PSLF Proposed Cap of $57k - 2015 Budget

[Baller MD]

Has the government put out an accurate PAYE/IBR tax bomb calculator? Their documentation is so ******* ambiguous that after reading it over I'm more confused than before.

Seriously WTF

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[RangerBob]

The tax bomb should be fairly easy to calculate--it's just treated as extra income (according to the Dept of Ed). Hopefully that changes, but for now you can just add the predicted forgiven amount to your anticipated salary and enter that into paycheckcity.com as your yearly salary, which will tell you your state, federal (including FICA) taxes owed. It's probably a safe bet to say that you'll have to pay tax worth at least 33% of the forgiven amount (maybe up to 40%--it'll all be income entirely in one of the highest federal tax brackets), unless you take other steps to minimize your tax burden (so that some of that forgiven amount gets taxed at a lower rate).

And of course that's just federal tax brackets (which I believe doesn't include FICA taxes), so worst case scenario could be closer to 55-55%. But paycheckcity.com will calculate you all the taxes you owe, so it's quite handy.

Hopefully a lot of you can see why paying the minimum IBR payment and relying on forgiveness may be a terrible idea--if your loans are large enough, you could owe far more than if you just paid off the loan due to negative amortization (accumulating more interest than you pay off, so your loan actually grows). A smarter way to approach forgiveness may be to aim for forgiveness of some of your loan (ie, pay off 75%, and then get 25% forgiven and pay taxes on that)

Calculating what's actually the cheapest (assuming they don't cap IBR/PAYE forgiveness) by combining that tax bomb payment and monthly payments probably requires a bit excel finesse, but should be doable.

 

[SigmaFS]

The tax bomb should be fairly easy to calculate--it's just treated as extra income (according to the Dept of Ed). Hopefully that changes, but for now you can just add the predicted forgiven amount to your anticipated salary and enter that into paycheckcity.com as your yearly salary, which will tell you your state, federal (including FICA) taxes owed. It's probably a safe bet to say that you'll have to pay tax worth at least 33% of the forgiven amount (maybe up to 40%--it'll all be income entirely in one of the highest federal tax brackets), unless you take other steps to minimize your tax burden (so that some of that forgiven amount gets taxed at a lower rate).

And of course that's just federal tax brackets (which I believe doesn't include FICA taxes), so worst case scenario could be closer to 55-55%. But paycheckcity.com will calculate you all the taxes you owe, so it's quite handy.

Hopefully a lot of you can see why paying the minimum IBR payment and relying on forgiveness may be a terrible idea--if your loans are large enough, you could owe far more than if you just paid off the loan due to negative amortization (accumulating more interest than you pay off, so your loan actually grows). A smarter way to approach forgiveness may be to aim for forgiveness of some of your loan (ie, pay off 75%, and then get 25% forgiven and pay taxes on that)

Calculating what's actually the cheapest (assuming they don't cap IBR/PAYE forgiveness) by combining that tax bomb payment and monthly payments probably requires a bit excel finesse, but should be doable.

Yes, the tax bomb may be fairly easy to calculate, but it's highly unpredictable as it is primarily a function of AGI over 20 or 25 years (PAYE or IBR) and future tax rates. FICA tax shouldn't be considered as it is assessed on earned income.

 

[Red Beard]

Related (maybe mentioned somewhere in this thread)--

Its conceivable that you could be stuck in your public service job for a long while while waiting for forgiveness to come through after you hit the 120th payment.

The terms outlined in the correspondence I got from fedloan servicing:

WHEN CAN YOU APPLY FOR FORGIVENESS?
You may apply for loan forgiveness after you have made 120 on-time qualifying payments. You must be working for a qualifying
public service organization at the time you submit the application for forgiveness and at the time the remaining balance on your loan
is forgiven. A final determination of your eligibility for forgiveness will occur upon receipt of your application.
While applying for and receiving forgiveness, you must continue full-time employment with a qualifying public service organization
while making on-time qualifying payments under one of the approved repayment plans until you have received notice that you may
cease making payments on your Direct Loan(s).

 

[RangerBob]

[

Yes, the tax bomb may be fairly easy to calculate, but it's highly unpredictable as it is primarily a function of AGI over 20 or 25 years (PAYE or IBR) and future tax rates. FICA tax shouldn't be considered as it is assessed on earned income.

True--it's very hard to predict how our AGI will change over 20-25 years. And who knows what future tax rates will be--I'd argue they're likely to be higher (given our country's debt problem) and that the tax bomb would be worse, but who knows--maybe taxes will go down. Anyone's guess is as good as mine. Could go either way. It's a risk--personally I wouldn't want to make a risk on that much money, but it could certainly work out in my favor. But the issue is I'm also risking my family's money/future--and I'm not willing to do that when I know if I pay off most of the debt prior that we will have a good stable life and I can afford to send my kids to college, not lose my house to Uncle Sam, etc.

I think it's important to take some risk (a fundamental rule of investing), but not excessive risk (also a fundamental rule of investing). So I think a middle-of-the-road approach is always best.

As far as FICA--it's sort of a drop in the bucket compared to federal + state taxes. Well, not quite, but there'd still be a significant tax burden without some smart tax-tricks that year.

Related (maybe mentioned somewhere in this thread)--

Its conceivable that you could be stuck in your public service job for a long while while waiting for forgiveness to come through after you hit the 120th payment.

The terms outlined in the correspondence I got from fedloan servicing:

I always forget about this, and it's actually a pretty important thing for us to keep in mind. Maybe all your servicer does is verify you made 120 eligible payments, which could be very quick if you've been updating them each year. But maybe the IRS gets involved and combs through tax records, verifies payments the were made, and verifies that you reported your income accurately for IBR payment calculations, etc. Who knows how long that could take. It took 4 months just for my servicer to sort out a mistake in the calculation of my interest rate for my consolidation loan, which was a simple matter of high-school level math. I can't imagine getting >$100K forgiven by the government would be a quick process.

 

[SigmaFS]

Yes, I expect future tax rates to move up given our $18T debt, annual deficit spending (albeit smaller) and predicted insolvency in Medicare and Social Security. But, PAYE (and I think the focus should be on PAYE as it will be available to all direct loans effective Dec 2015) is a viable and cost competitive repayment option.

Just for discussion purposes, let's assume the following:

• Principal balance at repayment = $400k
• Interest Rate = 7%
• Repayment Year 1 AGI = $100K
  • Thereafter, annual AGI increase of 6% with Year 20 AGI = $302,506

Given these assumptions, your 10-year standard repayment is:

• $4,644.34/month
• Total cost over 10 years = $557,321

Pay As You Earn Data Points (Up to a 20 year repayment term & no more than 10% of AGI annually):

• Year 1 = $688/month (w/AGI = $100K and 1 in family)
• Year 20 = $2,375/month (w/AGI = $303K and 1 in family)
• Total Payments = $332,846 (at this point, it's $224,475 less than the 10-year)
• Estimated amount forgiven = $627,154
• Estimated tax liability (assumed 50% effective tax rate) = $313,557

With these assumptions, the total cost of PAYE is $646,403 (total payments = $332,846 + estimated tax liability = $313,557), approximately $89k more than the 10 year plan, but with an additional 10 years. I would argue that this isn't the true cost as the estimated tax liability is 20 years in the future - time value of money. More importantly, I feel, is opportunity cost - what financial opportunities are delaying/avoiding with the 10-year standard repayment option?

 

[DrMidlife]

Thank you for that breakdown. I have no right to ask this, but would you be willing to run the numbers with a) IBR and b) IBR/PAYE repayment that starts during residency with AGI $50k?

 

[SigmaFS]

Thank you for that breakdown. I have no right to ask this, but would you be willing to run the numbers with a) IBR and b) IBR/PAYE repayment that starts during residency with AGI $50k?

More than willing, but can you fill in some of the income gaps? Start off at $50k, then... Please feel free to provide year by year amounts, or annual % increases, or any schedule you prefer.

 

[DrMidlife]

After a rapid fire survey of 2 FM programs (Ventura, Lancaster PA), one IM program (Ohio State), and one gen surg (Baylor) with deference to lots of people doing 2 year post-IM fellowship, and total disregard for those who will do enough additional training to make utter boatloads of money, how about run a 3 year and a 5 year like this:
PGY1 48,000
PGY2 50,000
PGY3 52,000
PGY4 54,000
PGY5 56,000

Point being to do a low/medium for the majority. Yeah?

 

[SigmaFS]

Disclosure: I am a tax advisor.

I'm confused at to AGI after PGY5, but I'll assume Year 6 AGI = $150k with 6% annual increases. Here's a screen shoot of the spreadsheet:

Pay As You Earn:

• Total payments = $340,130
• Estimated amount forgiven = $619,870
• Estimated Tax Liability = $309,935

Income Base Repayment (IBR):

• Total IBR payments = $802,045
• Estimated amount forgiven = $396,343
• Estimated tax liability = $198,171

 

[DrMidlife]

well that's about the most helpful thing I've seen happen in a long long time. thank you!

 

[RangerBob]

My understanding was the new PAYE (I think it rolls out next December, right?), while capping your payment at 10% of AGI like the current PAYE, didn't offer forgiveness until 25 years.

 

[SigmaFS]

well that's about the most helpful thing I've seen happen in a long long time. thank you!

You're welcome and Happy Holidays!

 

[SigmaFS]

My understanding was the new PAYE (I think it rolls out next December, right?), while capping your payment at 10% of AGI like the current PAYE, didn't offer forgiveness until 25 years.

It's in the process of negotiated rulemaking, which is expected to be completed July/Aug 2015. Currently, it's anticipated to be 10% and 20 years, but it is subject to change.

 

[Yellow mellow]

It's in the process of negotiated rulemaking, which is expected to be completed July/Aug 2015. Currently, it's anticipated to be 10% and 20 years, but it is subject to change.

I'm currently doing ibr but would want to switch to Paye. The only thing is I've heard that if I switched , I would not be able to have my loans forgiven after ten years even if I worked at a non profit hospital . So basically I would have to remain with my current ibr to qualify after ten years. Is this true?

 

[DrMidlife]

I'm currently doing ibr but would want to switch to Paye. The only thing is I've heard that if I switched , I would not be able to have my loans forgiven after ten years even if I worked at a non profit hospital . So basically I would have to remain with my current ibr to qualify after ten years. Is this true?

Please take the time to read about the basics of these repayment programs from the official source:
https://studentaid.ed.gov/repay-loans/understand/plans/
https://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service

Neither IBR nor PAYE forgive after 10 years. PSLF forgives after 10 years, if you qualify and if it's still around.

I'll leave it as an exercise for you to see whether PAYE qualifies for PSLF. Took me 5 seconds. Please take the time.

 

[Yellow mellow]

I

Please take the time to read about the basics of these repayment programs from the official source:
https://studentaid.ed.gov/repay-loans/understand/plans/
https://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service

Neither IBR nor PAYE forgive after 10 years. PSLF forgives after 10 years, if you qualify and if it's still around.

I'll leave it as an exercise for you to see whether PAYE qualifies for PSLF. Took me 5 seconds. Please take the time.

I was probably not clear in my question. I am currently doing ibr at a non-profit institution. I wanted to switch to paye next year once it becomes available. The only thing is I remember being told that if I switched to paye, I will not qualify for pslf. Now is this true or too soon to know for sure since the new paye for all will not be implemented until 12/2015?

 

[DrMidlife]

https://studentaid.ed.gov/sites/default/files/public-service-loan-forgiveness-common-questions.pdf

Bolded mine.

Public Service Loan Forgiveness—Qualifying Repayment Plans
Q21
What Direct Loan Program repayment plans qualify under the PSLF Program?
A21
The 120 required qualifying payments must be made under one or more of the following Direct Loan Program repayment plans:
• The IBR Plan
• The Pay As You Earn Repayment Plan
• The ICR Plan
• The 10-Year Standard Repayment Plan (see Q22 and Q24)
• Any other Direct Loan repayment plan, but only payments that are at least equal to the monthly payment amount you would be required to pay under the 10-Year Standard Repayment Plan may be counted toward the 120 qualifying payments for PSLF

 

[DrMidlife]

Probably a good time to remind folks that PSLF isn't a sure thing.

 

[SigmaFS]

Probably a good time to remind folks that PSLF isn't a sure thing.

Yes, one proposal is cap the PSLF non-taxable forgiveness @ $57,000, which is the maximum an undergrad can borrow in Direct Stafford. I believe the 1st cohort eligible for PSFL is 2017.

 

[SigmaFS]

Yes, one proposal is cap the PSLF non-taxable forgiveness @ $57,000, which is the maximum an undergrad can borrow in Direct Stafford. I believe the 1st cohort eligible for PSFL is 2017.

Oops. ..I guess it would help to read the title of the thread..

 

[RangerBob]

Yes, one proposal is cap the PSLF non-taxable forgiveness @ $57,000, which is the maximum an undergrad can borrow in Direct Stafford. I believe the 1st cohort eligible for PSFL is 2017.

I believe for the time being that proposal is dead, which is why Obama made the executive decision to expand PAYE. But that PSLF limit was proposed by Obama, a democrat (who are typically friendlier to students) so the odds of some limitation seems pretty likely to me if it's already being thought this far before anyone can even benefit from the program. It'll be interesting to see if people that have started having their payments logged/tracked are considered "grandfathered" or not (or if the changes are just made prospectively).

As far as I know, there's nothing in our MPN about PSLF, so I don't think any people currently "in" the program (you're technically not in it until you've made that 120 payments and applied for forgiveness) have much of a legal standing to challenge any changes to the program.

 

[sazerac]

Any changes to PSLF will only affect people who take out loans after the changes are implemented. I say this with confidence because PSLF is a law passed by lawyers, and far too many current Georgetown-trained DC lawyers and lobbyists are depending on this program to pay off their law school loans. They would never vote themselves out of a pile of cash.

 

[SigmaFS]

I believe for the time being that proposal is dead, which is why Obama made the executive decision to expand PAYE. But that PSLF limit was proposed by Obama, a democrat (who are typically friendlier to students) so the odds of some limitation seems pretty likely to me if it's already being thought this far before anyone can even benefit from the program. It'll be interesting to see if people that have started having their payments logged/tracked are considered "grandfathered" or not (or if the changes are just made prospectively).

As far as I know, there's nothing in our MPN about PSLF, so I don't think any people currently "in" the program (you're technically not in it until you've made that 120 payments and applied for forgiveness) have much of a legal standing to challenge any changes to the program.

Here's the language in the current MPN:

Public Service Loan Forgiveness
A Public Service Loan Forgiveness program is also available. Under this program, we will forgive the remaining balance due on your eligible Direct Loan Program loans after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed full-time in certain public service jobs. The required 120 payments do not have to be consecutive.

Also, the language re: PAYE forgiveness:

Under the Pay As You Earn Plan, if your loan is not repaid in full after you have made the equivalent of 20 years of qualifying monthly payments and at least 20 years have elapsed, any remaining loan amount will be forgiven. You may have to pay federal income tax on the loan amount that is forgiven.

Here's the link to the MPN: http://www.direct.ed.gov/pubs/dlmpn.pdf

• PSLF - page 9
• PAYE - page 7

 

[SigmaFS]

I believe for the time being that proposal is dead, which is why Obama made the executive decision to expand PAYE. But that PSLF limit was proposed by Obama, a democrat (who are typically friendlier to students) so the odds of some limitation seems pretty likely to me if it's already being thought this far before anyone can even benefit from the program. It'll be interesting to see if people that have started having their payments logged/tracked are considered "grandfathered" or not (or if the changes are just made prospectively).

 

[SigmaFS]

Yes, RangerBob, I believe you're right about the proposal. I haven't found anything in the House & Senate passed 2015 budget (awaiting the president's signature) limiting PSLF non-taxable forgiveness.

 

[RangerBob]

Here's the language in the current MPN:

Public Service Loan Forgiveness
A Public Service Loan Forgiveness program is also available. Under this program, we will forgive the remaining balance due on your eligible Direct Loan Program loans after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed full-time in certain public service jobs. The required 120 payments do not have to be consecutive.

Also, the language re: PAYE forgiveness:

Under the Pay As You Earn Plan, if your loan is not repaid in full after you have made the equivalent of 20 years of qualifying monthly payments and at least 20 years have elapsed, any remaining loan amount will be forgiven. You may have to pay federal income tax on the loan amount that is forgiven.

Here's the link to the MPN: http://www.direct.ed.gov/pubs/dlmpn.pdf

• PSLF - page 9
• PAYE - page 7

Interesting--I didn't think anything about PSLF was in any of my MPNs. I went back and looked and here's what mine read (from my 2012 MPN):

"A public service loan forgiveness program is also available. Under this program, the remaining balance due on your eligible Direct Loan Program loans may be cancelled after you have made 120 payments on those loans (after October 2, 2007) under certain repayment plans while you are employed in certain public service jobs."

I'm not sure if the slightly different wording will end up mattering or not, but I'd sure prefer my MPN said "will" instead of "may". And while I agree with Sazerac that lawyers are going to be up in arms if PSLF disappears, I think what could be far more critical to the program is what the general population thinks about what are generally high-paying professions (most people think lawyers make a lot of money) getting a lot of debt forgiven on the taxpayer dime. It just seems like something that will push Congressmen/women into a tight spot.

 

[Postictal Raiden]

Interesting--I didn't think anything about PSLF was in any of my MPNs. I went back and looked and here's what mine read (from my 2012 MPN):

"A public service loan forgiveness program is also available. Under this program, the remaining balance due on your eligible Direct Loan Program loans may be cancelled after you have made 120 payments on those loans (after October 2, 2007) under certain repayment plans while you are employed in certain public service jobs."

I'm not sure if the slightly different wording will end up mattering or not, but I'd sure prefer my MPN said "will" instead of "may". And while I agree with Sazerac that lawyers are going to be up in arms if PSLF disappears, I think what could be far more critical to the program is what the general population thinks about what are generally high-paying professions (most people think lawyers make a lot of money) getting a lot of debt forgiven on the taxpayer dime. It just seems like something that will push Congressmen/women into a tight spot.

Yup, my MPN shows this too.

 

[a runner]

Re: the FICA debate

Most of FICA is not assessed on taxes past the first $110k or so, so that wouldn't even apply (I think only ~1.45% for something like Medicare still applies and there might be an added small tax past $250k or $450k that Obama recently added)

 

[a runner]

may (auxiliary verb): used to express opportunity or permission:

You may enter.

This is typically how "may" is used in legal documents, to grant permission, at the grantee's discretion.

When used to express contingency or possibility, the terms of that contingency follow the use of the word. In this case, it is clear "may" is being used in its typical legal fashion which is to grant permission. The previous sentence confirms this interpretation because it unequivocally states that PSLF "is" available to the borrower. The "contingency" is that 120 qualifying payments must be made.

 

[Baller MD]

So did this cap actually go through? Does anyone know?

 

[IlDestriero]

If it didn't yet, rest assured that there will be a cap, or income phase out, etc. and the taxman will still come knocking for whatever does get erased. The country gets more indebted every second of the day and when the belt tightening begins, the highest income earners will be first in the firing line, well behind the real wealthy 0.1% crowd.

 

[salsasunrise123]

Couple of things. First, I want to commend the posters on this thread who have presented the opinions of experts in the field of fiscal education budgetary policy and financial aid experts such as from the people at the New America Foundation who helped craft Obama's proposals. These are the people we should be listening to. We should not be listening to the cookie-cutter pre-meds/med students/docs who are not well versed in matters of government, legislation, politics, and most of all the law. Claims suggesting that because of this country's deficit the government, PSLF will be taken away are irrelevent. Loan forgiveness under PSLF is a drop in the bucket compared to the trillions of dollars we owe. And let's not forget that we are facing a huge physician shortage that will reach a peak shortly after the 1st cohort will be eligible for forgiveness in 2017. PSLF is a great incentive for students to enter primary care instead the higher paying sub-specialties. The government does, in fact, have an incentive to keep forgiveness around in a form the benefits doctors. And for those who say that the government/voters will not let government forgive a neurosurgeons $400k student loan balance, you are using a extreme case to support your case, which is a textbook logical fallacy and pretty weak way to support your argument. However, I do agree that PSLF should not continue in its current form because it opens flood gates for school to drive up tuituion costs. But, it should not be retroactively changed for current borrowers for both the political and legal reasons discussed in this thread. Moreover, I feel that people on this thread overexaggerate the number of people who will be eligible for forgiveness. Not as many people know about this program as you would think and even fewer have probably taken steps to ensure they meet all the criteria.