Why are people complaining about crushing debt when there's IBR?

[cormy3]

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Unless you get a lower-interest private loan.

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<p>It is said that private loans may be lower-interest in the short term because of the state of the economy, but in the long-term they’re going to cost more overall once federal interest rate go up. Hence what I said, GradPlus either way.</p>

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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.

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<p>I thought we already covered this: IBR doesn’t affect your FICO score, which is based on whether you make timely payments. Of course it’s not safe to assume that lenders are going to ignore your total debt, which is independent of the FICO score, which is why I’m asking.</p>

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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.

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<p>I understand. I think we agree for the most part.</p>

<p>In my previous post(s) I just wanted to knock down the strawman that, with the safety and protection of IBR, you would necessarily be paying more in the long-run. That’s not true. You can make debt payments on IBR as high as you want. You only pay more in the long-run if you simply can’t make higher payments, meaning that IBR is saving your ass.</p>

<p>So for those who enjoy the IBR guarantee, but end up not needing IBR to keep their payments low, they are getting a free lunch, essentially. That free lunch is knowing they won’t default. I bet there are a lot of people out there like this, and I suspect I’ll be one of them. This is assuming that not defaulting is more important than higher payments in the long-run. I hope that’s a good assumption.</p>

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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.

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<p>As I said, I’m not doubting that the lender will look into this information, and have it at hand when making his decision. It’s just that several sources implied that the total debt to income ratio doesn’t matter all that much as long as your monthly debt payment to income ratio is good. I can understand why the information is vague: in most scenarios, both ratios will correlate pretty nicely: the higher your total debt, the higher your monthly payment. But the whole point of IBR is that you can have high total debt but a low monthly payment. So I just want to be sure.</p>

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vGo 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.

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<p>I’m not saying I disbelieve you. It sounds perfectly reasonable. I’m just surprised there are no official sources that can tell me this.</p>

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Never say never, but the chances of this or any similar bill ever going anywhere are very slim to none.

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<p>On another law school forum, the general consensus was that the bill was sure to pass eventually. I really don’t know how to evaluate these things.</p>

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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.

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<p>Yikes. Why do you put it in these terms? “for the IRS to go after to recover the tax liability”? The insolvency provision is a provision built into the tax code. You’re not getting off cheap. It’s perfectly in the spirit of the law. This isn’t the equivalent of getting your debt wiped by declaring bankruptcy (I’m referencing other types of debt; I’m aware educational debt is non-dischargeable).</p>

<p>Like I said, obviously this is a situation you should avoid altogether, but in the off chance that you’re in this situation, you can rest assured that you’ve screwed yourself and not by the IRS.</p>

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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.

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<p>If you take a look at my original post, you’ll see that 75% of it was my amazement that recent law grads are said to be in so much trouble when there’s IBR to bail them out in the short-term. Only 25% was, as an aside, about the existence and implications of loan forgiveness.</p>

<p>My motivation for posting about loan forgiveness (for public service or otherwise) was to get a handle on all the hypothetical scenarios that I can imagine played out. I’m completely new to financial matters, having never had to deal with these kinds of large numbers or percentages before. I was just curious about what it would mean to get your loan forgiven after 20 years, and was by no means suggesting that this idea is viable as a <em>plan</em>.</p>

<p>So fine, there is technically a downside to IBR (that is, assuming the debt is not all forgiven at the end). But that downside is incurred, as I explained before, only if you otherwise could not have made your monthly payments. In such a case, it seems quite reasonable. It negates the horror story often written about where the recent graduate can’t get a good job to pay his debts early on. This scenario is often alluded to to dissuade students from attending law school. If IBR negates it, that’s important, right? So why do I still hear all these stories about recent grads struggling so hard?</p>

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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.

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<p>The safety net, while not a free lunch, is much better than current options. Or do you really think payday loans are just as good? I’d like to hear why.</p>

[rocketman08]

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You can make debt payments on IBR as high as you want. You only pay more in the long-run if you simply can’t make higher payments, meaning that IBR is saving your ass.

Yes, you can make higher payments if you want. I agree that if you are on IBR and yet are somehow still able to make the original full payments that you don’t pay more and that IBR is basically a free insurance policy that would allow you to pay less if you had to…</p>

<p>…however, I think you’re overestimating the ability of many on IBR to make such substantial debt repayments. </p>

<p>It really depends on a case by case basis with looking at someone’s income, their non-debt expenses and the size of the student loans but generally speaking if someone is on IBR it’s likely going to be difficult to make payments that are substantially larger. </p>

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Or do you really think payday loans are just as good? I’d like to hear why.

With IBR it’s not uncommon to actually go into negative amortization (i.e. you pay money each month and each month you owe more than the previous month). This is where my comment about payday loans originated from. This is especially true with law school sized debts where someone comes out and then does not land a big-law job. </p>

<p>I certainly do not think a payday loan would be better… my point is that many people don’t understand that IBR can often be way for one to get stuck in a similar crazy financial situation where you just keep throwing money at a black hole. </p>

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Yikes. Why do you put it in these terms? “for the IRS to go after to recover the tax liability”?

Uncle Sam is not like a normal creditor. If you have a tax liability that you don’t pay, but you have assets, the IRS will just go after those assets and literally take them away from you to cover the taxes you owe. You can’t have assets (even non-cash assets) and owe the government money in unpaid taxes.</p>

<p>If you have a bank account they will just take money out of there… literally you’ll check your account one day and the money will just be gone. If you’re employed at the time they will take money right out of your paycheck… literally you’ll get your paycheck and you’ll be paid less. </p>

<p>A while back I used to work at a bank and we would simply get these notices from the IRS that said “so and so has an outstanding unpaid tax liability… we know they have an account with you… take $XXXXX from their account and send it to us”</p>

<p>What you’re referencing says that if you have no assets for the IRS to go after then they’ll go away… but if you have no monthly income, no savings, no investments, no property then you’re hardly in a desirable place. </p>

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On another law school forum, the general consensus was that the bill was sure to pass eventually.

One should keep in mind that many with such optimistic views are likely in a boat where they’ll desperately need this bill to pass because they borrowed way more than they could afford. </p>

<p>Who knows what the future would bring, but it would be very unwise to make a decision to borrow a massive sum of money on the basis that a law might change at some point down the line. The law is what it is today… that could always change but for the foreseeable future that seems highly unlikely. </p>

<p>I appreciate that you’re trying to find the positives in IBR and as you pointed out with the “insurance” analogy there can be some. However, this isn’t a magic wand. If you borrow a massive sum and then don’t end up making a massive income things are going to be really rough for a long time. A smaller monthly payment simply masks the fact that the debt isn’t really being repaid and instead you’re just paying more interest. </p>

<p>Yes, IBR will help provide some protection from allowing the student loans on their own to make you go bust… but on the flip side unlike most loans you’ll still owe the money back even if you do end up going bankrupt. </p>

<p>If you borrow the money you’ll pay it back one way or the other eventually… and if you don’t make full payments from day one you’ll end up paying back a lot more one way or the other.</p>

[mochamaven]

<p>I think you also need to understand that 25 years is a really long time. Sure, you’ll be forgiven in 25 years…and let’s assume that you go straight to LS out of undergrad, and therefore graduate at 25. 25+25 = 50, the age you will be when those loans get forgiven through this program. Something tells me you’d want to have a mortgage for a house long before then, and good luck getting that with $100k in debt.</p>

[cormy3]

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Yes, you can make higher payments if you want. I agree that if you are on IBR and yet are somehow still able to make the original full payments that you don’t pay more and that IBR is basically a free insurance policy that would allow you to pay less if you had to…

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<p>That’s what I meant, though. By IBR having no downsides, I meant in no case will you be worse off with IBR than without IBR. Will you be completely scot-free in any case? I concede that you won’t. But that doesn’t mean IBR isn’t a game-changer for many.</p>

<p>I’m still waiting for an answer to my original bafflement: why all the horror stories of recent grads when there exists IBR? Or are they all just worrying about the future, and are not actually hurting at this very moment?</p>

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With IBR it’s not uncommon to actually go into negative amortization (i.e. you pay money each month and each month you owe more than the previous month). This is where my comment about payday loans originated from. This is especially true with law school sized debts where someone comes out and then does not land a big-law job.</p>

<p>I certainly do not think a payday loan would be better… my point is that many people don’t understand that IBR can often be way for one to get stuck in a similar crazy financial situation where you just keep throwing money at a black hole.

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<p>The opinion of the guy in the forum link I posted was that if you’re making such small payments on your debt as to go into negative amortization, you definitely won’t have much assets 20 years down the road. Which means your enormous debts will be forgiven outright, under our current tax code, whether or not that debt forgiveness bill passes. This is unlike for other types of loans, as far as I know.</p>

<p>Whether this opinion is accurate, I don’t know. Right now it’s like, I have the raw numbers in front of me, and now I have to fit them into a qualitative model, which I am failing to do because I’m new. I see now why financial literacy or financial understanding is hard. There are so many variables wrapped around so many personal considerations, and the relationships among them are worked in percentages or compound percentages. What do you think I should do besides play around with calculators for a few years to get a “feel”?</p>

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What you’re referencing says that if you have no assets for the IRS to go after then they’ll go away… but if you have no monthly income, no savings, no investments, no property then you’re hardly in a desirable place.

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<p>What you described is what happens if you owe the IRS something. What I’m talking about is whether you will owe. In spirit, I don’t see the insolvency provision to be the same as having no more assets for them to go after. In financial terms, they are clearly different: with the insolvency provision, you will always be left with a substantial percentage of your assets remaining after paying off your obligations to the IRS. </p>

<p>I agree and have agreed many times that this situation should be avoided altogether. But if you’re in that kind of hole, the IRS and IBR and even the student loans themselves (because of IBR) are not what brought you there. </p>

<p>If you think law school graduates are likely to end up with a bad job and little assets, maybe that is good reason not to go to law school. But that’s pretty independent of the loans – thanks to IBR. I believe that, starting 2014, for the lowest income levels IBR will require payments of under 10% of discretionary income. That’s hardly going to keep someone down for the 20 years he has to make payments. If he is still poor 20 years down the road, much of his debt will be forgiven. The loans, and thus IBR, will not be his biggest concerns.</p>

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One should keep in mind that many with such optimistic views are likely in a boat where they’ll desperately need this bill to pass because they borrowed way more than they could afford. </p>

<p>Who knows what the future would bring, but it would be very unwise to make a decision to borrow a massive sum of money on the basis that a law mightchange at some point down the line. The law is what it is today… that could always change but for the foreseeable future that seems highly unlikely.

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<p>Okay, fair enough. I still have a few years to make my decision. Just like I talk in terms of getting my IBR loans post-2014 (20 year forgiveness instead of 25), I’ll wait and see what the future brings.</p>

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Yes, IBR will help provide some protection from allowing the student loans on their own to make you go bust… but on the flip side unlike most loans you’ll still owe the money back even if you do end up going bankrupt. </p>

<p>If you borrow the money you’ll pay it back one way or the other eventually… and if you don’t make full payments from day one you’ll end up paying back a lot more one way or the other.

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<p>Not if the other guy’s post is accurate. Basically it’s free lunch for 20 years, and then a big free lunch finale.</p>

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I think you also need to understand that 25 years is a really long time. Sure, you’ll be forgiven in 25 years…and let’s assume that you go straight to LS out of undergrad, and therefore graduate at 25. 25+25 = 50, the age you will be when those loans get forgiven through this program. Something tells me you’d want to have a mortgage for a house long before then, and good luck getting that with $100k in debt.

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<p>Please see discussion about this above. I’m still curious why there are no official sources that say exactly what lenders look for. ><</p>

[stacy]

<p>All I can say about mortgages is my own experience. I have good credit (score over 750) and a very very good payment-to-income ratio. But I’m on IBR and have a lot of debt. Even with a down payment approaching 20% I couldn’t get prequalified for a mortgage–any mortgage-- at 3 different banks.</p>

[zaprowsdower]

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@cormy3

It is said that private loans may be lower-interest in the short term because of the state of the economy, but in the long-term they’re going to cost more overall once federal interest rate go up. Hence what I said, GradPlus either way.

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<p>They’re probably not going to rise to the point where they’re higher than what you’d be paying on GradPlus, unless you get a terrible rate to begin with because your credit is really bad. GradPlus loans probably only make sense if your credit is horrible or you’re counting on IBR after you graduate.</p>

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In my previous post(s) I just wanted to knock down the strawman that, with the safety and protection of IBR, you would necessarily be paying more in the long-run. That’s not true.

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<p>Well, it’s almost invariably going to be true if you’re on IBR and actually use it. </p>

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I meant in no case will you be worse off with IBR than without IBR.

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<p>Sure, and I think the point, and the answer to the question you initially posed, is that in no case will you end up with what could be called a positive outcome. If you need to use IBR, you will either end up repaying your loans for thousands more than you would have on a normal repayment schedule, and/or end up with a huge tax liability at the end, or not have a huge tax liability because you have few or no assets despite being at least 45. It’s not hard to understand why someone facing one of those scenarios would complain, even if defaulting would be worse. And again, private, non-GradPlus loans aren’t covered, and those account for most of the debt of recent grads.</p>