Would using PAYE like this make sense?

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Elston Gunn
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Re: Would using PAYE like this make sense?

Postby Elston Gunn » Sun Apr 28, 2013 4:34 pm

Big Dog wrote:
90% sure


Therein lies my question. Where is the federal source which clearly states what/how the amount of the tax bomb is....

Ugh, as we have tried to explain to you several times, if it exists, none of us has been able to find it. Perhaps, as I suggested, you could directly contact the government employees instead of asking everyone else to do your work for you?

20141023
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Re: Would using PAYE like this make sense?

Postby 20141023 » Sun Apr 28, 2013 4:46 pm

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Big Dog
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Re: Would using PAYE like this make sense?

Postby Big Dog » Sun Apr 28, 2013 6:30 pm

Ugh, as we have tried to explain to you several times, if it exists, none of us has been able to find it.


With all due respect, that is the first time that such has been claimed. Instead, posters, trying to be helpful, think that they know the answer; the result is different opinions.

And no, I do not plan on calling the feds bcos I have zero intention of going PAYE.

But the reason I am raising the question is for the OP and anyone else who is considering PAYE -- so they don't get blindsided. And because it is clear, based on this thread, than no one has a firm grasp of what happens in Year 20. (As a Finance guy, even considering a 20 year loan program with KNOWING exactly what happens at the end is abhorrent.)

20141023
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Re: Would using PAYE like this make sense?

Postby 20141023 » Sun Apr 28, 2013 7:26 pm

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slawww
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Re: Would using PAYE like this make sense?

Postby slawww » Mon Apr 29, 2013 12:02 am

kappycaft1 wrote:I just sent the Feds the following inquiry:

kappycaft1 wrote:I am writing to inquire about the new PAYE (Pay As You Earn) plan:

1) Is interest under PAYE "simple interest" or "compound interest"? As long as a debtor has partial financial hardship (which prevents interest from capitalizing), interest will only accrue against the principal balance and not compound on any existing cumulative interest, correct? Assuming that this is true, if for some reason an applicant fails to submit documentation or loses partial financial hardship and has their interest capitalize, is it also true that the maximum amount of interest that can accrue in any given month is limited to the average interest rate on one's loans * (original principal balance + (original principal balance * 10%))?

2) At the end of year 20, if a debtor still has a remaining balance, will they be forgiven and thereby taxed on just the principal balance, or will they be taxed on the principal balance plus any accrued interest that hasn't capitalized? Also, based on the current IRS policies regarding insolvency, debtors will only have to pay taxes against an amount that cannot exceed the current value of all of their assets, correct? For example, if a debtor is making $50,000 a year, has $150,000 in assets, and is forgiven $300,000 by the end of year 20, instead of being taxed on $350,000 ($50,000 + $300,000), is it true that they would only have to pay taxes as though they earned $150,000 of income that year?

3) Technically speaking, most students meet the requirements of "partial financial hardship" while they are in school, albeit they likely haven't entered a repayment plan and started making payments towards their loans yet. Accordingly, will students be eligible to avoid interest capitalization while they are in school, or does this only kick in once they have graduated and started making their payments?


I tried to go into more detail, but they only allow inquiries to be up to 2,000 characters long. :?

I'll copy and paste their response here once I hear back from them. Hopefully this should clear some stuff up (or at least make official what we already thought we knew).


Thanks! Definitely let us know what they say.

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slawww
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Re: Would using PAYE like this make sense?

Postby slawww » Mon Apr 29, 2013 12:11 am

dr123 wrote:If your parents have a law school fund of 100k, why dont you just use that for tuition? I dont get it.


Because if my parents were to completely foot the bill of ~75k, they'd never get that money back. If I could use the investment funds' earnings to make the PAYE payments, the original principal will still be there at the end of the 20 years and they can keep the money. That's what I'm trying to figure out here.

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Re: Would using PAYE like this make sense?

Postby 20141023 » Mon Apr 29, 2013 8:35 am

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slawww
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Re: Would using PAYE like this make sense?

Postby slawww » Mon Apr 29, 2013 6:46 pm

Awesome analysis, kappycaft1, thanks a lot for that. I will definitely be taking all of this into consideration.

20141023
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Re: Would using PAYE like this make sense?

Postby 20141023 » Mon Apr 29, 2013 8:06 pm

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Elston Gunn
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Re: Would using PAYE like this make sense?

Postby Elston Gunn » Mon Apr 29, 2013 8:26 pm

^^That's annoying. I definitely got a real person when I tried. Maybe your question just made them go :shock:

20141023
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Re: Would using PAYE like this make sense?

Postby 20141023 » Tue Apr 30, 2013 2:53 pm

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slawww
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Re: Would using PAYE like this make sense?

Postby slawww » Tue Apr 30, 2013 3:25 pm

Jesus fucking Christ :roll:

09042014
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Re: Would using PAYE like this make sense?

Postby 09042014 » Tue Apr 30, 2013 4:55 pm

I think you'd have to call the IRS for tax stuff guys. The whole question is does removing unpayed interest count as income.

sf_39
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Re: Would using PAYE like this make sense?

Postby sf_39 » Mon May 06, 2013 5:52 pm

I'm a finance guy and I got confused reading through some of these pages! :D

--------

So two questions, the first one I think the posters above kind of answered but wasn't sure:

1. So if I borrow $200,000, will after 20 years if I just making minimum payments, the total principal + interest the tax bomb can be based off be capped at $220,000?

2. Is it possible and/or realistic for the government to change PAYE while you are in the 20 year payments? AKA pulling the rug out from under your feet.

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Elston Gunn
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Re: Would using PAYE like this make sense?

Postby Elston Gunn » Mon May 06, 2013 7:26 pm

sf_39 wrote:I'm a finance guy and I got confused reading through some of these pages! :D

--------

So two questions, the first one I think the posters above kind of answered but wasn't sure:

1. So if I borrow $200,000, will after 20 years if I just making minimum payments, the total principal + interest the tax bomb can be based off be capped at $220,000?

2. Is it possible and/or realistic for the government to change PAYE while you are in the 20 year payments? AKA pulling the rug out from under your feet.

1. We don't know.
2. We don't know.

Sorry :lol:

Edit: Though we do know that the government definitely could change the program at any time; most don't think they will though.

sf_39
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Re: Would using PAYE like this make sense?

Postby sf_39 » Mon May 06, 2013 10:54 pm

Elston Gunn wrote:
sf_39 wrote:I'm a finance guy and I got confused reading through some of these pages! :D

--------

So two questions, the first one I think the posters above kind of answered but wasn't sure:

1. So if I borrow $200,000, will after 20 years if I just making minimum payments, the total principal + interest the tax bomb can be based off be capped at $220,000?

2. Is it possible and/or realistic for the government to change PAYE while you are in the 20 year payments? AKA pulling the rug out from under your feet.

1. We don't know.
2. We don't know.

Sorry :lol:

Edit: Though we do know that the government definitely could change the program at any time; most don't think they will though.


Well that sucks :?

All I could find from the official website (don't know if this was posted already):

Limitation on the capitalization of interest—While you have a partial financial hardship, interest that accrues but is not covered by your loan payments will not be capitalized, even if interest accrues during a deferment or forbearance. Unpaid interest capitalizes if you are determined to no longer have a partial financial hardship, but the total amount of interest that capitalizes while you are repaying your loans under the Pay As You Earn plan is limited to 10% of your original principal balance when you begin paying under Pay As You Earn.

http://studentaid.ed.gov/repay-loans/un ... s-you-earn

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Rahviveh
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Re: Would using PAYE like this make sense?

Postby Rahviveh » Tue May 07, 2013 12:43 pm

sf_39 wrote:I'm a finance guy and I got confused reading through some of these pages! :D

--------

So two questions, the first one I think the posters above kind of answered but wasn't sure:

1. So if I borrow $200,000, will after 20 years if I just making minimum payments, the total principal + interest the tax bomb can be based off be capped at $220,000?

2. Is it possible and/or realistic for the government to change PAYE while you are in the 20 year payments? AKA pulling the rug out from under your feet.


Yeah I think the confusion about the tax bomb is that nobody has come up for forgiveness and it's really up to the IRS. But I do not think the tax bomb will be capped like that.

It may be possible for the government to change PAYE for participants in reliance. But IMO its totally unrealistic to think that will happen. Others will disagree.

sf_39
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Re: Would using PAYE like this make sense?

Postby sf_39 » Fri May 10, 2013 2:33 pm

My question to the feds:

I have a question about pay as you earn. On the website it says,

Limitation on the capitalization of interest—While you have a partial financial hardship, interest that accrues but is not covered by your loan payments will not be capitalized, even if interest accrues during a deferment or forbearance. Unpaid interest capitalizes if you are determined to no longer have a partial financial hardship, but the total amount of interest that capitalizes while you are repaying your loans under the Pay As You Earn plan is limited to 10% of your original principal balance when you begin paying under Pay As You Earn.

-------------------

So does that mean if I borrowed 100,000, that the principal could only get up to 110,000 from interest and/or the tax at the end of 20 years would only be based off the 110,000?


Their answer:

Thank you for your inquiry about federal student aid.

The limitation applies to borrowers who are determined to no longer have a partial financial hardship. It does not apply to borrower's who complete repayment under the program. For those borrowers, the full amount of principal and interest forgiven is reported to the Internal Revenue Service (IRS).

You should contact your loan servicer for more information.

We hope this information is helpful.

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iceman219
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Re: Would using PAYE like this make sense?

Postby iceman219 » Wed Sep 25, 2013 6:55 pm

trapster wrote:
studentloans.gov

It's got a repayment estimator (bottom left after you log in) that lays out how much you'll pay under each plan as well as an estimate for loan forgiveness.


Sorry to reanimate an old thread, but...

I have been trying to evaluate loan repayment options, and this simple comment was the biggest assistance.

You read a lot about the "tax bomb" and whether Obama will get that change thru Congress, and people trying to back into a number and get super fancy with projections. Just don't do all that; let the government calculate yours for you.

For the lazy, I've put my screenshot of my loan status up: see link. I feel like my loan amount is fairly average (approximately $123k, which the numbers are based off of; the Gov calculation includes uncapitalized interest) for a law school grad, so maybe this will be instructive for you.

For obvious reasons, if you can muster the standard monthly payment amount, or can foresee even hitting the graduated payment schedule, those make the most sense. However, in this scenario, anything less than $100k a year would make hitting these numbers prohibitive. At $75k for instance, your pre-tax weekly pay is $1562. After taxes (let's use 25%), health insurance co-pays, etc etc., you would be paying well over 25% of your monthly salary to loans, every month, for 10 years.

This is feasible if you want to be aggressive and not otherwise build up savings, make big purchases, propose to a girl, etc. AND you were guaranteed to not lose your job/be unemployed/not paid at some point (extended maternity leave, for instance, is not paid).

Under a graduated/standard loan payment attack, you would essentially be barred from buying a house during these 10 years until you could put 20% down, as FHA loans (low down payment loans) prohibit, without exception, a loan that House payment + other payments (home insurance, home owner's assocation, credit cards, auto, etc) from exceeding 43% without an exception. Your greater than 25% of your salary monthly loan payment would almost inhibit this by default.

SO, if living as a pauper for 10 years and forgoing savings, buying a home, & major life events is not your thing, look down the payment options list, at both the monthly payment ranges as well as the total amount paid.

The thing to keep in mind is that unless the aforementioned "tax bomb" is fixed, any forgiven loan amount will be taxed as ordinary income by the IRS in the year the amount is forgiven (at 2013 tax rates, it likely would be taxed at 33%).

Given all of the above, PAYE quickly becomes a strong option. $183k total amount paid, plus 1/3 of the loan amount forgiven paid as tax yields basically a 220k payment for a loan originally of $123k.

Income-Contingent Repayment however at first blush appears the strongest option, assuming the above "tax bomb" is never fixed by the government. 2nd shortest repayment period (its default payoff period is 25 years, so the payoff is occurring much quicker, in approximately 12 years), more initial financial flexibility initially, and the payoff being income sensitive. It also encourages early payoff of the loan if possible, given it does not depend on income forgiveness in this scenario.

And the reason I think ICR becomes the strongest is because of the default assumptions in the government calculator: 5% salary increases annually, with 3.5% indexed poverty increases (which governs the payment floor on income-based plans).

My route, based on all of the above assumptions, is to go with PAYE for the first year, save the $600-$700 per month in a separate savings account based on ICR projections, and see how the actual financial flexibility works out. If it's feasible, after a dry run under the conditions, I will switch over to ICR and dump my 1 year of trial savings immediately against the loan balance.




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