What's the catch in Income Based Repayment?

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niederbomb
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What's the catch in Income Based Repayment?

Postby niederbomb » Thu Apr 28, 2011 10:51 am

Just got a financial aid package from a T13 schools and was reading up on financing options.

If a student strikes out at OCI and gets a private sector job paying $50,000/year, it seems IBR would make the payments manageable so long as private loans were not involved. Why is everyone on this website so debt averse even for T13 schools?

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fathergoose
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Re: What's the catch in Income Based Repayment?

Postby fathergoose » Thu Apr 28, 2011 10:58 am

As I understand it, the interest keeps building and when the loans are forgiven after 25 years, the amount forgiven is taxed as income. So you could very well be looking at a tax bill of 75k+ at the end of this.

Which wouldn't be the end of the world if you had been saving up for it but given how much you'd pay over the 25 years already, its a significant portion of your income over the 25 years.

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japes
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Re: What's the catch in Income Based Repayment?

Postby japes » Thu Apr 28, 2011 10:59 am

For IBR, you’re paying less of your principal, which means you pay more in time over interest. It’s possible to be on IBR and not even be touching your principal, which would make your indebtedness even worse. If you’re on the 25 year plan, you also get hit with a tax bomb when the remainder of your balance is waived (though this is fortunately not the case for the 10-year public service loan forgiveness).

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AreJay711
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Re: What's the catch in Income Based Repayment?

Postby AreJay711 » Thu Apr 28, 2011 11:03 am

fathergoose wrote:As I understand it, the interest keeps building and when the loans are forgiven after 25 years, the amount forgiven is taxed as income. So you could very well be looking at a tax bill of 75k+ at the end of this.

Which wouldn't be the end of the world if you had been saving up for it but given how much you'd pay over the 25 years already, its a significant portion of your income over the 25 years.


Yeah there is this if your payments are less than the interest payments. I know some schools may be moving to a new LRAP model that mostly just helps IBR. Michigan's private sector one for example pays the difference between what you pay and the interest accruing for instance. These kinds of programs help for the other issue that after 15 years or so your income goes beyond the limit so you don't get stuck with 15 years of interest in addition to the principle.

pereira6
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Re: What's the catch in Income Based Repayment?

Postby pereira6 » Thu Apr 28, 2011 11:39 am

Yeah, I calculated my payments based on 150k of debt (self calculation), and that 150k of loans on 550 a month payment turns into about a 370k payment. Yikes. That said, it would be paid off in 24 years, so at least I would be paying enough to avoid the tax issue. I don't think the same can be said for sticker-price loaners. But, it is reasonable to suggest an individual will not be making 50k for his or her entire career (however, it is very possible).

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Grizz
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Re: What's the catch in Income Based Repayment?

Postby Grizz » Thu Apr 28, 2011 11:46 am

Also the catch is the program has to be around for 25 years, or you have to be grandfathered in if the govt. ends it.

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Re: What's the catch in Income Based Repayment?

Postby pereira6 » Thu Apr 28, 2011 11:50 am

rad law wrote:Also the catch is the program has to be around for 25 years, or you have to be grandfathered in if the govt. ends it.


Is there any chance of being in the middle of IBR and all of a sudden it disappears completely for everyone involved? I can't imagine people letting that happen.

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powerlawyer06
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Re: What's the catch in Income Based Repayment?

Postby powerlawyer06 » Thu Apr 28, 2011 11:54 am

I think the tax implications suck but they shouldn't be a huge factor in your decisioning because the program (and the tax code) will definitely change in that time frame. Who knows if the IBR program will even be around in 25 years and what tax brackets will look like then?

IBR+PSLF is much more attractive because it is forgiven after ten years and there is no tax bomb. There are still no guarantees but ten years is much easier to plan around than twenty-five.

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powerlawyer06
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Re: What's the catch in Income Based Repayment?

Postby powerlawyer06 » Thu Apr 28, 2011 11:55 am

pereira6 wrote:
rad law wrote:Also the catch is the program has to be around for 25 years, or you have to be grandfathered in if the govt. ends it.


Is there any chance of being in the middle of IBR and all of a sudden it disappears completely for everyone involved? I can't imagine people letting that happen.

I think the Republicans would try to do something like this.

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Re: What's the catch in Income Based Repayment?

Postby pereira6 » Thu Apr 28, 2011 12:03 pm

powerlawyer06 wrote:IBR+PSLF is much more attractive


Irrelevant, because we're talking about private-sector work.

powerlawyer06 wrote:
pereira6 wrote:
rad law wrote:Also the catch is the program has to be around for 25 years, or you have to be grandfathered in if the govt. ends it.


Is there any chance of being in the middle of IBR and all of a sudden it disappears completely for everyone involved? I can't imagine people letting that happen.

I think the Republicans would try to do something like this.


IBR was enacted in a federal program in 2007, so wouldn't that mean that a large number of Republicans supported it? Not sure about the politics there, but I don't think a blanket statement applies here.

fakemoney
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Re: What's the catch in Income Based Repayment?

Postby fakemoney » Thu Apr 28, 2011 12:06 pm

fathergoose wrote:As I understand it, the interest keeps building and when the loans are forgiven after 25 years, the amount forgiven is taxed as income. So you could very well be looking at a tax bill of 75k+ at the end of this.

Which wouldn't be the end of the world if you had been saving up for it but given how much you'd pay over the 25 years already, its a significant portion of your income over the 25 years.


Would it realistically be as high as 75K? Let's say you paid off 250K or so on a loan that with interest amounted to 370K or so. If at the end of the 25-years you were forgiven 120K, wouldn't you be looking at more like a 40K tax payment assuming you were in the 33% tax bracket (i.e. single making $174,401 – $379,150 including the forgiven loan income)? I mean, making enough to pay an average of 10K a year on a loan over 25-years seems a pretty reasonable "bad-case" scenario (though maybe not worse case scenario) in my eyes.

Also, isn't interest paid on student loans tax deductible to a point? So I guess one could save for this eventuality by putting away some of the tax refunds received from all the loan interest paid.

Edit: I can kind of see how the 75K+ bill could result when I break it down. I guess if all along you barely keep up with interest, you really don't dent the principle much at the end of the loan's term.
Last edited by fakemoney on Thu Apr 28, 2011 12:16 pm, edited 1 time in total.

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powerlawyer06
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Re: What's the catch in Income Based Repayment?

Postby powerlawyer06 » Thu Apr 28, 2011 12:11 pm

pereira6 wrote:
powerlawyer06 wrote:IBR+PSLF is much more attractive


Irrelevant, because we're talking about private-sector work.

powerlawyer06 wrote:
pereira6 wrote:
rad law wrote:Also the catch is the program has to be around for 25 years, or you have to be grandfathered in if the govt. ends it.


Is there any chance of being in the middle of IBR and all of a sudden it disappears completely for everyone involved? I can't imagine people letting that happen.

I think the Republicans would try to do something like this.


IBR was enacted in a federal program in 2007, so wouldn't that mean that a large number of Republicans supported it? Not sure about the politics there, but I don't think a blanket statement applies here.


I think it does because in this case congress has committed to cut massive amounts of money and programs out of the budget in order to curb deficit spending. The program cuts have largely been along party idealogical lines (see Republicans trying to cut Planned Parenthood and NPR). The house republicans already voted on repealing expansion of IBR and decreasing Pell grants.

--LinkRemoved--

This isn't 2007 anymore. There is no money and the Republicans would cut education way before they cut defense.

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Re: What's the catch in Income Based Repayment?

Postby pereira6 » Thu Apr 28, 2011 12:15 pm

powerlawyer06 wrote:
pereira6 wrote:
IBR was enacted in a federal program in 2007, so wouldn't that mean that a large number of Republicans supported it? Not sure about the politics there, but I don't think a blanket statement applies here.


I think it does because in this case congress has committed to cut massive amounts of money and programs out of the budget in order to curb deficit spending. The program cuts have largely been along party idealogical lines (see Republicans trying to cut Planned Parenthood and NPR). The house republicans already voted on repealing expansion of IBR and decreasing Pell grants.

--LinkRemoved--

This isn't 2007 anymore. There is no money and the Republicans would cut education way before they cut defense.


Gotcha. While I definitely see IBR not being viable for incoming students 10-15 years from now, I just don't see how it would be possible for students already paying under IBR to get the ladder kicked out from under them.

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Ty Webb
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Re: What's the catch in Income Based Repayment?

Postby Ty Webb » Thu Apr 28, 2011 12:24 pm

pereira6 wrote:
powerlawyer06 wrote:
pereira6 wrote:
IBR was enacted in a federal program in 2007, so wouldn't that mean that a large number of Republicans supported it? Not sure about the politics there, but I don't think a blanket statement applies here.


I think it does because in this case congress has committed to cut massive amounts of money and programs out of the budget in order to curb deficit spending. The program cuts have largely been along party idealogical lines (see Republicans trying to cut Planned Parenthood and NPR). The house republicans already voted on repealing expansion of IBR and decreasing Pell grants.

--LinkRemoved--

This isn't 2007 anymore. There is no money and the Republicans would cut education way before they cut defense.


Gotcha. While I definitely see IBR not being viable for incoming students 10-15 years from now, I just don't see how it would be possible for students already paying under IBR to get the ladder kicked out from under them.


The political fallout of trying to pull this trick would be historic.

fakemoney
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Re: What's the catch in Income Based Repayment?

Postby fakemoney » Thu Apr 28, 2011 12:35 pm

I did a little research on the tax bomb issue of IBR. I got this from IBR website:

Will forgiven loan amounts be taxed as income?
The U.S. Department of the Treasury determined that debt forgiven through PSLF is not considered taxable income under current law. That means that when you qualify for PSLF, you won't get slapped with a huge tax bill.

Unfortunately, the same good news doesn't extend to debt forgiven through IBR. In response, Congressman Sandy Levin (D-MI) is leading a bipartisan effort to ensure that borrowers who qualify for loan forgiveness through IBR (and Income Contingent Repayment) get the same treatment. Responsible borrowers with modest incomes shouldn't have to pay potentially crippling taxes on forgiven student loans. We are hopeful that this issue will be resolved before any borrowers qualify for forgiveness through IBR. We'll continue to work on this issue and keep you informed. Urge your representatives to support H.R. 2492. Learn more about the bill.


I looked into H.R. 2492. It was introduced in each of the last two Congresses and had mostly Democrat co-sponsors (47 in the last session). No hearings were ever scheduled and the bill never came to a vote. It hasn't been introduced this Congress. I wouldn't expect it to be in the current climate.

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Grizz
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Re: What's the catch in Income Based Repayment?

Postby Grizz » Thu Apr 28, 2011 12:38 pm

powerlawyer06 wrote:I think the tax implications suck but they shouldn't be a huge factor in your decisioning because the program (and the tax code) will definitely change in that time frame. Who knows if the IBR program will even be around in 25 years and what tax brackets will look like then?


They probably won't eliminate the tax bomb though. Otherwise people won't have any incentive to make other than minimum payments.

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fundamentallybroken
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Re: What's the catch in Income Based Repayment?

Postby fundamentallybroken » Thu Apr 28, 2011 12:40 pm

powerlawyer06 wrote:
"IBR was enacted in a federal program in 2007, so wouldn't that mean that a large number of Republicans supported it? Not sure about the politics there, but I don't think a blanket statement applies here."

I think it does because in this case congress has committed to cut massive amounts of money and programs out of the budget in order to curb deficit spending. The program cuts have largely been along party idealogical lines (see Republicans trying to cut Planned Parenthood and NPR). The house republicans already voted on repealing expansion of IBR and decreasing Pell grants.

--LinkRemoved--

This isn't 2007 anymore. There is no money and the Republicans would cut education way before they cut defense.


Congress was controlled by Democrats in 2007.

That said, it still wouldn't make sense for Republicans (traditional ones that is, not the teabags) to try to take away IBR as a spending cut, for two big reasons:

1. A large amount of Republicans, and Democrats, are lawyers. Cutting Planned Parenthood and NPR are politically expedient, because they are ideologically different than the Republicans' ideals. Pulling the rug out from poor lawyers (even though they're poor) would be pulling the rug out from their brethren.

2. It wouldn't make fiscal sense. IBR may lessen the repayment income stream from federal loans, but it's made up with an increased tax bill at the end of each person's program, and it decreases the chances someone will default on their loans. Only pulling in $550 a month on loan repayment is still way better than only pulling in $0 a month.

Federal loan programs will feel cuts before IBR programs do.

Anonymous Loser
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Re: What's the catch in Income Based Repayment?

Postby Anonymous Loser » Thu Apr 28, 2011 1:35 pm

powerlawyer06 wrote: The house republicans already voted on repealing expansion of IBR and decreasing Pell grants.

--LinkRemoved--


H. Con. Res. 34 is merely a concurrent resolution on the FY2012 budget; it does not have the force of law, and has no effect on the IBR program whatsoever. More importantly, despite the wording of the linked press release, the text of the bill makes no specific mention of educational lending. Indeed, nowhere in the bill itself is the IBR program discussed at all.

fakemoney
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Re: What's the catch in Income Based Repayment?

Postby fakemoney » Thu Apr 28, 2011 1:44 pm

Question about the tax bomb (quite possibly a dumb one):

Does the taxed portion of the loan money forgiven after 25-years include interest, or is it just the balance of the principle?

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powerlawyer06
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Re: What's the catch in Income Based Repayment?

Postby powerlawyer06 » Thu Apr 28, 2011 1:56 pm

Anonymous Loser wrote:
powerlawyer06 wrote: The house republicans already voted on repealing expansion of IBR and decreasing Pell grants.

--LinkRemoved--


H. Con. Res. 34 is merely a concurrent resolution on the FY2012 budget; it does not have the force of law, and has no effect on the IBR program whatsoever. More importantly, despite the wording of the linked press release, the text of the bill makes no specific mention of educational lending. Indeed, nowhere in the bill itself is the IBR program discussed at all.


Are you kidding? It definitely isn't law but this is the Republican suggestion for the 2012 budget. It specifically mentions reducing the SAFRA Act that expanded IBR. This is how the budget process works.

The SAFRA ACT did this:

The income-based repayment (IBR) plan would be amended for new borrowers,
as of July 1, 2014. The threshold to qualify for repayment according to the IBR
plan and for setting maximum monthly payment amounts would be reduced from
15% of income that exceeds 150% of the poverty line, to 10% of income that
exceeds 150% of the poverty line. Also, borrowers who repay according to the
IBR plan would be eligible to have any loan balance that remains unpaid after 20
years forgiven at that time, down from 25 years under current law.


The Republicans want to repeal that.

--LinkRemoved--

These cuts to Pell grants and IBR expansion are a strong indicator that when push comes to shove and hard budget decisions must be made the Republican Party is willing to make cuts to education funding.

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Re: What's the catch in Income Based Repayment?

Postby Anonymous Loser » Thu Apr 28, 2011 4:34 pm

powerlawyer06 wrote:
Anonymous Loser wrote:
powerlawyer06 wrote: The house republicans already voted on repealing expansion of IBR and decreasing Pell grants.

--LinkRemoved--


H. Con. Res. 34 is merely a concurrent resolution on the FY2012 budget; it does not have the force of law, and has no effect on the IBR program whatsoever. More importantly, despite the wording of the linked press release, the text of the bill makes no specific mention of educational lending. Indeed, nowhere in the bill itself is the IBR program discussed at all.


Are you kidding? It definitely isn't law but this is the Republican suggestion for the 2012 budget. It specifically mentions reducing the SAFRA Act that expanded IBR. This is how the budget process works.

The SAFRA ACT did this:

The income-based repayment (IBR) plan would be amended for new borrowers,
as of July 1, 2014. The threshold to qualify for repayment according to the IBR
plan and for setting maximum monthly payment amounts would be reduced from
15% of income that exceeds 150% of the poverty line, to 10% of income that
exceeds 150% of the poverty line. Also, borrowers who repay according to the
IBR plan would be eligible to have any loan balance that remains unpaid after 20
years forgiven at that time, down from 25 years under current law.


The Republicans want to repeal that.

--LinkRemoved--

These cuts to Pell grants and IBR expansion are a strong indicator that when push comes to shove and hard budget decisions must be made the Republican Party is willing to make cuts to education funding.


Of course the Republican budget proposal involves SARFA; SARFA was incorporated into HCERA, and health care is obviously a contentious issue. H. Con. Res. 34 makes the impossibly optimistic assumption that HCERA will be repealed in its entirety. If HCERA as a whole is repealed, then it follows that the very small portion of that Act that deals with educational lending and grants will be repealed as well. Thus, this budget proposal allows for de-funding those programs. This is what the educational lobby is concerned about, and this is what the press releases you keep linking to are talking about. But nowhere in the enrolled version of H. Con. Res. 34 is any specific mention made of any cuts to educational lending or grant programs. Rather, there is only specific mention of those aspects of HCERA that relate to the individual mandate and insurance subsidies.

H. Con. Res. 34 is not a "strong indicator" of anything more than the unpopularity of healthcare reform among Republican's constituencies.

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powerlawyer06
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Re: What's the catch in Income Based Repayment?

Postby powerlawyer06 » Thu Apr 28, 2011 5:15 pm

Anonymous Loser wrote:Of course the Republican budget proposal involves SARFA; SARFA was incorporated into HCERA, and health care is obviously a contentious issue. H. Con. Res. 34 makes the impossibly optimistic assumption that HCERA will be repealed in its entirety. If HCERA as a whole is repealed, then it follows that the very small portion of that Act that deals with educational lending and grants will be repealed as well. Thus, this budget proposal allows for de-funding those programs. This is what the educational lobby is concerned about, and this is what the press releases you keep linking to are talking about. But nowhere in the enrolled version of H. Con. Res. 34 is any specific mention made of any cuts to educational lending or grant programs. Rather, there is only specific mention of those aspects of HCERA that relate to the individual mandate and insurance subsidies.

H. Con. Res. 34 is not a "strong indicator" of anything more than the unpopularity of healthcare reform among Republican's constituencies.


Agreed that the bill targets HCERA more than SAFRA but to me it is more about what is left out of the bill. There could/should be provisions that would save SAFRA so that Pell Grants and IBR could remain at the levels indicated by SAFRA. That is conspicuously absent because it is not on the Republican agenda.

Of course they aren't going to call this bill the Income Based Repayment Killer Resolution, that would be unpopular and would be great campaign fodder against anyone who voted for the bill. Anyone in politics knows that a ton of policy is buried in the details of what is left out or in a bill. The fact remains, this bill proposes canceling the IBR expansion and that says alot.

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Always Credited
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Re: What's the catch in Income Based Repayment?

Postby Always Credited » Thu Apr 28, 2011 5:22 pm

they cancel IBR, i stop paying loans and leave the country. sup government.

fakemoney
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Re: What's the catch in Income Based Repayment?

Postby fakemoney » Fri Apr 29, 2011 9:18 am

Another IBR issue --

I read another poster on here speculating that the tax debt incurred from "The Tax Bomb" in IBR is dischargeable in bankruptcy, since it's technically no longer student loan debt, but federal income tax debt. Anyone know anything more about this?

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homestyle28
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Re: What's the catch in Income Based Repayment?

Postby homestyle28 » Fri Apr 29, 2011 9:23 am

fakemoney wrote:Another IBR issue --

I read another poster on here speculating that the tax debt incurred from "The Tax Bomb" in IBR is dischargeable in bankruptcy, since it's technically no longer student loan debt, but federal income tax debt. Anyone know anything more about this?


I think if you're planning bankruptcy in 25 years you've got bigger problems.




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