Forbes Artile - 3rd page mentions poss change limiting loan forgiveness to $57,000 coming

[Lesley]

http://www.forbes.com/sites/robertf...milies-end-up-with-massive-student-loan-debt/

Page 3

Potential Changes Coming

"Borrowers with massive student loan debt should also be aware of the potential changes coming to income based repayment programs and Public Service Loan Forgiveness. While none of the proposals have been finalized, President Obama has proposed putting a cap on the amount of student loan forgiveness borrowers could receive.

This would harm borrowers with massive student loan debt because only the first $57,500 would be forgiven, and the rest would need to be repaid."

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[Igor4sugry]

It also mentions this applies to new borrowers starting in July 2015. There are plenty of people who will benefit from pelf that have graduated before July 2015.

 

[Lesley]

Yes, it does appear borrowers before July 2015 will be more lucky than the borrowers after them. This seems to be a common theme for professionals over the past 70 years. Not long ago in the mid-late 40's doctors, lawyers, dentists were getting their undergrad and professional degrees for free on the GI bill. Tuition very gradually increased in the 50's and 60's until the late 70's when inflation hit and interest rates and tuition began to soar. Prior to the late 70's Stafford loans with limits of $20,000 and the additional couple of thousand of dollars from the Health Professional Scholarship Loans and National Direct Loans were enough cover all four years. Taking out private loans in addition to the federal loans due to the caps on federal loans took hold especially in the late 70's. Fortunately, the federal government has more recently opened the door to lending up to the cost of attendance, so it is not necessary to borrow from private loans unless one can't qualify for federal loans or as per one's choice. In the early 2000's, interest rates on federal student loans for professional students were around 2% with some of the debt subsidized while in school. Professional student borrowers starting July 2012 saw the end of subsidized graduate loans and higher interest rates. The progression seems to be consistent. Each generation since the mid-forties has had it worse than the generation before them. Regardless of how one benefits, overall it does not seem like such a good thing.

 

[packersfans]

Quite a few people have theorized that PSLF will get the axe ,or get capped, once it gets portrayed as a massive windfall for "rich doctors" and the like.

http://finance.yahoo.com/news/asking-everyones-rich-uncle-pay-120015289.html

"Critics say the plans are a hidden subsidy to well-off students and colleges, which can justify tuition increases by reassuring students that they may not have to repay their debt."

I'd say shots fired. One school that I interviewed at advertised their ability to get you going on PSLF during the financial aid seminar.

 

[Lesley]

Agreed the warning bell has rung. The ability and desire of the government to fulfill the promise of significant student loan forgiveness remains to be seen. Time will tell. Regardless, even with student loan forgiveness, the taxes owed on forgiveness will be a struggle for many borrowers.

 

[RangerBob]

Agreed the warning bell has rung. The ability and desire of the government to fulfill the promise of significant student loan forgiveness remains to be seen. Time will tell. Regardless, even with student loan forgiveness, the taxes owed on forgiveness will be a struggle for many borrowers.

This is why loan forgiveness via PAYE/IBR likely does not make sense--people with big enough loans that plan to pay the minimum payment for 20-25 years (depending on the program), will likely watch their loan balances increase as they won't even cover the accruing interest, and then they will get taxed on that large amount.

However, PSLF forgiveness is tax-free, which is why it's such a great program to benefit from (but rather poor policy decision when it comes in to reigning in the cost of tuition). Still, it would be wise to not count on it, as Congress could easily decide to make any limits to the program retroactive (technically it wouldn't be retroactive since no on is in the program, but current proposals only apply to future borrowers).

 

[Postictal Raiden]

This is why loan forgiveness via PAYE/IBR likely does not make sense--people with big enough loans that plan to pay the minimum payment for 20-25 years (depending on the program), will likely watch their loan balances increase as they won't even cover the accruing interest, and then they will get taxed on that large amount.

However, PSLF forgiveness is tax-free, which is why it's such a great program to benefit from (but rather poor policy decision when it comes in to reigning in the cost of tuition). Still, it would be wise to not count on it, as Congress could easily decide to make any limits to the program retroactive (technically it wouldn't be retroactive since no on is in the program, but current proposals only apply to future borrowers).

I'd argue that PAYE is still a very good deal for those with huge debt.

I'm projected to have ~500k by end of med school, which will balloons to ~650k by the end of a 4-year residency. If I start off making 300k (i'm accounting for inflation), my annual repayment amount will still be about 10k below how much interests my loan accrues annually. Therefore, by the end of the 20-year term, the 650k will have grown to 750k. The taxes on the forgiven amount will be ~300k.

Now let's figure out how much I will end up paying for my loans. (16 years x 25-35k/year) + (300k taxes on the forgivness) + a negligible amount during residency = ~780k in repayment. Although this amount seems high, I'd argue it's a good deal considering that I entered true repayment owing 650k (after residency), so the debt grew by only 130k over the 16 year repayment period. If I were to enroll in a standard 10-year repayment plan after residency, my total repayment amount will be ~$871k. Therefore, PAYE despite stretching my repayment over a longer term (16ys vs 10ys), will save me over 100k.

 

[Lesley]

I'd argue that PAYE is still a very good deal for those with huge debt.

I'm projected to have ~500k by end of med school, which will balloons to ~650k by the end of a 4-year residency. If I start off making 300k (i'm accounting for inflation), my annual repayment amount will still be about 10k below how much interests my loan accrues annually. Therefore, by the end of the 20-year term, the 650k will have grown to 750k. The taxes on the forgiven amount will be ~300k.

Now let's figure out how much I will end up paying for my loans. (16 years x 25-35k/year) + (300k taxes on the forgivness) + a negligible amount during residency = ~780k in repayment. Although this amount seems high, I'd argue it's a good deal considering that I entered true repayment owing 650k (after residency), so the debt grew by only 130k over the 16 year repayment period. If I were to enroll in a standard 10-year repayment plan after residency, my total repayment amount will be ~$871k. Therefore, PAYE despite stretching my repayment over a longer term (16ys vs 10ys), will save me over 100k.

So, Your options are?

1) $780k in total payments including 25-35k/yr for 16 years and taxes of $300,000 on forgiveness.

2) $870k in standard 10 year repayment.

And if they do away with loan forgiveness retroactively as Ranger Bob explained could happen and I think is very probable especially for higher income earners,

3) 16 years x 25 - 35k/year as you state above (approximately $480,000) plus $750,000 as you also state above (remaining amount left on loan and no loan forgiveness) for a total of $1,230,000 in payments?

Potentially an extra $360,000 in payments and six years longer to maybe save $90,000?

Is this a chance you are willing to take?

 

[Postictal Raiden]

So, Your options are?

1) $780k in total payments including 25-35k/yr for 16 years and taxes of $300,000 on forgiveness.

2) $870k in standard 10 year repayment.

And if they do away with loan forgiveness retroactively as Ranger Bob explained could happen and I think is very probable especially for higher income earners,

3) 16 years x 25 - 35k/year as you state above (approximately $480,000) plus $750,000 as you also state above (remaining amount left on loan and no loan forgiveness) for a total of $1,230,000 in payments?

Potentially an extra $360,000 in payments and six years longer to maybe save $90,000?

Is this a chance you are willing to take?

You are right, there's a risk, but fortunately, by the time I'm done with residency (~2022) I will have seen the potential of these forgiveness plans.

PSLF is highly unlikely to stick around, but I doubt that they will do away with PAYE. The government is still benefiting from this program. As you see in my calculations above that with PAYE, I'll end up paying a total of 780k for an original balance of 500k, a 280k net gain plus whatever interests had been accumulating during medical school (a big portion of 500k is interests).

 

[sazerac]

If they do away with loan forgiveness entirely, it would be god's gift to medical students. Student loans would be a constant <10% drain on current income until you die.

A person in California could move to Nevada, get that 10% back in income taxes, and essentially have gone to medical school for free.

 

[RangerBob]

I'd argue that PAYE is still a very good deal for those with huge debt.

I'm projected to have ~500k by end of med school, which will balloons to ~650k by the end of a 4-year residency. If I start off making 300k (i'm accounting for inflation), my annual repayment amount will still be about 10k below how much interests my loan accrues annually. Therefore, by the end of the 20-year term, the 650k will have grown to 750k. The taxes on the forgiven amount will be ~300k.

Now let's figure out how much I will end up paying for my loans. (16 years x 25-35k/year) + (300k taxes on the forgivness) + a negligible amount during residency = ~780k in repayment. Although this amount seems high, I'd argue it's a good deal considering that I entered true repayment owing 650k (after residency), so the debt grew by only 130k over the 16 year repayment period. If I were to enroll in a standard 10-year repayment plan after residency, my total repayment amount will be ~$871k. Therefore, PAYE despite stretching my repayment over a longer term (16ys vs 10ys), will save me over 100k.

If had an income of 300K, (take home after taxes likely around $170-200k or so), I'd live quite well on $60-$80k for at least few years and make giant ~$100k/year payments, so I could put a big dent in those loans (preventing massive interest accumulation) and ultimately pay off those loans sooner than 20 years.

My personal opinion is anyone with an income of $300k or higher shouldn't be on an income-driven plan. You can live quite the good life on $60-80k (much better than "living like a resident" on a take-home of about $35-40k).

In your situation, you will fortunately know if PSLF will stick around (we should know in 2017 or 2018, when people start getting their loans forgiven). So you won't have to worry about hedging your bets for/against PSLF. And I would tend to agree with you that the 25-year forgiveness under IBR/revised-PAYE will still be around.

The one thing not taken into account here is the value of income now vs the future. You never know--maybe with inflation your salary will be $500k by the end of those 25 years of payments, so making larger payments wouldn't be as big of a deal. And money now is worth more than in the future. So that's something everyone will need to consider. Personally, I want rid of my loans as quick as possible, and right now it's hard to beat a return of 6.8% by investing.

 

[Lesley]

If had an income of 300K, (take home after taxes likely around $170-200k or so), I'd live quite well on $60-$80k for at least few years and make giant ~$100k/year payments, so I could put a big dent in those loans (preventing massive interest accumulation) and ultimately pay off those loans sooner than 20 years.

My personal opinion is anyone with an income of $300k or higher shouldn't be on an income-driven plan. You can live quite the good life on $60-80k (much better than "living like a resident" on a take-home of about $35-40k).

In your situation, you will fortunately know if PSLF will stick around (we should know in 2017 or 2018, when people start getting their loans forgiven). So you won't have to worry about hedging your bets for/against PSLF. And I would tend to agree with you that the 25-year forgiveness under IBR/revised-PAYE will still be around.

The one thing not taken into account here is the value of income now vs the future. You never know--maybe with inflation your salary will be $500k by the end of those 25 years of payments, so making larger payments wouldn't be as big of a deal. And money now is worth more than in the future. So that's something everyone will need to consider. Personally, I want rid of my loans as quick as possible, and right now it's hard to beat a return of 6.8% by investing.

I also think that 25 year loan forgiveness under IBR/revised-PAYE will still be around but with income limitations. Loan forgiveness will be allowed on a sliding scale. For example, with incomes up to $90,000 student debtors will be entitled to 100% loan forgiveness gradually phasing out completely with incomes above $250,000. Just an example, but I think this is what could happen. Limitations could be similar to Roth IRA limitations. Income limitations are being bantered around for social security and medicare as well. GDP is projected, if we are lucky, to be around 2% going forward and as in one recent article I read, "4% GDP will be something as rare as unicorns." Income limitations on social programs are going to be seen as the fair solution for curtailing unnecessary government spending. I think there will be great support from the masses for "income limitations" on all types of programs. Although, borrowers on IBR/PAYE aren't thinking this far ahead,
I think the majority of these student loan debtors are going to have a significant problems paying the taxes owed on their forgiveness and, most likely, will have to borrow again at that time to pay the taxes owed on their forgiveness. For this reason, I am with Ranger Bob, if you can find some way to stick with a standard repayment plan, do it. Get this monkey off your back. The one's that do will be the lucky ones. Best wishes everyone.

 

[SigmaFS]

This excerpt from a Forbes article regarding a student loan repayment strategy which I posted on the Finance and Investment forum
http://www.forbes.com/sites/davidmarotta/2015/07/26/how-quickly-should-i-pay-my-student-loans/):

If you lengthen the time horizon to twenty-year periods between 1970 and 2015, then 100% of 306 twenty-year time periods have returns greater than 6.8%. This means that if you are investing for the long term (i.e. for retirement in your Roth IRA as a 22-year-old), then the odds are even more in your favor for investing while paying the minimums.

If you have graduated with student loans you are probably anxious to leave those loans behind you and get on with your life. The best way to accomplish this is to pay the minimum and start saving and investing toward your future financial security.

Megan Russell co-authored this article.

Keep in mind that if you're in PAYE and have a significant amount forgiven, you've likely paid an effective interest rate(what you paid over the life of the loan including the loan forgiveness tax liability) that is lower that the stated interest rate (what's stated on the promissory note). This articles' comparison rate is 6.8% which may be higher than the PAYE effective interest rate.
The concern here is opportunity cost - what financial opportunities are you delaying by aggressively paying down your debt.

In terms of retro-active changes to income driven repayment (ICR, IBR, PAYE & proposed REPAYE) programs and PSLF (which is a forgiveness program, not a repayment option), it's my opinion that's highly unlikely. But there will be changes to PSLF & income driven repayment (IDR) programs for future borrowers. Here are several reasons why I feel there will not be retro-active changes:

1. Dept of Ed has not retro-actively modified the terms of loan programs. Their practice has been to designate "New borrower/Old borrower" categories. Old borrowers will be grandfather under the original terms of the old borrower's repayment term. New borrowers might be defined as 1st time federal student loan borrowers, say as of July 1, 2016. I do believe their repayment programs and PSLF might be modified, and not so generous, for new borrowers.
2. The terms of IBR, PAYE, and PSLF are in your Master Promissory Note, which is a contract. Those borrowers most aggressively pursuing PAYE and PSLF are lawyers, who probably appreciate the obligation of the MPN. Below is the language from a current MPN regarding PAYE & PSLF:

Pay As You Earn Repayment Plan (Pay As You Earn Plan)


Under the Pay As You Earn Plan, your monthly payment amount is generally 10% of your annual discretionary income, divided by 12. Discretionary income for this plan is the difference between your adjusted gross income and 150% of the poverty guideline amount for your state of residence and family size. If you are married and file a joint federal income tax return, the income used to determine your Pay As You Earn Plan payment amount will be the combined adjusted gross income of you and your spouse.

The Pay As You Earn Plan is available only to new borrowers. You are a new borrower for the Pay As You Earn Plan if:

(1) You had no outstanding balance on a Direct Loan Program or FFEL Program loan as of October 1, 2007, or you have no outstanding balance on a Direct Loan Program or FFEL Program loan when you obtain a new loan on or after October 1, 2007, and

(2) You receive a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or student Direct PLUS Loan (a Direct PLUS Loan made to a graduate or professional student) on or after October 1, 2011, or you receive a Direct Consolidation Loan based on an application received on or after October 1, 2011. However, you are not considered to be a new borrower for the Pay As You Earn Plan if the Direct Consolidation Loan you receive repays loans that would make you ineligible under part (1) of this definition.

In addition to being a new borrower, to initially qualify for the Pay As You Earn Plan and to continue to make payments that are based on your income, the amount you would be required to pay on your eligible student loans under the Pay As You Earn Plan (as described above) must be less than the amount you would have to pay under the Standard Repayment Plan. If your Pay As You Earn Plan payment amount is less than the amount you would have to pay under the Standard Repayment Plan, you are considered to have a "partial financial hardship."

If you are married and file a joint federal income tax return, the loan amount we use to determine whether you have a partial financial hardship will include your eligible loans and your spouse’s eligible loans.

While you are repaying under the Pay As You Earn Plan, you must annually provide documentation of your income and certify your family size so that we may determine whether you continue to have a partial financial hardship. Your monthly payment amount may be adjusted annually based on the updated income and family size information that you provide. If we determine that you no longer have a partial financial hardship, you may remain on the Pay As You Earn Plan, but your monthly payment will no longer be based on your income. Instead, your monthly payment will be what you would be required to pay under the Standard Repayment Plan, based on the amount you owed on your eligible loans at the time you entered the Pay As You Earn Plan.

Under the Pay As You Earn Plan, if your loan is not repaid in full after you have made the equivalent of 20 years of qualifying monthly payments and at least 20 years have elapsed, any remaining loan amount will be forgiven. You may have to pay federal income tax on the loan amount that is forgiven. (Sigma added the emphasis)

Public Service Loan Forgiveness


A Public Service Loan Forgiveness program is also available. Under this program, we will forgive the remaining balance due on your eligible Direct Loan Program loans after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed full-time in certain public service jobs. The required 120 payments do not have to be consecutive.

 

[deleted158872]

It also mentions this applies to new borrowers starting in July 2015. There are plenty of people who will benefit from pelf that have graduated before July 2015.

By "new borrowers", do you mean people who take out loans for THE FIRST TIME IN THEIR LIVES?

 

[Lesley]

http://finance.yahoo.com/news/stude...0aG5zBGNvbG8DYmYxBHBvcwMxBHZ0aWQDBHNlYwNzYw--

"Roughly 40% of the $1.2 trillion dollars of outstanding student loan debt is owed by graduate/professional students." I believe many of these grad/professional students will have difficulty, at best, paying taxes on whatever forgiveness is allowed at that time let alone paying any student loan debt that may not be forgiven along with all of life's other expenses, mortgage, cars, children, etc. 10 years is a long time off, let alone 25.

 

[sazerac]

If forgiveness is still taxable in 25 years, the taxable amount of forgiveness is limited to your net worth... so it is really more of a confiscation of ~1/3 of your assets.

IRS debt can be negotiated, too, for cents on the dollar in genuine hardship cases.

 

[deleted158872]

Does retirement money count as asset?

 

[RangerBob]

Does retirement money count as asset?

I believe retirement accounts, investments, equity in your home, car, etc. all count. The odds are you would pay the full taxable amount on the forgiven loans as most of us should have a pretty good sized net-worth in 20-25 years. If you don't, you'd be doing something wrong.

Anyone planning on forgiveness via IBR/PAYE (where you pay taxes on the forgiven amount) should probably contact a tax lawyer at least 5-10 years prior to forgiveness to minimize liability. I don't know any of the methods myself, but it might include putting your house in your spouse's name and filing taxes separately, or putting it in your kid's names, setting up trusts, etc.

 

[sazerac]

Does retirement money count as asset?

Yes.

While you use form 982 line 2 to report the forgiveness that is excluded, the worksheet to calculate the amount of exclusion is on page 9 of publication 4681. Line 28 of that page asks you for the size of your IRAs and 401k's and stuff.

 

[deleted716403]

Hmm... I won't vote for whoever politician proposes or holds this idea.