V10 Corp owing 300k. PAYE make sense? Forum

[guano]

Oddly, both of these are incredibly credited:

Disagree. Just save the money rather than putting it towards loans. It will improve your quality of life and ability to peace out at anytime, and even with the tax bomb PAYE might be the better option. Who knows what inflation will look like 20 years from now.

Sofi. Don't create a situation where you have half a million dollars hanging over your head til you're 50.

But this is a good middle ground:

I'm gonna PAYE it down myself and then if after 6-12 months I see that I'm in it for the long haul I'll probably switch to SoFi/DRB depending on what the rates look like at that point.

If you're not sure you're in the long haul, give yourself options. Once you're set in your career, pay that shit down as fast as you can.

[Pokemon]

I would do PAYE... save money on the side for tax bomb and live the good life.
Inflation is your friend.

What I do not understand though, is whether you can overpay for PAYE/IBR and similar programs. Basically, I want the protection of the program, but also whenever I wish, I want to make some aggressive payments without getting out of PAYE/IBR territory.... is that allowed?

[Tiago Splitter]

I would do PAYE... save money on the side for tax bomb and live the good life.
Inflation is your friend.

What I do not understand though, is whether you can overpay for PAYE/IBR and similar programs. Basically, I want the protection of the program, but also whenever I wish, I want to make some aggressive payments without getting out of PAYE/IBR territory.... is that allowed?

Yeah you can always pay as much as you want.

[glitched]

Isn't the tax bomb dischargeable?

[Pokemon]

Isn't the tax bomb dischargeable?

It is... I think. But you really want to plan on applying for bk at that point in your life?

[glitched]

Isn't the tax bomb dischargeable?

It is... I think. But you really want to plan on applying for bk at that point in your life?

Hope not.

So if I do paye, I can always put more money down, do my own 10 year plan paying off the higher interest loans, while the interest isn't compounding, and have the govt safety net if the shit hits the fan? And on top of that I can convert some of my loans whenever I want using sofi?

[Pokemon]

Isn't the tax bomb dischargeable?

It is... I think. But you really want to plan on applying for bk at that point in your life?

Hope not.

So if I do paye, I can always put more money down, do my own 10 year plan paying off the higher interest loans, while the interest isn't compounding, and have the govt safety net if the shit hits the fan? And on top of that I can convert some of my loans whenever I want using sofi?

I thought so. That is why I am shocked when the TLS wisdom goes something along the lines of pay it all in 3-5 years. For what? So that in case they fire you, you are left with no savings and wheels spinning. But again, I do not know all of the details.

[Tiago Splitter]

I thought so. That is why I am shocked when the TLS wisdom goes something along the lines of pay it all in 3-5 years. For what? So that in case they fire you, you are left with no savings and wheels spinning. But again, I do not know all of the details.

Financially you're better off paying a loan off right away, at least if inflation doesn't rise. Firing are also rare, so people figure you just grind it out until the loans are gone and then go do what you want. I'm not worried about getting fired but I am worried about hating it and wanting to leave, and in that case cash helps a lot more than a smaller but still substantial loan balance. But if things work out and I make good money during my career I'll be a little bit worse off by not having paid my loans off as fast as possible.

Regarding taxes, forgiven debt is taxed only to the point of solvency, so if you have 200k in assets and 300k is forgiven you are only taxed on 200k.

[nouseforaname123]

Just curious, what does that debt do to your credit? Ability to get a mortgage? Etc...

[Pokemon]

I thought so. That is why I am shocked when the TLS wisdom goes something along the lines of pay it all in 3-5 years. For what? So that in case they fire you, you are left with no savings and wheels spinning. But again, I do not know all of the details.

Financially you're better off paying a loan off right away, at least if inflation doesn't rise. Firing are also rare, so people figure you just grind it out until the loans are gone and then go do what you want. I'm not worried about getting fired but I am worried about hating it and wanting to leave, and in that case cash helps a lot more than a smaller but still substantial loan balance. But if things work out and I make good money during my career I'll be a little bit worse off by not having paid my loans off as fast as possible.

Regarding taxes, forgiven debt is taxed only to the point of solvency, so if you have 200k in assets and 300k is forgiven you are only taxed on 200k.

I agree that you are better off paying off the loan as quickly as possible if things turn out well career-wise for someone (no alternative investment beats the 7% you pay in loan interest); but if things do not turn well, paying it at a slower rate seems like a good insurance policy. I guess this also depends on the safety net of most people.

I am no tax expert but I thought it was the opposite. If your liabilities surpass your assets, so let's say you are at -100k. If you are forgiven 300k, then you will be taxed as if you were only forgiven 200k.
Under your system, if I have 1k in assets, I would be taxed as if only receiving 1k, even if the forgiveness is 300k. That does not ring correct to me. I do not know much about tax law though.

[Pokemon]

Just curious, what does that debt do to your credit? Ability to get a mortgage? Etc...

I thought this was protected debt so it does not really hurt you. If anything, it helps you as long as you do not default.

[Tiago Splitter]

I am no tax expert but I thought it was the opposite. If your liabilities surpass your assets, so let's say you are at -100k. If you are forgiven 300k, then you will be taxed as if you were only forgiven 200k.
Under your system, if I have 1k in assets, I would be taxed as if only receiving 1k, even if the forgiveness is 300k. That does not ring correct to me. I do not know much about tax law though.

Yes. You would only be taxed on 1k. Here is what the IRS says:

"Example 1—amount of insolvency more than canceled debt.

In 2013, Greg was released from his obligation to pay his personal credit card debt in the amount of $5,000. Greg received a 2013 Form 1099-C from his credit card lender showing the entire amount of discharged debt of $5,000 in box 2. None of the exceptions to the general rule that canceled debt is included in income apply. Greg uses the insolvency worksheet to determine that his total liabilities immediately before the cancellation were $15,000 and the FMV of his total assets immediately before the cancellation was $7,000. This means that immediately before the cancellation, Greg was insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets). Because the amount by which Greg was insolvent immediately before the cancellation was more than the amount of his debt canceled, Greg can exclude the entire $5,000 canceled debt from income.

When completing his tax return, Greg checks the box on line 1b of Form 982 and enters $5,000 on line 2. Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Greg does not include any of the $5,000 canceled debt on line 21 of his Form 1040. None of the canceled debt is included in his income.

Example 2—amount of insolvency less than canceled debt.

The facts are the same as in Example 1 except that Greg's total liabilities immediately before the cancellation were $10,000 and the FMV of his total assets immediately before the cancellation was $7,000. In this case, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the canceled debt was more than the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.

Greg checks the box on line 1b of Form 982 and includes $3,000 on line 2. Also, Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Additionally, Greg must include $2,000 of canceled debt on line 21 of his Form 1040 (unless another exclusion applies)."

In my earlier example, you'd have 200k in debt and 300k in liabilities, so you are insolvent to the tune of 100k. You then exclude 100k from the 300k loan forgiveness, meaning you are taxed on 200k.

[NYSprague]

I have not heard or do not recall any requirement that you have a full time job to be on PAYE.

Can you please cite where that requirement is specified? I looked quickly but couldn't find it.

[Pokemon]

I am no tax expert but I thought it was the opposite. If your liabilities surpass your assets, so let's say you are at -100k. If you are forgiven 300k, then you will be taxed as if you were only forgiven 200k.
Under your system, if I have 1k in assets, I would be taxed as if only receiving 1k, even if the forgiveness is 300k. That does not ring correct to me. I do not know much about tax law though.

Yes. You would only be taxed on 1k. Here is what the IRS says:

"Example 1—amount of insolvency more than canceled debt.

In 2013, Greg was released from his obligation to pay his personal credit card debt in the amount of $5,000. Greg received a 2013 Form 1099-C from his credit card lender showing the entire amount of discharged debt of $5,000 in box 2. None of the exceptions to the general rule that canceled debt is included in income apply. Greg uses the insolvency worksheet to determine that his total liabilities immediately before the cancellation were $15,000 and the FMV of his total assets immediately before the cancellation was $7,000. This means that immediately before the cancellation, Greg was insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets). Because the amount by which Greg was insolvent immediately before the cancellation was more than the amount of his debt canceled, Greg can exclude the entire $5,000 canceled debt from income.

When completing his tax return, Greg checks the box on line 1b of Form 982 and enters $5,000 on line 2. Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Greg does not include any of the $5,000 canceled debt on line 21 of his Form 1040. None of the canceled debt is included in his income.

Example 2—amount of insolvency less than canceled debt.

The facts are the same as in Example 1 except that Greg's total liabilities immediately before the cancellation were $10,000 and the FMV of his total assets immediately before the cancellation was $7,000. In this case, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the canceled debt was more than the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.

Greg checks the box on line 1b of Form 982 and includes $3,000 on line 2. Also, Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Additionally, Greg must include $2,000 of canceled debt on line 21 of his Form 1040 (unless another exclusion applies)."

In my earlier example, you'd have 200k in debt and 300k in liabilities, so you are insolvent to the tune of 100k. You then exclude 100k from the 300k loan forgiveness, meaning you are taxed on 200k.

I am not sure, maybe we are saying the same thing, but the bolded example seems to agree with what I am saying.
Assets: $7,000
Liabilities: $10,000

A-L (aka insolvency)= - $3000.

Taxable Debt= Forgiven Debt - Insolvency
5,000 - 3,000 = 2k.

Greg will be taxed as if he received an income of 2k.

If Greg was not insolvent, but let's say he just had assets of 1K (with no liabilities), then he would be taxed as if he received income of 5k. This might put him into negatives, paying the tax bill, so Greg files for BK.

[Tiago Splitter]

If Greg was not insolvent, but let's say he just had assets of 1K (with no liabilities), then he would be taxed as if he received income of 5k. This might put him into negatives, paying the tax bill, so Greg files for BK.

But in our example, you have 300k in student debt which is a liability. When that's forgiven, you get to exclude 299k and pay tax on 1k of income. If you are like Greg in example 1 and have MORE than 300k in liabilities (so student debt plus other debts) and only 1k in assets then none of the forgiven debt is treated as income. You don't need to file bankruptcy, it just isn't income.

[glitched]

I am not sure, maybe we are saying the same thing, but the bolded example seems to agree with what I am saying.
Assets: $7,000
Liabilities: $10,000

A-L (aka insolvency)= - $3000.

Taxable Debt= Forgiven Debt - Insolvency
5,000 - 3,000 = 2k.

Greg will be taxed as if he received an income of 2k.

If Greg was not insolvent, but let's say he just had assets of 1K (with no liabilities), then he would be taxed as if he received income of 5k. This might put him into negatives, paying the tax bill, so Greg files for BK.

This would be impossible though bc in this scenario the 5k forgiven debt was liability. So he would have -4k insolvency. So 5k - 4k = 1K of TI.

[Pokemon]

I see your guys argument, but I always assumed that loan obligations did not count as liabilities, in the same way that loan income when you borrow it does not come as income. This is why when it is forgiven, it all of the sudden triggers income on the borrower and loss on the lender.

It seems to me like somewhat of an absurd result if tomorrow I borrow 300k, I have no assets, and then I get it forgiven. Since the money I borrowed make a liability of $300k and have no assets, then I get away without paying anything. I mean companies would pay us this way; they would be like oh, we are just lending him 100k and then forgiving it at the end of the year.

[glitched]

I see your guys argument, but I always assumed that loan obligations did not count as liabilities, in the same way that loan income when you borrow it does not come as income. This is why when it is forgiven, it all of the sudden triggers income on the borrower and loss on the lender.

It seems to me like somewhat of an absurd result if tomorrow I borrow 300k, I have no assets, and then I get it forgiven. Since the money I borrowed make a liability of $300k and have no assets, then I get away without paying anything. I mean companies would pay us this way; they would be like oh, we are just lending him 100k and then forgiving it at the end of the year.

You'd have to spend the money on consumables or gift the cash since cash would be an asset. But you're right, it's a pretty absurd result and I could be wrong. Maybe the company wouldn't be able to deduct that cash so then someone would still be paying the tax.

[glitched]

Well, it doesn't even matter for me anyway. I got the pre-2007 shaft.

But I guess there's always this: http://www.whitehouse.gov/the-press-off ... affordable

I don't get what's going on anymore...

[Nomo]

When you start your biglaw job you have a substantial change in income. You are absolutely supposed to report that.

Where are you getting a requirement to report a substantial change in income? I don't see any reporting obligations except when you file the annual application.

Personally, I'll be eligible to sign up for PAYE before my job starts, and it asks if "current" income is different than what's on your tax return. I think I would be truthful in saying no, given that my current income is 0 before work starts. But I wouldn't fill out the form next year based on my stub year tax return--that's blatant fraud.

You're not eligible for PAYE if you don't have a full-time job. So even if you enter repayment before your job starts, you still can't sign up for PAYE until your jobs starts.

I'm pretty sure, having gone through the PAYE process that you are required to report any time your income changes. But I'm not going to search through all the documents to find that right now. I guess I could be wrong though. My memory is far from perfect.

Fair enough. Personally I haven't found anything requiring updated income within 1 year or a requirement to have a full-time job when you sign up. The only full-time requirement I've seen is for Public Service Loan forgiveness (not for eligibility or 20 year forgiveness).

I am attempting to get PSLF, so its possible I didn't take notice of the differences in PSLF and 20-year forgiveness requirements. You should probably disregard everything I've said.

I would add that I've got a lot less debt than you will have and I've found it to be a much greater psychological burden than I expected. I didn't really understand how much it would weigh on me until I started working and realized that even though I was making money my debt was still increasing every month (as my PAYE payments are less than the interest). I don't know if the anxiety is entirely rational, but it doesn't make it less real. I know many of my friends have had the same experience.

[guano]

Just curious, what does that debt do to your credit? Ability to get a mortgage? Etc...

I thought this was protected debt so it does not really hurt you. If anything, it helps you as long as you do not default.

Credit Score: as long as you never miss a payment, it doesn't hurt you
Ability to borrow money: the maximum amount a lender will lend you is based on both income and debt outstanding. For example, if, based on your income, a lender would be willing to lend you $500,000, but you have $100,000 in student loans, the most you can borrow is $400,000.

But the important thing to add is that the amount lenders are willing to lend you tends to be a bit higher than the amount you're able to pay back without having to resort to drastic measures. For example, (assuming no student loan) a lender might be willing to lend you $500,000, when your income means that you really shouldn't be borrowing more than $400,000. The amount that banks are willing to lend someone tends to be so high that after loan payments you're basically down to subsistence living.

[DoveBodyWash]

Just curious, what does that debt do to your credit? Ability to get a mortgage? Etc...

this is what Google told me:

Many young people lack a long credit history, so on-time student loan payments can actually add to a positive credit report. On the other hand, student loan payments are part of the debt-to-income ratio, which compares all recurring minimum monthly payments to your gross income. Most lenders require a maximum debt-to-income ratio of 43%, although FHA lenders are sometimes a little more flexible if you have compensating factors such as a high credit score, a solid job history or additional assets in the bank. For example, if your monthly income is $4,000 and you have a monthly student loan payment of $400, your other monthly bills, including a car payment, credit card payment and mortgage payment including principal, interest, property taxes, homeowners insurance and a condo or homeowners association fee must be less than $1,320 to stay within the 43% debt-to-income ratio.