Income based loan repayment in the news

[Peacemaker36]

This article on Yahoo! news calls out Argosy, and hints that the end might come to IBR. Just something to think about for those considering entering a school with no funding...

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

The Congressional Budget Office estimates that, for loans originated in 2015 or after, the programs will cost the government an additional $39 billion over the next decade. That’s more than the agency spends each year on Pell grants, the public scholarship program for low-income students. “In a time of scarce resources, is it better to spend money in that way or raise the Pell grant?” asks Margaret Spellings, who served as education secretary under George W. Bush.

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[AcronymAllergy]

Somewhat related: I read a story the other day about how the University of Phoenix is under investigation by the FTC for a variety of reasons, including unfair marketing and business practices, taking in very large (perhaps disproportionately so) amounts of GI Bill and other student aid funds from veterans, and having very poor graduation rates (<10%, IIRC). They've apparently also had a ~50% drop in enrollment over the past year or few years.

I'd imagine if the FTC is looking at them, they may also have their eyes on other potential offenders.

 

[WisNeuro]

Finally, it'd be nice to curb the predatory degree programs. That money isn't free, someone is paying for it. I'd rather that money went to things like our crumbling infrastructure than students who made woefully bad decisions for a fake degree.

 

[PsyDr]

I always wondered how those that used IBR dealt with the tax bomb at the end.

 

[WisNeuro]

I always wondered how those that used IBR dealt with the tax bomb at the end.

Well, for many of these people, who rack up 150k+, money isn't a real thing anyway. I imagine they shrug and think someone else will take care of it.

 

[AcronymAllergy]

I always wondered how those that used IBR dealt with the tax bomb at the end.

None have yet gotten to that point, so it's all up in the air at the moment. I'd imagine some folks may be responsibly regularly saving some of the money that would've gone toward the non-IBR payment as a way of dealing with the looming tax hit, others may not even know about it or figure they'll save for/deal with it in the future, and others still may think they'll pay the loans off entirely before 25 years is up.

Also, folks with PSLF who (theoretically) have loans forgiven after 10 years aren't hit with a tax "penalty."

 

[Existenz]

Actually, they're (the government) is making the pay as you earn plan more widely available by the end of this year. Although I can see why it's bad for tax payers, I think it's a good idea overall. See https://www.whitehouse.gov/the-pres...al-memorandum-federal-student-loan-repayments

 

[clinpsyc87]

Actually, they're (the government) is making the pay as you earn plan more widely available by the end of this year. Although I can see why it's bad for tax payers, I think it's a good idea overall. See https://www.whitehouse.gov/the-pres...al-memorandum-federal-student-loan-repayments

This may swing the pendulum the other way against support, especially as the majority of Americans don't have student loans the government is going to forgive.

 

[Existenz]

So the new play (repaye) is going into effect. Making all payments lower and other big changes. see http://www.nytimes.com/2015/08/15/y...will-reduce-student-loan-repayments.html?_r=0 and here

 

[G Costanza]

Anyone know if you're already in an IBR plan, can you switch to Repaye when it becomes available?

 

[AcronymAllergy]

Anyone know if you're already in an IBR plan, can you switch to Repaye when it becomes available?

I would be shocked if that weren't the case, given that they've expanded access by removing the borrowing after 2007 criteria.

 

[Goobernut]

I always wondered how those that used IBR dealt with the tax bomb at the end.

My guess is that most don't even know about this...not a clue...

 

[Therapist4Chnge]

I was just looking over the various IBR options, and it looks like there is still a split between 2014 borrows and those prior to 2014. FWIW…the post-2014 looks like a much better setup. This overview looks simple enough, though it conflicts with what I was told by my loan provider (Navient) and it various a bit from what I've read elsewhere. I'm 5+ yrs into IBR and I still get different answers from different people (at Navient, previously Sallie Mae, etc).

I love when things are clear as mud….

 

[AcronymAllergy]

I was just looking over the various IBR options, and it looks like there is still a split between 2014 borrows and those prior to 2014. FWIW…the post-2014 looks like a much better setup. This overview looks simple enough, though it conflicts with what I was told by my loan provider (Navient) and it various a bit from what I've read elsewhere. I'm 5+ yrs into IBR and I still get different answers from different people (at Navient, previously Sallie Mae, etc).

I love when things are clear as mud….

I keep hearing that the post-2014 borrowers' repayment option (i.e., Pay As You Earn) will be expanded to pre-2014 borrowers soon, but I have no idea when/if that will actually occur. Until then, I believe IBR typically tends to represent the best option, depending on how one defines "best."

 

[Therapist4Chnge]

I keep hearing that the post-2014 borrowers' repayment option (i.e., Pay As You Earn) will be expanded to pre-2014 borrowers soon, but I have no idea when/if that will actually occur. Until then, I believe IBR typically tends to represent the best option, depending on how one defines "best."

So it seems. It's manageable, but it just isn't clear for how long, who it applies to...and if it will last the duration.

 

[Koogy]

I always wondered how those that used IBR dealt with the tax bomb at the end.

I haven't graduated yet so I'm not fully versed in all the repayment plans. What's the tax hit for IBR? After how many years? My plan is to pay off all federal debt within 5 years (basically be "loan poor" for that time). But I'd like to know what the options are In case I need to take a job that pays little.

 

[Chalupacabra]

I haven't graduated yet so I'm not fully versed in all the repayment plans. What's the tax hit for IBR? After how many years? My plan is to pay off all federal debt within 5 years (basically be "loan poor" for that time). But I'd like to know what the options are In case I need to take a job that pays little.

I may be wrong here, but I assume they mean the amount that is forgiven. I believe that amount counts as a form of income and is therefore taxable (and can bump you into a much higher tax bracket than anticipated).

 

[Koogy]

Ah, I see. Thanks!

 

[AcronymAllergy]

I may be wrong here, but I assume they mean the amount that is forgiven. I believe that amount counts as a form of income and is therefore taxable (and can bump you into a much higher tax bracket than anticipated).

Yep, my understanding is that the amount forgiven after 25 years is counted as income. Does not apply to PSLF amount after 10 years.

 

[PsyDr]

I haven't graduated yet so I'm not fully versed in all the repayment plans. What's the tax hit for IBR? After how many years? My plan is to pay off all federal debt within 5 years (basically be "loan poor" for that time). But I'd like to know what the options are In case I need to take a job that pays little.

Say you have 100k forgiven at the end of 25 years, including all the interest and fees and all. That 100k is counted as income at year 26. So let's say you are making 80k for that 25, are married, spouse doesn't work, have 1 kid, take 2 exemptions on your taxes, and never contribute to a retirement account. In general, you pay around 7k/year in federal income tax until the child tax credit ends when the kid hits majority. Not bad at all. On year 26, you would owe 31k in taxes for the year, which would mean you would write a check for around 20-25k AFTER your taxes had been taken out of your paychecks. This would be a lot more for 200k in loans, because of the progressive tax rates vs a flat tax structure.

Paying 25k to the gov't isn't bad when you have it. But when it is over 40% of your take home, you are going to be in a world of hurt.

 

[WisNeuro]

Say you have 100k forgiven at the end of 25 years, including all the interest and fees and all. That 100k is counted as income at year 26. So let's say you are making 80k for that 25, are married, spouse doesn't work, have 1 kid, take 2 exemptions on your taxes, and never contribute to a retirement account. In general, you pay around 7k/year in federal income tax until the child tax credit ends when the kid hits majority. Not bad at all. On year 26, you would owe 31k in taxes for the year, which would mean you would write a check for around 20-25k AFTER your taxes had been taken out of your paychecks. This would be a lot more for 200k in loans, because of the progressive tax rates vs a flat tax structure.

Paying 25k to the gov't isn't bad when you have it. But when it is over 40% of your take home, you are going to be in a world of hurt.

Are you implying that people should actually consider financial implications when taking on six figure loan debt? Simply preposterous, and patently unAmerican!

 

[AcronymAllergy]

Relatedly, if participating in IBR and banking on the 25-year forgiveness, as PSYDR pointed out, it's imperative to plan ahead for the tax hit at year 26. The IRS tends to be pretty insistent on getting money that they're owed.

This is, of course, assuming the plans stay as-is for the next couple decades.

 

[WisNeuro]

The only thing you should be paying off for more than 10 years is a mortgage. And at least that builds equity.

 

[AcronymAllergy]

Not saying I disagree, but particularly for those already involved in IBR/already in grad school, planning ahead for the tax hit is a must.