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Obama changing IBR via EO

Discussion in 'Finance and Investment' started by xenotype, Nov 9, 2011.

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  1. xenotype

    xenotype

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    I have been doing a lot of reading, and it seems like the new IBR terms are going to be a great deal for lower paying specialties under high debt. As I understand it, Obama is changing IBR terms via executive order and bypassing congress. The new terms will be 10% AGI and 20 years, instead of 15% and 25 years. This changes the economics of just doing minimum IBR payments for the entire term completely. If it is a promissory note containing the 10% and 20 years terms that you sign at the beginning of IBR, it would mean that it is much harder for the government to retroactively change the deal years down the line when they realize IBR is fiscally unsustainable.

    Some simplified numbers: Let's say I go to a standard private school and end up with $250k of debt under the current ridiculously high tuition rates. Let's assume I start IBR in residency and do a fellowship afterwards. At the end of ~5-6 years under ~7% interest, this will be some where above $400k on principle. On a 20 year term, there is only 14-15 years of 10% minimum payments to make. If you work as a hospitalist at $180k, you'll probably pay a bit over $200k total over the remaining years in the 20 year term. Since the 10% payments don't even cover the interest of the loan, the remaining balance should be somewhere north of $700k+. Assuming they don't change the income tax rule, you take a ~$250k hit in income tax from the forgiveness. This is around $500k in total payments, which is less than what you would pay under a standard 10 year repayment term and you get the added benefit of paying over a longer time period, giving you enough left over money to invest a portion of your remaining income after taxes.

    Am I doing anything wrong here? Under the new rules it seems like a steal for generalist specialties. If it is signed into a promissory note, how can it be taken away legally? This all assumes that PSLF is taken away or tightened up, which is a reasonable assumption. I think these changes will happen because they will be by executive order.
  2. Dirt

    Dirt From the earth.

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    I am not really following your math particularly well but I think your mistake is as follows

    The thing I think you are missing is that the 10% is actually 10% of your discretionary income (the difference between your income and 150% of the poverty level). As such, with the vast majority of attending salaries, you will not qualify for IBR because your calculated IBR payment will not be less than if you paid the full amount under a 10 year repayment plan. When this is the case, you are reverted back to the standard 10 year plan.

    In your scenario you would totally pay off the loan in the period between becoming an attending and the 20 year forgiveness limit for repayment under IBR.

    None of this takes the public service loan forgiveness into consideration.
  3. ccmonopolies

    ccmonopolies

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    after you start making an attending salary, you will not longer qualify for IBR and will transition into a 10 year plan.
  4. xenotype

    xenotype

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    How would the payments on over $400k in debt at 7% interest be less than 10% of discretionary income? The monthly payments on this are over $4500 per month according to ed.gov for the standard 10 year repayment term. That is almost 50% of a hospitalist attending's salary per month after taxes. How would one not qualify for IBR in this situation? The IBR payments wouldn't even cover the interest on the loan.
  5. Dirt

    Dirt From the earth.

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    Well you are correct in that a single person with $400K in loans making $180K does qualify for IBR at a monthly payment of $2045/month.

    Where are you getting the calculation that paying back a $250K loan under IBR for 5-6 years will lead to a balance of $400K though?
  6. ccmonopolies

    ccmonopolies

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    Once you start making attending salary, you will be forced to pay principal as well, not just interest. Welcome to reality.

    However, if your loans are so large that you qualify for IBR, you will likely still end up paying for at least the amount that you borrowed. Additionally, if you have 200k forgiven, you would most likely still have to pay 50-60k of it in taxes.

    Live below your means.
  7. xenotype

    xenotype

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    Guys you aren't reading my post. Ofcourse under the current IBR scheme of 15% and 25 years you are going to end up paying significantly more than the standard 10 year term.

    But Obama is slated to change it to 10% over 20 years. This changes the economics because that $2045 15% payment turns into $1370 per month at 10%, and you get the forgiveness five years sooner. Sure you have to pay a massive amount of taxes at the end of the 20 year period, but in total it will be a smaller amount of money than simply paying the loan off and you get to use more of your money over a longer period of time for things like investing. Living below your means always makes sense regardless of debt load.

    So since I didn't explain my math very well, let me start over.

    Tuition at most schools private or out of state or even some in state is $40k+ now. Adding $20k of living expenses per year means $60k per year in loans. Four years of this means $240k plus interest through med school and residency since this is no longer subsidized at all. At 7% average interest, this will balloon to $400k by the end of residency and fellowship. If the fellowship is in something like ID that doesn't pay well, then you are only going to have $180-200k income as an attending. Standard payments will be $4500 per month or more. After taxes, attending salary will be $11,000 per month or less. 40%+ of net income for 10 years or 10 % of net income for 15 years and an income tax hit of $150,000.

    Tell me if my math is wrong. I get $573,000 paid back under the 10 year term and $~400,000 paid back under the new IBR terms. Sorry for the length, but as far as I can tell the new coming IBR terms are a better deal than a standard 10 year payment term assuming PSLF doesn't go through.
  8. ccmonopolies

    ccmonopolies

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    You're saying you will pay ~$400,000 under IBR on a $240k loan?

    I didn't do your math, but yeah you are getting a better deal, but you are still paying 400k on a 240k loan. If you work out the interest rate it might be 3-4% or so. Regardless, try to minimize your loans, live cheaply when you're in school and residency.
  9. ckenny

    ckenny New Member

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    http://www.finaid.org/calculators/ibr10.phtml

    This calculator should be consistent with the new IBR rules I think. Plug some numbers in. I found that the 10 and even 20 year forgiveness programs to be beneficial if you have 250-300k in loans, even assuming a fairly high salary as an attending.
  10. xenotype

    xenotype

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    Yup, as far as I can tell, you'll end up paying about the same as a standard repayment term or less even with the income tax hit, except you are paying over a significantly longer period of time. Add in the possibility of getting PSLF and it seems like a steal.

    It is a bad deal if you are in a better paying specialty (EM and up) or your loan principle is < $200k after residency. Also, state/hospital loan forgiveness programs turn it into a bad deal as they knock a large chunk of cash out of the principle all at once.
  11. ccmonopolies

    ccmonopolies

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    This Income-Based Repayment Calculator implements the improved version of income-based repayment as enacted by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010. The legislation cut the monthly loan payments under income-based repayment by one third from 15% of discretionary income to 10% of discretionary income and accelerated loan forgiveness from 25 years to 20 years. Only new borrowers of new loans made on or after July 1, 2014 are eligible for the improved income-based repayment plan.


    I inputted some numbers and the 10% IBR actually does save borrowers a significant amount of money. In some cases, one would pay less than the amount that they borrowed if they qualified for the 10 year forgiveness program under the 10% plan.

    However, I strongly doubt the government will be willing to take losses on their loans. In my opinion, the public would become outraged when this happens en masse to professionals like doctors who "already make too much" and the laws would be changed.

    Edit: I re-read your original post, I don't know if they can change the terms on your agreement if you signed into it. But, I think that as long as you end up paying more what you took out as debt, you would be fine. If you end up paying less than what you took out as debt, then they might revoke it.

    You're right that the 20yr 10% IBR is better than the 25yr 15% IBR for the borrower, but the 10% only applies to loans made after July 1, 2014. All loans before then will be 15%.
    Last edited: Nov 17, 2011
  12. ckenny

    ckenny New Member

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    There was actually an executive order recently as was mentioned in the first post that will make these more favorable terms available to loans that are already disbursed and/or in repayment starting in 2012. The calculator has not been updated to reflect this.
  13. ccmonopolies

    ccmonopolies

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    my bad then. Someone really wants to get re-elected in 2012.

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