Budgeting/Expense Tracking - Practicalities

[FUEGO]

Isn't debt forgiveness considered taxable income?

Under current tax law, yes, most forgiveness of debt is taxable income.

Some exceptions exist that spring to mind:
-Public Service Loan Forgiveness wipes out any remaining debt after 10 years, and the forgiven debt is NOT taxable income.
-Forgiveness of mortgage debt on a principal residence is currently not taxable income, but was up till a few years ago
-non-recourse loans

There are current lobbying efforts to get Congress to extend the non-recognition of debt forgiveness to the regular 25 year income based repayment debt forgiveness plan in addition to the Public Service Loan Forgiveness non-recognition currently on the books. There is certainly precedent for not recognizing forgiveness of debt (PSLF and mortgage debt). And it won't be an issue for me till 25 years after I start IBR. By that time, there will be a few sob stories of 45-50 year old starving artists and actors who can't repay their mega hundreds of thousands in student loans from obtaining that quintessential MFA from some hoity toity college. They will be facing huge five figure income tax bills, and since they are broke, they will not be able to pay them.

In any event, I would much rather pay tax on a five or six figure forgiven debt in 25 years instead of paying all that debt over the next 17 years.

But the possibility of paying tax on that forgiveness of debt is a contingency I have to consider, just pretty small in dollar terms today.

 

[FUEGO]

Agreed...TP is a neccessity and not worth arguing about. Have to save that for more important battles like how to stack the dishwasher.

This is an area where I defer authority to higher powers. DW.

 

[FUEGO]

FUEGO,

The above quotes seem to imply that you:

a. Borrowed money on student loans
b. Used a portion of the proceeds for something other than qualified educational expenses (i.e., you invested them), and
c. Deducted the student loan interest on your federal income tax return.

Since you state that you follow the law, I trust that I have misunderstood something. According to IRS Publication 970:

a. "Student loan interest is interest you paid during the year on a qualified student loan."
b. "[A qualified student loan] is a loan you took out solely to pay qualified education expenses (defined later)..." (emphasis mine)
c. "For purposes of the student loan interest deduction, [qualified education] expenses are the total costs of attending an eligible educational institution, including graduate school."

Link to relevant portion of IRS Publication 970.

Link to relevant portion of the United States Code (Title 26).

If I have understood your situation correctly -- and it's quite possible I haven't -- then you should not be deducting the interest on any student loans where you invested any portion of the proceeds.

2Cor521

I guess I didn't explain my situation with sufficient clarity before, hence the reason for your misunderstanding.

Let's take a sample year of my grad school:

The school says that the "cost of attendance" (that term of art from the tax code/Pub that you cite) is say $27,000 which includes tuition, room board, transportation, books, and miscellaneous (or something like that breakdown). My loans plus grants may have totalled to $22,000 in my best year. As a result, all student loans that I obtained were 100% allocated to my cost of attendance. They are qualified student loans per the IRS definition and I used them solely for costs of attendance.

Yes, I may have made enough during the year from my business and from summer work to pay for my cost of attendance in full (or mostly in some years IIRC). But the point is that my cost of attendance exceeded the loans and grants I have, therefore all loans are qualified education expenses. I allocated my additional earned income to my investments, IRA contribs, mortgage prepayment, etc.

 

[FUEGO]

Again, I have not read every post, but it appears that FUEGO met the letter of the law. So give him a break and blame Congress for all this needless manipulation instead. These are not "unintended consequences", they ARE the consequences of passing "one size fits all" legislation. You either accept that there will be outlier 'violations', or you say that Congress should drop all this manipulation - OK, one more option, Congress writes perfectly effective laws, but that's not gonna happen.

That is basically my point. I'm not doing anything illegal, immoral, or unethical. This is a zany law that has ridiculous clearly foreseeable consequences.

For example, I could tell my nephew who is about to enter college about this deal. He could, for example, go through undergrad and then enter grad school and pursue a Master of Arts in Baseketweaving (graduation optional of course). Spend ten total years in school (including six in grad school "diligently" pursuing that master's) and get $140,000 or so in student loans over the course of his academic career.

Ten years later and $140,000 in debt, he's screwed, right? Nope. He can bumble along at a near minimum wage job and enter income based repayment and never pay a penny toward his student loans. By age 53 he is debt free (except the potential for a big tax bill due to forgiveness of debt unless Congress remedies this particularly grave injustice ). Or he could get a "real" job as a temp or gofer at a variety of government agencies or non profits (or Americorp if it still exists or peace corp etc) and spend 10 years coasting through life, then get all his student loan debts wiped out.

Admittedly, I would not choose to slack to this extreme degree, but for an unmotivated person, why not consider this course of action?

 

[Mulligan]

I guess I didn't explain my situation with sufficient clarity before, hence the reason for your misunderstanding.

Let's take a sample year of my grad school:

The school says that the "cost of attendance" (that term of art from the tax code/Pub that you cite) is say $27,000 which includes tuition, room board, transportation, books, and miscellaneous (or something like that breakdown). My loans plus grants may have totalled to $22,000 in my best year. As a result, all student loans that I obtained were 100% allocated to my cost of attendance. They are qualified student loans per the IRS definition and I used them solely for costs of attendance.

Yes, I may have made enough during the year from my business and from summer work to pay for my cost of attendance in full (or mostly in some years IIRC). But the point is that my cost of attendance exceeded the loans and grants I have, therefore all loans are qualified education expenses. I allocated my additional earned income to my investments, IRA contribs, mortgage prepayment, etc.

Fuegos student loans made me remember my student loan days from the early 80's. I took out students loans for 3 straight years, and put them all in 12% plus CDs, then used the interest from those loans to get a year of college paid for free. Did anyone else get to do that? I did pay the loans off after college. I guess that could be considered gaming the system, though I didn't think of it as such back then.

 

[KingB]

For example, I could tell my nephew who is about to enter college about this deal.

Why not suggest this to your kids too now and eliminate your goal of saving ~$60000 for their education and possible ER earlier.

 

[FUEGO]

Why not suggest this to your kids too now and eliminate your goal of saving ~$60000 for their education and possible ER earlier.

Believe me, I have considered it. I would rather encourage them to better themselves and get a real education and real skills that they can use to earn something in the free market. You never know when relying on the munificence of others will leave you coming up short. It is better to have some marketable skills.

And as to my need to save funds for them? I will be "rich" per the FAFSA and college aid formulas, hence my kids won't qualify for jack in terms of handouts. That means I'll either leave them unfunded and make them scrounge for work to pay for books and tuition, or pony up some money to help them get a good education.

 

[KingB]

Are you saying then, that what is good for your nephew is not good for your kids?

 

[FUEGO]

Are you saying then, that what is good for your nephew is not good for your kids?

No; I was giving that as an example of what advice someone could give. I never advocated actually giving that advice to someone that I want to succeed in life. I am simply pointing out that currently policy may not necessarily encourage hard work. Alternatively, that advice may apply to someone who you know would never really benefit from undergraduate and graduate education, but who may also flounder if they try to work right out of high school. At least in this situation, they get to live it up for 10 years by being a professional student (on the taxpayer's dime, of course).

But, hey, maybe our policymakers want to encourage more scrutinous analysis of Basketweaving in academia and hence create subsidies that encourage further study of Basketweaving.

 

[Sarah in SC]

I know a fellow (that my good friend should have married, dammit) who borrowed money for college back in the late 80s and used the money to make downpayments on student housing that was selling for cheap around the university. By the time I knew him, he had around 100 houses that he rented out.
That was a lot better education than what he was getting in college.
And then there is this article by Scott Adams, from earlier this week in the WSJ
How to Get a Real Education at College - WSJ.com

 

[SecondCor521]

I guess I didn't explain my situation with sufficient clarity before, hence the reason for your misunderstanding.

Let's take a sample year of my grad school:

The school says that the "cost of attendance" (that term of art from the tax code/Pub that you cite) is say $27,000 which includes tuition, room board, transportation, books, and miscellaneous (or something like that breakdown). My loans plus grants may have totalled to $22,000 in my best year. As a result, all student loans that I obtained were 100% allocated to my cost of attendance. They are qualified student loans per the IRS definition and I used them solely for costs of attendance.

Yes, I may have made enough during the year from my business and from summer work to pay for my cost of attendance in full (or mostly in some years IIRC). But the point is that my cost of attendance exceeded the loans and grants I have, therefore all loans are qualified education expenses. I allocated my additional earned income to my investments, IRA contribs, mortgage prepayment, etc.

(emphasis mine)

I trust, then, that you reduced your $27,000 cost of attendance by any loans and grants that you received that were subject to the double benefit clause in (2)(B) below:

"(2) Qualified higher education expenses The term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution, reduced by the sum of—
(A) the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and
(B) the amount of any scholarship, allowance, or payment described in section 25A (g)(2)."

(Again, red mine.)

...and that any such reductions resulted in a sum exceeding $22,000.

I know I'm being a little trollish here. The reason is that I also took out student loans in excess of my actual need -- in my case I paid down a higher interest debt -- but I discovered I could not deduct the interest on my taxes as I had hoped to do because of grants and payments made towards my schooling that resulted, in my case, of a cost of attendance of $0 after applying the (2)(B) clause above. So I did not deduct any of my student loan interest on my taxes. It was still, of course, a good deal, just not as good as I had hoped.

I think it is perfectly OK to take advantage of the law to the fullest extent. However, as a personal rule (and not one that you or anyone else need follow) I always check my strategies and tricks to ensure that they meet the letter of the law and do not represent loopholes that the lawmakers already thought of and have addressed in the current statutes (such as (2)(B) above, which you can find at the same US code link as in my previous comment).

2Cor521

 

[52andout]

Agreed...TP is a neccessity and not worth arguing about. Have to save that for more important battles like how to stack the dishwasher.

thanks for making me laugh out loud. I just throw it all in, much to the chagrin of DH, ex-engineer who stacks the dishwasher by size, color coded and in alphabetic order.

 

[easysurfer]

thanks for making me laugh out loud. I just throw it all in, much to the chagrin of DH, ex-engineer who stacks the dishwasher by size, color coded and in alphabetic order.

Glad I made you laugh. Dishwasher stacking methodology , really is a common issue. I'm pretty much a, start out neat, then throw it in type and let the dishwasher do the work. Whereas I know others who manually rinse the dishes out first, then stack it in nice and neat.

 

[Independent]

Glad I made you laugh. Dishwasher stacking methodology , really is a common issue. I'm pretty much a, start out neat, then throw it in type and let the dishwasher do the work. Whereas I know others who manually rinse the dishes out first, then stack it in nice and neat.

Glad to hear this is an issue with other people, thought it was just us. In our household, my wife rinses the dishes clean first, then puts them in the dishwasher according to a precise plan (which, in fact, maximizes the capacity of the dw). I have learned to just step away and do the hand washing.

 

[FUEGO]

(emphasis mine)

I trust, then, that you reduced your $27,000 cost of attendance by any loans and grants that you received that were subject to the double benefit clause in (2)(B) below:

"(2) Qualified higher education expenses The term “qualified higher education expenses” means the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution, reduced by the sum of—
(A) the amount excluded from gross income under section 127, 135, 529, or 530 by reason of such expenses, and
(B) the amount of any scholarship, allowance, or payment described in section 25A (g)(2)."

(Again, red mine.)

...and that any such reductions resulted in a sum exceeding $22,000.

I know I'm being a little trollish here. The reason is that I also took out student loans in excess of my actual need -- in my case I paid down a higher interest debt -- but I discovered I could not deduct the interest on my taxes as I had hoped to do because of grants and payments made towards my schooling that resulted, in my case, of a cost of attendance of $0 after applying the (2)(B) clause above. So I did not deduct any of my student loan interest on my taxes. It was still, of course, a good deal, just not as good as I had hoped.

I think it is perfectly OK to take advantage of the law to the fullest extent. However, as a personal rule (and not one that you or anyone else need follow) I always check my strategies and tricks to ensure that they meet the letter of the law and do not represent loopholes that the lawmakers already thought of and have addressed in the current statutes (such as (2)(B) above, which you can find at the same US code link as in my previous comment).

2Cor521

I guess I am still not making myself sufficiently clear, hence the continued misunderstanding.

As stated in my previous post, "My loans plus grants may have totaled to $22,000" when the "cost of attendance" was $27,000. In no event did my loans plus grants ever exceed the cost of attendance, hence, all loans were for qualified education expenses (and interest is fully deductible). The grants during law school when the student lending borrowing occurred were always smallish.

Undergrad was a different story, where I had huge amounts of scholarships (maybe 11??). Competitive merit based scholarships, not need based, so I wasn't harming those that "needed" the money more than me. I ended up with a ton of extra cash above the qualified education expenses, so I declared them as income and paid tax on my scholarships. How is that for honesty to the letter of the law?

 

[Rambler]

I think I'm gonna puke. I just finished my taxes today.

Result: Fuego's Education and now ER, courtesy of The Rambler household.

Yes there is "a program". But, it is unethical and immoral for someone to not repay ANY debt, just like borrowing your neighbor's lawnmower and never returning it. I really think I am going to be sick. It's crap like this that it killing our country. Scheist, why should I even work (and thus pay taxes) when all it does is support freeloaders?

Gonna go upchuck now.

R

 

[FUEGO]

I think I'm gonna puke. I just finished my taxes today.

Result: Fuego's Education and now ER, courtesy of The Rambler household.

Yes there is "a program". But, it is unethical and immoral for someone to not repay ANY debt, just like borrowing your neighbor's lawnmower and never returning it. I really think I am going to be sick. It's crap like this that it killing our country. Scheist, why should I even work (and thus pay taxes) when all it does is support freeloaders?

Gonna go upchuck now.

R

That's why I'm not really interested in working any more either. I have about as much interest as you do in paying for other people's educations. I never asked to have our government extract this wealth from you in order to redistribute it to people who work less hard (like me).

I wonder if there would be an equal amount of disgust about the non-repayment of loans if I said I plan to ER in 10 years and have all this debt forgiven using the public service loan forgiveness program. I wouldn't pay a penny under that plan either, as long as my wife stopped working immediately.

I don't want to get too political, but I find all these loopholes, credits, set asides, deductions, special interest programs, etc to be loathsome. Frequently they are disincentives to hard work (in two senses - 1: obviating the need for hard work by giving out free money, and 2: taking a big chunk of the paycheck you get from working).

edited to add: I really do feel sorry for people in your situation. You bust your a$s working hard, away from the comforts of your home country. You make personal sacrifices to increase your income, and then the government confiscates your wealth (at the point of a gun if you don't pay your taxes) to give it away willy nilly. I don't mean to be trite, this is really my feelings. It is the reason I took the low road and avoided working hard just to give away much of my hard earned wealth.

 

[Moemg]

. I really think I am going to be sick. It's crap like this that it killing our country. Scheist, why should I even work (and thus pay taxes) when all it does is support freeloaders?

Gonna go upchuck now.

R

Most of us pay our debts so we can look ourselves in the mirror and feel good . Plus we want our kids to know that just because you can do something doesn't make it right . Are we at ER poisoning our youth so that they think retirement is the garden of Eden and will do anything to reach it ? It's just life without work .

 

[FUEGO]

Most of us pay our debts so we can look ourselves in the mirror and feel good . Plus we want our kids to know that just because you can do something doesn't make it right . Are we at ER poisoning our youth so that they think retirement is the garden of Eden and will do anything to reach it ? It's just life without work .

Hey, you're pretty wealthy. Why not just forgo SS and medicare when it is your turn? You don't need it after all, since you have a lot more than most other folks in this country. The last thing you want to do is make the younger generation think that you are taking advantage of social welfare programs that you don't really need.

And I AM repaying the debt, pursuant to some zany government program that makes payments lower if your income is lower. I don't make the rules, I just follow them. I can honestly look in the mirror and feel good about paying these loans pursuant to the income based repayment plan.

 

[Moemg]

Hey, you're pretty wealthy. Why not just forgo SS and medicare when it is your turn? You don't need it after all, since you have a lot more than most other folks in this country. The last thing you want to do is make the younger generation think that you are taking advantage of social welfare programs that you don't really need.

I paid into SS & medicare for forty years that is a lot different than what you are doing .

 

[Alan]

After many pages of discussing budgets and expenses this has now gone well off the tracks so I'm closing the thread.