Anonymous User wrote:There's a bit of misinformation in this thread.
Most people who are starting law school now or have started in the past few years will be eligible for Pay As You Earn, which is basically a new form of IBR that took effect last December.
You are eligible for PAYE if you didn't receive a gov't loan before 2007 and have at least one federal loan disbursed after October 2011.
You also have to qualify for a partial financial hardship.
Once you are on PAYE, you never lose eligibility. Your monthly payment will never be higher than it would have been under the standard 10 year repayment plan.
Under PAYE, you pay 10% of your AGI above the poverty line. Say you owe $200k in student loans, and make $70k. Under PAYE, your monthly payment would be $444. Such a payment normally would not even cover the interest on the loan. Once you make qualifying payments for 20 years, (not the 25 as under IBR), you can apply for forgiveness.
The tax treatment right now is that the forgiven amount counts as income. Yes, at first glance that sounds bad. However, you'll want to consider a few things. The first is that the time value of money means that paying tax on the forgiven amount will be easier in 20 years than trying to pay the balance over nearly as long while paying much more per month in an attempt to cut through the high interest rate. Simply put, the money is much more valuable to you now than it will be then. Second, you only pay tax up to the amount of your net worth, so if you happen to be dirt poor and don't have much in the way of assets by the time the 20 years rolls around, your tax burden will be negligible.
I agree though with the concerns expressed that schools will use these types of programs of to induce people to not worry about the cost of school. Essentially the government is just paying the costs of higher education. Schools need to be held accountable and I think stricter protocols for disbursement of student loans should be in place so schools have incentives to keep costs down. Right now schools have little incentive reign in the costs.
There is no certainty that PAYE will exist in its current form in 20 years, but there is no reason to think that the government will just get rid of it completely. After all, they literally just enacted the program a few months ago.
PAYE is a better deal for almost EVERY student with loans above the $150k+ mark if they aren’t making biglaw money, although it will depend on your COL and other factors. I think you’ll find that in coming years even grads with biglaw will begin to use the program. More and more students are graduating with $250k+ debt, and even with Biglaw salary a new grad will qualify for PAYE.
I don't know what I'm missing but this PAYE seems ridiculously generous.
Take someone who graduates with $170,000 in debt and got biglaw. He plans to work at that for a few years and thinks he'll likely land at a low six figures job after five years. His original plan was to pay everything as quickly as possible, say four years of scrimping and saving every dollar and paying an average of $47,000 a year. Now, he can pay 10% of his AGI above the poverty threshold so say he'll pay 13,000; 14,000, 15,000 and 16,000 his first four years for a total of $58,000. The interest is raising his debt level but he's holding on to an extra $130,000 and if he's smart he'll invest it and get 5-7% APY.
Then, he goes to his $110,000 job. Now he's got a wife and a couple kids, so he's paying 10% of about $65,000 a year. (150% of poverty level is like $35,000 and the money he's paying to student debt comes off AGI.) Now, assume he's going to pay about $150,000 over the ensuing years if he gets some raises. His total payments will be $208,000 before forgiveness, which is likely worth far less in present value than the $170,000 over four years, and additionally, he'll have the $130,000 nest egg in case he gets laid off. Alternatively, if he gets a massive raise in year 14 when interest has already brought his "debt" to $320,000, he can choose to pay it off using his "nest egg" or continue at the old salary until after forgiveness.
TL;DR: How is PAYE not an incredible free lunch even for people who get Big Law?
Edit: http://www.constitutionaldaily.com/inde ... &Itemid=65