What's the catch in Income Based Repayment? Forum

[03121202698008]

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.

The problem is, what's their incentive to fix this now? No one is eligible for another 21 years. They could exempt/remove from exemption a dozen times by then. Who knows what the tax code will look like that far out.

Talk to any veteran or federal employee, with the F government you don't count on the money until it's in your bank account. This year, they hacked up the GI Bill formula, lowering reimbursement for people who go to private schools by up 60% in some states (increasing in others). Due to a provision added at the last minute, without any discussion, the VA is now a last payer and any veterans who had merit-scholarships will now not receive them in most circumstances.

My point...the GI Bill is popular on both sides of the aisle and there are several groups dedicated to lobbying Congress for it. And yet it was still changed on a whim with no grandfathering. There is no one lobbying to keep IBR. It's a pet project of a few people that could disappear just as quickly as it arrived...and there'd be little news or fanfare.

I'd be damned if I'd make less than interest payments for 20 years, let the loan grow ridiculously, then have the program killed right before you're due for the wipe out. Maybe you should start writing your congressman asking for a mandatory grandfather provision to be added...

And if you're relying on Congress changing the tax laws, and not changing them back over the next 20 years, you clearly don't pay attention to how things work on the hill. "You gave a tax break to lawyers! And the federal government is already eating $500K of loans for them! Why do you hate the poor?"

[niederbomb]

Tax bomb or not, failing to get Big Law doesn't seem to be the end of the world for graduates of a T13. Many of these schools have sub 1% unemployment (class of 2009) with nearly 90% reporting their salaries, so apparently nearly everyone (except maybe at some of the weaker schools like Northwestern) finds some kind of employment. Of course, life might suck if one doesn't make Big Law, but you're still unlikely to end up homeless or in debtor's prison, even in a class as bad as the class of 2009 (I am almost certain the class of 2014 will be no worse...taking bets...)

Thus, some of the rhetoric against debt at top schools on these boards is unjustified. For English majors from TTT UG who manage to get into a T13, if not a T20, whatever the cost, it appears law schools is almost always a winning situation due to IBR.

Also, how long is someone who graduates from a top national institution (particularly an Ivy League) in ANY field likely to remain employed in a $40,000/year job? At the very least, it seems IBR is a way to buy time to get one's career off the ground or wait out the economic slump.