Student Loan IBR Fail - Sallie Mae Edition

Here's how signing up for and cancelling an IBR application through Sallie Mae cost $5, but saves $2.84 per month:

My spouse has student loans that we have been paying been since 2005 (only $23,000 to go!). Shortly after getting married, I decided to go back to school to get my Master's which I just completed back in October. We got to put off repaying my loans six months from graduation in December to this June 2014. As we started to receive information about repaying my loans, I got a little bit excited and did a little research on some repayment options and we like the Income Based Repayment (IBR) plan. The calculators are very exciting and they illustrate how much you can save on your monthly payments. So I input the balance my wife has on her loans, and my balance ($63,000), and our dependent information, and it seemed like a manageable amount; my wife's payment would go down from $208.41 to about $80 according to this calculator and my payment would be $220, for a total of about $300 per month.

Keep in mind the standard repayment for my loans alone would be about $725 as calculated here.

Knowing that I will be in public service for at least the next 10 years, I feel pretty good about under paying the loan because the balance will be forgiven as part of the William D Ford Public Service Loan Forgiveness plan after 120 consecutive payments; so keeping my payments as low as possible is of the utmost importance.

Back in December, my wife and I filled out an IBR application through StudentLoans.gov which grabbed our information from the IRS and sent it to my wife's loan provider Sallie Mae. Maybe I needed to wait until we started repaying my loans in June before sending in an IBR application because here is what happened:

Sallie Mae finished processing our IBR application in February (almost two months after submitting the application). Sallie Mae did not offer a chance to approve or disapprove the terms of the IBR, but changed our payment from $208.41 to $263 and upped the interest rate 0.25%. Paying more for something that gives you zero extra utility is not the best financial practice.

So we called Sallie Mae so ask what's going on. After less than helpful information, they offered to postpone payments until May while they processed an income sensitive application which they emailed to us. That also would not work because postponing payments would eliminate the years of consecutive payments we had been making toward the balance.

We called today to restore payments on the account without the two month postponement and asked to have the payment amount reverted to $208.41. After the representatives first attempt, our $261 payments would be reinstated for this month. After explaining that was not what we wanted, the representative said that they could cancel the IBR application for $5. So I asked what the new payment amount would be and what our interest rate would be. The representative said our new payment would be $205.57 and our interest rate would be restored to the original interest rate. So it cost $5 to save $2.84 per month? Deal.

We'll have to wait and see what IBR will actually make our payments in June, but we will be laughing and taking our $3.52 net all the way to the bank.

What are your IBR experiences? I'd love to hear about them. Happy Saving!

Tax Time: Who's Earning Interest -- Uncle Sam or You?

It's  the worst part of the year if you are disorganized and another day in paradise for the anal retentive -- tax time. Do you file your own taxes or over pay a data entry clerk to do it for you? Do you like getting a big return or having more money in your paychecks throughout the year?

These are questions of preference, but if you like a big return Uncle Sam is earning interest on your money instead of you.

Here's the logic: let's say your allowances on your W4 are 1 for federal and 1 for state. You will notice you pay alot in taxes per check. If you increase your allowances, you will keep more of your check, but owe more on your taxes when you file.

 At the end of the day, it's a question of preference, would you rather get a check from the government after you file and the government earns money on the interest, or write one when you file and you keep the interest earned from that money.

For us, our tax situation doesn't change much year to year so we know what we will know; so we choose to keep as much of it as we can and get a small return or write a small check.

How do you like to file - expect a big return or keep most of it throughout the year and maybe write a small check?

You Can Major in Saving the World and Not Go Broke – Income Based Repayment

Most college graduates do not have the luxury of graduating debt free and were deterred from choosing jobs in teaching, public service, or non-profits due to taking on financially limiting student loan debt. When I chose to go to graduate school, I knew I would take on significant debt to get my Master’s, but I knew that I wasn't going to have to pay it all back!

In 2007, Congress created the William D. Ford Public Service Loan Forgiveness. The idea is that a graduate with federal student loans, who makes 120 consecutive payments, will have the remaining balance of their loans forgiven.

That might not seem like such a great deal since the standard repayment is 10 years or 120 payments. 

Whoop-de-doo.

Here’s the good part: There are programs where you repay your loans based on your income.

Why is that relevant?

You might not have to pay back everything you borrow(ed).

A teacher, public servant, or non-profit employee with a $30,000 salary with $30,000 in student loans would normally have to pay about $345 per month towards their loans (assuming 6.8% interest and repaying standard repayment) for 10 years.

Yikes!

That’s almost 14% of their gross income BEFORE taxes! That doesn't leave much for other expenses.

Thankfully our government stepped in to ease the burden.

Income Based Repayment (IBR), Pay As You Earn (PAYE), and Income Contingent Repayment (ICR) are programs designed to help students repay their loans without going broke.

IBR 15% Edition

With IBR, repayment terms are 15% of your adjusted gross income less 150% of the HHS poverty guideline based on family size.

Here's what you need to do:

Dig up your most recent tax return and find your AGI (Line 37 on a 1040 Form).

[(AGI – HHS 150%) x 15%] / 12 months= estimated monthly payment under IBR

For this example, let’s use $25,000 for AGI with a family size of 1 who does not live in Alaska or Hawaii.

Look up the HHS Poverty Guideline here: http://www.ibrinfo.org/poverty_level_2013.vp.html    

For this example, the HHS 150% of poverty guideline figure is $17,235 for 2013.

$25,000 - $17,235 = $7,765 

$7,765 x 15% = $1,164.75 Annual amount to pay towards loans

$1,164.75 / 12 = $97.06 is your new estimated monthly student loan payment.

This is a HUGE savings of $248 per month! (If your family is bigger than just one, add $6,030 to the HHS 150 for each additional family member and watch the savings grow!)

You could avoid paying back hundreds if not thousands of dollars as long as your AGI is near or equal to 150% of the HHS poverty guideline. This could be used by married couples who decide to file separately should it benefit them to pay less back in loans than the tax benefit of filing jointly.

Yes, more interest will accumulate to your loan balance which would result in paying more over time, but because your loan balance will be forgiven after 120 consecutive payments, you are looking at some significant savings over the next 10 years (as long as you work for a public, non-profit, or educational organization).

EVEN BETTER NEWS!

IBR gets better for new students and adults looking ahead into 2014. For new borrowers after July 1, 2014 the percentage of income decreases to 10%! In our above example, it would change the monthly payment to $777 per year or about $65 per month.

As long as the student loans are federal loans, and you meet the criteria, you can have the balance forgiven. If you can afford it, you might even take out a little extra to go on a vacation, put a down payment on a house, buy a car, etc. You can afford it!

Parents, if you want to help your kids pay for school or pay for all of their school, after they graduate, set up a separate checking account in their name and direct deposit whatever portion of the IBR you choose. Th

Stay tuned for other repayment programs such as PAYE and ICR, as well as ways to reduce your AGI to keep your loan payments low!

References:

http://www.whitehouse.gov/blog/2011/10/26/how-president-obama-helping-lower-monthly-student-loan-payments

http://www.law.gwu.edu/Admissions/financial_aid/Pages/PSLF.aspx

http://www.ibrinfo.org/poverty_level_2013.vp.html  

My First Post -

Welcome to the Glued Piggy Bank! Do you have student loans? Are you still going to be paying them off when your own children go to college? Do you know what your options for repayment are? Follow this blog for information on college and personal finance for yourself and your family.

I am brand new to blogging and I would love any feedback you can offer. Please feel free to post to the site or email me at thomaswrupp@gmail.com