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Under: Debt
Income Based Student Loan Repayment / Loan forgiveness
  • Bsmurphy
    I've been stuggling to figure out the best way to deal with student loans. I have $40,000 in Stafford loans and work in public service making $30,000 a year. I just put myself on the Income Based Repayment and understand that I can have my balances cancelled after 10 years of on time payments. My big problem with the loans is that I haven't even gotten a degree yet. I quit school when my marriage started falling apart so I could work more.

    I'd really like to go back to school, but I don't want to go any further into debt to do it. I've been thinking about it, and I'm thinking that since income based repayment caps my payments depending on my income, that it doesn't really matter how much more I take out in loans, that I'll only have to pay back the percentage for 120 payments.

    Sooo..... if I go back to school and take out $6,000 more in Stafford loans, then start back on IBR when I graduate, I won't have to pay back any more than I would have originally.

    Does that make sense to anyone else??
  • slweal
    It makes sense, and I think a lot of people will jump in and say it's unethical, but I don't believe that is so. I wouldn't exactly ask this question outright to any loan officer, but I would investigate carefully. It would be a waste for you to not finish your degree after putting so much effort towards it. The education system is very bad here. It favors the rich and the very poor and middle class families struggle. I am one of few of my friends that got caught in the middle (not rich enough to afford, not poor enough to get aid) and my parents and I are saddled with many loans.
  • Larsen014
    What are your payments every month, if you don't mind my asking?! I am struggling with the same thing. I am currently getting my Master's degree in Early Childhood Education, but by the time I get a teaching job I will have student loans accumulated from both my undergraduate degree and my graduate degree. I only have one semester left, but usually keep the full amount of the loan to help me through (although I know that is awful)! Does anyone have any sound knowledge as to how the Income-Based Repayment option works?
  • Bsmurphy
    slweal- Thanks for the comment. I agree, and I don't think it's unethical either. I'm not manipulating the system, just realizing the benefits of my loan program waaay later than I should have. I probably wouldn't have quit school if I'd realized I wasn't sinking as far into debt as I thought. Oh, the things I wish I'd known...

    Larsen 014- I'm still waiting for a loan to come out of forbearance to know exactly what my monthly payments will total, but I believe I will be paying about $180 a month. Without IBR, I was looking at about $400/month payments, and was in an absolute panic.

    There's a link to a calculator at the site below to estimate your payments. It also tells you if your job qualifies. It matters which kinds of loans you have. My $7000 in Perkins Loans was completely forgiven because I work in law enforcement. My remaining $40k are all Stafford Loans. Parent Loans don't seem to qualify and I think private loans only qualify if you're able to consolidate them into a federal loan program. The site says that Early Childhood Education should be a qualifying occupation for the Public Service Loan Forgiveness.

    Combining IBR with the Forgiveness should save me about $22k just on principal. I haven't even calculated how much interest I'll save.

    I'm definitely not an expert on any of this, but it's certainly worth the three or so hours it takes to work it all out, and the peace of mind I got was worth way more.

    http://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service#what-kinds-of-employment
  • brusselsprouts51
    I think there is also a way to get those loans forgiven through the National Health Corp. If you become licensed and commit to a few years they will forgive up to $60,000 or something like that. I don't remember the specifics
  • crisanja
    I was right there too, still am. I have student loan debt, and no degree, due to failed marriage, kids, and needing to work instead of finish school. I have not yet refinanced my student loans and maybe I should. I'll have to look into it some more.

    How does the IBR work exactly? Is it fairly simple to set up, is it a good thing? I just have hesitations about over extending my loans.
  • livendance
    Hey everyone!

    I currently am paying back my loans under the IBR plan. I have about $50,000ish in federal loans (that does not include the private loan I took out for college). I just wanted to point out that the IBR extends your payments for 25 years...not 10. After 25 years on the IBR plan the rest of your loan is forgiven. 10 years is for standard repayment.

    Currently my payments are $60, which is great. The catch about the IBR plan is that if your income goes up...so will your payments and since you are paying the loan over a longer period of time you run the risk of paying more than what you would pay under the standard repayment plan.

    Hope that didn't confuse people! That being said... the IBR repayment can be a great option. Just make sure you understand what it REALLY means. It's a great option for me but not necessarily for everyone.
  • Bsmurphy
    Hi Livendance,

    My loans will be cancelled after only 10 years because I work in public service. For most people, I do believe it's 25 years. The only reason the plan saves me money is because of the early cancellation.
  • livendance
    Ah I see Bsmurphy! I understand now.
  • Cay
    Hey guys,

    I read this discussion because I am also on the Income Based Repayment plan. My understanding of it is that you can be taxed on the amount that is "forgiven". That is, you may owe the IRS a percentage of the money that is written off in the end.

    For someone with six figure (and growing) student loans like myself, that amount could end up being a lot! Assuming, for example, that I owe $100,000 at the end of 25 years, and that it is taxed at, say, 30%, that would mean that I could owe $30,000 to the IRS after the debt is written off.

    Any thoughts on this?
  • MontanaLu
    Hi Cay -

    I'm thinking about the scenario you posed because I'm in the same boat. I'm currently on the IBR plan, and am counting on the Public Service Loan Forgiveness Program to forgive any outstanding debt in 9 years, 4 months (I consolidated 8 months ago). Within the fed system (ignoring private loans) I borrowed about $80,000 to go to law school and currently owe about $94,000, because I deferred payments for ~2 years while I was unemployed.

    If my math is correct, under the standard repayment I would be paying ~$1,000 a month; instead, under the IBR, I'm paying ~$150 a month. While I expect my income, and thus my IBR payment, to increase over the next 10 years, I think that my income would have to go up by 170% to get to the monthly payment equal to the monthly payment under the standard repayment plan. Thus, any month I'm below the 170% increase I'm coming out ahead (and since I don't think I'll see that kind of increase over the next 10 years, I think I'll be ahead the whole time).

    At the end of the 10 years, you're right, I think the IRS will count any loan balance amount forgiven as "income." However, I won't be paying a 100% tax on that forgiven income, I'll owe an amount based on the tax bracket I'm in at that time. If I was really forward-thinking, I'd be trying to build up a "student loan forgiveness tax" savings account over the next 9 years (out of the savings I'm realizing by being on the IBR plan) to account for that tax return hit I'll take in 2023...

    HOWEVER -
    I'm NOT a tax professional. I would love to hear from anyone else who might have a perspective to add on this issue!
  • Bsmurphy
    I was in Dave Ramsey's financial peace university back when I posted this. My instructor was worried about the same thing- paying income tax on the forgiven amount. He checked into it for me and said it is just forgiven and not counted as income. This link shows that public service loan forgiveness is not taxable, but it loooks like other kinds of forgiveness are.

    http://www.finaid.org/loans/forgivenesstaxability.phtml

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