The catch to IBR?

[timwatley]

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I doubt I will use this program to repay my loans but I'm wondering how much everybody knows about it. I'll be honest and say I don't know too much about it, but it does sound fishy and maybe too good to be true. For instance, how is it guaranteed? The big one for me is where the 'forgiven' money goes. As most of us know, we live in a society that charges credit cards first and asks questions later. I'm guessing the forgiven money gets dumped on the average tax payer somehow. Is that something people are ok with? Also, I've heard you have to sign up for IBR every year if you use it and the exit vehicle is expensive. It would be a good idea to pool together some knowledge and make a sticky thread somehow because it sounds like a lot of students will be using the program, and there could be some hidden strings or fine print that would surprise them. Also, if tuition keeps rising, IBR will only become more popular.

 

[letsdoitbama]

NOT guaranteed to stick around. Instead of debt decreasing over time, compound interest skyrockets with such small payments. In 25 years (or apparently 20 thanks to Obama), the remaining enormous balance is TAXABLE INCOME. Added bonus: you get kicked out if your yearly income exceeds original loan balance. Stay very far away from this program, does not save much if anything in the end and is extremely risky given such easy policy changes in government.

Live like a dental student for a few more years instead and get those loans taken care of, not like we won't be used to it.

 

[timwatley]

I feel the same way. I'm not sure if IBR people are taking everything into account or just blindly following and assuming its a solid, safe deal.

 

[cmcner]

NOT guaranteed to stick around. Instead of debt decreasing over time, compound interest skyrockets with such small payments. In 25 years (or apparently 20 thanks to Obama), the remaining enormous balance is TAXABLE INCOME. Added bonus: you get kicked out if your yearly income exceeds original loan balance. Stay very far away from this program, does not save much if anything in the end and is extremely risky given such easy policy changes in government.

Live like a dental student for a few more years instead and get those loans taken care of, not like we won't be used to it.

You can't get kicked out of ibr the worst that can happen is that your monthly payment maxes out at what your original 10 year repayment total was. And no nothing is guaranteed but usually people get grandfathered in if things do change, it's unlikely that there will be any changes before 2017 when the first ibr+public service loan forgiveness people are eligible for forgiveness and by that time hopefully you're graduated and in the program so that you're grandfathered in

 

[destinedsirius]

Excuse me if I'm asking general questions.

What happens if you monthly payment on Ibr matches the monthly payment on 10 year plan?

Ibr sounds really sounds good so why would other people go with other kinds of payment plans?

What is grandfathered in?

Can you pay more than your monthly payment on Ibr if you have disposable income and you want to get rid of your debt faster?

Thanks.

 

[letsdoitbama]

Obama's already changing the stipulations on this program. In the next 20 years, how the government treats student financial aid is likely to completely change. Do you really "trust" the government in this fragile economy to be nice and keep forgiving your loans 20 years from now? It's possible if changes occurred you could be grandfathered in (kept on the program even though it's been changed/doesn't exist), but it's just far too risky.

Remember, remaining balance can reach close to a million dollars in 20 years, and that is not something you want to pay income tax on. IBR was not designed for dental students with 350,000 in debt, it was designed for people with 30,000 in debt and a minimum wage job trying to pay off huge loans.

Unfortunately there seems to be a lack of thorough information on the web regarding this program, but that's the way I see it. Don't know if you can pay more monthly than the plan requires, once again, hard to find solid info on this program.

 

[A6project]

lol

 

[timwatley]

Awesome post A6, you should do a big report and get it stickied somehow because I feel like there are a ton of people who have no idea what they're in for. I think 2 years of frugal living after dds school will get the loans paid down to a manageable size.

 

[ginaych]

i did a massive research on this. called a few banks, talked with some officials and dept of edu.

IBR can be a good financial deal IF it is GUARANTEED. (I didn't find anything mentioned about IBR on my master promissory notes)

for example, a 350k loan will become a mill debt in 20yr. (a 300k loan becomes 810k). It seems like a lot but if you play your cards right, you could save and invest and come up with money to pay the taxable income after 20 years (taxable income will be 432k and 344k)

Also, to be qualified as IBR, your income has to be less than 150% of federally set poverty income. (can't exactly remember). Anyways, that means that you will be always elligible for IBR because your loan increases faster than your income. Also, you have to be verified every year but you just need to send a copy of your salary. pretty easy.

But IBR is not in set stone and that's why I wouldn't do it. After 10 years, your loan becomes too big to handle. Like someone mentioned, what if Washington changes the policy? In 20 years, your loan is a million. Do the math roughly 7% of that million for yearly interest.

Bankruptcy laws has changed and even if you file for a bankruptcy. The laws would not forgive your education loan anymore. So you are stuck with that million debt till you die. (this is the worst case)

For next 4 years, I am gonna keep my eyes on IBR to see what Washington does with the program, but I am pretty much planning to pay back ASAP when I am out.

it's a high reward/high risk. It's too much amount to take that gamble for me

Sorry for correcting you. Your income as a dentist can never be lower than 150% of the poverty level income because the poverty income is slightly above $10,000, so 150% of that is like $15,000. I think maybe you meant that the IBR federal loan payment is set up so your payments don't exceed 15% of (your gross income minus 150% of the poverty level). correct me if I am wrong.

 

[A6project]

you are right. 🙂 Thanks for the correction.

 

[A6project]

lol

 

[ake]

20 years is 3-5 different presidential administrations, a few election cycles in Congress, and probably a full economic cycle as well. You'd have to be pretty reckless to put a $1 million bet on a government program remaining fully funded and unchanged throughout all that.

 

[ginaych]

Excuse me if I'm asking general questions.

What happens if you monthly payment on Ibr matches the monthly payment on 10 year plan?

Ibr sounds really sounds good so why would other people go with other kinds of payment plans?

What is grandfathered in?

Can you pay more than your monthly payment on Ibr if you have disposable income and you want to get rid of your debt faster?

Thanks.

To be eligible to continuously stay in IBR, your monthly payment for the standard 10-year loan repayment program has to be higher than the IBR monthly payment. this means that you will be able to stay in the IBR program as long as your annual gross income does not exceed the amount you borrow initially (you can do the calculation yourself).

once you earn so much that your IBR monthly payment exceeds that of the standard 10-year repayment, your interests will be capitalized and get added to your principal. With IBR, your monthly payment is so low that it doesn't even cover the interest alone, and the sad truth is the payment goes directly towards paying interest, not principal. so the interests you didn't pay off all these years get added to the principal when you get kicked out or if you opt out of the program.

With the new policy the IBR repayment is lowered from 15% to 10% AGI, so your AGI will red to exceed 140% of the $ you borrowed for you to get kicked out.

Yes you can. but remember the payment goes towards the interest first, then principal.

 

[b714s]

I looked into the plans and the graduated repayment plan seems to be a the best option. The payments adjust every 2 years but start off about $1000 less per month than the regular 10-year repay plan (based on a $300,000 loan @ average 7.2%). The graduated repayment is also a 10-year plan that is set up to account for your salary increase from year to year. I looked into the repayment plans and found that you can pay more per month if you choose and there is no prepayment penalty for early payoff. So, if you do great right out of dental school then you can pay more towards your loans, if you struggle for the first few years then I think the lower graduated payment will be more manageable for your expenses.

The IBR plan sounds just like the home mortgage "neg-am". This is referring to the negative amortization loan that was so popular a few years back. In a neg-am the home owner gets a super-low monthly payment but the payment is so small that it does not cover the interest of the "true" monthly payment. This balance then gets put onto the total loan resulting in a larger principle balance every month. We all know what happened to the mortgage industry due to shady loans. So, I would stay away from the IBR plan.

 

[cmcner]

Awesome post A6, you should do a big report and get it stickied somehow because I feel like there are a ton of people who have no idea what they're in for. I think 2 years of frugal living after dds school will get the loans paid down to a manageable size.

If you're going to a school with close to $400,000 in debt this idea of living frugal for two years won't even scratch the surface. By your 4th year you will have accrued $100,000 interest so you really leave with $500,000 in debt. Now if you make a salary of $120,000 you will only take home $80,000 after taxes, if you put ALL of your income into your student loans and you don't eat and don't have a house or a car because you're putting all of your money into these loans it will take you about 8-9 years of your entire salary to pay it off. So you will be living like a homeless person or with your parents, penniless until you're 36 if you graduate at 27 with no money saved up to start your own practice, or get a home or anything.

For many people these numbers are realistic, is IBR a gamble, yes, but both parties have supported, Bush created it and Obama altered it so it seems to have decent bipartisan support and the politicians are encouraging students to use it not avoid it. Was it created for dental students, absolutely not, but we are in a unique position to take advantage of the system here. I think for me it's worth the gamble.

 

[mc719]

NOT guaranteed to stick around. Instead of debt decreasing over time, compound interest skyrockets with such small payments. In 25 years (or apparently 20 thanks to Obama), the remaining enormous balance is TAXABLE INCOME. Added bonus: you get kicked out if your yearly income exceeds original loan balance. Stay very far away from this program, does not save much if anything in the end and is extremely risky given such easy policy changes in government.

Live like a dental student for a few more years instead and get those loans taken care of, not like we won't be used to it.

One downside to it, I believe, is the fact that the forgiveness at 25 years is taxable. If, the principle gets ballooned to 1 million after 25 years, you would still owe like 350-400k to pay the taxes. However, 350-400k might not even be that much money in 25 years due to 3% inflation every year. Also, money now > money later because of the time value of money (possible investments and the like that will pay you in the future such as buying a practice, the stock market, residency training). So, it could still be a good deal.

Another downside to it could be the effect that it has on your borrowing abilities. I've heard of people having a lot of trouble getting mortgages when on IBR.

However, another aspect of IBR is loan forgiveness after 10 years of service for the feds. That might be something to look into. I believe that with that you won't owe taxes, but correct me if I'm wrong about that.

All in all, I would take advantage of it if I absolutely couldn't pay the normal loan payments for the first few years. I absolutely would not rely on it to allow me to go to a more expensive school.

 

[A6project]

If you're going to a school with close to $400,000 in debt this idea of living frugal for two years won't even scratch the surface. By your 4th year you will have accrued $100,000 interest so you really leave with $500,000 in debt. Now if you make a salary of $120,000 you will only take home $80,000 after taxes, if you put ALL of your income into your student loans and you don't eat and don't have a house or a car because you're putting all of your money into these loans it will take you about 8-9 years of your entire salary to pay it off. So you will be living like a homeless person or with your parents, penniless until you're 36 if you graduate at 27 with no money saved up to start your own practice, or get a home or anything.

You are very right. After dental schools, I will have 379k debt (minus whatever my parents offer to pay). My goal is to pay off 40k every year for first 5 years. It will be extremely tough and I will be living like I do in college again (or worse) And more than half will be still remaining... 🙁
But I have already accepted the fact that I will be very poor for a long period of time and I won't be able to make it rain as I thought I would when I was young 😀.

Everyone going to a private school should be ready for that. However, there are still opportunities out there that will help you very successful.

 

[cmcner]

You are very right. After dental schools, I will have 379k debt (minus whatever my parents offer to pay). My goal is to pay off 40k every year for first 5 years. It will be extremely tough and I will be living like I do in college again (or worse) And more than half will be still remaining... 🙁
But I have already accepted the fact that I will be very poor for a long period of time and I won't be able to make it rain as I thought I would when I was young 😀.

Everyone going to a private school should be ready for that. However, there are still opportunities out there that will help you very successful.

Yup you're ready for that or you're ready to take a risk. For me it will be IBR+PSLF, but I know after 10 years I could end up screwed and with more debt if those guys in congress or the next guys decide they hate me. If they just take away PSLF, my having just IBR would be a fine plan B and I plan to save up money to pay off the taxes until the loans are actually forgiven or until IBR loan forgiveness is changed to nontaxible income, which we should push the ADA to lobby for btw. We should also push the ADA to lobby for the creation of a document that locks us into both programs. I find that worst case would be if both of the programs get taken away but if that is the case I'm hoping it's because the US went broke and there is hyper inflation so half a million dollars is like a hundred thousand dollars in value and a Big Mac costs $30. We'll see it's all a crap shoot.

 

[timwatley]

It's always funny that hyper inflation gets brought up! It's a little scary though - if the Euro falls apart its likely the world would put their money in the US dollar, resulting in DEFLATION. This already happened in Switzerland and they had to scramble to get it under control. It's all just speculation though and I doubt we can get away from our money printing habits. As a country we are now 15+ trillion in debt by the way.

 

[cmcner]

It's always funny that hyper inflation gets brought up! It's a little scary though - if the Euro falls apart its likely the world would put their money in the US dollar, resulting in DEFLATION. This already happened in Switzerland and they had to scramble to get it under control. It's all just speculation though and I doubt we can get away from our money printing habits. As a country we are now 15+ trillion in debt by the way.

Well in the case of deflation we're all screwed.

 

[thesituationPhD]

apply and pray that you get the military scholarship. best situation hands down. unless your parents pay for you...