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

[cormy3]

<p>This is an old thread that I feel obligated to follow up on. I did a little bit more research and this is what I found.</p>

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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.

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<p>Okay, but you can’t get a mortgage to finance your education. The Grad Plus loan and its interest rate will have to be swallowed with or without IBR. But fine, I admit I was exaggerating when I called it a sweet deal.</p>

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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.

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<p>Are you absolutely sure? Could I get some references? I’m curious. I tried to look this stuff up, but the information I found was very vague. While all said that lenders check the total debt to income ratio (sucks if you’re on IBR), sometimes they imply that all that matters is the payment to income ratio (great if you’re on IBR).</p>

<p>Furthermore I found this guy’s forum post which says all that matters is your FICO score and the payment to income ratio: [IBR</a> Question](<a href=“http://qfora.com/jdu/thread.php?threadId=14341]IBR”>http://qfora.com/jdu/thread.php?threadId=14341).</p>

<p>“When you apply for credit on IBR, your FICO score will be OK and then on top of that, as long as you can show that al your monthly payments (amounts of which are reported) total less than like a third of your gross income, you’re good to go.”</p>

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I don’t think anyone ever suggested otherwise so I’m not quite sure what you point here is.

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<p>Well, you’re the one implying this, and it makes all the difference! For instance:</p>

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• 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>

<ul>
<li>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. </li>
</ul>

<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.”

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<p>You are suggesting that Person B deciding to “use” IBR would pay the reduced minimum payment of $1237 per month. No, he would choose to exceed the minimum and pay the $1807 that he would have paid without IBR.</p>

<p>The only reason he would pay $1237 is if he weren’t simply using IBR: he can’t afford the original payment, and is therefore being saved by IBR.</p>

<p>Thus with IBR the trade-off is not between paying a smaller monthly balance and paying a higher total balance (at least not necessarily, anyways) but between paying a higher total balance and not being able to make your monthly payment (whatever this term is called).</p>

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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.

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<p>Are you serious?</p>

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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.

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<p>Well, the fine print is that forgiven debt is not counted as income to the extent that it made you insolvent. (I got this information from the link I posted above. I verified it myself.) So you will never “go bust.”</p>

<p>According to the guy in the link (since I’m new to this stuff), if you’re still owing a substantial amount after 20 years, your assets will be low and very little of the forgiven debt will be taxable.</p>

<p>If you’re forgiven a substantial amount AND you have substantial assets, well, I dunno, sell a car?</p>