NYTimes: Vets in debt-low income -IBR discussed

http://www.nytimes.com/2013/02/24/b...trap-new-veterinarians.html?ref=business&_r=0

This article is worth reading. The comments following this article are worth reading too.

Page 3: (Note: Today she has $312,000 in student loans.)

Today, her debt exceeds her salary by a factor of five — much higher than the recommended twice-starting-salary ratio. She signed up for income-based repayment, a government program available to federal student loan recipients. (A newer program with slightly more generous terms, called Pay As You Earn, or PAYE, is available to more recent graduates.) Both income-based repayment and PAYE allow graduates to lead relatively normal lives by paying back a modest percentage of their income based on a formula. After a fixed amount of time, from 10 to 25 years, the balance of the debt is discharged.

That's the good news. The bad news is that the interest on the debt keeps growing and taxes must be paid on the amount discharged, as if it is a gift. Dr. Schafer sends $400 a month to Sallie Mae, a sum that will rise. But what kind of tax bill awaits her? Asked to run the numbers, GL Advisor, a financial services company that specializes in student loans, calculated that Dr. Schafer's debt is likely to exceed $650,000 when her tax bill lands 25 years after the start of the loan, which means she will owe the Internal Revenue Service roughly $200,000. That will happen while she is still deep in her career, perhaps around the time she wants to send some children to college.

Lesley said:

http://www.nytimes.com/2013/02/24/b...trap-new-veterinarians.html?ref=business&_r=0

This article is worth reading. The comments following this article are worth reading too.

Page 3: (Note: Today she has $312,000 in student loans.)

Today, her debt exceeds her salary by a factor of five — much higher than the recommended twice-starting-salary ratio. She signed up for income-based repayment, a government program available to federal student loan recipients. (A newer program with slightly more generous terms, called Pay As You Earn, or PAYE, is available to more recent graduates.) Both income-based repayment and PAYE allow graduates to lead relatively normal lives by paying back a modest percentage of their income based on a formula. After a fixed amount of time, from 10 to 25 years, the balance of the debt is discharged.

That’s the good news. The bad news is that the interest on the debt keeps growing and taxes must be paid on the amount discharged, as if it is a gift. Dr. Schafer sends $400 a month to Sallie Mae, a sum that will rise. But what kind of tax bill awaits her? Asked to run the numbers, GL Advisor, a financial services company that specializes in student loans, calculated that Dr. Schafer’s debt is likely to exceed $650,000 when her tax bill lands 25 years after the start of the loan, which means she will owe the Internal Revenue Service roughly $200,000. That will happen while she is still deep in her career, perhaps around the time she wants to send some children to college.

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If I were Dr. Schafer, every month when I send the $400 to Sallie Mae, I will deposit another $400 into a savings account. Over the next 25 years, I will have saved 120K plus their compounding interests. Therefore, by the time I need to make that gift tax payment to the IRS, I will have most of the money, if not all, ready.

Good idea! The bottom line is that if Dr. Schafer pays $400/month for 25 years, $120,000, adding the $200,000 she will owe the IRS, her total pay back will be $320,000, barely a little more than $312,000 she owes today. She would have essentially borrowed at zero interest for 25 years to fund her education courtesy of the tax payers Not a bad deal, huh? I think it seems like a pretty good deal. Yes, she may make more money and pay a little more back over the years as IBR dictates, but then again she may also make less money and pay less back. She may chose to work less hours due to family demands. Her ability to find work or her ability to work may be compromised should she have health concerns later in life. All of this still seems pretty reasonable compared the the 18-19% private loans I and many others acquired in the late 70's and early 80's. At that time federal loans were limited to $20,000 and later $25,000 for professional degrees regardless of the cost of our education. I can only say that there was very little empathy for health professionals then and looking at the comments after this article, I don't think much has changed. The reality is this is doable, and she made this grand bargain as an adult. It's not easy, not fun, and it is very stressful having this kind of debt hanging over your head from the start, but it seems like a fair deal. If it bothers anyone a lot, maybe the best they can do is help their children so they are in a better position when they start their careers. Believe me, this approach feels good.

Is one required to take loan forgiveness? Does anybody know the answer to this?

Seriously, she could not afford the loan forgiveness at 25 years; it would result in a tax bill of $200,000 that she could never pay off, with no IBR provisions, and it would be at an IRS interest rate of 18% APR. It would seriously be in her best interest to continue IBR for life, making $400 payments, and letting the loan balloon out to approximately $14 million, 40 years later at age 90. Even after an additional 40 years of $400/mo IBR payments she would not have contributed $200,000 in additional payments.

At least her student loan debt owed to the federal government is dischargeable in death... sticking it to the US taxpayer (e.g. your grandchildren) of course. I wonder if this is the future of student loans: essentially a lifetime surtax of 10% of one's income because no student can afford to pay off the loan and no student can afford to pay off loan forgiveness taxes.

It appears that when you sign on for IBR this is what you agree to in advance.

Copied from the website of Financial Student Aid, an Office of the U.S. Dept of Education.

Disadvantages of IBR

You may pay more interest—A reduced monthly payment in IBR generally means you'll be repaying your loan for a longer period of time, so you may pay more total interest over the life of the loan than you would under other repayment plans.
You must submit annual documentation—To set your payment amount each year, your loan servicer, the organization that handles billing and other services for your loan, needs updated information about your income and family size. You must provide the documentation or your monthly payment amount will be changed to the amount you would be required to pay under the 10-year Standard Repayment Plan, based on the amount you owed when you began repaying under IBR, and will no longer be based on your income. This amount will be higher than your prior IBR payment that was based on your income. If you do not provide the required income documentation, unpaid interest will also capitalize.
You may have to pay taxes on any loan amount that is forgiven after 25 years.

Lesley said:

It appears that when you sign on for IBR this is what you agree to in advance.

Copied from the website of Financial Student Aid, an Office of the U.S. Dept of Education.

Disadvantages of IBR

You may pay more interest—A reduced monthly payment in IBR generally means you’ll be repaying your loan for a longer period of time, so you may pay more total interest over the life of the loan than you would under other repayment plans.
You must submit annual documentation—To set your payment amount each year, your loan servicer, the organization that handles billing and other services for your loan, needs updated information about your income and family size. You must provide the documentation or your monthly payment amount will be changed to the amount you would be required to pay under the 10-year Standard Repayment Plan, based on the amount you owed when you began repaying under IBR, and will no longer be based on your income. This amount will be higher than your prior IBR payment that was based on your income. If you do not provide the required income documentation, unpaid interest will also capitalize.
You may have to pay taxes on any loan amount that is forgiven after 25 years.

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I did some research on this, and it looks like the answer is somewhat ambiguous - it won't really matter for a long time since these programs are so new.

One thing is certain: If the loan is forgiven, yes the debtor will be hit with a humangous tax bill.

According to the US Government websites, loan forgiveness will only occur if the debtor participates in IBR for 25 years and meets certain requirements though, and it is not at all clear what these requirements are. Perhaps the key is to discover these requirements, and deliberately miss them in order to remain in IBR in perpetuity.

Some financial opinion columns have already anticipated this problem, and they predict a tremendous hue and cry in 2032 as the possibility of the enormous tax penalty of student debt forgiveness becomes a reality.

Based on past behavior, I bet congress will most likely kick the can forward, threatening debtors with punitive forgiveness at 30 years, 40 years, 50 years, 75 years, etc. instead, while quietly waiting for "nature to take its course".

Interesting thought problem: what if somebody participates in a public service job at year 16? Would congress really have the heart to financially ruin a debtor with taxable loan forgiveness when the debtor has 90% completed the path to tax-free public service loan forgiveness? I'm sure things will get interesting around 2017 (the first possible public service loan forgiveness) and 2032 (the first possible catastrophic loan forgiveness).

I would like to officially coin the term "forgivageddon" (0 hits on google) for what happens when student loan debtors face financially ruinous taxable loan forgiveness on their out-of-control debt.

You heard it here first 🙂

sazerac said:

I would like to officially coin the term "forgivageddon" (0 hits on google) for what happens when student loan debtors face financially ruinous taxable loan forgiveness on their out-of-control debt.

You heard it here first 🙂

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Duly noted! 🙂