Student Loans - Income Based Repayment?

[FUEGO]

Note this thread is NOT in the political forum, so let's keep it on the financial aspects of what I'm laying out.

Any young dreamers out there plan on taking advantage of the "Income Based Repayment" option for their large student loan burdens? I did a quick search and could only find one post (my own) discussing in a semi-tongue in cheek manner, the potential application of the Income Based Repayment option available to student loan borrowers.

As DW and I approach FIRE as soon as the next few years (maybe Jan 1, 2014), I'm trying to figure out a way to [-]shirk my responsibility to repay my debt[/-] minimize my recurring student loan payments. And hey, if the government has deemed student lending of sufficiently high priority to throw some cash at it to allow repayment based on income, then who am I to challenge the will of the people?

We still owe a little over $100k, with monthly payments of ~$550 and interest rate of 0.75%. Roughly 18 years left to completely repay. Obviously sweet terms for repayment, but I'm trying to figure out a way to sweeten it more (ie reduce the payments to zero or near zero).

Income based repayment allows the borrower to pay 15% of his (or their, if married filing jointly) AGI for any income above 150% of the Federal Poverty Level for their family size. For my family of 4, this equates to zero payments due if I have an AGI of $33000 or less. After 25 years of repayment, all remaining debt is forgiven.

One catch is that under current tax law, forgiveness of the debt at year 25 is treated as income. I can't imagine a fix not being passed when the first borrowers reach 25 years, since I doubt they want borrowers who are typically low income on the hook for five or six figure tax bills due to a lumpy income from loan forgiveness (see, for example, the recently enacted exclusion from income of forgiven mortgage indebtedness). But this potential tax liability is the one major looming concern of mine.

So, anyone else considering switching to IBR to keep student loan payments very low during their ER?

 

[Texas Proud]

I am sure you will get a bunch of 'you should pay your debts' etc. etc. comments....

But is it only based on income, or is there a look at your assets

Also, it seems a bit strange that you have $100K in debt if you have been paying on this debt for awhile... seems like you got a very sweet deal allowing you to get a job that allowed you to FIRE....

But hey, I just paid my student loans off in 3 years instead of the 10 that I was given... different program for sure, but didn't want it hanging over me...

 

[FUEGO]

I am sure you will get a bunch of 'you should pay your debts' etc. etc. comments....

Yes, I'm sure I'll get these comments. And the thing is, I plan to pay them off, pursuant to the rules of the IBR program.

But is it only based on income, or is there a look at your assets

They only look at AGI. There is no asset test (under current rules).

Also, it seems a bit strange that you have $100K in debt if you have been paying on this debt for awhile... seems like you got a very sweet deal allowing you to get a job that allowed you to FIRE....

But hey, I just paid my student loans off in 3 years instead of the 10 that I was given... different program for sure, but didn't want it hanging over me...

We have only been paying on DW's loans for 5 years, my loans for ~4 years (I went back to school again for a brief stint). The majority of these loans were for professional degrees for DW and I, and we never really practiced in the areas where we were qualified.

I have no problem repaying them, but with 0.75% rates, I'm obviously putting them dead last in terms of repayment (mortgage first). And just trying to find a way to squeeze a little more value out of the student loan program.

 

[Texas Proud]

Quick calc based on the number you gave... you say you pay nothing if income is $33K or less... and then 15% above that...

So, if you are making $60K, you will be paying enough to pay it off in 25 years if zero interest... AGI is before deductions... if you are below that it seems to pay...

But, how long are you going to be a family of 4? I would think that kids would move on before the end... so you zero amount would decrease... what happens if you or spouse dies? I would think that the debt would have to be paid from the estate....

Seems like a no brainer to me if what you say is true.... unless your interest rate is higher for this program and there is a chance you will have to pay in full.... also, I would not bet on them changing the law where it would not be income.... to few people to waste time on 'fixing' the problem...

 

[clifp]

One catch is that under current tax law, forgiveness of the debt at year 25 is treated as income. I can't imagine a fix not being passed when the first borrowers reach 25 years, since I doubt they want borrowers who are typically low income on the hook for five or six figure tax bills due to a lumpy income from loan forgiveness (see, for example, the recently enacted exclusion from income of forgiven mortgage indebtedness). But this potential tax liability is the one major looming concern of mine.
?

God I hope not, it is a bad enough idea for precisely the reasons you are illustrating. Why should they make it even more appealing. Lets say at the end of 25 years you have 25K left, for a couple that additional 25K may move you into say the 25% bracket (or whatever the 2nd lowest bracket is in 2035) that is additional $6K in taxes which seems like a pretty small amount to pay for a professional degree 30 years after the fact.

I am firm believer in people doing all they legally can to minimize taxes, which is why I'm already scheming on ways I can get subsidized health care insurance in 2014.

 

[dex]

I am sure you will get a bunch of 'you should pay your debts' etc. etc. comments....

There are programs where if you work for the Fed. Gov. for x years your student loans are eliminated.

We are at a point in history where if you can get something for nothing; go for it.

The 'education' lobby is strong in Washington. Why else does no one focus on the fact that education costs have increased more than inflation for decades while education quality decreases.

If we called 'tuition' 'premiums' (as in health ins.) someone might 'nationalize' the costs (as in health care reform).

 

[kyounge1956]

Note this thread is NOT in the political forum, so let's keep it on the financial aspects of what I'm laying out.

Any young dreamers out there plan on taking advantage of the "Income Based Repayment" option for their large student loan burdens? I did a quick search and could only find one post (my own) discussing in a semi-tongue in cheek manner, the potential application of the Income Based Repayment option available to student loan borrowers.

As DW and I approach FIRE as soon as the next few years (maybe Jan 1, 2014), I'm trying to figure out a way to [-]shirk my responsibility to repay my debt[/-] minimize my recurring student loan payments. And hey, if the government has deemed student lending of sufficiently high priority to throw some cash at it to allow repayment based on income, then who am I to challenge the will of the people?

We still owe a little over $100k, with monthly payments of ~$550 and interest rate of 0.75%. Roughly 18 years left to completely repay. Obviously sweet terms for repayment, but I'm trying to figure out a way to sweeten it more (ie reduce the payments to zero or near zero).

Income based repayment allows the borrower to pay 15% of his (or their, if married filing jointly) AGI for any income above 150% of the Federal Poverty Level for their family size. For my family of 4, this equates to zero payments due if I have an AGI of $33000 or less. After 25 years of repayment, all remaining debt is forgiven.

One catch is that under current tax law, forgiveness of the debt at year 25 is treated as income. I can't imagine a fix not being passed when the first borrowers reach 25 years, since I doubt they want borrowers who are typically low income on the hook for five or six figure tax bills due to a lumpy income from loan forgiveness (see, for example, the recently enacted exclusion from income of forgiven mortgage indebtedness). But this potential tax liability is the one major looming concern of mine.

So, anyone else considering switching to IBR to keep student loan payments very low during their ER?

What exactly is it you are trying to accomplish? Is your goal to pay the loan off with the least total expenditure, or to renege on your student debt by putting off as much repayment as you can until the 25 years are up? You say you intend to pay the loan "pursuant to the rules of the IBR program", but the rules include the potential to cancel the debt by delaying for 25 years. I can't tell from what you wrote, and I can't tell if you are serious or tongue in cheek. Here's my suggestion: figure out how much a month it would take to pay off the debt in 25 years, and pay that much. That will keep the individual payments low. I haven't done the math, but I suspect you may pay less overall by paying more per month over a shorter period.

I don't think you should go any lower than that, even if the rules allow it based on your income level. Here's why: I just checked your profile. It says you're 32. If you'll be able to to retire in a little over 3 years, you're doing well enough financially that IMO it would be utterly inexcusable for you not to repay your student loan in full. Then you won't have to worry about tax implications of not paying it.

If you're serious about shirking your loan, I say "Shame on you!" I'm getting upset, so I'm going to stop now, before I say something really uncharitable. If you are kidding, or it's just a thought experiment to see whether it could be done, but with no intent to put the plan into effect, I apologize.

 

[ERD50]

I'm getting upset, so I'm going to stop now, before I say something really uncharitable....

kyounge, save your anger for the people who put the rules in place, that is the source of any percieved problem. Since this isn't in the "politics" forum, I won't mention any members of Congress by name.


-ERD50

 

[kyounge1956]

kyounge, save your anger for the people who put the rules in place, that is the source of any percieved problem. Since this isn't in the "politics" forum, I won't mention any members of Congress by name.


-ERD50

The rules were put in place so that people who were unable to pay back wouldn't have to. I don't see anything to get angry about in that.

Fuego is proposing that a person who has a great deal of money—enough to retire under age 40—abuse these rules to escape from a debt which is well within his ability to pay. That is what I am angry about. Again, I apologize if I have misunderstood, but if he's serious, I say again SHAME ON YOU!!

 

[clifp]

The rules were put in place so that people who were unable to pay back wouldn't have to. I don't see anything to get angry about in that.

Fuego is proposing that a person who has a great deal of money—enough to retire under age 40—abuse these rules to escape from a debt which is well within his ability to pay. That is what I am angry about. Again, I apologize if I have misunderstood, but if he's serious, I say again SHAME ON YOU!!

Are sure that is why the rules were put in place as oppose to putting the rules in place so that politicians could score political points by promising to help students who got themselves in to much debt? I finished my taxes this week and once again paid no state or Federal taxes. Now my income took a hit over the last couple of years and so logically my taxes should have dropped, I also paid a boat load of taxes (including some advance taxes AMT) when I was working so in some ways the Feds have had the free use of my money for the last decade. I have been pretty clever at seeking out ways of minimize my taxes, especially on the state level.

However, clearly I can afford to pay some taxes. Should I pay taxes eventhough the laws say I don't need? Fuego hasn't been out advocating the change to the student loan program. In fact, I bet he philosophically opposes it.

One of the consequences of absurdly complicated tax system, and strange subsidies for upper middle class people (student loans being a prime example) is that clever people will benefit at the expense of less clever people.

The problem isn't with Fuego it is with the law.

 

[kyounge1956]

Are sure that is why the rules were put in place as oppose to putting the rules in place so that politicians could score political points by promising to help students who got themselves in to much debt? I finished my taxes this week and once again paid no state or Federal taxes. Now my income took a hit over the last couple of years and so logically my taxes should have dropped, I also paid a boat load of taxes (including some advance taxes AMT) when I was working so in some ways the Feds have had the free use of my money for the last decade. I have been pretty clever at seeking out ways of minimize my taxes, especially on the state level.

However, clearly I can afford to pay some taxes. Should I pay taxes eventhough the laws say I don't need? Fuego hasn't been out advocating the change to the student loan program. In fact, I bet he philosophically opposes it.

One of the consequences of absurdly complicated tax system, and strange subsidies for upper middle class people (student loans being a prime example) is that clever people will benefit at the expense of less clever people.

The problem isn't with Fuego it is with the law.

Nonsense! the problem is borrowing money and not paying it back when he's perfectly able to do so. I don't pretend to know what the legislators' motives were in writing the law. If the law allows people to borrow more than they can ever hope to repay, or if it allows people who could repay to shirk their obligation to do so, then it needs to be rewritten or repealed, but that doesn't justify reneging on a debt.

I'm putting this thread on ignore. It's bad for my blood pressure.

 

[FUEGO]

However, clearly I can afford to pay some taxes. Should I pay taxes eventhough the laws say I don't need? Fuego hasn't been out advocating the change to the student loan program. In fact, I bet he philosophically opposes it.

Bingo! I'll try not to get too political here, but if this debt forgiveness provision for student loans went away, it would please me very much on a philosophical level, and work to my slight detriment on a financial level. I haven't been able to take advantage of other recent stimulus-y handouts, so my hand is still out. Hoping to fill it with some sweet forgiveness (of my loans, that is).

I mean, heck, they lent me many tens of thousands of dollars to go to law school. What did they think I would do with the education? Not learn how to interpret and apply the laws to my own situation and act like any rational economic actor should? I would say, if anything, I would be ripping the taxpayers of this fine country off big time if I DIDN'T use every available provision of the student loan debt forgiveness laws to my advantage. After all, what good is the education if I can't apply it in practical situations such as this one??!!

Also note that I nearly failed Legal Ethics.

I suppose the main opponent to my plan has set the thread on ignore so the need to address her concerns is moot at this point.

 

[FUEGO]

But, how long are you going to be a family of 4? I would think that kids would move on before the end... so you zero amount would decrease... what happens if you or spouse dies? I would think that the debt would have to be paid from the estate....

Seems like a no brainer to me if what you say is true.... unless your interest rate is higher for this program and there is a chance you will have to pay in full.... also, I would not bet on them changing the law where it would not be income.... to few people to waste time on 'fixing' the problem...

That is one concern. The family size will shrink from 4 to 2 sometime in the next 14-18 years. Unless the family size grows to 5+ first. In which case, it will be 19-23 years before it drops to 2. I'm gonna have to spreadsheet this thing and do some sensitivity analysis.

Rates may increase back to 3% from the current 0.75%, but I have been assured verbally that they will not. I get a 2.25% interest rate discount for paying my loan on time.

 

[FUEGO]

I am firm believer in people doing all they legally can to minimize taxes, which is why I'm already scheming on ways I can get subsidized health care insurance in 2014.

I'm with you there. I'm working to look poor on paper for dual reasons - ability to not have to repay most of these six figure student loans, and get some free/very cheap govt health insurance. I have no shame.

I wonder if our (and many others, I'm sure) plan to keep our 1040 AGI income low in order to qualify for cheap/free govt health insurance will meet with any ire? Playing devil's advocate, one could argue that many of us who are FIRE are also completely able to pay full price for health insurance, and as a result, it is shameful for us to accept any subsidy to help pay for our insurance. After all, there are plenty of other hard working Americans out there who have car payments, boat payments, credit card bills, etc who can't afford full price health insurance who will "need" the subsidies more than we will.

 

[FUEGO]

There are programs where if you work for the Fed. Gov. for x years your student loans are eliminated.

We are at a point in history where if you can get something for nothing; go for it.

Yes; I believe the debt forgiveness applies to employees of any government entity and non-profits (??). Ten years is all that is required. In hindsight, I made a very injudicious choice of employer in my field. And I think the debt forgiveness for being a public employee results in no recognition of the debt forgiveness as income (in contrast to the 25 year standard IBR debt forgiveness resulting in having your forgiven debt recognized as income).

Agreed on the handouts - get them while the getting is good. Clearly our legislators have decided that education is intrinsically valuable, and should be encouraged at any cost (well, in our case, just over $100,000 is the potential cost).

 

[chinaco]

I am not crazy about the program.

It is not the income based repayment part... but the forgiveness of the loan.

There are too many people that will game it.

However, I would not be opposed to the debt forgiveness if the borrower went through bankruptcy.

If the debt is forgiven... it should be treated as income... because it was!

 

[Texas Proud]

Nonsense! the problem is borrowing money and not paying it back when he's perfectly able to do so. I don't pretend to know what the legislators' motives were in writing the law. If the law allows people to borrow more than they can ever hope to repay, or if it allows people who could repay to shirk their obligation to do so, then it needs to be rewritten or repealed, but that doesn't justify reneging on a debt.

I'm putting this thread on ignore. It's bad for my blood pressure.

Well, since you are on ignore you will not get to read my response....


I think that it is stupid to lend money to someone for school if they can pay for it themselves..... so the first thing that comes to a question is could Fuego and spouse have paid for their education with their own funds

Second... I did not get a response on my question about income... it seems that the income threshold to pay for the loan in full is $66K right now... to me it is hard to imagine that FUEGO and spouse do not make this kind of scratch.... maybe he does, but is looking at the long term and is hoping to retire and have his income less than that... so, low payments on the middle years...

On the income question.... heck, I can't see how two working people of higher education can NOT make enough to get to the income threshold where you have to pay full boat for the first few years... and I would HOPE there is an exception in this rule that does not forgive a loan if the person decides to stop working... if not, then they need to put one in....

 

[Moemg]

..

On the income question.... heck, I can't see how two working people of higher education can NOT make enough to get to the income threshold where you have to pay full boat for the first few years... and I would HOPE there is an exception in this rule that does not forgive a loan if the person decides to stop working... if not, then they need to put one in....

I totally agree . This whole thing is one more example of people shirking their responsibilities because they've found a loop hole . Our housing situation is pathetic due to people not wanting to own up to buying a house at the wrong time so they just walk away and now this . It's a pretty sad state of affairs when the younger generation can not own up to their responsibilities so they find an out .

 

[chinaco]

This is an Obama program. The voter backlash will be in less than a month.


An even bigger kick in the groin... a lot of that money is really consumer debt. Money spent on non-educational crap!

 

[FUEGO]

An even bigger kick in the groin... a lot of that money is really consumer debt. Money spent on non-educational crap!

Mine is mostly non-educational crap. Investments! Shares of mutual funds and ETFs. I'm pretty sure I have made money on these loans since I was investing back in 2001-2004, and a little more in 2005-ish.

Hey, I agree this program is pretty ridiculous. But this is no more ridiculous than $8000 to buy a house you were going to anyway. Or forgiving tens of thousands of dollars of tax liability from forgiven mortgage debt that should have been treated as income and properly taxed (at least a lot of student lending goes on to produce something productive for our economy - better trained workers - instead of merely paying for nicer stainless appliances or better quality marble fireplace surrounds or granite countertops). Or tens of thousands to install solar panels. Or over a thousand to replace your dead HVAC or buy new windows. Or federal programs to pay people's mortgage who never should have qualified in the first place. Etc etc. The list goes on ad nauseam.

 

[FUEGO]

Well, since you are on ignore you will not get to read my response....


I think that it is stupid to lend money to someone for school if they can pay for it themselves..... so the first thing that comes to a question is could Fuego and spouse have paid for their education with their own funds

Technically, no, we would not have had adequate cash flow to pay for our own professional educations in full plus the standard allotment of non-education living expenses. Obviously we would have figured out a way though.

Second... I did not get a response on my question about income... it seems that the income threshold to pay for the loan in full is $66K right now... to me it is hard to imagine that FUEGO and spouse do not make this kind of scratch.... maybe he does, but is looking at the long term and is hoping to retire and have his income less than that... so, low payments on the middle years...

Apologies regarding my failure to respond to your Q regarding income. I was away from the thread for a while and had a lot of other responses to make! At least one disinterested poster had the courtesy to tell me that they are ignoring this thread, and hence no response was required!

To answer your question, yes, you can assume for the sake of this thread that our current 1040 AGI is in excess of $66k. Though due to the nature of the tax code, it isn't too much higher than that. Obviously our total gross income is MUCH higher than that.

Keep in mind though that we have 2 young children and both of us sacrifice to keep working and not spend time with our kids or be a stay at home mom (or dad in my case). In the parlance of 2010, we are "entitled" to have one of us stay at home to take care of the kids, hence our AGI would be well below $66k if we decided to exercise our "entitlement".

On the income question.... heck, I can't see how two working people of higher education can NOT make enough to get to the income threshold where you have to pay full boat for the first few years... and I would HOPE there is an exception in this rule that does not forgive a loan if the person decides to stop working... if not, then they need to put one in....

Well, if you know you have to either slave away to pay low to mid six figure student loan debts, or just chill in a $25-30k/yr government job and have your loans forgiven in 10 years, you have to accept that some will take the low road. I hope to post more later to expand on this point as it affects my outlook on a certain piece of advice I might give my kids. It may be a separate thread since it is a bit more political than I want to go here. This thread is intended to get some folks commenting on the IBR loan repayment - there must be a few others out there in a similar spot as me.

 

[haha]

Well, if you know you have to either slave away to pay low to mid six figure student loan debts, or just chill in a $25-30k/yr government job and have your loans forgiven in 10 years, you have to accept that some will take the low road. I hope to post more later to expand on this point as it affects my outlook on a certain piece of advice I might give my kids.

I know you enjoy being a goad, but think carefully before you turn your kids into the equivalent of little communists- putting all their energy into gaming the system rather than into accomplishment. You may be old enough to escape some of the corrosion that always comes from this course, but they definitely are not. Find a way to get down to Cuba for a look see.

Ha

 

[FUEGO]

I know you enjoy being a goad, but think carefully before you turn your kids into the equivalent of little communists- putting all their energy into gaming the system rather than into accomplishment. You may be old enough to escape some of the corrosion that always comes from this course, but they definitely are not. Find a way to get down to Cuba for a look see.

I see two distinct issues:

1. Proper form of government with proper economic incentives
2. Proper course of action given the government you got

Trust me, it isn't an easy decision for me to make.

 

[Emeritus]

This is an Obama program. The voter backlash will be in less than a month.


An even bigger kick in the groin... a lot of that money is really consumer debt. Money spent on non-educational crap!

Nope solid bushie

hE TOOK CREDIT FOR IT

On September 27, 2007, President Bush signed into law the College Cost Reduction and Access Act (Pub.L.110-84) (CCRAA). The Act reduces payments to lenders and guaranty agencies participating in the Federal Family Education Loan (FFEL) Program, authorizes increases in the amount of Federal Pell Grants, establishes the Teacher Education Assistance for College and Higher Education (TEACH) Grant Program, lowers the interest rates on some student loans, and expands loan repayment options for student borrowers. The Act also creates a new loan forgiveness plan for public service employees and directs the Secretary to undertake a pilot program for auctioning the rights to originate FFEL parent PLUS loans. In addition, the Act also provides funding for several institutional grant programs aimed at improving minority-serving institutions. Technical changes to the CCRAA were made in Pub. L. 110-153 signed in to law by President Bush on December 21, 2007. The changes made by the CCRAA and Pub. L. 110-153 are discussed in the attachment to this letter.


Watch for more GOP memory lapses
GEN-08-01: College Cost Reduction And Access Act Of 2007 (CCRAA) Summary

 

[samclem]

I agree that the brickbats being thrown at Fuego should instead be directed at those who write the rules for these programs.

It can be argued that Fuego is now doing the most most productive (and patriotic) thing possible:
-- Looking to extend his repayment so the money stays at work in the private sector rather than going to Washington.
-- Most importantly, he's posting here and baldly exposing this crazy waste of taxpayer money. Over 250 people have read this post--that's a lot of publicity. Maybe each one will tell a few folks. Hopefully the awareness and anger about programs like this will contribute to outrage among the electorate and the curtailment of these giveaways.

So, Fuego, yell it from the rooftops and use every loophole written into these ill-considered laws. People need less faith in government and a lot more cynicism. This is how we get there.

Similar, but expanded, line of reasoning here, and some interesting discussion:
http://www.early-retirement.org/forums/f28/housing-stimulus-42568.html#post786690