IBR and Interest Rates

[docmed2012]

---

Members do not see this ad.

For those who are doing IBR right now...how does the interest accumulate as you start repayment? Is it capitalized on a yearly basis...causing your principal to increase every year? I know that the subsidized interest is covered for the first three years. I read that it doesn't capitalize until you stop the IBR plan, but this doesn't sound right to me - so I just want to get some clarification. Thank you!

 

[dinosims]

Correct. There's no capitalization until you come off IBR, either by choice or by no longer having a partial financial hardship.

 

[Lesley]

I found this very good website and this question was asked and addressed well.

http://askheatherjarvis.com/forums/viewthread/64/

Her response follows a similar question to yours regarding interest and IBR:

Hello Heather,

I have a question on capitalized interest. The rule is:

"Under IBR, unpaid interest is capitalized (added to your loan principal balance) only if you are determined to no longer have a "partial financial hardship", or if you choose to leave the IBR Plan.

What I am not clear on is - if you no longer have a partial financial hardship or if you leave IBR, are you responsible for the interest that capitalized when you did have a partial financial hardship? Does that get carried forward? Or does the interest just begin to capitalize when you no longer have a partial financial hardship or if you change plans?

Also, do you know how much you would have to earn to longer have "partial financial hardship"?

Many thanks! I really appreciate what you are doing for us. I've been looking for a site like this for ages and found you on IBRinfo.org

GP

So interest "accrues" or adds up, all the time. Some of it is paid by you when you make your IBR payment (except maybe not you if you're paying $0!) If your IBR payment amount does not cover the full amount of interest that accrues on your loans each month, the government will pay any unpaid, accrued interest on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under IBR.

What happens to the accrued interest that isn't paid by you or the government? While you still are in IBR and have a Partial Financial Hardship, It hangs out in a kind of limbo and can continue to get bigger as more interest accrues. Capitalization (or adding that unpaid accrued interest to the principal balance of the loan) does not occur unless you no longer have a Partial Financial Hardship or you choose to leave IBR. Capitalization is bad, because then you begin to be charged interest on interest. Not something you want to do.

At some point, all the accrued interest and principal has to either get repaid or forgiven. Maybe it's repaid by you over time or you loan forgiveness. Hope that makes sense.

You are very welcome. Help me out please by passing along th(e info through your social media channels.

Yours,
Heather



Personally, I think IBR, while it sounds enticing, is not always in your best interest. With IBR you are paying a loan with interest for 20+ years. The longer the payoff period, the higher the total repayment. Think 30 yr vs 15 year mortgages. Capitalization is just interest on the interest. Regardless, you still owe interest on the principle you agreed to when you signed your promissory notes. A lower monthly payment can encourage spending that you could not afford if you were addressing debt repayment in a more aggressive manner. Basically, allowing you to live beyond your means. I think, if at all possible, the earlier the better, prior to debt repayment, figure out what you anticipate making. How much would that mean on an IBR repayment plan? Calculate the total payments over the life of the loan compared to standard repayment programs. For some, if you start IBR, maybe due to the specter of capitalization or other reasons, it may not be easy to go into a shorter standard repayment plan in the future. Then you are then stuck with a very long repayment period and an overall larger debt repayment regardless. Regarding loan forgiveness, it would be nice if it is in effect down the road, but at a time when pensions, social security and medicare that were "guaranteed" may no longer be so, it is best to be prudent. Do you really want that loan hanging around your neck for 20 - 30 years? Get rid of that debt. It will make you feel better and think clearer. Even if there is debt forgiveness going forward, the amount forgiven could be taxed. Who knows for sure? Just my opinion. Best Wishes Everyone!

 

[DrBender79]

With IBR you are paying a loan with interest for 20+ years

As I understand it, if you work for a non-profit hospital (most residencies qualify), you only have to do IBR for 10 years, and then your remaining balance is forgiven.

 

[Lesley]

It is possible with 120 of the right kind of payments, any debt beyond that may be forgiven as things are written now. However, there are no guarantees going forward that there will not be changes, minor or substantive, or if there will be any grandfathering protecting against future changes. As I said before, under certain circumstances, IBR is enticing. For most people on IBR, debt will not be forgiven for 20 - 25 years and any forgiveness could be taxed. Sometimes you just have to go with your gut and make the best decision based on the options available. Good Luck.




Copied from a site on PSLF:

How does Public Service Loan Forgiveness (PSLF) work?

To be eligible for Public Service Loan Forgiveness (PSLF) you must make 120 of the right kind of payments, with the right kind of loan, while working in the right kind of job. The 120 payments do not have to be consecutive. If you're doing all of these things, the first date that a payment can count towards PSLF is October 2007, and the first date that one can be eligible for forgiveness is October 2017.

More details on the eligibility criteria for PSLF:

1) The right kind of job. In general, you should qualify if you are a full-time employee of a local, tribal, state, or federal government, or a 501(c)(3) nonprofit. Full-time is defined as an annual average of at least 30 hours a week, or the number of hours your employer considers full-time, whichever is GREATER (unless you work for multiple public service employers, in which case only the "30 hours a week" definition applies). For teachers and other public service employees whose typical employment period is for 8 months or more, the full-time guideline is working an average of at least 30 hours per week during that period. See the next question for details on other jobs that may qualify.

2) The right kind of loan. These are federal Direct Loans (William D. Ford Direct Loan Program). If you have federal loans from a private lender through the Federal Family Education Loan (FFEL) Program, you can consolidate into a Direct Loan to take advantage of PSLF, even if you have consolidated previously.

3) The right kind of payment. These are payments made under the Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), or Standard 10-Year Repayment plans. PSLF is intended for people who have high debt relative to income and qualify for ICR or IBR for at least part of their career in public service.
Where can I find more information about PSLF job eligibility?

According to the Department of Education's final regulations for PSLF, your job is eligible if you:

are employed by any nonprofit, tax-exempt 501(c)(3) organization (not sure if yours counts as a 501(c)(3)? Check with the IRS);
are employed by the federal government, a state government, local government, or tribal government (this includes employment by the military, public schools and colleges, public health centers, etc.); or
serve in a full-time AmeriCorps or Peace Corps position.

If you don't meet these criteria, the Department of Education's regulations create a two-part test of other circumstances under which you may still be eligible:

(1) your employer is not "a business organized for profit, a labor union, a partisan political organization, or a non-profit organization engaged in religious instruction, worship services, or any form of proselytizing;" AND,

(2) your employer provides any of the following public services: emergency management; military service; public safety; law enforcement; public interest law services; early childhood education; public service for individuals with disabilities and the elderly; public health; public education; public library services; and school library or other school-based services.
Can I qualify for Public Service Loan Forgiveness if I work overseas?

As long as you are working for a U.S. nonprofit organization or a U.S. government employer you should meet the eligibility criteria for employment. PeaceCorps volunteer work is explicitly eligible for Public Service Loan Forgiveness, but unpaid volunteering is not.
I think I qualify for Public Service Loan Forgiveness, but how can I be sure? Is there a way to register for the program?

In January 2012, the Department of Education issued the long-awaited Employment Certification Form for Public Service Loan Forgiveness, which will allow Direct Loan borrowers who work in public service to confirm periods of qualifying employment and payments. This is not the PSLF application, but will help borrowers who may qualify for loan forgiveness stay on track.
Visit the Federal Student Aid website for the Employment Certification instructions, form and fact sheet.
Do income-sensitive, graduated, or extended loan payments count towards PSLF?

No. Only Income-Contingent, Income-Based, and Standard 10-Year payments made since October 2007 count. PSLF is intended for borrowers with high debt-to-income ratios for at least part of their careers in public service. Graduated and extended repayments are available to all borrowers regardless of income, so it would be easy for higher-income borrowers to game the system if these payments were eligible.