I am intrigued by Income Based Repayment and trying to figure out how it stacks up as an actual aid to borrowers, or if it leaves people paying more in the long run.
Correct me if I'm wrong, but this is my understanding of how it works:
They take your loans and info about your income and personal circumstances. They run everything through a magic machine to determine what your monthly payments are. Every year, they dig through your earnings and adjust your payments accordingly. If your monthly payments are computed to be less than what you would pay on interest, the government picks up the difference for the first 3 years of repayment.
However, IF you start making too much money and your computed payments turn out to be more than what you would pay on standard repayment, then you make your payments at the standard repayment level.
If you work in public service and started paying your loans back in 2008, then the remainder of your loans are forgiven after making 10 years' worth of "qualifying payments" either at IBR level or at standard repayment level. No other repayment plan can be substituted as a qualifying payment.
If you work in a regular old job, then the balance of your loans is wiped clean after 25 years (if you meet all of their requirements).
Now, the latter one sounds like it would be difficult to actually achieve. I don't even want to know how much money someone is going to shell out in interest over the course of two decades. Barring that, let's say that at year 10 of repayment and you had a relatively small loan principal to begin with (about $100,000). And, because you came into the right financial circumstances, you are now paying what you would pay at standard repayment levels. Does that push up your repayment date? What I mean is, does the lender calculate your payments based upon the expectation that it will take you 30 years to repay your loan even if you are now paying more? Or, do they say, "based upon your monthly payments, you should have this loan paid off by year 20," which means that you'll never get to the magical 25 year mark?
I point out that it's usually better to pay things off sooner so that you aren't wasting money on unnecessary interest. However, if the latter is the case, I wonder how many people out there might have been motivated to pay extra every month just to get rid of their student loans and pay less in interest over the life of the loan instead of thinking that they'll get a big chunk of their debt wiped away.
Additionally, it seems like it would be very hard for for a borrower to be able to anticipate how this repayment plan will financially benefit the borrower the most.
If you owe $250,000 in student loan debt, and can see the writing on the wall that you will always have a $30,000 a year job and are never going to marry someone rich, it looks like more of a no-brainer that your loans might make it to the 25 year mark (even if it will make you cry how much money you spent on interest making it to that milestone).
As for public interest jobs, the question becomes slightly different. The quandary becomes this:
Would it be better to eat top ramen and pay off your loans in about 5-7 years, or should you just go ahead and ride the white lightening for the full 10 years?
Yes, I know the answer depends heavily upon how much you owe and the income you have over the next 10 years. But, once again, let's say that a person had a principal of less than $100,000, and they expected to make about $60,000 by the 4th year of their employment, is that person better off living in a shed and paying above the monthly amount? Or, should they just make the minimum payments on IBR for 10 years with the full expectation that they will always work in public service for that entire decade and wait to see what debt gets wiped away?
I know there are money gurus out there who could calculate this stuff faster than Rain Man, but they still can't calculate variables such as your promotional potential, whether you lose that job due to unforeseen circumstances, or if they give up on public service at year 7 of repayment, which would then presumably put them on the road to the "25 or die" track unless they go back to public service at some point in the future. Unless you owe a very large student loan debt, at which it is going to be hard to pay the full standard repayment amount regardless of what happens in your career, it seems like people who are right on the edge could end up paying more than what they had to should they make the wrong decision (whether it be to try to pay off the debt early or to do IBR for the full 10 years).
What do you think?