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

There is a tax bomb at the end. All that money they write off? It counts as taxable income. You might have 300K in loans, and that year you'll have to pay tax on 300K of extra income. That might be more than you make in a year.

This doesn't apply for the public interest one.

IBR will save you from being put into poverty by your loans. But it's not justification to wildly gamble your future away.

Desert Fox wrote:There is a tax bomb at the end. All that money they write off? It counts as taxable income. You might have 300K in loans, and that year you'll have to pay tax on 300K of extra income. That might be more than you make in a year.

This doesn't apply for the public interest one.

IBR will save you from being put into poverty by your loans. But it's not justification to wildly gamble your future away.

So, how does the tax bomb work? They need to explain this better. I've tried to research this and I've asked financial aid offices, but the details aren't clear.

Desert Fox wrote:There is a tax bomb at the end. All that money they write off? It counts as taxable income. You might have 300K in loans, and that year you'll have to pay tax on 300K of extra income. That might be more than you make in a year.

This doesn't apply for the public interest one.

IBR will save you from being put into poverty by your loans. But it's not justification to wildly gamble your future away.

So you'd have to take out another loan to pay the taxes on IBR. This doesn't sound good.

Or take out a second mortgage on your home (assuming you have paid down your mortgage to have enough LTV on the home).

sumus romani wrote:

Desert Fox wrote:There is a tax bomb at the end. All that money they write off? It counts as taxable income. You might have 300K in loans, and that year you'll have to pay tax on 300K of extra income. That might be more than you make in a year.

This doesn't apply for the public interest one.

IBR will save you from being put into poverty by your loans. But it's not justification to wildly gamble your future away.

So you'd have to take out another loan to pay the taxes on IBR. This doesn't sound good.

So is IBR really that helpful?

qualster wrote:

sumus romani wrote:

Desert Fox wrote:There is a tax bomb at the end. All that money they write off? It counts as taxable income. You might have 300K in loans, and that year you'll have to pay tax on 300K of extra income. That might be more than you make in a year.

This doesn't apply for the public interest one.

IBR will save you from being put into poverty by your loans. But it's not justification to wildly gamble your future away.

So you'd have to take out another loan to pay the taxes on IBR. This doesn't sound good.

So is IBR really that helpful?

Note Desert Fox's qualification. It sounds like for those who work for non-profits and do the decade plan, there is no tax bomb. But for those who do the 25 year private employment plan, there is the tax bomb, at least for now (though presumably no one has experienced a big one yet).

sumus romani wrote:

Desert Fox wrote:There is a tax bomb at the end. All that money they write off? It counts as taxable income. You might have 300K in loans, and that year you'll have to pay tax on 300K of extra income. That might be more than you make in a year.

This doesn't apply for the public interest one.

IBR will save you from being put into poverty by your loans. But it's not justification to wildly gamble your future away.

So you'd have to take out another loan to pay the taxes on IBR. This doesn't sound good.

LOL at thinking someone is going to give you a loan for 100K with no collateral.

But if you put around 2k each year into a savings account or investment portfolio, over 25 you will have saved up around 50k or more, so it really isn't that hard to do. The bitch of it is for people that don't plan on getting hit with the taxes and then have to come up with 50k to pay in taxes.

Desert Fox wrote:

sumus romani wrote:

Desert Fox wrote:There is a tax bomb at the end. All that money they write off? It counts as taxable income. You might have 300K in loans, and that year you'll have to pay tax on 300K of extra income. That might be more than you make in a year.

This doesn't apply for the public interest one.

IBR will save you from being put into poverty by your loans. But it's not justification to wildly gamble your future away.

So you'd have to take out another loan to pay the taxes on IBR. This doesn't sound good.

LOL at thinking someone is going to give you a loan for 100K with no collateral.

So what would happen if one didn't have the money to make the balloon payment.

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.

Typically, they would just take away any tax refund that would get for the rest of your life, deny you social security (if it's still around by then) and place a tax lien on your property. They could also garnish your wages.

sumus romani wrote: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.

I gotta be honest. The financial aid office at the school I'm about to attend seems to have no clue about how IBR works. They direct you to web sites for info. They certainly never mentioned the balloon tax payment.

AsylumPB wrote:Typically, they would just take away any tax refund that would get for the rest of your life, deny you social security (if it's still around by then) and place a tax lien on your property. They could also garnish your wages.

Let us never forget that Wesley Snipes did time for not paying his taxes. Didn't he? Or am I making that up. Also, there is always the option of moving to the mountains and stockpiling guns.

qualster wrote:So what would happen if one didn't have the money to make the balloon payment.

People don't realize this, but the IRS is actually rather friendly and helpful toward those who actually want to pay taxes but can't. They'll set you up on a payment plan. So you'll have another monthly payment for the rest of your life.

Also, the amount of taxes owed is on how much debt is forgiven. After 25 years, you should be able to get rid of a lot of your debt. Otherwise you'll have a huge tax bill. But if you can reduce what you owe significantly over 25 years, you should be fine.

AsylumPB wrote:Typically, they would just take away any tax refund that would get for the rest of your life, deny you social security (if it's still around by then) and place a tax lien on your property. They could also garnish your wages.

Sounds pleasant. Sign me up.

sumus romani wrote:

AsylumPB wrote:Typically, they would just take away any tax refund that would get for the rest of your life, deny you social security (if it's still around by then) and place a tax lien on your property. They could also garnish your wages.

Let us never forget that Wesley Snipes did time for not paying his taxes. Didn't he? Or am I making that up. Also, there is always the option of moving to the mountains and stockpiling guns.

Leaving the country is also an option. People have done so in order to escape student loan debt.

vanwinkle wrote:

qualster wrote:So what would happen if one didn't have the money to make the balloon payment.

People don't realize this, but the IRS is actually rather friendly and helpful toward those who actually want to pay taxes but can't. They'll set you up on a payment plan. So you'll have another monthly payment for the rest of your life.

Also, the amount of taxes owed is on how much debt is forgiven. After 25 years, you should be able to get rid of a lot of your debt. Otherwise you'll have a huge tax bill. But if you can reduce what you owe significantly over 25 years, you should be fine.

OK. That sounds a bit better.

qualster wrote:

sumus romani wrote:

AsylumPB wrote:Typically, they would just take away any tax refund that would get for the rest of your life, deny you social security (if it's still around by then) and place a tax lien on your property. They could also garnish your wages.

Let us never forget that Wesley Snipes did time for not paying his taxes. Didn't he? Or am I making that up. Also, there is always the option of moving to the mountains and stockpiling guns.

Leaving the country is also an option. People have done so in order to escape student loan debt.

I'll never leave are country!

sumus romani wrote:

qualster wrote:

sumus romani wrote:

AsylumPB wrote:Typically, they would just take away any tax refund that would get for the rest of your life, deny you social security (if it's still around by then) and place a tax lien on your property. They could also garnish your wages.

Let us never forget that Wesley Snipes did time for not paying his taxes. Didn't he? Or am I making that up. Also, there is always the option of moving to the mountains and stockpiling guns.

Leaving the country is also an option. People have done so in order to escape student loan debt.

I'll never leave are country!

I was kidding. It's a bit extreme. People have actually done so though.

I wouldn't be completely surprised if they write in some sort of exception for people who are getting loans forgiven due to IBR.

sumus romani wrote: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.

bgdddymtty, your totals are all based on 10 years of payment, but I thought borrowers working in the private-sector and using IBR make payments for 25 years...

spondee wrote:bgdddymtty, your totals are all based on 10 years of payment, but I thought borrowers working in the private-sector and using IBR make payments for 25 years...

My IBR numbers are based on 25 years (300 payments at the government-prescribed amount), and the number they're compared to is based on 10 years (120 payments to pay the debt in full). Under IBR, you pay for a maximum of 25 years, but according to the federal student aid website's IBR page, this is available as an alternative to standard repayment plans, which are amortized over 10 years. Even if you could get my example debt amount amortized over 25 years, though, you'd pay $2,255.73/month, and your discounted total repayment would be $475,680.34. That makes IBR an even better deal.

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.)