Income Based Repayment

[kov82]

I think the system now is 15% of your monthly income above the poverty standard for 25 years and the rest is forgiven. Work in the public sector and its 10 years and the rest is forgiven.

I believe starting in 2014 the new numbers will be 10% of your monthly income above the poverty standard for 20 years and the rest is forgiven.

So I dont know if there is a "catch" to this. I dont know much of the details and some financial aid people seem hesitant to answer confidently, but does this mean that your total debt really wont matter? (unless its ridiculously low from a state school so you could pay it off very quickly) in other words, if its $330,000 or $420,000 even though $90,000 plus interest seems like a lot, either way, you are paying 10% of your income for 20 years, (possibly 10 if you work in the public sector). Its unlikely if you have other costs like family, house, cars, business loans, etc, that you would be able to pay 330,000 off earlier than 20 years anyway, so what does it matter if its 330,000 or 420,000 if its 10% of your income and for 20 years either way?

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[cbizzle7994]

From what I have read about IBR, at the end of the 25 years of repayment whatever is left over (principle + accumulated interest) is forgiven, but it counts as taxable income. This doesn't apply to public service loan forgiveness, where whatever is forgiven is not considered taxable income.

http://www.ibrinfo.org/faq.vp.html#_How_does_loan

If you had $330,000 in debt and an income of $150,000 a year for 25 years, you would be paying $1,670 per month (or $20,040 a year). That isn't even enough to cover the interest per year which would be $22,440. Over the course of 25 years, you would pay $501,000.

Assuming that all of your loans are at 6.8% (which they probably won't be, but for simplicity reasons), after 25 years you would still have roughly $400,000 left on your loan. When the government forgives that, assuming roughly 35% tax rate, you will pay another $140,000 in taxes.

That brings your grand total after 25 years to roughly $641,000 for a $330,000 loan.

If you were going to be spreading the $330,000 out over 25 years with a standard repayment schedule, you would be paying $2,290.44 a month ($27,485.28 per year) for a grand total after 25 years of $687,130.38. So if you were going to spread it out over 25 years, it would be a good idea to do IBR.

For $420,000, assuming all of the same factors, you would be paying the same amount per month ($20,040 per year). The interest alone would be $28,560 per year. So after 25 years you would owe roughly $680,000 on the loan. When that is forgiven you will have to pay roughly $238,000 in taxes for a grand total of $918,000. So that extra $90k in loans would come out to about $230k in the end. Again, if you were able to pay it off normally over 25 years, it would be $2,915.10 per month ($34,981.20 per year) for a total of $874,532.23. So doing a normal repayment plan over 25 years would be about $45k cheaper.

If you do the 10 year public service forgiveness, you would only be paying $20,040 per year for a total of $200,400. Anything forgiven would not be taxable, so the extra $90k wouldn't matter. But, you would need to know now whether or not you were gonna go the public service route.

Sorry for this being so long, didn't mean for it to be originally. All math is subject to criticism since there was definitely a bit of rounding and maybe even some errors.

 

[TheOx777]

I was thinking the same thing. Now I am not pre-dent but pre-DPT. The IBR, if utilized, as advertised will be a huge relief for all graduate/professional students who have hundreds of thousands of dollars in debt. Combining IBR and PSLR for federal loans is an amazing option for ppl who work for a non-profit or in public service. I was just using the calculator today and was amazed at how much the monthly payments would drop in comparison to a traditional 10-yr repayment plan. I believe there is a cap on the amount of federal student loans you can borrow after a while, so its not like one could borrow a million dollars and get away "scott free". That said, if you have 100-300K in student loans and start out at 70-100k. It's a sweet deal IMHO!

 

[kov82]

Thanks guys,

I did just speak to someone at a financial aid office, and I understand the intention of IBR seems to be mostly for the non profit or public sector workers, but I think as a secondary function its meant for struggling private dentists (or other health care professionals etc). Even then, I feel most dentists go into private practice, and so thats what I am mostly comparing.

One thing I did not know was that you have to apply for it EVERY year for that 20 years, you have to qualify for it. Like many programs, it can be potentially cut down the line, then you would have to go with one of the other repayment options, so that is something to consider.

For dentistry, as far as loan limits go... from what I have been told, $224,000 aggregate limit, $65,500 of which is subsidized. The unsubsidized amount would be at 6.8% fixed while you're in school.

The Grad Plus has no limit (although I THINK each individual school puts a limit on what they will allow you to borrow each year), so its still a federal load right? the difference between Grad Plus and unsubsidized is that Grad Plus is 7.9% fixed (that's what I was told was the difference).

I didn't consider how much the taxes on what's left would effect the value of doing IBR, no wonder its ALWAYS mentioned along with forgiveness.
Hopefully $680,000 won't be a lot of money 20 years from now! But if you owe $238,000 as taxes (for example), wouldn't the government want that money right then and there? If so, that's another big thing to consider.

I never actually calculated the numbers, thank you cbizzle7994!