link that says that there are tax consequences to IBR?

[ScaredWorkedBored]

It's called the US Tax Code. The way said code works is that unless there is an explicit exception that tells you otherwise to the general rule, something is considered income. Discharge of indebtedness is income unless they tell you otherwise. You pay tax on income. Like all other income, it's also earned when you get it - meaning yeah, you get $100,000 in debt written off in one year, ouch.

See 61(a)(12).

http://www.law.cornell.edu/uscode/uscod ... -000-.html

IBR is simply not designed to have you not pay your large loans while working in the private sector and then get them all written off (which seems to be what people want to use it for, as opposed to something that helps them pay until they have a job where they can make real progress). The lifestyle hit is severe and there's currently no exception like their is in the public interest forgiveness.

[jdubb990]

What is this IBR acronym you people are talking about? Should I already know about this?

[bgdddymtty]

What is this IBR acronym you people are talking about? Should I already know about this?

Income-Based Repayment (of federal student loans). Learn more here.

[Brassica7]

bgddymtty, I am no expert, but my understanding of IBR is that if you have a private sector job, you will be taxed on he amount of loans forgiven after 25 years as though that were income for that year. So, I believe that under your calculation for an average income of $80,000, that family would be taxed as though they made an extra ~$260,000 that year. Paying whatever the tax bill is on $340,000 when you only have $80,000 income would be hard. Although, as someone said earlier, it could be done with careful saving.

[qualster]

bgddymtty, I am no expert, but my understanding of IBR is that if you have a private sector job, you will be taxed on he amount of loans forgiven after 25 years as though that were income for that year. So, I believe that under your calculation for an average income of $80,000, that family would be taxed as though they made an extra ~$260,000 that year. Paying whatever the tax bill is on $340,000 when you only have $80,000 income would be hard. Although, as someone said earlier, it could be done with careful saving.

So the total tax bill that year would be like 80K or something? That's not that bad as long as you've saved some over the course of 25 years.

[bgdddymtty]

bgddymtty, I am no expert, but my understanding of IBR is that if you have a private sector job, you will be taxed on he amount of loans forgiven after 25 years as though that were income for that year. So, I believe that under your calculation for an average income of $80,000, that family would be taxed as though they made an extra ~$260,000 that year. Paying whatever the tax bill is on $340,000 when you only have $80,000 income would be hard. Although, as someone said earlier, it could be done with careful saving.

Yeah, that certainly is an issue, and anyone who thinks he might be on IBR for the full 25 years ought to save for it. In my example, even if one were to have the entire debt forgiven and be taxed on that amount at 35%, it would take an extra payment of about $250/month at 3% interest to have that amount on hand at the end of 25 years. Not peanuts, but not break-the-bank kind of stuff either.

Let me clarify my position: IBR, even with tax consequences, can be a really good deal for those with exorbitant amounts of school debt, such as my $325 example (or, if you prefer, my actual situation ). For most law school students, though, it simply delays their days of reckoning. If you're looking for a sure way out of school debt, the public sector/non-profit IBR option is best, but, again, for the amount of debt most students will accrue, if you have the choice between decent private work and working for peanuts in a public service job, you'll give up far more in salary by going the public route than you'll gain from IBR.

[sumus romani]

I've also been running some numbers on IBR. It isn't really good for those with kids. Under the plan, it would be very hard to save both for (1) college for, say, 3 kids, and (2) retirement at the same time. A lot of employers are cutting back on the money they put up or match for retirement, making the employees put up their own money. To be sure, this is a general problem with the middle class in America today, and not specific to IBR, but it is something that people need to consider.

The appropriate question here is, "As opposed to what?" As opposed to the financial consequences of paying back the same amount of debt under the traditional 10-year plan? As opposed to the financial position (both debt and income) one might reasonably expect to be in accepting a scholarship to a lower-ranked school rather than paying sticker and needing IBR? As opposed to skipping law school altogether?

My situation is somewhat unique because I am attending law school later in life than most and therefore already have a wife and two kids (so I will have to borrow more than most other students), but it illustrates an example of exactly the type of situation for which IBR was created. I'll do it with three different income levels. I won't bother with a low-income example, since my school's loan forgiveness plan covers all IBR payments for incomes up to $55K and then phases out completely at $75K. I'll also only assume private sector work, since I think everyone here is in agreement that the public sector/non-profit IBR program is a pretty sweet deal. I'll assume no more kids, but remember that the IBR payment goes down with each additional family member (though not by much). Finally, I'll assume a modest 3% inflation rate, although any higher rate would be even more beneficial to the borrower on IBR.

For all examples:
Starting debt, including undergrad and interest accrued while in law school: $325,000
Traditional 10-year payment: $3,740.11/month
Total (discounted at 3%) amount repaid: $387,332.35

Example 1:
Average income: $80,000
IBR payment: $585
Total (discounted at 3%) amount repaid: $123,362.73

Example 2:
Average income: $120,000
IBR payment: $1085
Total (discounted at 3%) amount repaid: $228,800.95

Example 3:
Average income: $160,000
IBR payment: $1585
Total (discounted at 3%) amount repaid: $334,239.18

IBR not only makes a potentially onerous monthly payment into a much more manageable one, it also has the potential to decrease the real overall cost of post-secondary education. (Of course, the education wouldn't be nearly as expensive as it is if not for all of these government education subsidies, but I digress.) For me, that means eliminating the "BigLaw or bust" pressure that a lot of law students feel. And that, as Martha would say, is a good thing.

I didn't run my IBR figures with an amount even in the ballpark of 325k. I can see how IBR is good for someone with such a high debt load and basically no other options. Basically, what you are talking about is someone who owes $44,880 a year on the 10-year plan--an amount that would be very hard to pay back, even starting single at $160,000/yr, much less with a family.

But I still don't see how those in example 1 will be able to help pay for their kids college and save for retirement at the same time. $7000 is a lot of money to pay each year on 80k with a family and taxes. Yet example 1 is the likely outcome for most law grads (avg. 80k over their first 25 yrs after law school--e.g. start at 0k or 35k and work up).

[bgdddymtty]

But I still don't see how those in example 1 will be able to help pay for their kids college and save for retirement at the same time. $7000 is a lot of money to pay each year on 80k with a family and taxes. Yet example 1 is the likely outcome for most law grads (avg. 80k over their first 25 yrs after law school--e.g. start at 0k or 35k and work up).

This is true, but it's certainly no worse than the position in which most Americans find themselves. An effective income of $73K/year will probably still be above the national household median 10-15 years from now. Most of those people aren't lawyers, of course, but still...

Going back to our original discussion, someone facing such a prospect should probably think long and hard about whether he can support his family better, and enjoy his work more, going down this or another career path.

[cavebat2000]

What are the realities of IBR and what potential problems are people not taking into consideration?

check out financialaid.gov and read for yourself. Some paranoid people think the gov is gonna back out of the deal. Many others disagree. Many think it's a great deal and that it is a way for those without huge family privilege to finally be able to afford law school.

Best thing to do is figure it out for yourself.

[qualster]

What are the realities of IBR and what potential problems are people not taking into consideration?

check out financialaid.gov and read for yourself. Some paranoid people think the gov is gonna back out of the deal. Many others disagree. Many think it's a great deal and that it is a way for those without huge family privilege to finally be able to afford law school.

Best thing to do is figure it out for yourself.

Oh, OK.

[chicago520]

It's called the US Tax Code. The way said code works is that unless there is an explicit exception that tells you otherwise to the general rule, something is considered income. Discharge of indebtedness is income unless they tell you otherwise. You pay tax on income. Like all other income, it's also earned when you get it - meaning yeah, you get $100,000 in debt written off in one year, ouch.

See 61(a)(12).

http://www.law.cornell.edu/uscode/uscod ... -000-.html

IBR is simply not designed to have you not pay your large loans while working in the private sector and then get them all written off (which seems to be what people want to use it for, as opposed to something that helps them pay until they have a job where they can make real progress). The lifestyle hit is severe and there's currently no exception like their is in the public interest forgiveness.

LOL someone didn't apy attention in Tax class. No. this is wrong. See 108(f). there is an exception that makes the forgiveness excludeable. You will NEVER pay taxes on this amount.

edit: only applies to the 10 year PI forgiveness route.

[ScaredWorkedBored]

It's called the US Tax Code. The way said code works is that unless there is an explicit exception that tells you otherwise to the general rule, something is considered income. Discharge of indebtedness is income unless they tell you otherwise. You pay tax on income. Like all other income, it's also earned when you get it - meaning yeah, you get $100,000 in debt written off in one year, ouch.

See 61(a)(12).

http://www.law.cornell.edu/uscode/uscod ... -000-.html

IBR is simply not designed to have you not pay your large loans while working in the private sector and then get them all written off (which seems to be what people want to use it for, as opposed to something that helps them pay until they have a job where they can make real progress). The lifestyle hit is severe and there's currently no exception like their is in the public interest forgiveness.

LOL someone didn't apy attention in Tax class. No. this is wrong. See 108(f). there is an exception that makes the forgiveness excludeable. You will NEVER pay taxes on this amount.

You're awfully illiterate for someone who wants to troll a tax thread and claim that you are right while the actual IBR FAQ's put out by the government and legislation being proposed by Congress (namely H.R. 2492) are wrong:

--LinkRemoved--

(f) (1) In general
In the case of an individual, gross income does not include any
amount which (but for this subsection) would be includible in
gross income by reason of the discharge (in whole or in part) of
any student loan if such discharge was pursuant to a provision of
such loan under which all or part of the indebtedness of the
individual would be discharged if the individual worked for a
certain period of time in certain professions for any of a broad
class of employers.

Not reading second half of provision in exclusion from gross income section = PROFIT. Now, since you did so well in tax class despite your lack of understanding that you have to read every word in a tax provision, perhaps you can explain to me why in the world Congress thinks that http://www.govtrack.us/congress/billtext.xpd?bill=h111-2492 is a necessary provision. Since you're so smart.

[Oban]

But I still don't see how those in example 1 will be able to help pay for their kids college and save for retirement at the same time. $7000 is a lot of money to pay each year on 80k with a family and taxes. Yet example 1 is the likely outcome for most law grads (avg. 80k over their first 25 yrs after law school--e.g. start at 0k or 35k and work up).

This is true, but it's certainly no worse than the position in which most Americans find themselves. An effective income of $73K/year will probably still be above the national household median 10-15 years from now. Most of those people aren't lawyers, of course, but still...

Going back to our original discussion, someone facing such a prospect should probably think long and hard about whether he can support his family better, and enjoy his work more, going down this or another career path.

The answer is you don't have kids if you don't think you can afford it. Anyway most people who have kids will make less combined family income than the average lawyer.

[chicago520]

It's called the US Tax Code. The way said code works is that unless there is an explicit exception that tells you otherwise to the general rule, something is considered income. Discharge of indebtedness is income unless they tell you otherwise. You pay tax on income. Like all other income, it's also earned when you get it - meaning yeah, you get $100,000 in debt written off in one year, ouch.

See 61(a)(12).

http://www.law.cornell.edu/uscode/uscod ... -000-.html

IBR is simply not designed to have you not pay your large loans while working in the private sector and then get them all written off (which seems to be what people want to use it for, as opposed to something that helps them pay until they have a job where they can make real progress). The lifestyle hit is severe and there's currently no exception like their is in the public interest forgiveness.

LOL someone didn't apy attention in Tax class. No. this is wrong. See 108(f). there is an exception that makes the forgiveness excludeable. You will NEVER pay taxes on this amount.

You're awfully illiterate for someone who wants to troll a tax thread and claim that you are right while the actual IBR FAQ's put out by the government and legislation being proposed by Congress (namely H.R. 2492) are wrong:

--LinkRemoved--

(f) (1) In general
In the case of an individual, gross income does not include any
amount which (but for this subsection) would be includible in
gross income by reason of the discharge (in whole or in part) of
any student loan if such discharge was pursuant to a provision of
such loan under which all or part of the indebtedness of the
individual would be discharged if the individual worked for a
certain period of time in certain professions for any of a broad
class of employers.

Not reading second half of provision in exclusion from gross income section = PROFIT. Now, since you did so well in tax class despite your lack of understanding that you have to read every word in a tax provision, perhaps you can explain to me why in the world Congress thinks that http://www.govtrack.us/congress/billtext.xpd?bill=h111-2492 is a necessary provision. Since you're so smart.

jesus man relax. You didn't see my edit. And I didn't read the last sentence of your post. lol. definitely a miscommunication, we were getting at the same point. but either way, its TLS....so...yeah