What does IBR actually do for you? Forum

[What the f.supp?]

My girlfriend graduated last year and has about $260k in law school loans. She works in mid-law making about $140K and on IBR she pays something like $1,400/month. When she called the myfedloans people they told her something to the effect of "the government pays for your loan interest for the first 3 years." I witnessed last month when she paid the IBR payment and an additional $600. However, this month the principal is only like $200 less--after paying about $2,000 the month before! I would think that the principal would be about $600 less, assuming the interest was being subsidized by the feds. Do you guys know how IBR works? Should I just tell her to get out of IBR and do the 25-year plan? Really appreciate any advice or info!

[rayiner]

My girlfriend graduated last year and has about $260k in law school loans. She works in mid-law making about $140K and on IBR she pays something like $1,400/month. When she called the myfedloans people they told her something to the effect of "the government pays for your loan interest for the first 3 years." I witnessed last month when she paid the IBR payment and an additional $600. However, this month the principal is only like $200 less--after paying about $2,000 the month before! I would think that the principal would be about $600 less, assuming the interest was being subsidized by the feds. Do you guys know how IBR works? Should I just tell her to get out of IBR and do the 25-year plan? Really appreciate any advice or info!

Only the interest on the Stafford loans (max about $60k for LS) is subsidized. The rest is not. Paying $1,400 per month, she's not even paying all the interest that accrues each month on her loan (about $1,700 per month). So paying $2,000 one month would only reduce your principal by $300 or so (obviously the math is approximate).

Tell your GF to get on Pay as you Earn. The nice thing about PAY-E is that your total principal + capitalized interest is capped at 10% more than what you started with, over the lifetime of the repayment. So even if your payments continue to be less than the interest that accrues each month, only $26k of that interest will get capitalized on top of the original principal, and anything above that will get thrown away.

[buffalo_]

My girlfriend graduated last year and has about $260k in law school loans. She works in mid-law making about $140K and on IBR she pays something like $1,400/month. When she called the myfedloans people they told her something to the effect of "the government pays for your loan interest for the first 3 years." I witnessed last month when she paid the IBR payment and an additional $600. However, this month the principal is only like $200 less--after paying about $2,000 the month before! I would think that the principal would be about $600 less, assuming the interest was being subsidized by the feds. Do you guys know how IBR works? Should I just tell her to get out of IBR and do the 25-year plan? Really appreciate any advice or info!

That's a lot of loans. She is probably going to need to pay a minimum of $2,500 a month if she hopes to make a dent in it.

This really isn't a question for this forum though. You need to talk to a financial aid specialist. They will charge you for advice, but it will be worth it when she is saving tens of thousands if not more in loan interest.

[Tiago Splitter]

Tell your GF to get on Pay as you Earn. The nice thing about PAY-E is that your total principal + capitalized interest is capped at 10% more than what you started with, over the lifetime of the repayment. So even if your payments continue to be less than the interest that accrues each month, only $26k of that interest will get capitalized on top of the original principal, and anything above that will get thrown away.

Just so people don't get too excited, only 26k will be added to the principal if you are no longer in financial hardship, but you'll still accrue simple interest on the principal. The balance could end up much higher than 286k.

[withoutapaddle]

Even if your loans are forgiven after 20 years you're still on the hook for taxes (We're talking five or six digit tax burdens). Remember while on IBR you're not really paying much and your loan principal is increasing. You could go from having 150k in debt to 500K in debt over the 20 year period due to the interest .

You can declare bankruptcy but a creditor won't touch you for seven+ years. So let's say you graduate when you're 27. You complete IBR at the age of 47 and declare bankruptcy. A creditor won't touch you until you're 54.

[Tiago Splitter]

Even if your loans are forgiven after 20 years you're are still on the hook for taxes (We're talking five or six digit tax burdens). Remember while on IBR you're not really paying much and your loan principal is increasing. You could go from having 150k in debt to 500K in debt over the 20 year period due to the interest .

You can declare bankruptcy but a creditor won't touch you for seven+ years. So let's say you graduate when you're 27. You complete IBR at the age of 47 and declare bankruptcy. A creditor won't touch you until you're 54.

For better or worse bankruptcy ain't what it used to be. People get car loans and even home loans within 2-3 years after foreclosures and bankruptcies these days. Definitely not something to plan on but it's not quite as punitive as you make it sound.

More importantly, interest does not compound on IBR/PAYE as long as you are in partial financial hardship. 150k debt at 7.5% interest leads to $11,250 a year in interest, which after 20 years puts you at a balance of 375k assuming you paid absolutely nothing towards your loans the entire time. Someone with 150k debt whose balance is at 300k at the end of 20 years is looking at a six figure tax burden, but that's not a bad deal when you consider the time value of money. And FWIW forgiven debt is only taxed to the point of insolvency, so someone who is legitimately broke at the end of 20 years won't face a tax hit at all. Again, not something to plan on, and certainly not a good reason to pay a lot of money for law school, but it's worth considering if you're an idiot like me and are already 2/3 way through.

[withoutapaddle]

I think there's going to be an education bubble in the near future

2-5 percent increases in tuition every year is ridiculous and it's not like teaching law is expensive (like medical school)