<p>It's basically a program where federal educational loans are capped at a certain percentage of your discretionary income, and after 25 years (or 10 if you go into public service) you are automatically discharged of any remaining debt.</p>
<p>So if the job market is really as bad as everyone says it is, and you have to wait tables or whatever, your loan payments will adjust to that fact. And you'll never have to pay more than around 10% of your income, which is still significant but basically doesn't sound crushing. That's right: borrow $200k for law school, and worse comes to worst, you pay nothing because you're unemployed and below the poverty line! It won't be the debt that gets you, it'll be the not having money for food and rent after graduation.</p>
<p>I did some preliminary research on this stuff, and it seems like an awesome deal to me. There must be a catch, right? What's the catch if so many people claim to be suffering from their debilitating student loans? Come on, let me in on the secret.</p>
<ul>
<li><p>First off, these programs only apply to certain government subsidized student loans. Those graduating with massive law school debt typically also have a lot of debt from other sources, which would not be eligible for these programs. </p></li>
<li><p>Second, you only really benefit from these programs if you end up doing really poorly over the long term. This is because although your payments may be capped those loans still accumulate interest and the amount owed may actually INCREASE over time. In short, although you get to pay back a smaller amount in the short term… in the long term, assuming you get back on your feet, you can end up paying back a lot more. </p></li>
<li><p>Finally, you still owe the money for decades out of school. Good luck trying to get someone else to loan you money (i.e. a bank for a mortgage) when you have that huge outstanding liability. </p></li>
</ul>
<p>These IBR programs were put in place to prevent people from being financially destroyed the first few years out of college by massive payments before they got on their feet financially. If it needs to be used over the long term it can help someone from going completely bust, but you’re not really “winning” you’re just stuck in the safety net.</p>
<p>My impression is that the majority of educational loans are government loans. Or that it would be easy to get all your law school loans to be government loans. In fact it’s advised NOT to get private loans, unless they are connected with the government. And once government loans, you’re just some paperwork away from getting IBR status. So eligibility is the program isn’t a big hurdle, or so I think.</p>
<p>No, this program won’t make you pay more in the long term. If you have extra money left over on top of your IBR loan payment, you can always pay more than the capped amount. But the capped amount being there makes it harder for you to default. Win-win. the point is that at no time will you be CRUSHED. 10% of discretionary income, that never changes. And again, this is like a humongous safety net. If you go to law school and make it big, you don’t need this, sure. But if you lose big time, this will save your butt. It makes the gamble of law school worth it for a lot more people. Besides, if you go into government service, there is a high chance that you will not pay all your debts off before 10 years time is up, and then you get off with thousands for free. Basically this program is win-win, I see no downsides. What are the downsides?</p>
<p>Can you be more specific about how this affects your chances of getting other types of loans in the future? At the very least you’ll be wayyyy better off than the guy who get traditional loans.</p>
<p>Government loans add up to about $20,000 a year at most. Cost of attending a law school is something like $55,000 a year. So government loans are less than half of the cost.</p>
<p>This might be true if you never land a job that earns in the ballpark of what most lawyers want to make and feel like they should make. In some cases the first three years of extra interest may be forgiven, but after that you will still owe any additional interest for the next 25 years. Even if you are still in the program that interest will continue to accumulate and it will still be listed on your credit report as an outstanding debt. This will severely impact ones attempts to land other types of credit during that 25 year period. </p>
<p>If you land a higher paying position you’ll fall out of the IBR program and be expected to make payments on this, now larger, debt. In this situation one will almost certainly pay more than they would have paid if they made full payments from the beginning. </p>
<p>In both situations you get some help from a safety net, but there are serious downsides too. </p>
<p>
The jobs that offer the 10 year public service option only covers a narrow range of positions. There are plenty of low paying legal jobs that are not in this program. Also, if you have to choose a specific job just because of the potential for a loan forgiveness program, as opposed to having the freedom to do what one wants to do, I fail to see how one “wins.” </p>
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<p>A student loan is still an loan and an unsecured one at that. It shows up on your credit report just like any other loan as would the fact that you’re not able to repay it at the full monthly amount. </p>
<p>In a nutshell, if you already have a big loan that you’re unable to fully repay each month then why would a bank give you another big loan to say buy a house? They won’t–and especially not now in the post bust world where we saw what happens when you loan money to people already in big debt.</p>
<p>Finally, as also stated above, the typical debt taken on in law school is often far above that available from normal student loans so one often also has to take big private loans. Those loans are never covered by these programs and look even worse on a credit report.</p>
<p>I think rocketman has it right. Even ignoring private loans, 25 years is a long time to be paying off law school loans. If you have children who want to go to college, you will probably still be paying off your own loans while you are figuring out how to pay for your childrens’ college.</p>
<p>Man, I am really clueless about this financial stuff. But the more I read, the happier I’m getting.</p>
<p>So far my research says you all are wrong in the points that lead to your cynicism. I took all your points very seriously, and looked into them further. Please prove me wrong, please. This sounds too good to be true. I know I probably sound really light headed and naive, but this really opens a lot of options for me.</p>
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<p>That would be true if you were talking about just the Stafford loan. But according to [IBRinfo</a> :: Can they help me?](<a href=“http://www.ibrinfo.org/can.vp.html]IBRinfo”>http://www.ibrinfo.org/can.vp.html), Grad Plus loans are included in the IBR program. The Grad Plus loan is offered basically to any graduate school regardless of their family’s financial situation. Furthermore, it is offered with no borrowing limit other than the cost of attendance of the school minus whatever other financial aid the borrower has received. That means for law school, loans that qualify for IBR can meet all your needs, including costs of living and whatever. There is NO need to get private loans, hence none of your loans will not qualify for IBR, hence this sweet sweet deal whose contents I will talk more about below will save your WHOLE debtor life. (Obviously my certainty is exaggerated given how shallow my research has been, this is just a challenge to show me up, please.)</p>
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<p>First of all, refer here about the credit stuff: [IBRinfo</a> :: Frequently Asked Questions](<a href=“http://www.ibrinfo.org/faq.vp.html#_credit]IBRinfo”>http://www.ibrinfo.org/faq.vp.html#_credit). As long as you make your IBR-based payments, credit score ratings will only reflect the fact that you are making your payments. There is nothing released to them about the payments being somehow “reduced.” You will be just as good as anyone else who makes their loan payments on time, in fact better, because there is a much better chance that you WILL make those payments on time.</p>
<p>Secondly, refer back to that same link with the FAQ, you are free at any time to contribute more to paying off your loan than your IBR terms require you to. So nothing is stopping you, if you have the means, from making the same larger payments that you would have made if you didn’t have IBR. The key point is that if you DON’T have the means, IBR is there to save your life.</p>
<p>So no, you will not be paying more in the long-term unless having IBR there makes you a spendthrift and pay the minimum payment even though you have the means and would have paid more with the tougher terms of a non-IBR loan. Such a person could hardly complain because that’s their own damn fault for doing so. In any case, given the utter doomsday portrayed in other threads, about post-law school employment prospects, there IS a high chance of finding a job that you call not in the ballpark of what lawyers want to make. Law school is criticized as being dangerous specifically for the short-term catastrophe of having crushing debt payments during the first few years of one’s careers. This IBR program at the very least negates that. In summary, there is no REAL downside. Perhaps a psychological downside of you being lazier with your debt payments; but the very real upside of not being crushed right out of law school is far, far greater.</p>
<p>Oh and for non-public employees, starting in 2014 you need 20, not 25, years of payment before remaining loans and interest are forgiven.</p>
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<p>Jesus, no one is choosing the type of career based on the terms of this program. I said IF one were to go into public service, there is a layer of sweet goodness on top of an already well-layered cake. </p>
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<p>If you read what I post above, even if IBR is cancelled, had you been working hard to pay off your loans, your situation should be no different than if you had never done IBR in the first place. Again, it doesn’t hurt you.</p>
<p>But what are the chances that you disqualify for IBR? I did some sloppy approximating in the IBR qualification calculator, [IBRinfo</a> :: IBR Calculator](<a href=“http://www.ibrinfo.org/calculator.php]IBRinfo”>http://www.ibrinfo.org/calculator.php), and it looks like for a loan amount of $200k, you would need an income over $200k to disqualify for IBR. That’s a hard thing to do, man.</p>
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<p>Read above about IBR not harming one’s credit report. In fact your reduced payments do show up as repaying “the full monthly amount.”</p>
<p>Student loans are non bankruptable, and you will never get ahead until they go away. The go away only if you pay them or die. If you die make sure your parents didn’t cosign because then even death leaves them on the hook. If you plan on a low income to stay within IBR, plan on alpo for retirement. If you earn enough to no longer qualify for IBR then you will pay off the entire amount. Grad school is a great thing. I heartily recommend it. There is a cost and a return on investment. Make sure you are not mortaging your future. Work for a couple of years. Go to a state school and pay as you go. Minimize the debt. Do not plan on a program that can be changed on a whim to bail you out from ruinous decisions. </p>
<p>Read this article today in the NY Times Is Law School a Losing Game?</p>
<p>Hey thanks for the reply. But can you please talk about the situation at hand instead of bringing up shock examples?</p>
<p>As I already said, to disqualify for IBR off of a $200k loan, you need an income over $200k. I’m assuming at that point I wouldn’t really need or want IBR anyways.</p>
<p>Both of my children are college grads. My daughter is a 3L, no undergrad debt, 200k law school debt. She went to a good law school. Did well enough that had she entered a year earlier she would have had no problem finding a summer internship program in a large firm. Her boyfriend at the time, a year ahead of her in Law school, worse grades at a school that was 25 places lower on US News Rankings got 2 offers. During her first year in school I was not aware of the IBR program. I was mighty concerned with the state of the World, U.S., and Law school economies. When I learned about the IBR program a fair amount of my anxiety was alleviated. I didn’t understand why there was never any mention of this program on CC. I toyed with posting on CC but but never did. An important particular for me is that my daughter has a good credit rating and her debt all falls under this program. In addition she loved law school and is probably interested in Public Service law. If I get this payments are 15% of AGI…ten years and she is debt free. If not its 25 years and debt free. If you make $200000(as a single person), more or less, you are still in IBR. If you make more you are not in IBR and you should be able to manage your debt. We can help her a bit but not a huge amount. I no longer fret about the issues as it relates to her debt. I’m concerned that her career options maybe somewhat limited. However, I hope, and believe, that she will have the ability to craft a satisfying career and life.</p>
<p>At the end of the 20-25 year IBR period the debt just doesn’t magically disappear… it is “forgiven” but that amount is treated as income for tax purposes and you’ll owe, potentially a lot, of additional tax that year. You need to read the fine print. </p>
<p>If someone had big law school debts and used the IBR to avoid making significant dents in principal for 20 years their debt could easily baloon well into the mid six figures. When the loan is finally “forgiven” said indivdual owes income tax on that lump sum amount–potentially more in income taxes than they even earn that year. At this point you could be totally screwed. </p>
<p>If your payments aren’t even covering the interest owed, and you have high-interest loans, then the amount you owe will be rapidly and constantly increasing, which doesn’t help your credit rating at all.</p>
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<p>Right, but if you can afford to pay the normal amount, then you wouldn’t need IBR. And if you subsequently end up deciding to pay more than the minimum, you’ll still have to pay more because of the larger amount of interest that accrued while you were on IBR. If you pay the minimum required by IBR, you will almost invariably end up paying more, and in many cases end up with a lot of taxable “income” if and when the loan is forgiven. Here are several illustrations, none of which really deals with the more dire situation faced by most TTT law school grads:
<a href=“http://www.projectonstudentdebt.org/files/pub/IBR_forgiveness_ex.pdf[/url]”>http://www.projectonstudentdebt.org/files/pub/IBR_forgiveness_ex.pdf</a></p>
<p>Which is not to say that IBR is a terrible option, since that’s still a better outcome than default or deferrment. But it’s not an option that should cause anyone to disregard the enormous debt they may incur by going to law school.</p>
<p>If you are working in Public Service Law for ten years IBR debt relief is not treated as taxable income. There is discussion about doing the same for lawyers who remain for 25 years in the non Public Service Law IBR program.</p>
<p>Don’t hold your breath on that one. Tax free bailouts for lawyers isn’t exactly going to garner widespread public support. The tax based balloon payment at the end of IBR is also an important aspect of the program in so far as it provides a strong incentive to make meaningful efforts to pay off/down the debt. </p>
<p>IBR is ment as a short term way to reduce payments to manageable levels. If you hang on it for 20-25 years Uncle Sam finally just steps in and says “OK you’ve been playing this game too long… pay up.” </p>
<p>The public service debt relief is a whole different scenario and is in effect part of the compensation package for the, typically lower paying, public service positions.</p>
<p>Grad Plus loans have an interest rate of 7.9%. Compare that to the fact that someone with good credit can currently get a bank loan (i.e. mortgage) for about 4.3%. Having typical law school sized debts tied up in a program with 7.9% interest is hardly a sweet deal.</p>
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<p>You’re talking specifically about credit scores… I was talking about ones credit in general, of which the credit score is only one part. You are correct that so long as one makes the agreed payment amount that this in itself will not hurt a credit score. However, you’re failing to appreciate the different between a simple credit score and the impact that outstanding debt has on ones ability to take out future debt. </p>
<p>If you want to say get cable TV setup the cable company will ping your credit score. They don’t care about your debt they just want to see a consistent history of making payments. </p>
<p>However, for more important and substantial desires like becoming a homeowner the loan officer will not only look at your payment history but also your overall debt picture. They’ll be looking at your outstanding debt and how that’s changed over time. If you’re using an IBR program to avoid substantially paying down your debt, that will certainly be noticed and will certainly count against you. If someone has six figures of student loan debt, has low income with IBR and is thus failing to pay down the debt a post-recession banker wouldn’t them with a ten foot pool if they came in asking for a mortgage or other substantial financing request.</p>
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<p>I don’t think anyone ever suggested otherwise so I’m not quite sure what you point here is. </p>
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<p>You do understand how compound interest works right? IBR helps people fresh out of school who have yet to reach their full earning potential avoid financial disaster by limiting their payments. However, that is not without consequence. Reducing payments at any point in a loan, and especially early on, means you will end up paying back far more money in the end. Take the following example:</p>
<ul>
<li><p>Person A graduates with $175k in debt at an interest rate of 7%. They make a requested monthly payment of $1,807 per month.</p></li>
<li><p>Person B graduates with the same $175k in debt at 7% but isn’t earning as much as they had hoped and enrolls in IBR. Their monthly payment is reduced to $1,237 per month. </p></li>
</ul>
<p>Sounds like a nice use of IBR… until you realize that person B ends up paying $112,000 more because of this magical thing called compound interest. This is the “REAL downside.” </p>
<p>Yes IBR helps keep person B from becoming functionally insolvent based on their income, but they pay heavily for that service in the same way someone does when they take out a pay-day loan. </p>
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<p>True, but as mentioned earlier you’re forgetting the fine print about how that “forgiven” amount is treated by the IRS as income in the year it occurs. In practice this means you’ll have to pay out about 25-30% of the outstanding balance at the point in cash to Uncle Sam. That might sound like you’re still getting off with a good deal, but by 20-25 years out you’ve likely either already paid for every dollar borrowed several times over in interest or, if you’re been in negative amortization, would have such a huge tax liability it could simply make one go bust.</p>
<ul>
<li><p>huge tax burden at the end if your loans get forgiven</p></li>
<li><p>huge amount to pay off if you do end up in a higher-paying job at some point (I believe the interest recapitalizes when you leave IBR…and you have to leave IBR if your income gets above a certain point relative to your debt)</p></li>
<li><p>extremely difficult to explain IBR or LRAP to mortgage brokers…they see this ballooning debt and don’t want to loan to you. good luck explaining “but it’ll get forgiven in 7 more years!” or something. I just had this experience this year.</p></li>
<li><p>many recent law grads have private loans…i took them out in the pre-CCRA days, when it made sense to do so, since the interest rate was super low and no one knew there’d be debt forgiveness like this.</p></li>
<li><p>doesn’t affect undergrad loans</p></li>
<li><p>IBR is slow to adjust to changes in income, so if you lose your job or something it can be a while til your payments go down. This can be an issue for contract lawyers and others working sporadically.</p></li>
<li><p>doesn’t take into account dependents, cost of living in different areas, etc. </p></li>
</ul>
<p>I benefit from IBR, LRAPs, and public service loan forgiveness. I’m thrilled they exist. But they don’t make post-law-school life easy for everyone.</p>
<p>This is an old thread that I feel obligated to follow up on. I did a little bit more research and this is what I found.</p>
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<p>Okay, but you can’t get a mortgage to finance your education. The Grad Plus loan and its interest rate will have to be swallowed with or without IBR. But fine, I admit I was exaggerating when I called it a sweet deal.</p>
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<p>Are you absolutely sure? Could I get some references? I’m curious. I tried to look this stuff up, but the information I found was very vague. While all said that lenders check the total debt to income ratio (sucks if you’re on IBR), sometimes they imply that all that matters is the payment to income ratio (great if you’re on IBR).</p>
<p>“When you apply for credit on IBR, your FICO score will be OK and then on top of that, as long as you can show that al your monthly payments (amounts of which are reported) total less than like a third of your gross income, you’re good to go.”</p>
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<p>Well, you’re the one implying this, and it makes all the difference! For instance:</p>
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<p>You are suggesting that Person B deciding to “use” IBR would pay the reduced minimum payment of $1237 per month. No, he would choose to exceed the minimum and pay the $1807 that he would have paid without IBR.</p>
<p>The only reason he would pay $1237 is if he weren’t simply using IBR: he can’t afford the original payment, and is therefore being saved by IBR.</p>
<p>Thus with IBR the trade-off is not between paying a smaller monthly balance and paying a higher total balance (at least not necessarily, anyways) but between paying a higher total balance and not being able to make your monthly payment (whatever this term is called).</p>
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<p>Are you serious?</p>
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<p>Well, the fine print is that forgiven debt is not counted as income to the extent that it made you insolvent. (I got this information from the link I posted above. I verified it myself.) So you will never “go bust.”</p>
<p>According to the guy in the link (since I’m new to this stuff), if you’re still owing a substantial amount after 20 years, your assets will be low and very little of the forgiven debt will be taxable.</p>
<p>If you’re forgiven a substantial amount AND you have substantial assets, well, I dunno, sell a car?</p>
<p>Hopefully this change will be implemented soon, and that will be the end of the threat of taxation in the off chance that you have significant debt after 20 years. Obviously this is a situation to avoid altogether.</p>
<p>Unless you get a lower-interest private loan.</p>
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<p>Well, some guy’s forum post notwithstanding, having a ton of debt is probably going to hurt your FICO score. And it’s probably not safe to assume that lenders are simply going to ignore the hundreds of thousands of dollars that you owe.</p>
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<p>Right, and the cost of being “saved” is that he ends up paying back a lot more than he otherwise would have, and/or getting hit with a huge tax charge at the end. That’s why people still complain about debt even though there’s IBR (in addition to the fact that many of them have loans that don’t qualify). Of course, you may be able to avoid most of the tax charge as long as you have few or no assets in your mid/late-forties. But that’s not really a great outcome, either.</p>
Don’t know what to say other than this guy doesn’t know what he’s talking about. 5 years ago this was probably true, but those day’s are long over. </p>
<p>You need far more than just a good FICO score to get a mortgage. The FICO score is really only a measure of your historical ability to make monthly payments on time. It also looks at the amount of debt relative to your credit limits on variable accounts (eg credit cards) but it does not really look at the total amount of debt you have overall nor does it have anything at all to do with your income. The later is what a bank loan officer will dig into during the mortgage application process.</p>
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Go down to your local bank, tell the loan officer you have six figures + in non-dischargable educational debt and are on a government program to reduce your payments since you’re not able to make full payments… then ask them for a mortgage. See how long it takes for them to laugh you out of the bank. </p>
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By definition someone who borrows way more than they can ever afford to repay is not a “responsible borrower.” As such this quoted statement really makes no sense. </p>
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<p>H.R. 2492 was introduced several years ago and never went anywhere. It was thrown out there in the midst of big bailouts just like several bills proposing to just “forgive” the massive debt of those that purchased way more home than they could ever afford. Such concepts were very unpopular with the broader public and were quickly pushed aside–given that it’s the broader public that would be expected to pick up the tab for the irresponsible poor decisions of others.</p>
<p>Never say never, but the chances of this or any similar bill ever going anywhere are very slim to none. </p>
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<p>If at the forgiveness point you have no real assets to speak of for the IRS to go after to recover the tax liability (no bank savings, no house, no car, no taxable investments…) well then you’re basically bust already. </p>
<p>IBR is designed to be a short term safety net system, primary for the first few years out of school when one’s income may have yet to reach full potential. The price for using that safety net is that you pay back more money in the longer term. </p>
<p>There’s no free lunch here. If you borrow a huge sum, and are not getting public service forgiveness credit, you’ll pay it back one way or the other (+ a boatload of interest)… unless you’re just completely bust for several decades and that’s hardly a desirably outcome.</p>