Income Based Repayment Scenarios Forum

[scheherezade]

I am an entering law student, contemplating the possibility of using the government's new Income Based Repayment plan (IBR) after graduation. I wanted to ask for some informed input on a couple of issues, especially from those who may already be using it.

For those of you who haven't read about it yet, IBR gives you the option of paying a monthly fee that does not depend on your loan amounts but rather on your yearly income (capped at 10-15% of gross income), and, unlike Public Service Loan Forgiveness (PSLF) or your school's LRAP, there is no qualifying employment (you can do anything; if unemployed, you pay $0/year). While PSLF forgives your debt after 10 years of consecutive work in US govt/NGOs, IBR forgives your debt after 25 years of payments, no matter who you work for or where, so long as your income remains low compared to your debt.

1. Non-traditional paths
People have commented in other forums about IBR's usefulness (esp. in combination with PSLF/LRAP) for those entering public interest work. I see an additional use: if, after three years of law school and $100-200k in debt, you decide that you want to do something quite different than what a JD normally equips you to do (say you want to write a novel, start a company, or working for a foreign NGO that pays little - rather than US firm/US PI/US govt/US legal academia) the debt is no longer a major constraint. Some people in this forum may jump up and say that if you don't want to do the usual, you shouldn't go to law school; but most people can't experiment with real legal work before law school, and I think it's reasonable for some people to change their minds after already having taken the debt plunge. IBR seems to bring relief for those that may have a non-traditional trajectory (albeit at taxpayer expense).

Does anyone know anything to the contrary, e.g. you cannot work abroad and use IBR?

2. Loans and repayment
A. People working for firms and earning $160k+/yr generally cannot use IBR, because their debt/income ratio is not high enough. Anyway, these people should be able to repay loans within 2-4 years. Incentive is to keep debts low.
B. People whose salaries increase significantly after a few years may be penalized for using IBR; they may use IBR at first and switch out later, incurring some interest penalties. Your strategy here depends in part on your salary expectations, but, in any case, IBR could give you some welcome flexibility at the beginning of your career by taking away the stress of high debt payments. Incentive is still to keep debts low.
C. People whose salaries remain low enough over 25 years of debt repayment will have their debt forgiven after 25 years, while those in PI/govt can combine IBR with PSLF to have it forgiven in 10, while still making affordable payments. It seems that their incentive would be to max out on debts and not contribute personal/family savings.

Am I wrong in my understanding?

Thanks!

Information on IBR: http://www.ibrinfo.org/
An older thread on IBR: http://www.top-law-schools.com/forums/v ... 5&t=102898

[Gideon Strumpet]

PSLF is based on 120 payments, not 10 consecutive years. You can move in and out of qualifying work and still get forgiveness as soon as you have hit 120 payments while in qualifying employment. You also need to qualify for IBR at some point in order to get PSLF, but you do not need to remain income qualified while making all of the 120 payments. Payments made under IBR and under the standard repayment plan both count, as long as you're in qualifying employment. If you cap out on income eligibility for IBR, then your payments default to the standard 10-year repayment rate, but payments continue to count toward the 120 needed for PSLF forgiveness. "Payments" made while your calculated IBR "payment" is $0 also count.

One nice thing is that IBR payments run from your AGI, which means if you're saving aggressively (fully funding your IRA / 401K accounts), then all of your retirement saving deductions will reduce your income for IBR purposes. Any other "above the line" deductions you get will also reduce your income for IBR purposes; this includes the student loan interest deduction, to the extent you can take it.

You DO, however, need to have a job to qualify for PSLF. This is one of the sticky points about it, since public service and government employment may be the hardest piece of the puzzle to fill in. The coverage is broad, since any government agency and any 501(c)(3) will qualify, as well as a few other employers under some specific definitions of "public service" agencies or firms. You might qualify for a hardship deferment or forbearance during a period of unemployment, or your IBR payment might be set to $0. But you need to be working "full time" (at least 30 hours per week) for a qualified employer at the time you make a "payment" in order for that payment to count towards the 120 required for PSLF. If you're not working, then by definition you're not working for a qualified employer, regardless of how low your required payments are based on lack of income.

On the overseas employer issue:

http://www.ibrinfo.org/faq.vp.html#_overseas

[scheherezade]

Gideon, thanks very much for the informative post. It's helpful to think about how PSLF and IBR can complement each other, although I think most of the non-traditional routes (with the exception of working for US NGOs or govt agencies abroad) would imply using IBR without PSLF.

The link you provided talks about overseas employers vis-a-vis PSLF, but it doesn't clarify them vis-a-vis IBR. In the absence of information to the contrary, I assume you can do any kind of work anywhere and qualify for IBR (so long as your debt-income ratio qualifies).

[Gideon Strumpet]

The link you provided talks about overseas employers vis-a-vis PSLF, but it doesn't clarify them vis-a-vis IBR. In the absence of information to the contrary, I assume you can do any kind of work anywhere and qualify for IBR (so long as your debt-income ratio qualifies).

The IBR formula is based on your "AGI as reported to the IRS," so I'm not sure what that means for borrowers working outside the U.S. I assume that if you're not paying U.S. income taxes they would require alternative documentation of your income, and would base your IBR payments on that; although it's not clear how, if you're paid in foreign currency, that would work.

The Direct Lending program obviously services people with loans who are living outside the U.S., but I don't see anything in the regs or the statute that says one way or the other how IBR applies to borrowers working outside the U.S., if at all. Your best bet is find some contact information and just ask someone in the Direct Lending program how they deal with borrowers living abroad who are on income based plans. They've had the Income Contingent plan for a while now, so it has to have come up before.

[voltage88]

All income earned by US Citizens, regardless of where on earth it was earned, is subject to US income taxes. The interesting thing regarding IBR for those working overseas is the fact that IBR is calculated using a formula that incorporates the US poverty line. If you're living overseas, the poverty line might drastically be different. So, IBR may not be all that helpful if you live in a country where the average income level and poverty line is drastically lower than in the US. I'm not sure if IBR addresses this.

[duckmoney]

PSLF is based on 120 payments, not 10 consecutive years. You can move in and out of qualifying work and still get forgiveness as soon as you have hit 120 payments while in qualifying employment. You also need to qualify for IBR at some point in order to get PSLF, but you do not need to remain income qualified while making all of the 120 payments. Payments made under IBR and under the standard repayment plan both count, as long as you're in qualifying employment. If you cap out on income eligibility for IBR, then your payments default to the standard 10-year repayment rate, but payments continue to count toward the 120 needed for PSLF forgiveness. "Payments" made while your calculated IBR "payment" is $0 also count.

One nice thing is that IBR payments run from your AGI, which means if you're saving aggressively (fully funding your IRA / 401K accounts), then all of your retirement saving deductions will reduce your income for IBR purposes. Any other "above the line" deductions you get will also reduce your income for IBR purposes; this includes the student loan interest deduction, to the extent you can take it.

You DO, however, need to have a job to qualify for PSLF. This is one of the sticky points about it, since public service and government employment may be the hardest piece of the puzzle to fill in. The coverage is broad, since any government agency and any 501(c)(3) will qualify, as well as a few other employers under some specific definitions of "public service" agencies or firms. You might qualify for a hardship deferment or forbearance during a period of unemployment, or your IBR payment might be set to $0. But you need to be working "full time" (at least 30 hours per week) for a qualified employer at the time you make a "payment" in order for that payment to count towards the 120 required for PSLF. If you're not working, then by definition you're not working for a qualified employer, regardless of how low your required payments are based on lack of income.

On the overseas employer issue:

http://www.ibrinfo.org/faq.vp.html#_overseas

This point just gave me an idea. If you are unemployed at any time, is there anything stopping you from creating your own 501(c)(3) organization, which is not a very difficult thing to do, becoming employed as its full time president and ceo, and PROFIT from PSLF?

What about if you did this while you were also employed full time in another job, say, shitlaw?

[MarkKimUNC]

I just graduated school and work overseas. The IBR guidelines state that the IBR loan payment amounts will be based off the individual’s AGI (No where have I read that it is based off the MAGI).

US Citizens are required to pay taxes on all worldwide income. That said, US Citizens working abroad can utilize a Foreign Earned Income Exclusion, which allows the individual to exclude $91,500 from their taxable foreign salary. In addition, you can also take advantage of a Foreign Tax credit for any foreign taxes paid on income that you are not able to exclude.

For example, if you earn $91,500 USD in your job overseas, than your AGI will be $0. I haven’t called my Loan Servicer yet. My loans falls from grace in November. The question I will have for them is if my Loan Payment amount will be based off this AGI. Probably not, but who knows.

[vanwinkle]

This point just gave me an idea. If you are unemployed at any time, is there anything stopping you from creating your own 501(c)(3) organization, which is not a very difficult thing to do, becoming employed as its full time president and ceo, and PROFIT from PSLF?

What about if you did this while you were also employed full time in another job, say, shitlaw?

Creating a 501(c)(3) is not hard, but there are some big problems here:

1) A 501(c)(3) organizations are typically set up as corporations. You need directors who will approve the appointment of officers, sign off on having attended board meetings, and be responsible for ensuring the corporation upholds the law. That means that, if someone figures out that you are using your non-profit to "PROFIT", it wouldn't just be you that'd be liable, it'd be them, too. How many people do you know that would risk going to jail to help you make money by defrauding the government? (The IRS actually encourages people to report fraudulent use of tax-exempt status, too, and any random person who noticed what you're doing and got angry at you could bring the feds down on you.)

2) Often, 501(c)(3) officers/directors are unpaid. Compensation can be given to employees, but it really needs to be justifiable for the hours that are put in. You can't pay yourself a full-time salary without actually recording enough hours of work for the non-profit to justify it. If the non-profit requires a lot of work, and you have a paper trail showing you worked 30-40 hours a week consistently on various projects the non-profit was engaged in, that'd be one thing. But you can't just declare yourself the "full-time president" and cash out. You're talking about working full-time in another job, a salaried law-firm job that will probably work you a lot more than 40 hours a week. You wouldn't have time to do full-time work for a non-profit, and that would be abundantly obvious if you were ever audited.

3) 501(c)(3) orgs do not just magically have money appear in their bank accounts. Even if it's not hard to start a non-profit, it's certainly not easy to raise money for one. Also, raising money means having an actual mission, and telling people you'll do things related to that mission, and then actually doing them. If you don't then use the money you raise effectively and actually accomplish something with it, you're not going to be able to keep raising money. Non-profits develop reputations, and one that developed a reputation for paying its founder regularly and not having any money left over to actually do charitable work would just ... die.

Sure, you could start your own non-profit. But for this to work, it wouldn't actually be "profitable" in the long term. You'd either 1) defrauding people until you got audited and caught, or 2) be getting by on a pretty meager salary while putting in a lot of work to accomplish your non-profit's goals and build its reputation so you can keep raising enough money to keep paying your pretty meager salary. The latter isn't "profit", it's just non-profit work, and the financial return on investment is not that high for most people who attempt it.