Ex-Students With 'Income-Based' Loan Payments Face Crushing Tax Bill
So this showed up in my Facebook feed last night. Here is exactly what I posted about this article on Facebook:
"Stories like this are really irritating. SO sorry you have to pay back money you borrowed!
Oh wait, you AREN'T paying it back. You're knowingly paying way less than you should so you'll still have debt in 25 years and the government will take care of it for you... AND you're whining about it.
The government is going to forgive hundreds of thousands of dollars in debt that you knowingly incurred and in return you just have to pay taxes on it. Grow up!
I feel like I'm living in the Twilight Zone."
Strangely, all of my fellow millennial are silent on my post....
"Stories like this are really irritating. SO sorry you have to pay back money you borrowed!
Oh wait, you AREN'T paying it back. You're knowingly paying way less than you should so you'll still have debt in 25 years and the government will take care of it for you... AND you're whining about it.
The government is going to forgive hundreds of thousands of dollars in debt that you knowingly incurred and in return you just have to pay taxes on it. Grow up!
I feel like I'm living in the Twilight Zone."
Strangely, all of my fellow millennial are silent on my post....
IMHO if there's fault it's on the gov't side for lending $100k with no collateral and terms that allow negative amortization (i.e. paying less than the interest). I suppose they're doing it b/c they think it helps students. It's a bad business deal that a responsible bank would not enter, so the gov't will do it for the benefit of students. (I'm not endorsing the gov't's view, just saying what I think it is.)
If you go and max out a credit card at $20,000, and you decide you are simply not going to pay it, at some point, the credit card company my 1099 you the $20,000 and write it off as a bad debt/unrecoverable. That 1099 is misc income, so it is reported on your income taxes as misc income. It absolutely should be.
Any loan is the same thing, he got a $200,000 education that everyone else has to pay for, whether its cash or goods or services rendered, he still needs to be taxed for it if he received it.
The difference is a credit card can be discharged in a bankruptcy, but a student loan cannot. That is made very, very clear in the student loan disclosures that it is not qualified based on your income or ability to repay, that you need to know what you are borrowing and how you can repay it. Ultimately if it is indeed forgiven, it is income to him.
It's amazing to me how youngsters always think they are the first to the shaft & screws put to them. We've all been on that merry-go-round, get over it. There is no "right" to borrow money and not repay it. He didn't need to be a lawyer, a Caterpillar Diesel Mechanic starts at quite a bit more than $90,000 a year and they pay their apprentices to go to school. He could have done that, he could have went into the military if he isn't a fat-ass, he could have done many different things, but chose to borrow $200,000 at a high interest rate. It is what it is.
LOL. Millennials...
Ain't this fun?
He received $100,000 tax free when he took out the loan. He's not planning on paying enough to cover the 7.5% interest so the balance will grow. Suppose he took that $100k and invested it in something returning 12%. In 20 years, he'll have $1 million. If he makes the minimum payment, he'll owe $400k. If the lender forgives the $400k, that's a real xfer of wealth from the lender to him. The lender could have invested the $100k, but they didn't. They gave to to the borrower, and he only paid part of it back. If the rules allow him legally to pay the minimum payment and he knows something that returns > 7.5%, it's in his interest to pay the minimum and accept the tax hit of them forgiving the loan. They're giving him $400k, and all he has to pay is the taxes. It's a good deal for him.
(I keep thinking - is his name Saul GoodMan?)
Anyway... This is how I read this. You take out a loan. Normally when you take out a loan the payments are set up to cover the interest and part of the principal. So why is this guy's loan set up to where it's not even paying interest, let alone principal? This sounds like one of those Countrywide home loan scams that ran a number of years back - "Sure, pal, we'll loan you $500K to buy that house, it doesn't matter if you're making $7.50 an hour... It'll all work (wink wink). It's called an Interest Only loan, see how cheap the payments are?" And then when the note comes due, the former homeowner now not only has no roof over their head, but no credit. Wheee...
I do know paying for grad school ain't cheap. But if you can't afford it (or at least the terms of a REAL loan (not one of these joke loans) to pay for it) then maybe you should be doing something else. I hear Cinnabon is hiring...
Too much imaginary money, and not enough people making real money.
but then hey we elected them...and will do it again.
So borrow, beg, or steal. You have a right to live the way you want, even if someone else has to pay for it. Magic thinking.
The saddest part of this is he's planning on paying $575 for the next 22 years. In 20 years, $575 will be equivalent to paying around $300 and change. He's frickin lawyer! He earns $90k. He should find a way to pay $20k a year or so to the loans, so that he's at least going the right direction. If he gets involved with boards and brings in clients, he'll double his pay to $180k in five years. Then this debt is a lot less significant. Before 22 years, he can be a partner at a good firm or have started his own firm, and whatever's left of the debt will be just noise.
His arithmetic sounds right in that he's on track to get $400k in debt forgiveness in 2038. The more important thing than that, though, is that he not plod along for 22 years doing basically the same job barely able to pay the loans. I've seen immigrants with little formal education build that much wealth over decades though hard work. A CA lawyer should not plan for a static life of paying $575/mo. That's his real problem.
Easy answer, you don't need to go to Columbia or Yale if you can't afford it.
Why is he not paying it down?
Same reason why south american countries who took out loans from US banks didn't. The interest rates are unreasonably high compared to the cost of the money to the lenders.
The banks collected lots more in interest than the principle they loaned to the SA countries, and then they got the US taxpayers to cover the banks "loss" of the principle balance. that is on credit (the principle) that the banks created from nothing. No it wasn't the banks investment capital, it was created from nothing.
The same thing is being done again on the student loans. Banks are paying near zero interest to their depositors, and creating the student loans at no cost. Then they are charging the borrowers 8% interest and adding any shortfall of payments to the principle. That's why the loan principle is now $220,000 when it was $145,000 when it was borrowed in 2012. In the end, the "debt" is forgiven after the bank has received millions in interest, and the fedgov gets a payoff in income taxes. The article doesn't say if the bank forgives the loan, but my guess is that the taxpayer gets stuck with paying the bank for the "loss" that isn't a loss.
Yes, the students agreed to the contract. They are responsible for that action.
I guess it's true that even law students have trouble with math.
$200,000 really isn't a lot of money in California, let's put things in perspective, the average house is around $350,000 state-wide, in urban areas, closer to $425,000 or in Southern Cal closer to $600,000.
He's a lawyer, income can be unlimited, he just needs to get out and hustle some work.
I originally started in college with the understanding that my GI Bill would cover tuition and books, I quickly found that to be false. I worked a full time job all through college, used ALL of my GI Bill and still ran up substantial debts in the form of student loans. What did I get my degree in you might ask? Management Information Systems. I was told that there would be good paying jobs in that field. Sadly the best paying job I have been able to get paid 33K which is in no way sufficient to cover my bills and repay my student loans.
I had my loans in deferment expecting to get a promotion and then be able to make payments. About the time my deferments ran out I lost my job. Spent 2 years unemployed receiving harassing calls on a daily basis. Demanding that I make payments to the tune of approximately $1200 a month. When I finally gave up explaining to them that I was unemployed and actually ran the numbers with them. They told me that, "These numbers don't work." MY response was, "No Shit!" So then they said that I would still have to pay the $1200 a month and hung up on me. They have garnished my taxes and wages.
Yes I do have a job now and am making a better wage. As a school teacher. I am working towards correcting all the debt issues that I have due to being unemployed for 2 years and will be able to eventually consider repaying my student loans.
In hind sight I would have been better off not going to college and staying at the dead end job I had right out of the Army. Right now I would be making essentially the same wage that I am making as a teacher, never been out of work, I would be 6 months away from paying off the house that I lived in then and have no debt to speak of. Not to even mention the money that I would have in my retirement account both at that company and in separate savings.
Sorry but I have served my country, work my ass off and my only mistake was following the age old advice of trying to better myself.
But to rack up a student loan for anything other than a high-employability STEM, business or law degree course is asking for financial trouble in later life. If someone wants to explore French Renaissance History, let them do it, but they need to know it's gonna hurt when they find themselves stuck in some teaching, burger flipping or civil servant job
I served in the military, my education was basically free.
I have zero sympathy for these deadbeats... Considering I paid around $40,000 for my education, and I earn something north of 4 times that a year, I felt completely fine paying for it.
If you fail to do the market analysis on that $200,000 education that might make you a 'journalist' or whatever, and you simply can't pay the bill, its called failure & bankruptcy. Of course... they can't be discharged in bankruptcy either... so maybe running off to live in Europe or China ?