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

[rocketman08]

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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.

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<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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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.

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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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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.

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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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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.

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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>

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<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>
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<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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Oh and for non-public employees, starting in 2014 you need 20, not 25, years of payment before remaining loans and interest are forgiven.

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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>