Thoughts On Income Based Repayment

[dmd87]

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I had a few questions about the income based repayment. Has anyone on these threads done this before? From what I understand, its based on your adjusted gross income, which is gross income, minus deductions and the poverty level or something along those lines, and you pay 15% of that amount on a yearly basis. For all the dentists out there, would this not be a fantastic deal for someone who went to USC or NYU? I figure, the first few years your AGI would not be that high because you would be associating. I've heard that later on once you open your own practice, it would eat into your earnings since you would be earning more. But I would imagine that if you had your own practice, it would eat into your earnings even less. Say your practice is incorporated and not a sole proprietorship or a partnership, and the practice's net income before your own salary expense is 200K, could you not just pay yourself 80K, and invest the other 120K into something else (so that your Net Income does not get taxed, since it would be reduced to 0). By paying yourself 80K, you would reduce your AGI significantly, and pay hardly anything in loan payments. Just keep investing that 120K into low interest bonds/funds, or something else if you are investment savvy, until your 25 years is up on the loan payments. During the 26th year you would sell off some your bonds etc since you have to pay taxes on the amount that is forgiven. Would this not make significantly more sense?

To those who think 80-90K is not livable off of, you will basically have no student loan payments, and you could just buy your car through your practice, so that 80-90K should be enough for a good house and more than enough spending money, esp if you have a significant other making a similar amount.

What do you guys think?

 

[xhamburgersamx]

I had a few questions about the income based repayment. Has anyone on these threads done this before? From what I understand, its based on your adjusted gross income, which is gross income, minus deductions and the poverty level or something along those lines, and you pay 15% of that amount on a yearly basis. For all the dentists out there, would this not be a fantastic deal for someone who went to USC or NYU? I figure, the first few years your AGI would not be that high because you would be associating. I've heard that later on once you open your own practice, it would eat into your earnings since you would be earning more. But I would imagine that if you had your own practice, it would eat into your earnings even less. Say your practice is incorporated and not a sole proprietorship or a partnership, and the practice's net income before your own salary expense is 200K, could you not just pay yourself 80K, and invest the other 120K into something else (so that your Net Income does not get taxed, since it would be reduced to 0). By paying yourself 80K, you would reduce your AGI significantly, and pay hardly anything in loan payments. Just keep investing that 120K into low interest bonds/funds, or something else if you are investment savvy, until your 25 years is up on the loan payments. During the 26th year you would sell off some your bonds etc since you have to pay taxes on the amount that is forgiven. Would this not make significantly more sense?

To those who think 80-90K is not livable off of, you will basically have no student loan payments, and you could just buy your car through your practice, so that 80-90K should be enough for a good house and more than enough spending money, esp if you have a significant other making a similar amount.

What do you guys think?

Trafficking your business income sounds like a great idea, however i don't think the gov't will let you off that easily. It does sound like a loop hole however (not sure). Also I would expect you to be audited heavily for anyone that owes the gov't that much loan money.

This is an example:

[FONT=ARIAL, HELVETICA]Loan Balance: .[FONT=ARIAL, HELVETICA] $300,000.00 . [FONT=ARIAL, HELVETICA] Adjusted Loan Balance: .[FONT=ARIAL, HELVETICA] $300,000.00 . [FONT=ARIAL, HELVETICA] Loan Interest Rate: .[FONT=ARIAL, HELVETICA] 6.80%. [FONT=ARIAL, HELVETICA] Loan Fees: .[FONT=ARIAL, HELVETICA] 0.00%. [FONT=ARIAL, HELVETICA] Loan Term: .[FONT=ARIAL, HELVETICA] 25 years. [FONT=ARIAL, HELVETICA] Minimum Payment: .[FONT=ARIAL, HELVETICA] $50.00 . [FONT=ARIAL, HELVETICA]
. [FONT=ARIAL, HELVETICA]Monthly Loan Payment:.[FONT=ARIAL, HELVETICA] $2,082.22 . [FONT=ARIAL, HELVETICA] Number of Payments: .[FONT=ARIAL, HELVETICA] 300.
Under IBR, if you're AGI is say $100k, then you only owe $1250 per month. That's far less but at the same time you are not paying back too much toward the principle of the loan. I'm just curious what happens when your income starts getting higher as you are in mid-career and earning far more. The 15% of AGI is going to exceed the normal loan payment amount...are you kicked out of the IBR program? IF so, then you end up paying MORE over the span of the loan because interest was barely being paid off during your earlier years AND the principle has barely been reduced. IT's very hard to calculate the exact numbers so a finance person can really help chime in here. No one really understands IBR fully either and if it's actually beneficial long term.

 

[dmd87]

I don't think they can exactly audit you personally. They can audit your business, but it is totally up to you what you choose to pay yourself as a salary. I doubt any audits would find anything "fishy". As long as you set it up as a corp, you and the business are legally separate entities, as well as separate entities for accounting purposes.

And it is AGI minus the 150% of the poverty line. "That means that a single borrower without children pays 15% of whatever he makes above $16,245 per year." (http://www.forbes.com/2010/01/27/obama-income-based-repayment-personal-finance-student-loans.html)

so if you pay yourself 80K, then 80K-16,245 = 63755

63755 * 15% = 9563.25

9563.25/12 = 796.94 Per Month.

compare this to 2K+ per month, it is much less, and you can take the residual and invest it etc into your personal retirement savings if you choose to.

The only catch is the huge tax you will have to pay in year 26, at which point you would liquidate your investments that you have made through your corp and pay yourself the hefty amount (divert the income through your kids who are "employees", hence reducing the tax rate on the amount you take out).

 

[Mackchops]

Another option that might help you out is getting a job with a dental school. I believe (though I'm not certain) that all public university jobs (and most private university jobs if the school is registered as a non-profit) would qualify you for the 10 year loan forgiveness program. Work for 10 years, make monthly payments through IBR, and come out clean at year 11 - this option makes your remaining balance non-taxable!

Kinda cool... maybe?

I don't think they can exactly audit you personally. They can audit your business, but it is totally up to you what you choose to pay yourself as a salary. I doubt any audits would find anything "fishy". As long as you set it up as a corp, you and the business are legally separate entities, as well as separate entities for accounting purposes.

And it is AGI minus the 150% of the poverty line. "That means that a single borrower without children pays 15% of whatever he makes above $16,245 per year." (http://www.forbes.com/2010/01/27/obama-income-based-repayment-personal-finance-student-loans.html)

so if you pay yourself 80K, then 80K-16,245 = 63755

63755 * 15% = 9563.25

9563.25/12 = 796.94 Per Month.

compare this to 2K+ per month, it is much less, and you can take the residual and invest it etc into your personal retirement savings if you choose to.

The only catch is the huge tax you will have to pay in year 26, at which point you would liquidate your investments that you have made through your corp and pay yourself the hefty amount (divert the income through your kids who are "employees", hence reducing the tax rate on the amount you take out).

 

[xhamburgersamx]

I don't think they can exactly audit you personally. They can audit your business, but it is totally up to you what you choose to pay yourself as a salary. I doubt any audits would find anything "fishy". As long as you set it up as a corp, you and the business are legally separate entities, as well as separate entities for accounting purposes.

And it is AGI minus the 150% of the poverty line. "That means that a single borrower without children pays 15% of whatever he makes above $16,245 per year." (http://www.forbes.com/2010/01/27/obama-income-based-repayment-personal-finance-student-loans.html)

so if you pay yourself 80K, then 80K-16,245 = 63755

63755 * 15% = 9563.25

9563.25/12 = 796.94 Per Month.

compare this to 2K+ per month, it is much less, and you can take the residual and invest it etc into your personal retirement savings if you choose to.

The only catch is the huge tax you will have to pay in year 26, at which point you would liquidate your investments that you have made through your corp and pay yourself the hefty amount (divert the income through your kids who are "employees", hence reducing the tax rate on the amount you take out).

Sounds like a very good idea/plan however no one has ever done this yet so we don't really know if that's truly possible to do. Why don't you just pay yourself less and pay even less back to the loans? Even if you're only paying off your interest with the 15% monthly payments, you still make out a bandit after 25 years. I guess the only issue is that you will be paying more business tax if you keep that income there which is definitely much higher than personal.

I just did some research online and it seems most dental offices set up as LLC and not true S corporations. Although for IBR purposes, a true corporation set up would be the only option since LLC income goes through the standard 1040 from the sole owner (the dentist). Now for financial sakes, your business income will certainly exceed 200K net if you are in mid-career. For purposes of taxes, it seems you might end up paying more than if you paid yourself slightly more and paid back your loans. I can't really figure the exact numbers but there has to be a point where loan payment is a better option than paying taxes through the corporation. This takes into account the taxable forgiveness amount. Take some time to figure it out because 25 years and not actually understanding which option is the most beneficial in terms of real money SUCKS!

 

[Oracle DMD]

i think people should check this IBR stuff out for themsleves. for those that attend the private dental schools and rack up the 300K+ in loans, i think its a solid option. it ensures that the payments will never drown you, and that's some security, so that's nice.

my biggest fear about dental school loans, is that it would drive the kind of dentistry i would do, and i think that IBR puts that idea to rest.

http://www.ibrinfo.org/what.vp.html#calculator

 

[Brachyury]

I just want to clarify a few points:

If you carry loans for 25 years, when the loans are cancelled at year 26, in the current system, the cancellation of loans is classified as a government payment, and thus it is taxable. For example, if at year 25, the government cancells $500,000 in loans, then you have to pay taxes on this $500,000. However, if you are able to cancel your loans after 10 years via public service, then you do not have to pay taxes on the amount the government cancelled.

Another point, your loans have to be direct student loans when you start IBR in order for the government to eventually cancel them, and if they are not, then they have to be consolidated into direct student loans. The downside of this is that instead of having your stafford and grad plus loans seperate, and thus being able to pay more towards your gradplus which are at a higher rate, all of your loans are consolidated together, and the interest rate of the consolidate loan is calculated from the loans consoliated into it. To clarify, if 15% of you loans are at an interest rate of 5%, 30% are at 6.8%, and 55% are at 7.8%, then you interest rate on your consolidate direct loan is (.15*.05+.3*.068+.55*.078)= 7.08%. If you did one of the repayment options other than IBR (25 year repayment, graduated repayment, etc), you wouldn't have to deal with this problem

When you enter repayment, a ceiling on what your payments can be is set at either 15% of income or whatever a monthly payment would be to payback your loans in 10 years from when you start repayment. For example, let's say you have a balance of $275,00 in loans when you start repayment, and in order to pay that it ten years, it would cost a total of $380,000, or about $3200 a month, or $38,400 a year. This means you will either pay 15% of your income or $38,400 a year, depending on which one is lower. So, if your first job pays $150k a year (I have no idea how much you guys make, so forgive me if I'm off), then 150k-15k (poverty threshold), leaves you with 135k, and 15% of that is $20,250 a year. Six years later, once you have your own practice, you make 250k a year, so 250k-15k leave 235k, and 15% of that is $35,250. A few years later you start making 300k, and 300k-15k is 285k, and 15% of that is $42,750, but since your 10 year repayment amount was $38,400 a year, you pay 38.4k instead of the 42.75k

Any loans that originate starting July 1, 2014 will only require you to dedicate 10% of your income instead of 15%