Income Based Repayment

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MarylandHockey

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10+ Year Member
This is a rather naive question; please forgive my ignorance.

After I take out loans for medical school, I graduate and I start to work for a non-profit (i.e. a hospital). It is my understanding that my loan payment is locked to a percentage of my salary (IBR).

But then, because I am working for a non-profit all of my loans will be forgiven after 10 years.

So what difference would it make if I take out $150,000 v. $250,000 in loans? The payments are exactly the same up until forgiveness; is there a maximum amount they will forgive? Am I missing something obvious?

Thank you in advance for clarifying this seemingly simple question.
 
From http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp


25-YEAR CANCELLATION — If you repay under the IBR plan for 25 years and meet certain other requirements, any remaining balance will be canceled.

10-YEAR PUBLIC SERVICE LOAN FORGIVENESS — If you work in public service, on-time, full monthly payments you make under IBR (or certain other repayment plans) while employed full-time in a public service job will count toward the 120 monthly payments that are required to receive loan forgiveness through the Public Service Loan Forgiveness Program. Through this program, you may be eligible to have the remaining balance of your Direct Loans forgiven after you have made the 120 qualifying as described above. The Public Service Loan Forgiveness Program is available only for Direct Loans. If you have FFEL loans, you may be eligible to consolidate them into the Direct Loan Program to take advantage of the Public Service Loan Forgiveness Program. However, only the on-time, full monthly payments made under IBR or certain other repayment plans while you are a Direct Loan borrower will count toward the required 120 monthly payments. For more information about this program, review the Department’s Public Service Loan Forgiveness Program Fact Sheet.


I don't think you're missing anything, but you will have to do a ton of record keeping and paper pushing to prove what your income is, that you made payments of the correct percentage of your income, and that your employment qualifies as public service (for the 10 year plan)
 
i don't think you're missing anything either, and the way i read these regs and the way in which they've been explained to me have made it sound as though debt >$200k is irrelevant now, even if you don't go the 10-year non-profit route. that said:

1) they could always change the law. just ask anyone who was taking loans for school in the early 80's what happened when Reagan took office.

2) whether or not you're considered to be working for a non-profit during residency depends on how your residency program is structured, which could make a big difference when you're talking about 4+ years.

3) +1 for paperwork. you're really going to have to have all your ayes dotted and tees crossed for this one.
 
paperwork isn't difficult at all, you consent for them to access your tax info every year and it goes off of your AGI that you already figure out for taxes. I'm currently on the plan for consolidated undergrad and grad loans and I pay next to nothing (which is what I make as well....)

every employer has an ID number used for taxes, I'm sure any place you'd be working has already been qualified as a non profit if they are such, so really again it's no more difficult than gathering the info you've already gathered for tax purposes.

as mentioned, the bigger issue is whether or not the law gets changed, which I'm assuming it will once this catches on and the gov starts losing tons of $$$
 
The main hitch also is that any amount of money forgiven is counted as earned income in the final year. If they forgive 100k in debt, you're liable for the taxes on that as if you earned an extra 100k.
 
DrBowtie said:
The main hitch also is that any amount of money forgiven is counted as earned income in the final year. If they forgive 100k in debt, you're liable for the taxes on that as if you earned an extra 100k.
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whoa! i was unaware of this. it appears however that forgiveness through the 10-year non-profit scheme under IBR would not be taxable. The 25 year would be.

that totally screws the math on what i was saying before about $200k being the cutoff. thanks for pointing that out :prof:
 
Interesting about the taxable income. I knew our fin aid office has repeatedly said that the ten year payoff is not taxable but I didn't know at all about the 25 year plan.

Although this would be a great program, I think planning on it being available and in its current form by the time you would use it is naive. It could be rescinded or changed beyond recognition anytime the congress sees fit, and if you've followed the news lately healthcare/education/funding changes abound. Take out as little as you can and enjoy this as an added benefit if its there when you need it. If it changes you won't be out anything. Don't borrow willy nilly full tilt expecting it to get paid off because there is a substantial chance you'll be stuck with it. Not to mention it just ain't right.

Also this applies only to federal loans correct? Private loans cannot be applied for either the lower payments or the forgiveness.
 
I truly appreciate the time people took to answer my question.

It is really fascinating that in the several financial aid seminars I have attended while I've been interviewing for medical school, the directors have all focused on ways to keep the debt burden low.

I think it is important to be skeptical; and I am cautious of any future changes in the law, which is a very real possibility. But as it stands now, I am still considering taking out the maximum amount of money I can during medical school and put the extra away in I-series savings bond. At the very least, you make the interest during the grace period.

Again thanks for the advice.
 
MarylandHockey said:
I am still considering taking out the maximum amount of money I can during medical school and put the extra away in I-series savings bond. At the very least, you make the interest during the grace period.

Again thanks for the advice.
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You are being charged 6.8% interest and are making much less than that on a savings bond. The grace period is only during medical school and it means only that you don't have to pay interest at the time. It is still being charged to you to pay off at some point (again without taking loan forgiveness for granted).

If you do not borrow the entire amount and realize you need additional money you can always take out more. In the end the choice is yours. You might end up ahead with more money now and end up having the balance forgiven. You might get stuck with tens of thousands of additional interest payments.

I would be interested in hearing your reasoning for taking out the additional funds.
 
MarylandHockey said:
I think it is important to be skeptical; and I am cautious of any future changes in the law, which is a very real possibility. But as it stands now, I am still considering taking out the maximum amount of money I can during medical school and put the extra away in I-series savings bond. At the very least, you make the interest during the grace period.

Again thanks for the advice.
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uh, yeah... don't do that unless you are only taking out the $8,500 in subsidized staffords. oh what, Congress just nixed subsidized staffords for grad school? damn.

edit: just saw that I series bonds are paying 0.74%, i'm doing better than that with an internet savings account.
 
gravitywave said:
uh, yeah... don't do that unless you are only taking out the $8,500 in subsidized staffords. oh what, Congress just nixed subsidized staffords for grad school? damn.

edit: just saw that I series bonds are paying 0.74%, i'm doing better than that with an internet savings account.
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Yes I suppose if the only thing you were taking out in loans were the subsidized loans then it would make sense to put it in a bank account and pay it off the day you graduate.

I hadn't heard that the subsidized staffords are going away. It just goes to show though that this stuff really does change year to year and what you've been told cannot be trusted. I guess that means my expected 150k debt became 152k. Sheesh.
 
Instead of depositing in an account that yields 0.74% what if you opened a discount brokerage account with a small portion of the money (say $1,000/year) and invested in a diverse ETF (fund that invests in a wide variety of companies) that will net you ~11% growth per year. I know the market is the reason we're in this mess, but it has steadily risen back in the past year or so.
 
DrLeon said:
Instead of depositing in an account that yields 0.74% what if you opened a discount brokerage account with a small portion of the money (say $1,000/year) and invested in a diverse ETF (fund that invests in a wide variety of companies) that will net you ~11% growth per year. I know the market is the reason we're in this mess, but it has steadily risen back in the past year or so.
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Thats quite a lot of trouble to go through to make $30 a year.

You'd probably lose even that after paying additional origination fees, taxes on the "profit," and the brokerage company their share.
 
organdonor said:
Thats quite a lot of trouble to go through to make $30 a year.

You'd probably lose even that after paying additional origination fees, taxes on the "profit," and the brokerage company their share.
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It was more so a plan to begin investing, not just the put the initial $1k in, but an additional $1K each year in med school and through residency it would be a matter of investing any extra money I have that would have gone to paying down the loan faster since the interest rate would be lower than my return. The idea would be that the reinvestment and compounding would ramp it up after a few years, but I see what you're saying with the trouble for a little gain.
 
organdonor said:
I would be interested in hearing your reasoning for taking out the additional funds.
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I was thinking that the additional loan is essentially money in the bank.

A real life example to explain my reasoning...

A friend of mine was a MD/Ph.D in a funded position. Even though her tuition was completely paid, she maxed out her federal loans upto 70K putting all that money in the bank while in medical school. She did research (as required during her residency); and the LRP for research completely paid back the 70K loan for her, while she still held onto the original money (the LRP was salary based, not asset based)

Now, even just regular MDs have reason to take out the extra money if it is available. For example, a financial aid officer told me that I should not take out the extra $1500 federal loan for a computer if I already have one. Thereby saving me the loan + interest payments. But after a tipping point, it's actually financially wise to take the extra loan.

The way I read it now is that this new law essentially incentivises taking out additional federal loans after you've reached this tipping point - because the repayment is capped to a 10 year percentage of your salary not the actual loan amount + interest.

Put another way, if you have to take out the loans to pay for school, it appears that you should take out as much as you are possibly allowed because after it crossed a threshold amount it has no bearing on your final loan payments.

My idea concerning the I-bond wasn't to profit off the loan, it's to protect the money if crap hits the fan (i.e. the law is changed, economy tanks, etc.). The loan itself is the profit.

There are dozens of caveats here, and each person is in a different position. But the general point is that it doesn't matter if you take out 200k or 300k in loans.
 
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MarylandHockey said:
I was thinking that the additional loan is essentially money in the bank.

A real life example to explain my reasoning...

A friend of mine was a MD/Ph.D in a funded position. Even though her tuition was completely paid, she maxed out her federal loans upto 70K putting all that money in the bank while in medical school. She did research (as required during her residency); and the LRP for research completely paid back the 70K loan for her, while she still held onto the original money (the LRP was salary based, not asset based)

Now, even just regular MDs have reason to take out the extra money if it is available. For example, a financial aid officer told me that I should not take out the extra $1500 federal loan for a computer if I already have one. Thereby saving me the loan + interest payments. But after a tipping point, it's actually financially wise to take the extra loan.

The way I read it now is that this new law essentially incentivises taking out additional federal loans after you've reached this tipping point - because the repayment is capped to a 10 year percentage of your salary not the actual loan amount + interest.

Put another way, if you have to take out the loans to pay for school, it appears that you should take out as much as you are possibly allowed because after it crossed a threshold amount it has no bearing on your final loan payments.

My idea concerning the I-bond wasn't to profit off the loan, it's to protect the money if crap hits the fan (i.e. the law is changed, economy tanks, etc.). The loan itself is the profit.

There are dozens of caveats here, and each person is in a different position. But the general point is that it doesn't matter if you take out 200k or 300k in loans.
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According to the law the way it is currently read then yes this would be true. I think you are making a big mistake assuming it will be unchanged for the duration of your paying it off.

I actually discussed this with my financial aid officer at my school. He told me the same thing. Even a simple change could completely screw you out of a lot of money. As I understand it, the repayment program was really more intended for undergraduate degrees. As such, it was originally intended for loan amounts smaller than what we experience. The financial aid officer told me that there has been discussion of a "cap" put on the amount forgiven. He didn't know an amount.

Just look at the recent changes to subsidized loans. These terms are really changing around us. Expecting the terms of your loan not to change in 15 years in such a dynamic environment isn't wise. If the terms change they aren't going to be in your favor. Not with the current funding of education, not with this congress. 14 years from now they could do away with the forgiveness portion and look where you'd be?

Plus, you wouldn't feel a little bit bad about gaming the system like this? There's not a little teapartier in you saying "gee that guy doesn't need governement assistance yet he's getting hundreds of thousands of dollars of it?
 
DrLeon said:
It was more so a plan to begin investing, not just the put the initial $1k in, but an additional $1K each year in med school and through residency it would be a matter of investing any extra money I have that would have gone to paying down the loan faster since the interest rate would be lower than my return. The idea would be that the reinvestment and compounding would ramp it up after a few years, but I see what you're saying with the trouble for a little gain.
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Can you point me in the direction of an ETF where I can make 10%? I and my wallet would thank you.
 
organdonor said:
Can you point me in the direction of an ETF where I can make 10%? I and my wallet would thank you.
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There are a lot that have grown tremendously since the crash. It's something I'm in the preliminary stages of looking at, but I'll let you know if i come across a good one
 
DrLeon said:
There are a lot that have grown tremendously since the crash. It's something I'm in the preliminary stages of looking at, but I'll let you know if i come across a good one
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I think you are missing the main point of your statement....Since the crash.

Look at the long term return of the various investments.
 
organdonor said:
Expecting the terms of your loan not to change in 15 years in such a dynamic environment isn't wise. If the terms change they aren't going to be in your favor.
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Hmm. Not quite sure if I was sold by this argument.

There is no more reason to assume they will change than stay the same. And assuming they will only get worse... why? They actually just got better a few years ago.
 
organdonor said:
Plus, you wouldn't feel a little bit bad about gaming the system like this? There's not a little teapartier in you saying "gee that guy doesn't need governement assistance yet he's getting hundreds of thousands of dollars of it?
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Btw, I do agree here. You shouldn't game the system just to feed your greed.

If you are working as a doctor and have your loans paid off in 10 years, you should be able to survive without an extra 20-50k or whatever we're talking here.
 
MCAT guy said:
Hmm. Not quite sure if I was sold by this argument.

There is no more reason to assume they will change than stay the same. And assuming they will only get worse... why? They actually just got better a few years ago.
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The graduate school lending market has actually worsened significantly within the last 5-10 years. Two main things that I saw within my educational time:

1) Staffords fixed at 6.8%. Many current upper level residents were able to consolidate around ~2.0% when the rate was tied to T bonds.

2) Lender perks have dried up since everything has gone federal direct. There used to be pretty substantial interest rate drops and incentives when competition among lenders existed.
 
DrBowtie said:
I think you are missing the main point of your statement....Since the crash.

Look at the long term return of the various investments.
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I don't think the whole, borrow at 7% and invest at 11% thing is any bit of smart.

Btw, the geniuses who think this stuff up forget that you have to pay capital gains tax on that sliver of 4% that you are earning off of the few thousand dollars. Then, surprise!, there is no guarantee on that 11% gain. You risk leverging yourself for a 4% taxable gain.

Wow.

What's this in $ and cents?

10k invested: $400
50k invested: $2000

Let's be honest, are you really going to be working with 50k? Putting 50k into a market that can be volatile for a 4% gain isn't smart.

Yeah, rich people do leverage, but they try to leverage 20k to turn it into 30k or 40k (i.e. 100% return or 50% return). You do nothing by going into a risky situation for a crapy gain.
 
DrBowtie said:
The graduate school lending market has actually worsened significantly within the last 5-10 years. Two main things that I saw within my educational time:

1) Staffords fixed at 6.8%. Many current upper level residents were able to consolidate around ~2.0% when the rate was tied to T bonds.

2) Lender perks have dried up since everything has gone federal direct. There used to be pretty substantial interest rate drops and incentives when competition among lenders existed.
Click to expand...

Interest rates are always going to change. I think the ability to completely forgive debt while paying a percentage of your income is a very significant improvement. So I guess it depends on your perspective.
 
MCAT guy said:
Interest rates are always going to change. I think the ability to completely forgive debt while paying a percentage of your income is a very significant improvement. So I guess it depends on your perspective.
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It's not a matter of the changing variable interest rate. It was a complete shift away from basing the interest rate on T-Bills to an inflated (based on current rates) somewhat arbitrary fixed rate.

I'm also waiting to see how the whole 10 yr plan works out. No one has done this yet and I am sure there are unforseen hurdles. This is definitely a finite point where going into private practice, making more money and just paying off the loan is far better than taking a depressed salary academic job just for the sake of getting loan forgiveness.

I'm not really emotionally invested one way or the other since I will not be using the programs. The goal should always be to minimize your debt liability and taking out more loans on the promise of a government program is quite foolish.
 
Thank you for everyone's thoughtful discussion.

Regarding the "morality" of "gaming" the system. I've thought long and hard about this issue, and haven't come to a firm resolution. Because there are so many different personal situations I don't think there is one clear cut answer.

If you look at an extreme, a resident neurosurgeon who is working for nonprofit (i.e. academic hospital) and who will eventually pull in close to a million dollars a year. It is hard to argue that the government should pay off 100k in their loans. But, from personal anecdotes this is exactly what many of them are doing. Their logic is that "it is the same as taking a tax credit that is written into the law."

But what about the other extreme, the rural doc making 90K a year or a MD who goes into research making 50K a year. Someone could argue reducing a 250K debt load is a good thing so that we, as a society, can provide the financial incentives so that these individuals can continue to provide health care in an under-served community or focus on making the next big discovery. I think it is hard to argue that these people are "gaming" the system by reducing their debt load. In fact, some might argue that this is the entire purpose of these programs.

There is a full spectrum of doctors in between.

Basically I think striking the right balance is a decision is that is being made by the public, their representatives, and policy makers.
 
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DrBowtie said:
The graduate school lending market has actually worsened significantly within the last 5-10 years. Two main things that I saw within my educational time:

1) Staffords fixed at 6.8%. Many current upper level residents were able to consolidate around ~2.0% when the rate was tied to T bonds.

2) Lender perks have dried up since everything has gone federal direct. There used to be pretty substantial interest rate drops and incentives when competition among lenders existed.
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Not to mention that you don't select IBR at the time of origination. The govt. always has the option to change the rules before you enter the program. If you decide to take out the max amount, then they change the rules you may end up having to pay back the full amount plus with more interest than the smaller amount with less interest you would have otherwise taken
 
ucbsmd said:
Not to mention that you don't select IBR at the time of origination. The govt. always has the option to change the rules before you enter the program. If you decide to take out the max amount, then they change the rules you may end up having to pay back the full amount plus with more interest than the smaller amount with less interest you would have otherwise taken
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Yeah, definitely true. It is the uncertainty of future policy that negates any potential positive benefit.
 
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