Student loan income % payoff

February 15, 2014 4:00 PM

(USA) I heard something about student loan payoffs based on a % of your income,and after 12 (?) years anything left is forgiven. Is this real and how would one get this?

School was finished ~3 years ago. Income went up, (4-5) loans got paid on, and now we might want to switch to a very low payment system since income is going down to sporadic/freelance/lucky levels. So how does this work, what are our needed qualifications, what limits are there, etc? Use small words since we don't really... finance maths/govtalk :)
Thanks!

posted by Jacen to Work & Money (5 answers total)

This is income based repayment.
posted by saeculorum at 4:05 PM on February 15, 2014 [1 favorite]

This is very easy. Go to the student loan government site and they'll determine which plan makes the most sense for you.
If you're in a public service job, you pay in for 10 years and the rest is forgiven. If this applies to you maybe be able to get credit for past payments.
posted by k8t at 4:09 PM on February 15, 2014

Not all student loans are eligible for public service loan forgiveness but it is a real thing. Loans are forgiven after 120 consecutive on time payments on a qualifying loan while you are fulltime at a qualifying employer (some forebearances do not interrupt the forgiveness period, but some do). The people at the government are EXTREMELY helpful in helping you determine if your loans and your employer qualify. Gather all your loan docs and call them.

There are both income based repayment plans, available to some borrowers for some loans, and income contingent repayment plans, available to some borrowers for some loans. There is also a pay as you earn plan, available for some loans and some borrowers.

Income-based repayment impacts forgiveness negatively most notably in reducing the amount of principal you pay oyver the life of the loan which increases the amount which is forgiven WHICH COUNTS INCOME FOR TAX PURPOSES the year it is forgiven. That's quite a tax hit.

Private student loans don't qualify for these programs, but you may be able to refinance existing loans into qualifying loans.

The folks at the government are very helpful. Call them.
posted by crush-onastick at 4:37 PM on February 15, 2014 [4 favorites]

Also, there are tax implications for income based repayment, especially if you are married and filing jointly, especially if you both have loans in repayment. Most tax preparers are not terribly conversant in these rules and I have never run across tax preparer software that was able to handle it effectively.

However, the calculators are the government website can help you figure out whether you should/can or should not/can not file income taxes jointly or separately (if you're married). How you file impacts your income for purposes of IBR, as well as how you can take the student loan interest deduction.
posted by crush-onastick at 4:43 PM on February 15, 2014 [1 favorite]

It's theoretically quite a tax hit. It only counts as income for tax purposes in SOME circumstances, and if you've been low enough income to not pay off your student loans over 20+ years, there's a fair chance that least part of the difference may not be taxable. You should be aware that it can come up, but people tend to phrase it in very absolute terms, whereas in reality, as someone who does tax prep, a large proportion of people who come in with forgiven debt are insolvent to some degree. But it's a matter of: this exists if you need it. If you acquire assets instead of paying off your student loans, you will pay tax on the forgiven amount, but that'll still be only a percentage.

See the IRS publication on the issue.
posted by Sequence at 5:09 PM on February 15, 2014 [4 favorites]