Mike Kueber's Blog

December 15, 2012

Income-based repayment of student loans

Filed under: Issues,Law/justice,Politics — Mike Kueber @ 11:07 pm
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An article in today’s New York Times calls our attention to a hidden “tax time bomb” in one of the federal government’s most recent expansions of welfare into the middle class.   According to the article, student borrowers who have their loans forgiven after making income-based payments for either 10 or 25 years will be confronted by a tax bill from the IRS based on its characterization of the forgiveness as taxable income.  Clearly, something needs to be done to fix this inequity, the article suggests.  Or are crocodile tears in order.    

The Times article doesn’t do a good job of describing the essentials of income-based repayment, so I turned to my favorite stand-by, Wikipedia.  According to Wiki, the program limits the monthly repayment of federal student loans to 15% of discretionary income. (Under federal law, discretionary income is any income that exceeds 150% of the poverty line).  The payment period is 25 years unless the person works in a field like teaching or advocacy law, in which case the period is shortened to 10 years.  If the loan isn’t repaid by then, the balance is forgiven, but as imputed income. 

The last sentence in the Times article is particularly revealing – “After all, no matter how high the bill, there are severe penalties for not paying it right away. The Internal Revenue Service, alas, does not have an income-based repayment program.”  Ah, in a sea of fiscal irresponsibility, the IRS remains as a bulwark of old-fashioned ethics. 

Indeed, the principal example used in the story, 40-ish social worker Stephanie Day, declines to conform to the story’s narrative that there is an injustice here:

  • Ms. Day has run the numbers and can foresee a situation where the government will forgive more than $100,000 of her debt, given that her unpaid balance keeps growing thanks to the low payments. And while she expressed dismay that so few people were aware of the tax bill in their future, she does not necessarily mind paying it. “I think it’s perfectly fair,” she said. “I guess I’m old school.”

Call me old school, too.  As usual:

  1. The federal government is bailing out people who made unwise economic decisions.
  2. The bailout is exceedingly generous considering that federal government that is itself deep in debt.  Whoever concluded that an individual should not have to pay more than 15% of discretionary income was obviously not giving away their own money.  The rate should have been higher than 15% and discretionary income should begin at 100% of the poverty line.

I do agree, however, that forgiveness after 25 years is appropriate, especially since student loans are mostly exempt from bankruptcy.  And shifting the collection of a portion of that forgiveness to the cold-hearted IRS is a reasonable price for the forgiveness.

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