The Truth About Income-Based Repayment

I recently took a few days from posting to apply for student loan consolidation. One of the the more interesting repayment options I came across was IBR, or Income-Based Repayment.

Since July 1 of this year, IBR makes repaying staggering college loans more manageable by scaling monthly payments to yearly income, while factoring in martial status, dependents, and state of residence. According to the their website, those with a total debt greater than a year's earnings probably qualify for IBR.

This is different from its 1994 sister plan, Income Contingent Repayment (ICR), in that the formula for monthly payments is capped at 15% of income. Under IBR, some people may not even have to make monthly payments if they're not earning enough money (see video below).

There are a few problems with this. While forgoing payments might seem like a godsend to those who are struggling with bills, I wonder just how much interest will be accruing after a few months of nonpayment?

This may not be an issue if there wasn't a problem with another aspect of both IBR and ICR. Both repayment plans advertise "Loan Forgiveness" after 25 years of regular payments. Sounds great, right? Sure, if you overlook the fact that any remaining debt is filed on your tax return as taxable income.

If the point of this government program is really to subdue the financial burden of pinched graduates, why make them pay taxes on what could be a huge sum of money after giving them the possibility to pay nothing each month, effectively extending the life and total amount of their loan?

And what if that taxable income boosts someone to the next tax bracket, suddenly requiring a higher tax percentage on that year's income? So much for making life easier for college grads.

My issue is not so much with the tax itself as it is with false advertisement. If taxing the remaining total makes the program work, fine. But don't call it "Loan Forgiveness" if graduates are slapped with yet another financial burden at the end of 25 years. Don't advertise that IBR is out to save people money when it's just out to make money. That's not the way to get people to believe in government again.

In short, just like any business, IBR has the potential to screw you over if you're not careful. Ignorance of loans, in general; and the repayment plan, in particular, can be disastrous. Granted, someone opting into a plan they know nothing about has only their self to blame. But this is not the best example of an honest, upfront government alternative to "business as usual."

To its credit, IBR's info site does include the fact that remaining amounts are taxed in its FAQ (so technically, they're not completely hiding it), and just recently announced on its main page that legislation is being put forth to ensure that any "forgiven" debt is not taxed. Also, as it currently stands, working a public service job will relieve all debt after 10 years without it counting as taxable income.

You be the judge. Watch the video for yourself: