I graduated law school in 2010 with just under 200K in Fed PLUS loans…yes, $200,000. The job market was terrible during that time and i was unable to secure steady employment. I used deferments, financial hardships programs, and then eventually enrolled in IBR once I had some income coming in.  Because my income was so low and my loan balance so high, my payments were significantly less than the monthly interest accruing.  Like $1000 less. So my principal has grown and grown in the last few years. In essence, the loan is negatively amortizing.

Even though I have finally found a job I love that pays decently, I still cannot afford the regular monthly payments, so I remain in IBR. These payments are nowhere near high enough to start bringing down the principal, but they are all I can afford.  As you might have guessed, as the principal has grown, so has the monthly interest that accrues, making it more and more difficult to even pay the interest. Presently, my monthly payments are less that half of the monthly interest accruing. 

Now let’s assume I continue to make IBR payments for next 25 years of my life, the balance of my loans is going to be astronomically high…500K? more?!? And if the government still permits forgiveness of remaining balance at that time, any remaining balance is reported as taxable income, meaning my tax bill for that year is going to be HUGE, and the IRS is a different beast. 

Heather, my question is: how can I avoid/prevent this from happening? Is the only solution to make more money and be able to afford monthly payments that at least pay off interest? Is my situation hopeless? My concern is that the IRS is going to take my home or other possessions when I’m in my 50’s.  Can you recommend any group or agency I can consult with that might be able to advise me on this? Any input you can offer would be greatly appreciated, thank you.

I’d stay on IBR to keep your payments affordable so you do not go into default. You can always pay more than your IBR monthly amount should money start to roll in. The way IBR is set up now, the 25 year forgiveness is taxable income. If you are insolvent during the forgiveness, the tax blow could be significantly decreased. There has been much discussion of changing PAYE and IBR to be tax free after 25 years. Let’s hope they get this done, as I’m sure it’s going to hurt a lot of people.

The other option is to work as a lawyer in the public sector. You’ll make less money, but you could consolidate your PLUS loans into a consolidated loan, and apply for PSLF after 10 years. This forgiveness is tax free.

PSLF was my first best option, but those jobs were few and far between upon graduation as every agency was cutting back, and in the years following graduation, the jobs that opened up were fiercely competitive in California.  I applied to any and all federal jobs as well, east coast, west coast, wherever….no luck.  I was absolutely willing to work for less money for 10 years in exchange for forgiveness, but it hasn’t been an option for me sadly.

The tax repercussions of the forgiveness of the remaining loan balance is what is so disconcerting to me. After making payments for 25 years my payments will total an amount close to the original loan, but will still have 300K + in unpaid balance. Planning to be insolvent at age 55 is not exactly something i am comfortable with. By then I hope to have a house, kids in college, etc and a tax bill of 100K is downright terrifying.  And counting on a rule change that may or may not even happen provides little comfort. 

As to staying in IBR, I am not sure why that is a better choice than switching to REPAYE when it becomes available. I read through the federal register, and it appears to me that REPAYE is a much better option. Payments are 10% compared to 15% and of the unpaid interest each month, I only accrue 50% of it.  Someone on this blog posted that the 50% of the unpaid interest accrued it capitalized, but I didn’t see any indication of that on the federal register. Here’s what it reads:

“Proposed Regulations: Under proposed § 685.209(c)(2)(iv), in the REPAYE plan, accrued interest would be capitalized when the Secretary determines that a borrower does not have a PFH or at the time a borrower leaves the REPAYE plan. The amount of accrued interest capitalized when a borrower is determined to not have a PFH would be limited to 10 percent of the original principal balance at the time the borrower entered repayment under the REPAYE plan. After the amount of accrued interest reaches this limit, interest would continue to accrue but would not be capitalized while the borrower remains on the REPAYE plan.”

This is similar to IBR in that any accrued interest is not capitalized unless and until you leave the program, or no longer qualify for a partial financial hardship. Under REPAYE there is the added benefit that if you do leave the plan of no longer have a PFH, the total interest that is capitalized is limited to 10% of the original principal. 

Am i missing why it would be better to stay in IBR when REPAYE becomes available?

I hear ya… I went for my doctorate hoping for a professorship somewhere, and relying on PSLF with slightly over six figures of debt. Little did I know there are only about 10-15 open positions per year in my field scattered all over the country, which pay less than an auto-mechanic’s salary, and still get 100-200 applicants to compete with…Being an adjunct is awful, so I’m seriously thinking of working up the corporate ladder somewhere and just paying them off.

REPAYE might indeed be a better choice…I was just saying not to switch back to the standard payments to pay more per month, as some people think that’s a swell idea, and is completely unnecessary. It’s all going to depend on how REPAYE shapes up. I didn’t know about the 50% interest benefit… good to know. I did hear that you won’t be able to get away from reporting joint income if you are married, and that may be a pitfall if you are married filing separately under IBR so that only your income is considered…I wonder how the transition from IBR to REPAYE will be….will the time already passed under IBR be included in the 25 years for REPAYE, or will it reset? Hopefully they won’t mess up counting PSLF payments!

I agree, it seems like a better switch, but read every fine detail before doing so….I’m always leery of some hidden catch in the fine print. We shall see. Good luck!

Sen Merkley just introduced the Income-Based Repayment Debt Forgiveness Act, which would eliminate the tax at the end of the IBR/PAYE 25 year period. Let’s hope it passes!

I entered public service after law school and agree that the federal jobs are very competitive. If you are interested in government work, you may also want to look at State-level legal jobs (or local government), including judicial branches, which also qualify for PSLF.

I’m in a very similar situation, high balance/decent salary, but my total loan amount keeps going up - I have an IBR plan.
Would it be “best” for me to keep paying what I’m supposed to each month and put any extra money I have in a bank account for use 20 years down the road when the tax bill comes knocking?

I graduated from lawschool in 2009 with similar loan amounts. Simply perform a present value analysis of:

IBR payments (including expected salary increases) + expected tax bill from forgiven debt income

And

Rapid Repayment

Emabark on whichever

I’ve performed this analysis with many different variables (increased/decreased income, 50% top tax rates, different rates of return/discount rates, etc.) and if you are a few years into IBR with a negatively amortizing set of loans it almost always makes sense to remain in IBR making minimum payments and reducing discretionary income as much as possible (max 401k, use HSAs, transit benefits, capitalize a business with zero salary, etc).  I find it almost always works out to being pay 200k now or pay 200k @ the time of forgiveness.  Again, you should perform your own analysis with personal data points and a range of assumptions, but even a little understanding of present value goes a long way here.

Dear Heather,

I am in a similar situation to “lawyerloans” who asked at one point in the thread:

“Heather, my question is: ... Can you recommend any group or agency I can consult with that might be able to advise me on this?...”

However, unlike “lawyerloans” I graduated in 2014, and I am ALREADY in my 50’s—59 to be exact. I enrolled following a job layoff in 2009 after 10 years with Starbucks—the company I planned to work for until retirement. I worked part-time, then full-time while serving as stay-at-home-mom and community volunteer, and helped my ex spouse put both of our kids through college. They completed their undergrad degrees debt-free due to our efforts.

I am at that point when most folks are planning for retirement. I want to learn to manage the complex student loan arena. My $50K in student loans will be my ONLY debt once my divorce is final this spring (married 30 years). I hope to buy a small house. Maybe that’s not the best plan though considering my student loan debt.

With a low salary currently working in food service while I grow a small consulting business—under IBR, I currently qualify for zero $ per month in payments. I understand perfectly well how this affects my loans and that $200 in interest accrues each month, at least for now. I—like “lawyerloans”—want to find a group or agency to consult for financial advise. In preparation for post-divorce financial planning, I have interviewed 5 financial advisors to date, none of whom have a clue about managing student loans. I refuse to work with a financial advisor who knows less about student loan repayment than I do.

Heather, I understand you answer readers’ questions and that you are not OUR lawyer. Please tell us, as I’m sure many of your grateful readers would appreciate knowing whether there is a type of financial advisor that specializes in understanding how to best manage finances affected by student loan debt (including tax ramifications).

AND IN PARTICULAR, considering my age —maybe I’ll retire in my mid-70’s if I’m lucky—I need to find is a financial advising specialist and/or group that has broad expertise, encompassing student loans, taxes, AND retirement planning.

Thank you so much for all you do, Heather!

PS - In 2010 (my freshman year), I stumbled on your website & used it to write a term paper. I also created a brochure sponsored by Phi Theta Kappa to inform students about now to pay for college and manager student loan debt. My college provided every new student that year with a copy of the brochure.

Gratefully,

Anthea

lawyerloans - 21 August 2015 02:54 PM

Someone on this blog posted that the 50% of the unpaid interest accrued it capitalized, but I didn’t see any indication of that on the federal register.

I guess this is an old post now, but since your current accrued interest under IBR will be capitalized when you switch to REPAYE, the savings from the 50% discount of unpaid but accrued interest may not be as great as you think - depending on your current amount of uncapitalized interest, your overall rate could even go up.