Income Tax Question Forum

[Law1491]

under current Internal Revenue Service (IRS) rules, you may be required to pay income tax on any amount that is forgiven if you still have a remaining balance at the end of your repayment period for an income-driven repayment plan.

So, you may be required? Who is required and who is not?

Thank you

[rinkrat19]

As the laws stand right now:
People who've worked in public interest for 10 years won't be required to pay tax on the forgiven amount (unless the laws are changed). You have to keep proof of your payments and PI employment to turn in at the end to qualify. I don't think this program has been around for 10 years yet, so nobody has actually finished their 10 years and had their loans forgiven.

People who don't have 10 years of working in PI will be required to pay taxes (unless the laws are changed).

[Law1491]

Thank you. What is the probability the the law might be changed and in what way?

[Tiago Splitter]

You'll also avoid some of the taxes if your assets at the time of forgiveness are less than the forgiven loan balance. You'll pay tax on the lesser of 1) the amount of your assets or 2) the amount of loans forgiven. So if you have 400k in loans forgiven in 20 years but only 250k in assets you'll pay tax on 250k as if you had received a 250k windfall in year 20. Which would be like 85k in taxes.

I wouldn't count on the laws changing anytime soon.

[rinkrat19]

Thank you. What is the probability the the law might be changed and in what way?

Nobody knows. But considering Congress can barely pass a motion to break for lunch, a major shakeup (for better or worse) in student loans seems unlikely for the time being. And many people think that any changes would have grandfather clauses, so any loans taken out under a certain program might still have the same forgiveness, even if the laws change.

[Law1491]

How can debt be $400K after 20 years of repayment? So, can one work for 10 years in the government sector, have his or her loan forgiven, and then go to the private business?

[rinkrat19]

How can debt be $400K after 20 years of repayment?

If you're making income-based payments (IBR and PAYE), you're very likely not even keeping up with the accruing interest.

So, can one work for 10 years in the government sector, have his or her loan forgiven, and then go to the private business?

Yep. And some schools (typically better schools) have LRAP programs that will pay off some of the unpaid interest while you're working in PI, so the amount forgiven by the Feds is less.

Y'all need to do some research on IBR, PAYE, PSLF, and LRAP.

[Law1491]

Thank you for all replies. Just did some reading on these 4 programs. And I still have more questions than answers. When I accept Stafford and Grad Plus loans, what repayment plan am I agreeing to? Or is it completely contingent on the outcome: my salary and debt ratio upon graduation?

[Tiago Splitter]

Thank you for all replies. Just did some reading on these 4 programs. And I still have more questions than answers. When I accept Stafford and Grad Plus loans, what repayment plan am I agreeing to? Or is it completely contingent on the outcome: my salary and debt ratio upon graduation?

You'll be eligible for PAYE as long as you have financial hardship, which means your payment under PAYE is lower than your payment would be under a standard ten year repayment plan. Once you're on PAYE you can't be kicked off. In practice everyone will be PAYE-eligible because you use the previous year's income to qualify, and no one makes very much money during law school.

As long as you don't refinance your loans to a private lender you'll retain those government repayment options.

[Law1491]

OK, so is it a standard practice to be on PAYE the first year after law school regardless of what kind of job you have or how much you owe?

[Tiago Splitter]

OK, so is it a standard practice to be on PAYE the first year after law school regardless of what kind of job you have or how much you owe?

yeah you just jump into PAYE and then you can always pay more.

[Law1491]

Theoretically, if someone get a high paying job, what is the best way to pay the loan. Do people go with the 10-year repayment plan and pay $3K a month for 10 years or do most people still go with PAYE program? I always thought that the best way is to pay as much as you can and be done with it in 10 years, but now with all these assistance programs I don't even know.

For someone with 60K a year salary, it is a necessity.

I wrote it and am laughing at myself, asking questions what is the best way to pay loans with a high paying job. ha ha
I am just trying to understand how the whole system works.

[Tiago Splitter]

There's a lot of debate on TLS about the best move. Many people with high salaries refinance their loans because with interest rates being so low they can save a lot of money with a private lender. The downside is that you lose the PAYE option. I'll be at a large firm but I'm gonna start out making fairly low payments on PAYE because a) I want to build up a nice savings cushion and b) I don't know how long I'll be able to tolerate that life. If after several months I think I'm in it for the long haul I'll probably start trying to pay down the loans more aggressively. Ultimately it just depends on your debt load and your career plans. Someone planning to move from private practice to government after a few years should not be paying a dime more than they have to if they expect to be in government for at least ten years.