Why does everyone on TLS disregard IBR? Forum

[FeelTheHeat]

From the information I have gathered, IBR seems to be an excellent means of paying back substantial (100k+) debt, especially outside the T14. Does anyone care to share information on why it seems to fly under the radar on this site? Specifically, what are the caveats to it that fail to make it as relevant as it should be.

[SisyphusHappy]

1. You have to hope it sticks around for 13 years (which isn't really a concern of mine, but still)
2. You have to find employment (easier said than done right now)
3. You can't change your mind about public interest.

Basically, the fear is doing IBR for 5 years and then losing your job/going private/etc. You've paid off nothing, and the interest will bury you.

[dakatz]

Because people are skeptical of some "safety net" that is supposed to protect them from crushing debt. You know what they say about things in life that seem too good to be true. This has the smell of one of those things.

[cmraider]

From the information I have gathered, IBR seems to be an excellent means of paying back substantial (100k+) debt, especially outside the T14. Does anyone care to share information on why it seems to fly under the radar on this site? Specifically, what are the caveats to it that fail to make it as relevant as it should be.

I'm not sure if I fully comprehend the stips of IBR, but as I understand it once you hit the end of your loan term (or maybe it's 10 or 20 years, not real sure), your remaining loan balance is considered taxable income. It's a good deal if you are A. making a lot of money down the road and B. don't have a large balance left (but if you didn't, you probably wouldn't have needed IBR in the first place).

ANECDOTE ALERT: My ex took out 85,000 between getting her UG and master's in education. Her IBR repayments are 1/3 of what her actual payments would be. Now, if we use some simplified (and most likely incorrect) math and we assume she only pays 1/3 (probably more like 1/4 when you factor in capitalized interest) of her balance over 10 years, she will have to claim an additional 56,000+ the year her term is up, which could be double her actual earnings for that year (what with being a teacher and all).

[Borhas]

^ IBR loan forgiveness for PI/Gov't work isn't taxed (and it's forgiven after 10 years), but IBR loan forgiveness for private sector work is taxed (forgiven after 25 years)

[NCtoDC]

^ IBR loan forgiveness for PI/Gov't work isn't taxed (and it's forgiven after 10 years), but IBR loan forgiveness for private sector work is taxed (forgiven after 25 years)

what he said^^^^

http://www.finaid.org/loans/forgivenesstaxability.phtml

[cmraider]

^ IBR loan forgiveness for PI/Gov't work isn't taxed (and it's forgiven after 10 years), but IBR loan forgiveness for private sector work is taxed (forgiven after 25 years)

I concede. I should have mentioned this, but I wasn't entirely sure how it related to lawyers since my only experience in it was in the education sector. Similarly, those who teach math and hard sciences or teachers who work in under-privileged schools for 10 years have their loans completely forgiven. My ex was very much stressing out about her IBR because she fit none of the aforementioned criteria.

[BruceWayne]

The reason they disregard it is because very few people want to work in PI. If you pay attention you'll see that the goal of most posters is to work in a high ranking "Vault" NYC firm.

[FeelTheHeat]

Understood. I fully plan on pursuing a job with the SA so this is relevant for me. Thanks to everyone who responded.

[rayiner]

I don't think IBR is disregarded around here. When people express an interest in public service, IBR is regularly mentioned as being a major factor in the decision.

When people don't mention being interest in public service, nobody mentions IBR because it's not useful. Currently, if you go into the private sector, IBR won't pay off your loans for 25 years. Moreover, when it does, the forgiveness amount will be treated as taxable income. Since for most people IBR payments won't even cover interest payments (almost $20k the first year if you take full loans) your principal will keep growing and the resulting tax bill will be enormous.

[DeeCee]

Because people are skeptical of some "safety net" that is supposed to protect them from crushing debt. You know what they say about things in life that seem too good to be true. This has the smell of one of those things.

personally, this is my opinion as well. If it works out for me, outstanding, otherwise I'm still trying to limit my debt as much as possible by being debt-averse

[vanwinkle]

I mention IBR in nearly every "pick between schools" thread I join that hasn't discussed it already.

IBR gets discussed quite a bit, and I don't think people are just "disregarding" it. There are regular debates about the pros and cons. I'm highly skeptical of the biggest potential con (defunding the program) because of the potential political fallout. Others take a different view. But it's a conscious choice and not just people ignoring one option. Even the people choosing to take large scholarships over higher-ranked schools will probably use IBR if they ever need to. It's not like choosing a particular school means you're choosing to opt out of IBR.

[cmraider]

IBR can lead to a catch-22 where you're damned if you do, damned if you don't situation. If you take out 150k+ in loans, but end up practicing in a small firm for a modest salary for most of your career, it can create a scenario where your loan payments are too large to handle, but if you take IBR, you could be faced with a crippling tax situation after the 25 years are up.

ANOTHER ANECDOTE: My ex was stressing out about her IBR because if she chose not to do it, roughly 1/3 of her pre-tax income would go toward servicing her student loans. If you're making 35k as a teacher out of college, with 11k going to loans, plus another ~7k to Uncle Sam, you have 17k to pay for rent, food, etc.

Likewise, when her loans are forgiven, she will likely have to pay taxes more than double her income for that year. Obviously income and debt levels are different for lawyers, but I think the example still applies considering most students will make more $, but have more debt.

[OperaSoprano]

We don't disregard IBR. Not for half of a minute. It's the only reason I was able to go to Fordham at sticker instead of attending Temple at a gigantic scholarship, with almost no CoL in north Philly. I have given this a good amount of thought, and I want to work in NYC public interest when I graduate. Moreover, Fordham's LRAP will cover 100% of my IBR payments for the first five years, so if I do pull this off and stay with it ten years, I will likely pay less than $75,000 for my education. (This is assuming raises by year five of my career.) I have no other debt, and this seems reasonable to me.

Even for people who don't do PI, IBR will prevent default, though as others have pointed out, your debt will grow if your IBR payment is less than the interest you owe. You should attempt to cover your interest payment at the very least, if you possibly can.

[Geist13]

Also, it doesn't need to stick around for 13 years for you to be in the clear. It is very unlikely that if the law were changed, the individuals already on the program (i.e. those that have been relying on it from the start) would immediately be dropped and stuck with all these loans, unpaid interest and low paying jobs. Likely, the program would just not be available to any more graduates or matriculants.

With regard to the crippling tax scenarios, that is mitigated by saving some extra dough over the years for that one-time increased tax payment. The vastly reduced loan payments make this possible, even if you're not making a lot of money.

[vanwinkle]

Moreover, when it does, the forgiveness amount will be treated as taxable income. Since for most people IBR payments won't even cover interest payments (almost $20k the first year if you take full loans) your principal will keep growing and the resulting tax bill will be enormous.

One small thing to point out, just for clarity: Interest does not compound under IBR. If your IBR payment is too small to cover the interest payment alone, any leftover interest is added to your debt but interest does not accrue on the added amount. There's no resulting compounding or snowball effect. You still can end up with a rather large debt after 25 years, but it's not as terrible as people might initially imagine.

Also, eligibility for PI forgiveness is counted non-consecutively and calculated on a monthly basis. While it's often described simply as "after 10 years", it's actually eligibility after 120 months of eligible employment. The 120 months can be non-consecutive. If you work in PI for ten years (120 months) TOTAL somewhere before you hit 25 years, you're eligible for non-taxable PI loan forgiveness. Something else to consider.

[rundoxierun]

I mention IBR in nearly every "pick between schools" thread I join that hasn't discussed it already.

IBR gets discussed quite a bit, and I don't think people are just "disregarding" it. There are regular debates about the pros and cons. I'm highly skeptical of the biggest potential con (defunding the program) because of the potential political fallout. Others take a different view. But it's a conscious choice and not just people ignoring one option. Even the people choosing to take large scholarships over higher-ranked schools will probably use IBR if they ever need to. It's not like choosing a particular school means you're choosing to opt out of IBR.

The political fallout would be near zero. This is America. There is no fallout from cutting a program that affects a small, and financially poor, minority. We just cut back energy assistance programs for the poor while energy prices threaten to rise at rates above inflation for the foreseeable future, cutting subsidization for graduate stafford loans is under serious consideration, and there are even talks about reducing the max pell grant as governments cut back on education funding and college costs skyrocket.

There is very, very little political fallout for cutting things that affect the poor. All you have to do is spin it as a welfare program that is being fradulently taken advantage of and barely helps anybody.

[rayiner]

Moreover, when it does, the forgiveness amount will be treated as taxable income. Since for most people IBR payments won't even cover interest payments (almost $20k the first year if you take full loans) your principal will keep growing and the resulting tax bill will be enormous.

One small thing to point out, just for clarity: Interest does not compound under IBR. If your IBR payment is too small to cover the interest payment alone, any leftover interest is added to your debt but interest does not accrue on the added amount. There's no resulting compounding or snowball effect. You still can end up with a rather large debt after 25 years, but it's not as terrible as people might initially imagine.

Also, eligibility for PI forgiveness is counted non-consecutively and calculated on a monthly basis. While it's often described simply as "after 10 years", it's actually eligibility after 120 months of eligible employment. The 120 months can be non-consecutive. If you work in PI for ten years (120 months) TOTAL somewhere before you hit 25 years, you're eligible for non-taxable PI loan forgiveness. Something else to consider.

Yeah. DF actually told me about the non-compounding thing recently, and it makes sense. Still, if you graduate with $200k of debt and make $90k/year on average in PI, you'll still double your original principal in interest, and have $400k forgiven at the end, which will translate into a 6-figure tax bill.

EDIT: As vanwinkle mentioned, this applies to a non-PI job.

[vanwinkle]

Yeah. DF actually told me about the non-compounding thing recently, and it makes sense. Still, if you graduate with $200k of debt and make $90k/year on average in PI, you'll still double your original principal in interest, and have $400k forgiven at the end, which will translate into a 6-figure tax bill.

I'm assuming you meant $90K/yr in non-PI, since PI forgiveness isn't taxable. But it would suck for people in lower-paying non-PI jobs, yeah.

And it's a hell of a world I've entered where I'm referring to $90K/yr as "lower-paying". (I'm using that to refer to jobs that don't pay enough to afford your interest payments, which, well, $90K wouldn't.)

[DeeCee]

I mention IBR in nearly every "pick between schools" thread I join that hasn't discussed it already.

IBR gets discussed quite a bit, and I don't think people are just "disregarding" it. There are regular debates about the pros and cons. I'm highly skeptical of the biggest potential con (defunding the program) because of the potential political fallout. Others take a different view. But it's a conscious choice and not just people ignoring one option. Even the people choosing to take large scholarships over higher-ranked schools will probably use IBR if they ever need to. It's not like choosing a particular school means you're choosing to opt out of IBR.

The political fallout would be near zero. This is America. There is no fallout from cutting a program that affects a small, and financially poor, minority. We just cut back energy assistance programs for the poor while energy prices threaten to rise at rates above inflation for the foreseeable future, cutting subsidization for graduate stafford loans is under serious consideration, and there are even talks about reducing the max pell grant as governments cut back on education funding and college costs skyrocket.

There is very, very little political fallout for cutting things that affect the poor. All you have to do is spin it as a welfare program that is being fradulently taken advantage of and barely helps anybody.

I agree. This is why I'm picking my least debt option, that way I know I can stay above water either way. I am definitely hoping this program is still available when I graduate in 2014, but I have to be sensible here and still make financially prudent decisions, even if the program looks to be solid.

[OperaSoprano]

I disagree that IBR could be easily defunded. We are talking about highly educated and extremely vocal people who would cause a shitshow if this were to happen. I am not saying it could not happen, just that it would be a political liability and not an easy trifle for politicians to mess around with. It would also be impractical in that it would lead to widespread defaulting by well meaning people who simply could not afford their full payments with, say $220k in debt on a $45k salary.

[vanwinkle]

I mention IBR in nearly every "pick between schools" thread I join that hasn't discussed it already.

IBR gets discussed quite a bit, and I don't think people are just "disregarding" it. There are regular debates about the pros and cons. I'm highly skeptical of the biggest potential con (defunding the program) because of the potential political fallout. Others take a different view. But it's a conscious choice and not just people ignoring one option. Even the people choosing to take large scholarships over higher-ranked schools will probably use IBR if they ever need to. It's not like choosing a particular school means you're choosing to opt out of IBR.

The political fallout would be near zero. This is America. There is no fallout from cutting a program that affects a small, and financially poor, minority. We just cut back energy assistance programs for the poor while energy prices threaten to rise at rates above inflation for the foreseeable future, cutting subsidization for graduate stafford loans is under serious consideration, and there are even talks about reducing the max pell grant as governments cut back on education funding and college costs skyrocket.

There is very, very little political fallout for cutting things that affect the poor. All you have to do is spin it as a welfare program that is being fradulently taken advantage of and barely helps anybody.

I disagree. Even people who hate many institutions of higher learning and regard them as bastions of liberalism want to know their kids can afford to go to college. This affects many people personally, and unlike most "welfare" programs, access to higher education is something the mainstream middle-class care about as well. This is something I think would go too far and face public backlash if they seriously tried to cut it, because it's in that "cut spending, but not things that help us" category.

[vanwinkle]

To put it another way: Cutting Pell grants and loan subsidies hurts the eligible poor, especially minorities. Cutting loan forgiveness hurts working professionals, and your kid's ability to afford to become one. There would be a different kind of outrage.

[DeeCee]

To put it another way: Cutting Pell grants and loan subsidies hurts the eligible poor, especially minorities. Cutting loan forgiveness hurts working professionals, and your kid's ability to afford to become one. There would be a different kind of outrage.

Although I see where you are coming from, I don't have that kind of faith in our system. This is because we have all seen things change with each incoming administration.

[BruceWayne]

I mention IBR in nearly every "pick between schools" thread I join that hasn't discussed it already.

IBR gets discussed quite a bit, and I don't think people are just "disregarding" it. There are regular debates about the pros and cons. I'm highly skeptical of the biggest potential con (defunding the program) because of the potential political fallout. Others take a different view. But it's a conscious choice and not just people ignoring one option. Even the people choosing to take large scholarships over higher-ranked schools will probably use IBR if they ever need to. It's not like choosing a particular school means you're choosing to opt out of IBR.

The political fallout would be near zero. This is America. There is no fallout from cutting a program that affects a small, and financially poor, minority. We just cut back energy assistance programs for the poor while energy prices threaten to rise at rates above inflation for the foreseeable future, cutting subsidization for graduate stafford loans is under serious consideration, and there are even talks about reducing the max pell grant as governments cut back on education funding and college costs skyrocket.

There is very, very little political fallout for cutting things that affect the poor. All you have to do is spin it as a welfare program that is being fradulently taken advantage of and barely helps anybody.

I hate to say it but this is totally on point.