Income Based Repayments

[daveblax]

As a graduate student about to finish their masters degree with near six-figure debt, the income based repayment plan makes the most sense, correct?

I have a little bit of savings from teaching overseas, but not enough to make a sizable difference.

As someone who is recently married and will hopefully start work next year as an elementary or special education teacher with a small salary, doesn't is make sense for me to make the income based repayments, and then have the balance forgiven after 10 years as part of the public service loan forgiveness program?

Is there a catch?

[greenskeeper]

What makes the most sense is for you to repay the full amount that you borrowed according to the terms of your note.

If you want to pay a little extra each month to benefit yourself by all means go ahead.

[cooliemae]

I would go with the income based repayment plan and put more towards the student loans as your finances dictate.

I wouldn't count on the loan being forgiven in 10 years simply due to the fact that we don't know what Congress will do (if anything) to that program over the next decade. So you should go into repayment status as if you are going to pay the full amount off and if it works out that the loans will be forgiven in 10 years, kudos to you!

[phantom]

Off the top of my head, I'd say the catches are:

1) The loan forgiveness is based on a law rather than the terms of your loan, which means it could change on you. (I think it's unlikely that if you wouldn't be grandfathered under the current law if there was a change. But, I'd still be a bit leery.)

2) You will be locked into working in the public sector for 10 years. If you really want to quit before that, the cost of leaving will be higher since you'll have to factor in the lack of loan forgiveness. Although I gather that most teaching jobs are pretty stable, there's also the risk that your job won't last 10 years and that you won't be able to find another public sector job.

3) Anytime you want to find a way to earn extra money, like taking a job in the summers or a coaching position, it will be as though there's an extra tax on that income because the amount you owe on your loans will go up.

4) You will be stuck with student loan payments for 10 years. Knocking out 6-figures of debt in less time than that shouldn't be impossible, even on a small income, and being free of debt is really nice.

To really make a good judgement on this, you should compare two scenarios: aggressively tackling your debt before doing any other savings vs. using income based repayment while aggressively saving for other goals like retirement and/or a house. Consider how extra income or a tighter budget would impact each scenario. You might want to wait until you actually land a teaching job so that you have a better idea of what your pay will be to make a decision.

Whatever you decide, if the money that you earned teaching overseas is your only extra cash, I would hold onto it as an emergency fund rather than throwing it straight on your loans or towards some other goal.

[Weird Tolkienish Figure]

As a graduate student about to finish their masters degree with near six-figure debt, the income based repayment plan makes the most sense, correct?

I have a little bit of savings from teaching overseas, but not enough to make a sizable difference.

As someone who is recently married and will hopefully start work next year as an elementary or special education teacher with a small salary, doesn't is make sense for me to make the income based repayments, and then have the balance forgiven after 10 years as part of the public service loan forgiveness program?

Is there a catch?

The only catch to IBR is that you will be hit with a tax bill for all the forgiven debt, I would roughly estimate about 1/3 the amount of the forgiven debt.

This isn't as dire as people think, if you're still destitute in 25 years, I believe the IRS will presently consider you insolvent if you assets are lower than the debt, so you might get away with paying a reduced amount. I don't know the specifics of that however.

Also, interest will accrue I believe, but not capitalize. So the amount you owe might keep growing and growing while you're on IBR. However, hopefully the economy will improve so will your salary, and eventually you will make enough to pay it off.

IBR is a good option for people who are having a tough time paying bill right out of school in this crappy job market. If you also figure in inflation then that also makes it a good option.

[phantom]

The only catch to IBR is that you will be hit with a tax bill for all the forgiven debt, I would roughly estimate about 1/3 the amount of the forgiven debt.

While this is true of some IBR, I do not believe it would be true for the OP. See Q3 of this official looking document

[Petunia 100]

The only catch to IBR is that you will be hit with a tax bill for all the forgiven debt, I would roughly estimate about 1/3 the amount of the forgiven debt.

No, student debt forgiven under PSLF is not taxed.

From IRS publication 4681:

Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers.
If your student loan is canceled as the result of this type of provision, the cancellation of this debt is not included in your gross income.

https://www.irs.gov/pub/irs-pdf/p4681.pdf

[Petunia 100]

What makes the most sense is for you to repay the full amount that you borrowed according to the terms of your note.

There is nothing at all wrong with taking advantage of PSLF. The program exists to attract educated people into low paying public jobs, such as teaching and social work. If the salaries were more lucrative, PSLF would not be necessary. Higher salaries would be paid with tax dollars; it's a wash.

Personally, if I thought loan forgiveness was a possibility, I would pay the minimum on my loans while saving/investing as much as I could. If the loan forgiveness did not work out, there would be money available to repay the loans.

[Weird Tolkienish Figure]

No, student debt forgiven under PSLF is not taxed.

From IRS publication 4681:

Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers.
If your student loan is canceled as the result of this type of provision, the cancellation of this debt is not included in your gross income.

www.irs.gov/pub/irs-pdf/p4681.pdf

No, PSLF and IBR are two different things. PSLF debt forgiveness is not taxable but IBR debt forgiveness is.

[Petunia 100]

No, PSLF and IBR are two different things. PSLF debt forgiveness is not taxable but IBR debt forgiveness is.

The OP states: and then have the balance forgiven after 10 years as part of the public service loan forgiveness program?

That's PSLF.

Debt forgiveness under IBR happens after 25 years.

OP intends to use IBR (income based repayment) to keep monthly payments low, not to forgive debt.

[dczech09]

There is a lot of information available on IBR. Here are links to a blog post that I wrote a while back. It is a three part post:

http://payczech.blogspot.com/2013/12/the-truth-about-income-based-repayment.html

http://payczech.blogspot.com/2013/12/the-truth-about-income-based-repayment_28.html

http://payczech.blogspot.com/2013/12/the-truth-about-income-based-repayment_29.html

Income-based repayment is a tough road simply for the fact that you spend so long in the program. Basically, you are a slave for life. Even then, there is no certainty that your debt will be forgiven. The government does not have any money! So relying on them pay off your debt, even after all of the hoops that you jump through, is risky business.

Why limit your income just to get forgiveness? Why limit your options for where you live? Why subject yourself to so many years of debt payments?

Your best bet is to get as good of an income as you can and work hard to pay that debt off! I am not saying that it will be easy. A near six-figure debt will be tough to clean up making $40k or so. But if you have no other debts, a 10-year pay-off should be possible.

Not a fun situation to be in. But in all honesty, the IBR program is not really a great benefit.

Also, keep in mind that different IBR programs have different requirements.