IBR Formula ‘Cracked’ on the Am Law Daily

It’s actually really easy, just required a trip to the Dept. of Health and Human Services’ Web site. However, I learned quite a bit in the process, especially how much income debtors need to avoid loan cancelation (answer: more than most law grads make). Check it out:

Income-Based Repayment: Lifeline for Law Graduates, Certain Loser for Government

One important mea culpa: Unpaid interest on IBR loans does not capitalize onto loan principal as I’ve stated elsewhere, so very few people will be paying hundreds of thousands of dollars in income tax 20 years into repayment, unless they borrowed, like, more than $500,000 and didn’t pay any of it back.

Another tidbit I learned is that a fraction of debtors might have lower monthly payments on a 25-year repayment plan than IBR, provided they don’t get laid off or suffer a wage loss.

Now, you must trip to this sugarlump.

6 Responses

  1. Matt
    Good work on your blog. Did you hear about the recent back and forth on curing law school tuition between the law school dean and the tax law professor? See http://www.abajournal.com/news/article/is_law_school_tuition_too_damn_high_dean_and_tax_prof_differ_on_solutions_t

    – Mo

    • Hey Mo. I did see that exchange and I read Caron’s article in the Pepperdine journal. What I found ironic is that UC-Hastings reduced its enrollment when UC-Irvine was just accredited. Sounds like a wash to me.

  2. I don’t think it will be lawyers who get IBR repealed. It will be doctors working at non-profits hospitals getting $250,000+ forgiven tax-free. A lot of medical students have figured out they can get their PSLF clock started in residency and then work 5-6 more years at a non-profit hospital to get the remainder of their debt discharged. It’s going to make for some great headlines in 10 years when this begins to happen.

  3. What happens to the interest that accrues each month under IBR? Typically, when you begin repayment, any interest that has accrued prior to repayment gets added to your principal. Under IBR, students can pay for years, possibly even a decade or more, without ever reducing the principal balance of the loan. This occurs when the student’s monthly IBR payment is less than the interest accrued each month on the principal. During the repayment period under IBR, the student’s balance will grow, and like you have pointed out, when the IBR loan is forgiven at 25 years, the balance will have ballooned. It’s nice that student’s won’t get hit with the principal balance plus any accrued interest for the purposes of getting stuck with an IRS bill. But I wonder what occurs if, 10-15 years post graduation, students begin to make enough money to start reducing the principal. Would students have to pay off the accrued interest before putting a dent in the principal?

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