Income-Based Repayment Plan for federal student loans

Discussion in 'Teacher Time Out' started by TamiJ, Oct 27, 2011.

  1. TamiJ

    TamiJ Virtuoso

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    Oct 27, 2011

    Okay, so you all know my student loan situation since I have discussed it here a few times. I think some of you might have mentioned the income-based repayment plan to me in the past, but I have done more research on it. I thought I was on that plan, but what I am on in the income-sensitive payment plan.

    In a nutshell, is anyone else on this plan or know anything about it? In February my current payment plan expires and I start paying regular full payments (about twice what I am currently paying), or I re-apply for a new, low payment plan. I am considering IBR.

    In sum, it is based on monthly income, and household size. My monthly income is about $1333 USD (I know that sounds low, but cost f living is also very low here in Mexico). My debt is a considerable amount, over $50k. While this plan would likely mean my loans would grow, it says after 25 years of paying, my loan would be forgiven. I won't qualify for the 10-year forgiveness plan for government public-service jobs because I don't teach in the states, but so far I don't see anything that makes me think I would not be eligible for being forgiven after 25 years.

    Does anyone know the stipulations that surround the loan forgiveness after 25 years? It says even interest is forgiven. Here is a link with a brief video that discusses it. I am very interested, but would like any input you guys might be able to provide.

    Thanks

    http://www.ibrinfo.org/index.php
     
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  3. mmswm

    mmswm Moderator

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    Oct 27, 2011

    Any debt forgiven at the end of the year is considered taxable income. The year that it all goes away will turn in to one heck of a tax bill.
     
  4. TamiJ

    TamiJ Virtuoso

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    Oct 27, 2011

    Does this mean you advise against that plan? I have a very low monthly income and while I hope it grows, I don't know how much it will grow while I am here. I am literally drowning in my student loans.
     
  5. mmswm

    mmswm Moderator

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    Oct 27, 2011

    It's actually the plan I'm on. It works for me, at least for now. The tax consequences down the road, however, are something that you need to seriously consider.

    You say you have over 50K in debt right now. So, lets say, like me, your payment doesn't even cover the interest that's accruing. Every year, that unpaid interest is capitalized, and the debt accrues interest even faster. Year after year that happens. At the end of 25 years, you could easily have added another 15-20k to that total. Lets say it's 20K. Now you have a debt of $70,000.00 that's forgiven and is considered taxable income. Now, instead of a yearly taxable income of 15,994, your income is 85,996. Unless you've planned for that tax bill, you're going to have trouble paying it, and the IRS is MUCH less forgiving than Direct Loans.
     
  6. TamiJ

    TamiJ Virtuoso

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    Oct 27, 2011

    Boy you sure make it sound scary. Well, thanks for the information because that's really what I need so I can make a decision.

    By the way, do you know if I would qualify since I am working in Mexico? I don't see any reason why I wouldn't. I know I don't qualify for the 10 year plan because that's only if you are working in the states, but from what I understand, the loan forgiveness is automatic after 25 years.
     
  7. mmswm

    mmswm Moderator

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    Oct 27, 2011

    I'm not sure if there are any residency requirements. I'm sorry if I scared you. I crunched all those same numbers when I made the decision to go on that payment plan myself. It is pretty scary to think of it. Having that much more taxable income throws you into a different tax bracket, which is taxed at a higher rate than the lower bracket. Of course, 25 years from now, that could all be different, but it's still something that you have to consider before making the choice.


    For me, it was the right choice. Crunch your own numbers. It may or may not be right for you.
     
  8. TamiJ

    TamiJ Virtuoso

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    Oct 27, 2011

    So, assuming my loan does look the way you have predicted it to be, and let's assume I have been on the IBR plan for 25 years. What might I be looking at to pay as far in terms of taxes? And, if I anticipated this for 25 years and prepared financially for that dreadful day, would I be better off doing that some of my other options?
     
  9. TamiJ

    TamiJ Virtuoso

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    By the way, thanks so much for the information. These things are really foreign to me, and I just don't trust my own understanding.
     
  10. mmswm

    mmswm Moderator

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    I'm going to simplify things to get round figures. The actual calculations would be much more complicated. Lets say your taxable income is 85,000.00 before any deductions. You itemize and are able to get your adjusted gross income to 75,000.00. At this year's rates, you would owe 25% in federal income tax. Now, how much you actually have to pay will be reduced by any amount you've had withheld from you payroll, and any tax credits you might be eligible for. Forgetting that for the moment, the actual amount would be 18,750.00.

    Can you figure out a way to make sure you have enough to cover that bill? 25 years is a long time. You really have no idea where you'll be at that time. You might be making much more. You might be back in the states. You might have 8 dependents by then. The types and amounts of tax credits and deductions might have changed dramatically. I think we can count on the federal government continuing to allow us to withhold more than we have to from our regular paychecks. You could do that for the applicable tax year and get most, or all, of the extra tax bill covered that way. You could start a savings account a couple years ahead of time to make sure you're prepared when the time comes.

    Also consider that your financial circumstances could change between now and then and you could then start making payments that will actually reduce the principal you owe, making this whole discussion a non issue.

    The IRS website is actually pretty reasonable and readable. There's lots of information there that will give you a good idea of how the general tax structure works. That's a good place to start if you're interested in researching how this might effect you if you chose this plan.
     
  11. Securis

    Securis Cohort

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    Oct 27, 2011

    What I know about loan forgiveness is that you must make 120 consecutive payments in good standing, no late payments. That's 10 years of payments. Let's say that you pay $250 a month. That's $3000 in a year excluding interest accrued. Then say that you're good for 10 years, that's $30,000 not including interest. So, if you owed an amount less than (10 x 12 x (monthly payment + interest accrued)) it does you no good. Loan Forgiveness will only do you any good if you owe an excessive amount and currently make low monthly payments for that 10 year period.

    Income Contingent might rise or lower depending on your income. If you want that to work in your favor, then take a low income position and get set for privation or a very simple lifestyle for 10 years.

    Then you've got those graduated payment plans that rise gradually every year. Never done any of those.

    I don't think I have ever had Income Contingent either. Somehow, I've remained on a static payment plan where I pay a certain amount. Once I have made those 10 years of payments, I will not have that much left. Maybe a year and a half. That much? I think I'll just pay it because it will have become the principle of the matter. ;)
     
  12. TamiJ

    TamiJ Virtuoso

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    Oct 28, 2011

    Thanks everyone. I was just curious who knew what about this payment plan. Major, I definitely want to get my loan paid off, which is why I am looking into the different payment plans. Currently, my income is so low that I cannot even cover the interest, so my loan continues to grow. It's very scary. I would love to be making enough money to be able to make higher payments, but right now that's not happening. Okay, thanks everyone! I am still investigating the different payment options.
     
  13. mrachelle87

    mrachelle87 Fanatic

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    Oct 28, 2011

    I was lucky...I only had to have one loan when I went to college and I was guided by my advisor on the type. That meant after teaching three years in a low income school it was forgiven in full. I would talk to an accountant before doing anything.
     

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