Obama proposes key changes to Income Based Repayment

[PostLessOne]

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Good news, if it happens. This will significantly affect most of us with big med school loans if it passes.

Essentially, Obama is proposing changing Income Based Repayment to take 10% of your income over 150% of the poverty line instead of 15% like it is now. For an average attending physician making $160k a year and paying 40% taxes, that's $13,000 less in mandatory loan payments every year.

Second, he's also proposing to change the forgiveness period from 25 years to 20 years. This will help primary care docs would would probably otherwise still be paying their loans 20 years after graduating from medical school.

Will it happen? Maybe. Then again, the Federal government has financial problems as it is. Also, such a change would accelerate the trend of schools raising their tuitions and spending more and more money every year.

Link :
http://www.salon.com/news/2010/01/25/us_obama_jobs/index.html?source=rss&aim=/news

 

[lee9786]

Did I read right that what ever principle + interest that isn't paid after the 25 years will be "forgiven", but the forgiven amount would count as taxable income? I've thought about IBR but I wonder how reliable it would be to count on. You pointed out a significant point. What's stopping the educational institutions for increasing their educational costs further. We need education reform because this is getting ridiculous.

 

[zriceman]

Did I read right that what ever principle + interest that isn't paid after the 25 years will be "forgiven", but the forgiven amount would count as taxable income? I've thought about IBR but I wonder how reliable it would be to count on. You pointed out a significant point. What's stopping the educational institutions for increasing their educational costs further. We need education reform because this is getting ridiculous.

Does Taxable Income mean we still have to repay the amount left after the 20 year period? I dont understand how is this portion is "forgiven'?

 

[Phlame217]

What the "forgiven but taxable income" means is the debt is erased, however its as if you were gifted the balance of the loan and have to pay income tax.

IE:

after 25 years, balance of loans = 40,000.00
By law, loans forgiven so balance now = 0.00
That year you earned 160,000.00
Due to 25 year forgivess, 40,000 + 160,000.00 = 200,000 taxable income.

Better have good deductions for that year!

 

[PostLessOne]

However, it'll be another 23 years before people start filing for forgiveness. There's a distinct possibility that the tax laws will be changed to eliminate this problem.

Although, I do wonder what would happen if you had a 200k remaining loan balance at the 25 year mark, and an income of 60k a year. (a high school teacher who went to an Ivy League college would get into this situation). You would not have the financial means to even remotely consider paying the tax bill in this case.

 

[zriceman]

What the "forgiven but taxable income" means is the debt is erased, however its as if you were gifted the balance of the loan and have to pay income tax.

IE:

after 25 years, balance of loans = 40,000.00
By law, loans forgiven so balance now = 0.00
That year you earned 160,000.00
Due to 25 year forgivess, 40,000 + 160,000.00 = 200,000 taxable income.

Better have good deductions for that year!

Is it only for a 1 year "ultra tax" period, or will that person have to pay the "40,000 + 160,000.00" tax each year after the 25th until the 40K is fully erased. If this is NOT the case, then what is going to stop students from maxing out their student loans if the govt will cover their behinds??

 

[PostLessOne]

If this is NOT the case, then what is going to stop students from maxing out their student loans if the govt will cover their behinds??

Basically nothing. This in turn means that educational institutions will freely spend more and more money each year, raising tuitions to match. An existing example of what perverse incentives like this create : hospitals today have raised their costs and the sophistication of their equipment almost without constraints because medicare and other insurances will pay for nearly any procedure you can justify on paper. Along the same idea, educational institutions have gained lots of fancy features they didn't have 20 years ago, because even now the government will grant loans for just about any amount of tuition.

The problem in both cases is that much of these expenditures grant sharply diminishing returns. There's only so much knowledge you can force into a students head in 4 years, and fancy classrooms and rec centers don't necessarily help very much. A hospital can only do so much for an elderly dying person, and it can cost hundreds of thousands of dollars to increase a person's remaining life by a few weeks.

 

[Phlame217]

Is it only for a 1 year "ultra tax" period, or will that person have to pay the "40,000 + 160,000.00" tax each year after the 25th until the 40K is fully erased. If this is NOT the case, then what is going to stop students from maxing out their student loans if the govt will cover their behinds??

as i read it (though i am not jargon expert interpreter), it would be a one year tax as the government essentially "gives" you the balance of your loans, but instead of putting it in your bank account, they apply it directly to your loans to pay them off. The way they do it, though, counts as taxable income on your return. Its like if you have investments and get the returns, you have to file them as taxable income and pay the tax.

Therefore you have the ultra tax period.

And as to the 25 year period, no clue... however there is a shorter ten year forgiveness period that applies to any doctors who work in public health or a few other areas, so any one doing an EM or similar residency will qualify for that.

 

[pem8erly]

As I read it the loan forgiveness under IBR is only if you continue to make payments under the IBR plan during the 10 or 25 year period. Once you're out of residency and making more money, even in the lower income fields, you won't qualify for IBR and therefore no forgiveness.

 

[PostLessOne]

As I read it the loan forgiveness under IBR is only if you continue to make payments under the IBR plan during the 10 or 25 year period. Once you're out of residency and making more money, even in the lower income fields, you won't qualify for IBR and therefore no forgiveness.

Incorrect. Once you start making more money, your required payments will rise accordingly.

 

[pem8erly]

Incorrect. Once you start making more money, your required payments will rise accordingly.

But that is not infinite. There will be a cap in salary that limits participation in IBR. I ran the calculator and for a 200K debt in student loans once you make over 200K in AGI it says that you would no longer qualify for IBR. It may not matter once you're making that kind of money but with all the discussion of loans becoming forgiven after 10 or 20 years, I wanted to make sure people knew that there were conditions to qualify for that forgiveness other than just making payments.

 

[PostLessOne]

I'd like to know where you found this. Obviously, at a certain salary level IBR won't help you any more because your required payments will be high enough that you'll have paid the debt off before you reach the 10 or 25 year forgiveness date.

However, the calculators I used mention nothing of this. For example, if you trained to be a fellowship trained neurosurgeon, you'd be under IBR for about 8-9 years, towards your 10 year forgiveness clock. If you then took a faculty job at a nonprofit for another year and were paid a large salary, presumably those additional year would still count towards forgiveness.

Can you find the actual policy? Are you sure the calculator wasn't just telling you that IBR won't help above a certain income level?

 

[pem8erly]

I agree with what you've posted. But really how many borrowers fall under that scenario? How many other are going to complete a 3-4 year residency and begin working making 4-5 times what they did in residency, most likely in private practice? I didn't say that everyone gets disqualified once they leave residency, but I just wanted to point out that some will.

All I did was read the qualifications for IBR which states that you are eligible as long as your maximum monthly payment based on salary is less than the monthly payment of your loans under a 10 year repayment plan.

In regards to your statement that IBR will no longer be helpful over a certain income: once that is the case, I don't see the benefit of the lenders allowing you to continue on the program when they can just collect all of the balance from you instead of forgiving the loans.

http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp

And like I said before, it probably won't even matter once you start making that kind of money so it's just FYI

 

[PostLessOne]

I agree with what you've posted. But really how many borrowers fall under that scenario? How many other are going to complete a 3-4 year residency and begin working making 4-5 times what they did in residency, most likely in private practice? I didn't say that everyone gets disqualified once they leave residency, but I just wanted to point out that some will.

All I did was read the qualifications for IBR which states that you are eligible as long as your maximum monthly payment based on salary is less than the monthly payment of your loans under a 10 year repayment plan.

In regards to your statement that IBR will no longer be helpful over a certain income: once that is the case, I don't see the benefit of the lenders allowing you to continue on the program when they can just collect all of the balance from you instead of forgiving the loans.

http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp

And like I said before, it probably won't even matter once you start making that kind of money so it's just FYI

Good point. And for a person with a "problem" of making too much money for IBR to help, I'm sure there are solutions. One that just occurred to me : a lot of hospitals offer new doctors an "income guarantee" in the first few years. The way those work, the hospital or group loans the new doctor a bunch of money, and will forgive that loan if the doctor stays about 3 years. Time it right, and the date of forgiveness for the loan could be AFTER the government forgives you your student loans. And the loan doesn't count as income until it is forgiven...

So you could do a 7 year residency + fellowship (lots of specialties have a training program that is roughly that long) followed by a job working for a hospital with a hefty "income guarantee". During those years, since most of your income is from that loan, you would keep making IBR payments (your actual income might be really low, under 80k or so) and then the government would forgive you your huge debt.

Right after that, you could then switch to a private practice job that pays what the going rate is : most of the specialist jobs pay between 300k-500k a year, and you won't have any student loan debt...