FIL is going for IBR & says it'll be forgiven even w/ $200k of income...

[lackofstache]

My FIL says that because his wife is a SAHW and brings in no income, she's eligible for IBR, which he thinks will also be forgiven after 20 years of paying on it. He said it's the William D Ford act, but I can't find anything with details on income, filing jointly, etc. They file jointly and have an income of over $200k. She has over $25k in student loans, but doesn't work. Is this a situation where someone could slip through by being a SAH spouse or is he mistaken?

[lbmustache]

Yes, you can be married but still pay IBR based on your own income (rather than both, even if you file taxes jointly) - which is what they are trying to do, except the income is zero and the payment is zero.

What is the current status of the loans? Did they defer the loans? Default?

My understanding is you do not qualify for forgiveness if you do not pay (unless you die or are disabled or something). You can default for a # of years but after a certain point you need to start paying. And whatever is left after 20/25 years will be forgiven and you'll pay tax on the remaining amount (basically gets added to taxable income).

[rubybeth]

Well, there are a few little things that I could nitpick that may be wrong in his thinking. If this person (the wife) has already obtained an IBR plan, based on their joint income on their taxes, then it sounds like yes, the remaining debt would be forgiven after 20 years. However, with that high of a joint income, I would imagine their IBR payments are pretty high and they are likely to just pay off $25k in 20 years. I don't think this really makes sense, they might as well just pay it off sooner to avoid paying as much interest.

You can read about repayment options here: https://studentaid.ed.gov/sa/repay-loans

And you can use the calculator here to estimate their payments (when I did it for an AGI of $150k assuming they are getting some tax breaks with a family of 4, they pay off the loan before any amount is forgiven): https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action#view-repayment-plans

[rubybeth]

Yes, you can be married but still pay IBR based on your own income (rather than both, even if you file taxes jointly) - which is what they are trying to do, except the income is zero and the payment is zero.

What is the current status of the loans? Did they defer the loans? Default?

My understanding is you do not qualify for forgiveness if you do not pay (unless you die or are disabled or something). You can default for a # of years but after a certain point you need to start paying. And whatever is left after 20/25 years will be forgiven and you'll pay tax on the remaining amount (basically gets added to taxable income).

I'm pretty sure you'd have to be married filing separately to do an IBR on just her income: http://www.finaid.org/loans/ibrfaq.phtml

[lackofstache]

Thanks for the replies.

To clarify, the IBR is based on her income, $0, not their joint income, but she will still be paying a small amount each month. The loans are not deferred or in default.

It'll be interesting to see how this works, as rubybeth pointed out, filing jointly seems to nullify individual income. I suppose getting a job in the future (doubtful) or even getting Social Security benefits will impact how much they pay over the next 20 years as well.

[lbmustache]

Yes, you can be married but still pay IBR based on your own income (rather than both, even if you file taxes jointly) - which is what they are trying to do, except the income is zero and the payment is zero.

What is the current status of the loans? Did they defer the loans? Default?

My understanding is you do not qualify for forgiveness if you do not pay (unless you die or are disabled or something). You can default for a # of years but after a certain point you need to start paying. And whatever is left after 20/25 years will be forgiven and you'll pay tax on the remaining amount (basically gets added to taxable income).

I'm pretty sure you'd have to be married filing separately to do an IBR on just her income: http://www.finaid.org/loans/ibrfaq.phtml

Oops, you are correct! You have to be filing separately. Sorry for that.

[nereo]

anyone have an ethical objection to this?

[rubybeth]

To clarify, the IBR is based on her income, $0, not their joint income, but she will still be paying a small amount each month. The loans are not deferred or in default.

How is that possible? If they are filing jointly, her IBR plan would be based on their joint income, not just her $0 income.

Feel free to ignore these nosy questions, but I have to ask: is this an older person who already has the work credits to be eligible for their own social security and not the spousal benefit? Did this person go back to school at an older age, and then decide not to use the degree for their career? It sounds kind of weird because I'm pretty sure FIL = father in law. Is this a second wife who is considerably younger?

[lackofstache]

Nereo: I have an ethical objection, but I was trying to make sure it wasn't also a legal objection...

Rubybeth: I don't think it's possible, I think he was misled, misheard or did something incorrectly. Older person, no real work credits, will be spousal benefit. Went to school for 10-12 years total, but no degree, no career. First wife, married for 30+ years. She raised the first three children and started school when they were going as well, then had a late surprise that is now 16. The others are 28,29,30.

[lackofstache]

Apparently what he's going for is the Direct Consolidation, which is actually ICR, not IBR. Not sure that that's a benefit in any way.

[justajane]

Several people on here are doing this exact thing. RootofGood comes to mind. You will find mixed opinions about it on here.

I have mixed feelings myself, but clearly it is allowed legally. In light of how little her loans are and how much they make, it seems pretty silly IMO. Just pay the damned 25K. He could have that sucker paid off in a few months. A year tops.

[rubybeth]

Apparently what he's going for is the Direct Consolidation, which is actually ICR, not IBR. Not sure that that's a benefit in any way.

Okay, thanks for answering my nosy questions, that makes more sense.

As for ICR, same deal, I plugged in a family of 3 (only the 16-year-old being a dependent on their taxes), with $150k AGI, married filing joint, and the ICR payment on $25k at 8% is $382 and it's paid off in 85 months (a bit over 7 years), no amount forgiven.

In the event that they aren't proving their joint income correctly, I am not sure what the implication would be, but I am guessing the IRS and the US Department of Education aren't exactly going to be happy... I guess it's their dumb butts, though, if that happens, and not really your problem.

[nereo]

Several people on here are doing this exact thing. RootofGood comes to mind. You will find mixed opinions about it on here.

I have mixed feelings myself, but clearly it is allowed legally. In light of how little her loans are and how much they make, it seems pretty silly IMO. Just pay the damned 25K. He could have that sucker paid off in a few months. A year tops.

ok thanks.  I'm not certain what I think about this (in other words, I too have mixed feelings).  Normally I encourage taking every tax deduction that you can, but here .... not sure.
Agree though that with that income and the size of these loans it's a bit silly to let them linger, legality or no.  I'd want to eliminate the risk.

[lackofstache]

Thanks all for the replies & information. I appreciate it.

Best,
lackofstache

[Psychstache]

I'm pretty sure that all of the income based repayment plans (REPAYE, PAYE, IBR, and ICR) require you to include your spouse's income when calculating payments unless you are MFS.

I haven't done the math, but with incomes of 200k and 0, I feel like they would pay well over 25k in extra taxes from MFS vs MFJ to make this a poor decision.

[teen persuasion]

What about the taxes on the forgiven balance?  As I understand it, if your small payments don't cover interest, the balance grows thru negative amortization.  When this large ending balance is forgiven, it is treated like income, and you owe tax on it.

[rubybeth]

What about the taxes on the forgiven balance?  As I understand it, if your small payments don't cover interest, the balance grows thru negative amortization.  When this large ending balance is forgiven, it is treated like income, and you owe tax on it.

Also true, unless you are having loans forgiven under a program that requires working in a particular type of job for a number of years in order to have the loans forgiven: http://www.finaid.org/loans/forgivenesstaxability.phtml