WSJ: U.S. Student-Loan Forgiveness Program Proves Costly

[Gombrich12]

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Shashank Sinha and his wife are physicians from Ann Arbor, Mich., on track to receive forgiveness. The couple owe a combined $360,000 in debt after graduating from the University of Chicago’s Pritzker School of Medicine.

Like most new doctors, they are making relatively little—in the range of $50,000 apiece—as they spend their first years out of school in training. With monthly payments set at 15% of their incomes, they put $1,200 a month toward their loans. Mr. Sinha estimates they’ll have repaid roughly $150,000—mostly covering interest—while having 80% to 90% of their original balances forgiven. They’re on track to have forgiveness within four years."

 

[baronzb]

This isn't maybe the best example, as their earning power will pay-off the loan eventually, as long as they get through training. However, IBR, et al., are just means to hide the fact of people defaulting.

 

[297point1]

Show of hands: who thinks there will be a cap put in place by 2017?

 

[confettiflyer]

Show of hands: who thinks there will be a cap put in place by 2017?

See my reply in the other thread...the proposal most recently made to "fix" student loans coauthored by Marco Rubio and the next Senate committee chair whose charge is Dept of Ed kept PSLF.

I'm saying mostly no - it's too lucrative for universities, medical professions, and attorneys. The lobbying will be fierce.

WSJ and right leaning New America run anti-PSLF/quasi-anti-PSLF material every few months.

 

[npage148]

Won't they have to pay income tax on what's forgiven?

 

[confettiflyer]

Won't they have to pay income tax on what's forgiven?

Not for PSLF

 

[confettiflyer]

Here's my reply from the other thread. I'll also point people to the recent WSJ article about the breadth and power of the university lobby.

http://www.king.senate.gov/download/?id=9CD8B23D-0FF8-4880-A656-4C7767EE4FA7&inline=file

The above is why I think PSLF will be around. Look at the co-authors (and turn to page 18).

1) Sen. Marco Rubio - possible president of the united states
2) Sen. Lamar Alexander - the current (edited) chair of the Senate Heath, Education, Labor and Pensions committee and thus controlling the HEA reauthorization process.
3) Sen. Warner -- Democrat, wrote the dynamic repayment act w/ Sen. Rubio.

 

[confettiflyer]

I do find it interesting that pretty much the entire economy has changed around the legislation that spawned this program (CCRA 2007). This article touched on it a bit.

1) There wasn't this glut of unemployed lawyers out there.
2) Most physicians went into private practice and were not employees of a non-profit health system.

 

[BMBiology]

A beautiful Monday morning.

Oh, student loan forgiveness? I like how they already got a name for it, "doctor loophole". When was the last time the federal government ever did anything for us "high wage" earners? We get to spend 10 years in school then work for the next 30 years and pay 40% of it in taxes. That is what we get.

I am certain PSLF will change. The big question is will the government make it retroactively?

The government can make some minor changes and close this "doctor loophole". Here are some possibilities:

(1) cap forgiveness at 57.5 k. The rest is then move to the new REPAYE (25 years, take spouse's income into consideration).

(2) make the forgiveness amount taxable, just like any other debt.

(3) make hospitals apply for this program like the H1 visa program. If they can demonstrate this program is needed to recruit employees, then they would qualify. So the guy working for the Indian Health Service would qualify while the guy working for Cedars in Beverly Hills would not.

I am all for keeping school affordable but it should be applied to everyone, not just for students who over borrowed and for schools to keep on raising tuition.

That being said, who else is glad he paid off his student loans?

 

[awval999]

The government doesn't fix anything until is has to.

I reckon they will cap it at $57500 in late Dec 2016 with a lame duck Congress and Obama signs it.

 

[steveysmith54]

I like how all these government websites that talk about these plans fail to mention anything about the balance of the loan after 25 years. Before I paid off my loans, I actually called and they told me it's yet to be determined what will happen with the balance. I've seen outside websites talk about paying taxes on the balance, but if someone has seen a student loan gov website mention that, please share

In my opinion all they had to do was to decrease the interest rate to 2%, which is what people received when they went to school in the 90's or early 2000's. Instead they created this mess.

 

[confettiflyer]

There have been dozens of attempts to change the program, mostly from the right, and some more progressed than others in the process...

...I've yet to see anyone post up actual proposed legislation that will retroactively claw back PSLF. Zero, zip. The latest one I posted even talks about keeping it, and it was signed by freaking Marco Rubio who has a freaking Heritage Action score of 94%!!

Even I'm looking just to contradict myself. I find nothing.

So if anyone wants to post up actual, evidence-based arguments rooted in legislation....please do so, but conjuring up the Tea Party/austerity boogeyman is getting old. Obama's one-time brain fart thoughts don't count, either.

C'mon, contrarian debaters...I know you can do better than this.

 

[confettiflyer]

I like how all these government websites that talk about these plans fail to mention anything about the balance of the loan after 25 years. Before I paid off my loans, I actually called and they told me it's yet to be determined what will happen with the balance. I've seen outside websites talk about paying taxes on the balance, but if someone has seen a student loan gov website mention that, please share

In my opinion all they had to do was to decrease the interest rate to 2%, which is what people received when they went to school in the 90's or early 2000's. Instead they created this mess.

Current law = taxable, it would require a full act of Congress to remove this tax bomb.

It is thought that the tax bombs, along with PSLF and repayment plans, will be discussed and finalized when the HEA is up for reauthorization in 2016 (originally 2013, then again punted to 2015, and now it's November so nothing...probably 2016). That process is led by Sen. Alexander (R) in the senate and would be signed by Pres. Obama, unless for some reason punted to next Congressional session (again).

Basically, no one wants to do anything with HEA, so it just keeps getting extended and extended.

 

[BMBiology]

^ That is a fair point. I think it is a race against time. However, the American Bar Association does say this on their website:

"No Guarantee for "Grandfathering" While there is no legislation presently proposing retroactive elimination of PSLF for current borrowers, there is nothing to prevent Congress from doing so, and that possibility simply should not be on the table."

https://www.americanbar.org/advocacy/governmental_legislative_work/loan4giveness.html#action

 

[confettiflyer]

I will say the main anti-PSLF person that would have sway over the HEA process is Rep. Foxx (R-VA), chairwoman of the subcommittee that houses the HEA reauthorization process in the HOR. I quote her from 2012 saying:

""I have very little tolerance for people who tell me that they graduate with $200,000 of debt or even $80,000 of debt because there's no reason for that," Foxx continued. "We live in an opportunity society and people are forgetting that. I remind folks all the time that the Declaration of Independence says 'life, liberty, and the pursuit of happiness.' You don't sit on your butt and have it dumped in your lap."

That said, this was on a conservative talk show in 2012.

 

[confettiflyer]

^ That is a fair point. I think it is a race against time. However, the American Bar Association does say this on their website:

"No Guarantee for "Grandfathering" While there is no legislation presently proposing retroactive elimination of PSLF for current borrowers, there is nothing to prevent Congress from doing so, and that possibility simply should not be on the table."

https://www.americanbar.org/advocacy/governmental_legislative_work/loan4giveness.html#action

We've known this, Congress can do whatever it wants, when it wants. There's a legal argument put forward that because PSLF is mentioned in the MPN, it de facto created a legal agreement between DOE and the borrower. It's a thin argument at best. Tax breaks are made retroactive all the time, but they're primarily for the benefit of the taxpayer, not the government.

I dunno man, it's not the lawyer lobby or doctor's lobby that will push this, it's the university lobby that will keep PSLF around. This was the article I was talking about http://www.wsj.com/articles/colleges-flex-lobbying-muscle-1447037474

Don't forget hospitals and other health care entities that can now pay employees less with their non-profit status essentially boosting pay implicitly.

 

[steveysmith54]

Current law = taxable, it would require a full act of Congress to remove this tax bomb.

It is thought that the tax bombs, along with PSLF and repayment plans, will be discussed and finalized when the HEA is up for reauthorization in 2016 (originally 2013, then again punted to 2015, and now it's November so nothing...probably 2016). That process is led by Sen. Alexander (R) in the senate and would be signed by Pres. Obama, unless for some reason punted to next Congressional session (again).

Basically, no one wants to do anything with HEA, so it just keeps getting extended and extended.

If it is indeed the law, it needs to be stated clearly on the govn't website. This actually troubles me. Here is what the official website states " In addition, under current Internal Revenue Service (IRS) rules, you may be required to pay income tax on any amount that is forgiven if you still have a remaining balance at the end of your repayment period for an income-driven repayment plan." https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven

"may be" sure doesn't sound like it is the law right now and unless changed you will be taxed. It actually gives the opposite impression. This is why I actually called for clarification. Students are making decisions that will impact their financial future based on a "may be". I had several classmates go this route and perhaps they have been misinformed, however very few think they will be taxed.

 

[BMBiology]

I agree. The government is doing a horrible job at explaining IBR, PAYE, REPAYE, PSLF.

 

[BMBiology]

Here is what I know:

(1) Only certain federal loans qualified (i.e., direct loans). Parent loans do not. Private loans do not.

(2) The forgiveness amount is taxable for IBR, PAYE, REPAYE. No forgiveness tax for PSLF.

Lets say 20 years later, the government forgive $200 k and you made $300 k that year. If you are on PAYE then your taxable income for that year is now $500 k. Expect to pay 35% federal tax on the $200 k forgiveness amount. You may even have to pay state tax as well. So $200 k x 0.35 = $70,000 in addition to all the payments you have made for the last 20 years.

(3) Your monthly repayment depends on your income. So if you make more, then you will pay more.

(4) Your monthly repayment is calculated (for most people): (pre-taxed income - 401 k contribution - 150% of the poverty guideline) x 10% (for PAYE).

For example, you are single (no kids), you make 120 k in 2014 and you contributed 5 k to your 401 k:

$120,000 - $5,000 - [$11,670 (2014 poverty guideline for single) x 1.5] = $97,495

So if you are on PAYE (10%), then $97,495 x 10% = $9750 (total amount you will pay in 2015) or $812 per month. But again, this $812 monthly repayment is not set in stone. So if you got a pay raise next year, then you will pay more next year.

Some people incorrectly think if they made $120,000 k and bring home $80 k (after taxes) then their payment will be $80,000 x 10% = $8,000 or $667 per month. That is wrong. You will end up paying $812 per month, not $667 per month.

Poverty guideline: http://aspe.hhs.gov/2014-poverty-guidelines

 

[steveysmith54]

Here is what I know:



Lets say 20 years later, the government forgive $200 k and you made $300 k that year. If you are on PAYE then your taxable income for that year is now $500 k. Expect to pay 35% federal tax on the $200 k forgiveness amount. You may even have to pay state tax as well. So $200 k x 0.35 = $70,000 in addition to all the payments you have made for the last 20 years.


Poverty guideline: http://aspe.hhs.gov/2014-poverty-guidelines

70K is manageable taking into account it's after 20 years. just set aside 3.5K a year annually for 20 years to accumulate that...

 

[confettiflyer]

Lets say 20 years later, the government forgive $200 k and you made $300 k that year. If you are on PAYE then your taxable income for that year is now $500 k. Expect to pay 35% federal tax on the $200 k forgiveness amount. You may even have to pay state tax as well. So $200 k x 0.35 = $70,000 in addition to all the payments you have made for the last 20 years.

([/COLOR][/URL]

this reminds of a type of mortgage written during the go-go days of the mid-2000's called negatively amortizing pick-a-payment loans w/ recast @ 120% or balloon payment.

Basically, a loan intended for businesses (which typically balloon at 5 or 10 years) perverted and used for residential loans.

Those loans didn't go so well for everyone...lender and borrower included.

The end mechanism for extinction of the liability was foreclosure. I've argued here from day #1 such a mechanism needs to exist with student loans if such "pressure" is allowed to build up on the front end.

 

[BMBiology]

70K is manageable taking into account it's after 20 years. just set aside 3.5K a year annually for 20 years to accumulate that...

Yeah 70k at the end of 20 years is management but that is based on the assumption you work for 20 years with no period of unemployment and with annual raises.

 

[confettiflyer]

If it is indeed the law, it needs to be stated clearly on the govn't website. This actually troubles me. Here is what the official website states " In addition, under current Internal Revenue Service (IRS) rules, you may be required to pay income tax on any amount that is forgiven if you still have a remaining balance at the end of your repayment period for an income-driven repayment plan." https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven

"may be" sure doesn't sound like it is the law right now and unless changed you will be taxed. It actually gives the opposite impression. This is why I actually called for clarification. Students are making decisions that will impact their financial future based on a "may be". I had several classmates go this route and perhaps they have been misinformed, however very few think they will be taxed.

You're asking the Ed. Dept. to predict tax law in 20 years...it can't do that, it also can't give tax advice, so it has to be vague on purpose.

I get it, it's annoying, it should be clear as day (yes tax bomb, no tax bomb).

But it's the nature of the legislative process, nothing is certain until it actually happens. In theory, in July 2035 (~20 years from now), a student loan could be discharged and it would be taxable (Ed. Dept. sends a 1099-C). Then on December 31, 2035 Congress can retroactively make it not taxable for the year 2035, just in time for that borrower to file their taxes in 2036.

There was actually an article about this in WSJ recently about how a lot of small business tax breaks will be applied retroactively at the end of the year, but never made permanent. Given that legislative potential, Ed. Dept. can't issue guidance.

But this is absurd, predicting tax policy 20 years from now? That's like asking someone from 1985 to predict the rise of streaming movies online, the invention and explosion of the internet, and the fall of the USSR and subsequent rise of China as a world economic power.

No one in Congress wants to touch this with a 10 foot pole...it's not a sexy topic, NO ONE on the republican debate front has even mentioned it (except Teddy Cruz...for like 0.5 seconds), and the income based plans that were put forward by Bush and Obama are a nice little band aid that reduce payments now, and the tax bomb is for some congress to take care of starting in 2027 and beyond (when the first IBR-15, 20 year plans start to hit). Too much headwind from AMA, attorneys, hospitals, and to a lesser extent, borrowers, to tinker with the system.

 

[confettiflyer]

And if you want another piece of evidence, BMB, that the gov't is not likely to retroactively claw back PSLF. Look at the removal of the file-and-suspend strategy for Social Security -- it gave everyone 6 months to do it before cutting them off, and everyone who already did it gets to continue.

 

[steveysmith54]

You're asking the Ed. Dept. to predict tax law in 20 years...it can't do that, it also can't give tax advice, so it has to be vague on purpose.

I get it, it's annoying, it should be clear as day (yes tax bomb, no tax bomb).

But it's the nature of the legislative process, nothing is certain until it actually happens. In theory, in July 2035 (~20 years from now), a student loan could be discharged and it would be taxable (Ed. Dept. sends a 1099-C). Then on December 31, 2035 Congress can retroactively make it not taxable for the year 2035, just in time for that borrower to file their taxes in 2036.

There was actually an article about this in WSJ recently about how a lot of small business tax breaks will be applied retroactively at the end of the year, but never made permanent. Given that legislative potential, Ed. Dept. can't issue guidance.

But this is absurd, predicting tax policy 20 years from now? That's like asking someone from 1985 to predict the rise of streaming movies online, the invention and explosion of the internet, and the fall of the USSR and subsequent rise of China as a world economic power.

No one in Congress wants to touch this with a 10 foot pole...it's not a sexy topic, NO ONE on the republican debate front has even mentioned it (except Teddy Cruz...for like 0.5 seconds), and the income based plans that were put forward by Bush and Obama are a nice little band aid that reduce payments now, and the tax bomb is for some congress to take care of starting in 2027 and beyond (when the first IBR-15, 20 year plans start to hit). Too much headwind from AMA, attorneys, hospitals, and to a lesser extent, borrowers, to tinker with the system.

I disagree with you. If the current law is that the balance will be taxed, then it clearly needs to say that. "may be" is not acceptable. As you stated, nobody wants to touch this, then the right thing to do is just state what it is now, then update once a concrete change is made.

 

[Monsterdaddy]

Some clarifications:

1) Parent PLUS can be made eligible for PSLF by consolidation (but you are not eligible for IBR, instead you are eligible for ICR which is more expensive)
2) The IRS treats all loan forgiveness as income (mortgages, car loans, etc.) That is why the 20/25 year forgiveness is taxable and why there is no need to see this on any ED website. They use the legal term "may" as in you are required unless you have an exception (and there are a few exceptions). However, PSLF forgiven loans are exempted by law.

 

[confettiflyer]

I disagree with you. If the current law is that the balance will be taxed, then it clearly needs to say that. "may be" is not acceptable. As you stated, nobody wants to touch this, then the right thing to do is just state what it is now, then update once a concrete change is made.

I can agree with that, and I mean, I think people will understand if it says "Under current laws, the remaining balance is considered taxable. Tax laws may be changed at any time by an act of Congress."

 

[owlegrad]

I disagree with you. If the current law is that the balance will be taxed, then it clearly needs to say that. "may be" is not acceptable. As you stated, nobody wants to touch this, then the right thing to do is just state what it is now, then update once a concrete change is made.

Isn't "may be" the same as "well be", in tax terms?

 

[confettiflyer]

Some clarifications:

1) Parent PLUS can be made eligible for PSLF by consolidation (but you are not eligible for IBR, instead you are eligible for ICR which is more expensive)
2) The IRS treats all loan forgiveness as income (mortgages, car loans, etc.) That is why the 20/25 year forgiveness is taxable and why there is no need to see this on any ED website. They use the legal term "may" as in you are required unless you have an exception (and there are a few exceptions). However, PSLF forgiven loans are exempted by law.

To piggy back here, cancelled mortgage debt was a temporary exemption that was granted from 2007 to 2014 in response to all the upside down foreclosures.

Also, non-recourse loans do not result in cancelled debt, nor does Chapter 11 bankruptcy.

source: https://www.irs.gov/publications/p4681/

 

[confettiflyer]

Isn't "may be" the same as "well be", in tax terms?

"May" is permissive, "will be" is definitive and declarative.

It's like "shall" vs. "will." "Shall" imposes duty upon a capable actor, "will" creates a contractual obligation. "May" is discretionary, think of it as "is authorized to" or "has discretion to."

So for Ed. Dept. to say "The IRS may tax you" is the same as "The IRS is authorized to tax you, if given the proper Congressional authority." ( had to put the Congress thing because IRS is not a capable actor without Congressional authority to levy and collect taxes).


Sources:
Adams, Kenneth. Legal Usage in Drafting Corporate Agreements (page 33).
Garner, Bryan. A Dictionary of Modern Legal Usage (page 940–941).

 

[BMBiology]

I was watching "The Big Short" trailer. A few guys made a grip of money by betting against the housing market.

Is there a way to make money by betting against student loans?! Lol that is the American way right?

I saw the pharmacy school bubble a while ago. Of course I didn't know how to bet against it. I just made some personal finance decisions.

 

[owlegrad]

"May" is permissive, "will be" is definitive and declarative.

It's like "shall" vs. "will." "Shall" imposes duty upon a capable actor, "will" creates a contractual obligation. "May" is discretionary, think of it as "is authorized to" or "has discretion to."

So for Ed. Dept. to say "The IRS may tax you" is the same as "The IRS is authorized to tax you, if given the proper Congressional authority." ( had to put the Congress thing because IRS is not a capable actor without Congressional authority to levy and collect taxes).


Sources:
Adams, Kenneth. Legal Usage in Drafting Corporate Agreements (page 33).
Garner, Bryan. A Dictionary of Modern Legal Usage (page 940–941).

Well, you would know more than me. Still, if something "may be" taxed, that still sounds the same to me as saying it "will be" taxed.

 

[steveysmith54]

Well, you would know more than me. Still, if something "may be" taxed, that still sounds the same to me as saying it "will be" taxed.

lol.. to me it sounds the opposite, which is in fact why there is no place for it.

 

[confettiflyer]

Well, you would know more than me. Still, if something "may be" taxed, that still sounds the same to me as saying it "will be" taxed.

Yeah they're completely different. "I may slap you" and "I will slap you" are completely different. One's a more existential threat, the other is impending bodily harm!

lol.. to me it sounds the opposite, which is in fact why there is no place for it.

They should just remove the possibility completely. "Consult a licensed tax professional for any impacts cancelled debt may have on your tax liability."

You figure...they don't need to state that, "Hey, maybe taking all this money out isn't such a good idea." Why bother with the tax thing, either? Hahah

 

[confettiflyer]

I was watching "The Big Short" trailer. A few guys made a grip of money by betting against the housing market.

Is there a way to make money by betting against student loans?! Lol that is the American way right?

I saw the pharmacy school bubble a while ago. Of course I didn't know how to bet against it. I just made some personal finance decisions.

You could maybe do a CDO swap or a synthetic CDO with all of the collateralized FFEL loans that banks have had to hold because their underlying values have dropped.

But you probably have to run Goldman Sachs to do that...can't do it in your Vanguard brokerage account, hahah.

 

[owlegrad]

Yeah they're completely different. "I may slap you" and "I will slap you" are completely different. One's a more existential threat, the other is impending bodily harm!

But saying "you may be slapped" isn't the same as saying "you may be taxed". It's like saying you may be prosecuted for murder if you commit murder (and are caught, etc). May means will in this instance. Just like when you ask if you may do something.

Child: May I go to the bathroom?

Teacher: Yes you may.

 

[confettiflyer]

But saying "you may be slapped" isn't the same as saying "you may be taxed". It's like saying you may be prosecuted for murder if you commit murder (and are caught, etc). May means will in this instance. Just like when you ask if you may do something.

Child: May I go to the bathroom?

Teacher: Yes you may.

You inadvertently backed up my definition in your post.

"You may be prosecuted for murder when you're caught" = But you might instead be charged with manslaughter, involuntary manslaughter, etc....

"You will be charged with murder when you're caught" = You will be charged with murder with no other possibilities.

"You may go to the bathroom" = permission granted by competent actor (teacher). Kid changes their mind and poops their pants, that satisfies the condition because the statement was permissive.

"You will go to the bathroom" = a command by said competent actor. Kid poops their pants, violates the command.

 

[owlegrad]

You inadvertently backed up my definition in your post.

"You may be prosecuted for murder when you're caught" = But you might instead be charged with manslaughter, involuntary manslaughter, etc....

"You will be charged with murder when you're caught" = You will be charged with murder with no other possibilities.

"You may go to the bathroom" = permission granted by competent actor (teacher). Kid changes their mind and poops their pants, that satisfies the condition because the statement was permissive.

"You will go to the bathroom" = a command by said competent actor. Kid poops their pants, violates the command.

I wonder if the teacher agrees with that?

 

[Monsterdaddy]

Um, just so everyone understands -- currently student loan forgiveness under the 20/25 year plans are taxable. There is no debate on that.

In any case, many proposals to change student loans also include provisions to make loan forgiveness tax exempt just like PSLF.

 

[PharFromNormal]

You inadvertently backed up my definition in your post.

"You may be prosecuted for murder when you're caught" = But you might instead be charged with manslaughter, involuntary manslaughter, etc....

"You will be charged with murder when you're caught" = You will be charged with murder with no other possibilities.

"You may go to the bathroom" = permission granted by competent actor (teacher). Kid changes their mind and poops their pants, that satisfies the condition because the statement was permissive.

"You will go to the bathroom" = a command by said competent actor. Kid poops their pants, violates the command.

Objection - incomplete. The teacher was using the term "will go to the bathroom" to infer the student will defecate not travel to the lavatory.

 

[confettiflyer]

Objection - incomplete. The teacher was using the term "will go to the bathroom" to infer the student will defecate not travel to the lavatory.

Lol. Good one.