Friday, September 4, 2009

Why I'm not excited about the new IBR Program

The Income Based Repayment program does not impress me. Recently, Sandra Baum from the College Board was asked to inform people of how financial aid has changed. I take issue with the fact that Baum says again that "borrowing for college is sensible." We'll get to that in a moment. First, let's discuss why IBR is unimpressive.

Realistic Scenario - John and Jane, a married couple with student loan debt. (See them above, sipping wine and adoring one another).

If a married couple both have debt, the spouse's income counts in determining the person's monthly payment, but the spouse's debt doesn't count.

So, John and Jane both have 100k in student loan debt. 

John makes 45k a year. Jane makes 35k a year. Yikes! (They really are being reckless in their spending - I mean, they're drinking red wine and their clothes look awfully smart. Those irresponsible borrowers!)

In any event . . .

In determining John's payment, his household income is calculated at 70k a year, but his student loan debt is only calculated at 100k, and the same goes for Jane. Therefore for each of them, their household is calculated at 70k in income, but their total debt burden is only seen as 100k. When it fact it's 200k. (Remember: John owes 100k and Jane owes 100k).    

Hmmm . . . should John and Jane, even though they're madly in love, divorce?

Here's an IBR calculator - have fun with that!

I filled it out. Here's what I was informed:

"Unfortunately, current IBR rules use your and your spouse’s combined income to determine what monthly payment you can afford, but do not consider the burden of your combined student debt. This results in higher payments for both borrowers, a type of double-counting that is unfair and inappropriate for your situation.
The US Department of Education has agreed to revisit this rule and factor in both spouses' debts when calculating one applicant's IBR payments, but that change would not go into effect until as late as July 2010. In the meantime, the current rules will apply. Please sign up for our mailing list so we can keep you updated on these and other changes. More information is available here."

Hmmm . . . I'm glad I got married, but this news is not good.

Let's talk (again) about Baum's claim that "borrowing from college is sensible." To be cont . . .


adirondackmoose said...


I agree with you. Some things are kind of fishy with IBR programs. Some of my loans were held by Sallie Mae. I had to fight and fight, and threaten with a call to to Ombudsman, but I was able to get that transferred over to Direct Loans. I had to do this to get on a IBR. Short story, I have a family of 8. I have 3 children of my own, and in 2001, I adopted 3 children, thinking that we could handle all our financial obligations in the process (under IBR). Never happened. Life changes. Rarely could I even give them what they wanted, and I sporadically pay what I can.

In any event. Is it realistic to think that anyone can make 25 years worth of qualified payments to actually get forgiveness? That's 15% of your monthly income for 25 years. And, the difference between the standard payment and actual payment is added to the principal, so the loan just grows indefinitely. Right now, the amount that is forgiven is taxable. The amount that will be forgiven at the end of 25 years of compounding interest will be HUGE.

This same principal applies to federal employees, except the period or repayment is 10 years, and the forgiven amount is not taxed. However, make 9 years and 11 months of payments, and get laid off or fired, the deal is off.

Some questions to ponder.... Why don't they hack of the interest, roll the loan back, and let us pay back what we borrowed? Why can't student loans fall under the consumer protections that every other loan in the universe falls under? I'd teach, work some public service job in return for repayment assistance, but some of the programs would require people living near poverty level for dozens of years, does that actually help? Doesn't ANY form of public service count? What about adoption?

Ok -- I'll stop ranting here.

Thanks for the article!!


MJR said...

WOW, Cryn, this is a good piece. There are a couple of married couples I will forward this article to.

When I first read about IBR, I got excited. I thought it would be a really helpful option, especially in this economy. I guess not.

C. Cryn Johannsen said...

Thanks, MJR.

Sorry to disappoint you and others though.

Anonymous said...

if you file seperately your spouse income is not considered

C. Cryn Johannsen said...

@ Anonymous - that's true, but most people file jointly to take advantage of the tax benefits.

Leni said...

This is a great article and darn it, I wish I would have read this before I sent my letter,darn it. I'll just have to ask you first.

me said...

IBR actually did help us, for now. I do agree that eliminating the interest and just paying what we borrowed seems quite reasonable.

C. Cryn Johannsen said...

That's good to hear. Thanks for sharing.

C. Cryn Johannsen said...

Quick question though - are you married? You're saying it helped the two of you out?

Anonymous said...

It might be good to see things from another perspective. My wife & I have a Spousal Consolidation Loan at 70k + I have a Direct Consolidation Loan at 60k. Payments would be around $900 per month total, between the two loans. With IBR, our total monthly payment is only $60. Not $60 each, just a flat $60. So, for some, there is no option which would even come close to the break we get with IBR. Sure, as we earn more income the monthly payment increases. But, remember they only take 15% of the amount above 150% of the poverty line for your family size, not just a flat 15% per month. If the Spousal loan was not held jointly, then the payment would be $120 per month right now. But, since we have the joint loan, it overcomes the double dipping issue, because they use the figures for whoever would have the lower payment due, based on the IBR formula, when it's a jointly held loan. It's complicated, but needless to say, I am very happy saving $840 per month right now & knowing the burden of student loans will only equate to 15% of the amount above 150% of the poverty line, which is easy to afford! To get near the $900 we would have been paying, we would need to earn near $100,000 per year. In other words, we keep 100% of the income that equates to 150% of the povery line for our family size, then we keep 85% of all dollars above that. That is a great deal!

Anonymous said...

December 18 Anon. Gee you sound like you got a really good deal going on. Here is my situation. All my student debt was incurred before bankruptcy was ripped away. While I had made payments in late 90's I had multiple bumps in the road of life, leaving me, for a while destitute, depressed, jobless. This was followed by periods of unemployment and underemployment. Bankruptcy and I could not afford a lawyer who could make an argument for hardship, much less afford to put on an adversarial case. After finally getting a little bit of a footing I remarried. But my non-US citizen wife and I signed prenuptials, hoping to isolate my debt from her. While we may be able to file separate tax returns that increases our tax liability. Further, no matter how you look at it, the IBR increases our monthly by 300 to 400, and thus with the 11,000 we have to pay for child care so she can work, my wife’s net income drops to a couple of hundred a week.

This leads to a disincentive to work and a disincentive to stay married to me. Neither speaks of family values.

BTW, the IBR which would be about 700 a month to 1200 a month only covers a part of the continually accumulating interest. So what happens in 25 years when I am suddenly hit with $500,000 in taxable income when I am 78?

Anonymous said...

Anony on Dec 18th. Sorry but I have to believe you are a fake blogger. You are so excited about limiting yourself to 1.5 times the poverty level, and talk about how wonderful it is to keep 85% of your earnings, essentially for the rest of your life, given your generally limited financial aspirations. Did you notice that you are also expected to pay taxes on that income, state, federal and local. So above the 1.5 times poverty level, you also get to pay 15 - 20% (conservatively - on 100% of that extra income since student loans are not tax deductible, for the most part) of that income in taxes. Now you only have 60 to maybe 70% to play with. Remember you are only getting to live 50% better than poverty level to start with and now your excess income is capped at 60/70% of whatever you make above that. Now granted if you luck out and can maybe double your salary, you can then pay the whole tab and begin to see your retained excess income increase, but how many years is that going to take you? Do you have the motivation to take on bigger and bigger job opportunities while essentially earning far less then your colleagues? Also, does not this put you at a serious disadvantage when competing with rich kids whose parents paid the whole education ticket? In this hard economy do not those same lucky kids get to offer their services at a lower wage because, after all, they do not have the extra student loan debt. Plus, with so much money in student loans pumped into the system, there are a lot more graduates, and thus employers can now offer much smaller salaries to you, so you can not really expect that kind of income growth. So you are buried financially, doomed to insolvency for the rest of your life. Yea, I call that a really good deal.

WI Will