The Ugly Facts
Here’s the scoop:
As it’s currently set up, income-based student loan forgiveness is, to be frank, a ruse (see also: sham, hoax, jig, and shenanigans). Contrary to all common sense, it will not save most borrowers from crushing debt.
To clarify, I am not referring to the narrowly applicable Public Service Loan Forgiveness (PSLF) program, which does legitimately seem to conform to the average human’s sense of what “loan forgiveness” would entail… although it is also not without its problems.
No, I am referring to the more common income-driven repayment plans available to most federal loan recipients, which include such interchangeable alphabet soups as:
- REPAYE (Revised Pay As You earn)
- PAYE (Pay As You Earn)
- IBR (Income-Based Repayment)
- ICR (Income-Contingent Repayment)
All four of these plans have the power to make monthly loan payments more affordable because they usually tie the minimum payment to a percentage of your income. If you were to lose your job, for example, your monthly payments would be reduced to zero, provided you filed the proper paperwork and proof annually. I experienced this phenomenon first-hand when I dropped out of law school and could not find gainful employment. Apparently, half a JD doesn’t translate into earning potential. Who knew?
At any rate, the idea is that if you dutifully make payments every month for somewhere between 20 and 25 years, your loans will be forgiven. Mmmmmm-hmmmmmm.
The Philosophy Of It All
In theory, student loan forgiveness makes sense.
When you sign your life away to an institute of higher education, the idea is not so much that you are throwing away your future, ahem, but that you are making an “investment.” You are investing an ungodly amount of money in the hopes that your ROI will be good enough to justify the cost. Essentially, you are betting that your earning potential post-degree will make it all worthwhile, and that the math will work out… somehow.
Student loan forgiveness is designed to lessen the burden if the investment turns out poorly. Many industries have “outs” like this for investors, limiting liability if things go wrong. A fantastic example is the concept of limited liability in corporate ‘Murica. If a company has limited liability, then it is the company (and only the company) that gets sued — NOT its shareholders. They can’t come for your personal fortunes just because you bought into a foolish enterprise, hence the risk of your bet is mitigated.
The whole point is that if it should have been a good investment but didn’t run out that way, you aren’t penalized horribly because of your generally-assumed-to-be wise choice. The idea behind student loan forgiveness is that things didn’t work out the way anyone expected, but you should still feel like getting a degree was a good choice.
This begs the question, of course, of how universities have managed to successfully peddle the idea that paying 50k a year for 3 or 4 years translates into a “good choice.”
But I’ll save that rant for another day.
As I was saying, at the end of your 20–25 years, if you follow all the rules and meticulously file all the paperwork without fail, if you STILL have a loan balance after that time, it shall be FORGIVEN!!!!
The Ugly Truth
First off, even if you succeed in making it through the 20–25 years, it will still mean that for all those years you somehow managed to faithfully submit the annual paperwork required by the 4 income-driven payment plans mentioned above.
This means that during the course of your loan repayment, you will have had time to:
- Get pregnant.
- Have the baby.
- Raise the baby.
- Take the baby through elementary, middle, and high school.
- See the baby transform into a rebellious teenager.
- Drop the rebellious teenager off at college.
- See the rebellious teenager transform into a rebellious collegiate.
- Allow the rebellious collegiate to boomerang back home post-graduation.
And the kicker is, you’ll probably still be paying off that loan.
By this point, you’ve already paid your blood money in the form of somewhere between 240 and 300 monthly payments, which is a huge barrier to overcome. And then the worst thing ever happens.
The Worst Thing Ever Happens
It turns out that somewhere along the way, Congress neglected to close the loophole that states that IBR-forgiven student loans count as taxable income.
Did you catch that? It’s pretty crazy and makes zero sense, so I’ll repeat it for good measure:
IBR-forgiven student loans are taxed as income.
When I was considering whether to throw everything I had at my loans or simply pay the minimum for another 20 years, I had to calculate what those two options would look like. In my case, if I had paid only the minimum $750/month for another 20 years, a grand total of $150,000 would have been forgiven. I was balancing the monthly needs of cash flow, short-term savings, and retirement funds against what I would save on my loans if I paid them off aggressively. This means that if my estimated $150k was forgiven, and I assumed that I would be paying 33% in income tax 20 years down the road, I would owe a massive balloon payment of $47,000 to the IRS in taxes for that year.
$47,000. Due immediately. And this would be in addition to any other taxes I owed, too, for my real income.
With each calculation, I could see the savings and benefits of income-based repayment slowly disappearing into the ether. What was intended as a program for debt relief was becoming an even greater financial burden.
But imagine for a moment if I wasn’t able to make my $750/month at all, which barely paid down the interest accumulating each month. What if, due to my economic circumstances, I wasn’t able to pay anything at all. The total loan amount would rise each month, and then even more money would be forgiven at the end of 20 years. I would then owe an even larger balloon payment to the IRS, and would be even less financially capable of paying it. My situation was bad, but it could easily have been worse — and it is, for far too many students.
The Reality We Live In
So, here’s the real question: how many students and graduates know that as of now, their IBR-forgiven loans are counted as taxable income?
Even if they hear the phrase, how many actually know what it looks like to receive a bill for that much money, due immediately?
Even if you are that rare breed of tax-savvy 19-year-old ready to take on the world, how are you able to plan that far ahead? Realistically, what guarantees do any of us have financially 20 years down the road, at any age?
This system is bogus. I call shenanigans of the highest degree. And of course, we as a nation have not yet had to bear the collective burden of these tax balloon payments yet, because these loans will not be eligible for “forgiveness” for another 10 years or so. When the time comes, the country is going to be in for a big surprise.
Some Hopeful Signs… but Don’t Hold Your Breath
Shockingly, two forward-thinking Congresspeople have taken this into account. Back in July 2014, U.S. Representatives Mark Pocan and Frederica Wilson introduced a bill called the Relief for Underwater Student Borrowers Act. It’s designed to close this very loophole, so that forgiven loans are not absurdly taxed as income. It is also aptly named.
Guess what’s been done with it since it was introduced?
Tick-tock, Congress. Tick-tock.
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