Tax ☠

Now that you mention it, there does seem to be a hole in this plan:
These plans allow borrowers to reduce monthly payments to just 10% of discretionary income. The loans can then be forgiven after ten years if borrowers work in government or for a non-profit—basically any job as long as it doesn't involve a profit-seeking business.

...So the government is spending taxpayer dollars to encourage young people to avoid repaying loans to taxpayers, while at the same time encouraging these young people to work for outfits that don't pay taxes.
Well, and places that don't generate profits! It's a huge incentive, too, since it cuts the time you have to pay by ten full years.

However, there is one big drawback to opting into these plans. When you reach the point at which the rest of the loan is forgiven, you have to pay taxes on that as income that year. So, let's say you owed $100,000 in student loans at 3.4% as a grad student entering the workforce. You go to work at a non-profit, earning $40,000 a year -- that will seem like a huge increase in your standard of living after the hardships of grad school. You're married, and your spouse and child stay at home. According to the calculator the Federal Student Loan people provide, IBR will result in your monthly payments dropping from nearly a thousand dollars a month to perhaps as low as $124 a month. The estimate is that you'll be forgiven more than $63,000 of your loans.

(This isn't the best plan for you! The "Pay as You Earn" plan saves you $117,980 over the ten years -- almost the full amount of your loans.)

Sounds great, until you reach the end of the plan and suddenly have a tax bill not on the $27,000 or so that is your gross income minus your standard deduction, but on a $90,000 "income" of which you actually received only $27,000. The IRS withholding calculator suggests that you'll owe $11,000+ in taxes that year.

Still a win, since it saves you over fifty grand for the life of the loan. But there's a big hit you take all at once at the end in return for that. Of course, you have ten years to plan and save for that hit -- but if you were good at long-term life planning, you'd never have gone to grad school.

34 comments:

E Hines said...

He always can claim hardship and get a payment plan to space out the tax bite--even get much of that forgiven, though that last is far from common.

I also have to wonder: what sort of government agency will hire a BS [sic] holder in 19th Century Women's Studies? Oh, wait....

Eric Hines

Anonymous said...

I've read that the average student debt "burden" is $29K. Or the price of a mid-range car.

I'm trying to find a table that shows the various student debt ranges ($0-$10K, $10K-$20K, etc) and the number of people within each range. Not having any luck so far.

Why $29K should amount to a lifetime burden is something that I'm not understanding, nor why it merits a taxpayer bailout.

I'd log in under my standard handle (jabrwok) but the OpenID thing doesn't recognize it, though WP doesn't have a problem over at accordingtohoyt...

Cass said...

Why $29K should amount to a lifetime burden is something that I'm not understanding, nor why it merits a taxpayer bailout.

Exactly.

E Hines said...

various student debt ranges

Try this.

Eric Hines

Cass said...

Sounds great, until you reach the end of the plan and suddenly have a tax bill not on the $27,000 or so that is your gross income minus your standard deduction, but on a $90,000 "income" of which you actually received only $27,000.

How does that compute?

From where I'm sitting, if you take out a loan for 100K and spend it on pretty much ANYTHING, you received 100K. You spent someone else's money, perhaps wisely, perhaps not.

But you spent it.

Grim said...

I'm talking about that year's income, Cass. You're going to have to pay taxes on the 27K you normally would have to pay taxes on that year, plus the 63K in forgiven loans. So, in that tax year, income is 27K, but you're going to be taxed as if you had earned 90K.

It's a solvable problem if you plan for it, knowing it's going to come up that year. But it's still a big hit to take all at once.

Ymar Sakar said...

The IRS benefits. The feds benefit from another wage, debt, etc slave. The colleges benefit from getting theirs. The teacher's unions and professors get theirs, from the fed subsidies.

What's there to dislike about the slave economy.

Ymar Sakar said...

Oh yea, SWAT and police unions benefit because they get an excuse to use their firepower to collect the debt on student loans.

Cass said...

...in that tax year, income is 27K, but you're going to be taxed as if you had earned 90K.

As long as we're both stipulating that borrowers did receive those funds in the first place, I'm OK.

I didn't see the part about taxing the forgiven balance as income in the WSJ article, but found it on another site. I guess I have very mixed feelings about any of this. It's particularly disturbing to see loan forgiveness on federally subsidized loans that were cheaper in the first place.

*sigh*

At any rate, I really think you need to come over to VC and police the comments section. That horse that sat on you a few years back has been shooting his big mouth off...

*running away*

MikeD said...

Frankly, I have problems with "debt forgiveness" on federally granted student loans, period. It's not their money, what gives them the right to forgive the debt? See, this is my problem in general with the government engaging in largess with money that they take from the citizenry. The days when they acted as stewards of the public's funds are over, and now they consider it charity to let us keep as much of our income as they do (begrudgingly).

E Hines said...

this is my problem in general with the government engaging in largess with money that they take from the citizenry

But government can't engage in all its social engineering if it can't control how we spend our money.

Eric Hines

Anonymous said...

E.Hines, thanks for the link. That is very much the kind of information I'm looking for.

- Jabrwok

Cass said...

It's not their money, what gives them the right to forgive the debt?

Not to mention that it makes loans more expensive for everyone else, but that's a minor point next to that whole "it's not your money to give away" part.

Tom said...

Get government out of the student loan business altogether. Cheap, government guaranteed loans have made education more expensive for everyone.

And, given that most university faculty list to the port, it's more government funding of the left, similar to the bureaucracy and government unions.

This is really the brilliance of the left on display: Set up progressive programs that funnel money to progressive constituencies who then send part of it back to progressive causes to set up more progressive programs, etc. It's really a massive money laundering scheme.

E Hines said...

Cheap, government guaranteed loans have made education more expensive for everyone.

This is only part of it--all those government subsidies for colleges and universities contribute to driving up the cost of education. Prices rise to absorb the money available. Certainly, so does supply, but prices rise much more quickly. In education, it's by design: one-time Boston University Associate Provost and University President's Chief of Staff Peter Wood on Federal subsidies in 2005: [these] are seen by colleges and universities as money that is there for the taking…. Tuition is set high enough to capture those funds and whatever else we think can be extracted from parents.

As usual, the putative target of the "help" remain priced out of the thing they're being "helped" to get. Why do you think we get affirmative action programs (aside from their inherent racist and sexist bent, I mean)?

I'm not convinced it's all part of a vast Left-wing conspiracy, but there is a definite synergy to the things.

Eric Hines

Grim said...

Personally I think higher education should be free as are secondary and primary education, provided one can demonstrate the aptitude and the conscientiousness to obtain good marks. We hear the complaint about 'giving away taxpayer money' because it is structured so that people take loans and pay for it; but it's really quite a bargain for the taxpayer. After all, as with the money spent on lower education the taxpayer obtains other companion taxpayers better fitted for higher income-earning and thus for sharing the burden of taxpaying to a greater degree. But in this case, the taxpayer gets repaid the cost of the education with interest as well!

The analogy we make is so important to our basic idea about what justice entails. Because we've analogized this to commercial loans, it's thought a great injustice that any part of them should not be repaid, and a further injustice that they should be charged only a pittance of interest instead of the full amount the market would bear. But no one asks our high-school students to pay back the cost of their educations, nor to think of themselves as indentured servants for having obtained them; we could have analogized in that way instead, and to as good -- no, to a better -- purpose.

E Hines said...

higher education should be free as are secondary and primary education

There's nothing free about secondary or primary education.

as with the money spent on lower education [!?] the taxpayer obtains other companion taxpayers better fitted for higher income-earning

Not at all. We get, as businesses are starting to complain, degree holders (I hesitate to call them graduates) wholly unsuited for the work force. Too many degree holders haven't learned the first syllable of a marketable skill; they've spent their time on Gender Studies, or Swahili, or African American Studies, or.... They've only learned to borrow, to freeload, and then to welsh on their loans.

no one asks our high-school students to pay back the cost of their educations

They didn't borrow the cost of their educations, either. But too many of them are denied a chance at an education: witness Holder's suit against Louisiana for the crime of vouchers to give a pittance of students such a chance.

Eric Hines

Grim said...

Well, what I say is that we need a happy medium. Lower education should become more like higher education via vouchers and parental choice. Higher education should become more like lower education in not being paid for by loans, but by gifts to our fellow citizens as we do with the lower education. It is to our common benefit overall: a more-educated citizenry is better than not.

E Hines said...

As long as the gifts are mine to make, and not government's or the giftee's to demand....

I don't object, either, if my education tax money goes to fund primary and secondary school vouchers, as is the case in Louisiana.

But if someone is going to go to college on my nickel, they're going to study--and graduate on the basis of--a major of my selection.

Eric Hines

Grim said...

That might be worth re-thinking. "Your selection" is going to mean, in practice, the decision of some bureaucrat appointed by a president elected by "us" in common -- currently appointed, that is, by Barack Obama. Every college student will be routed into race and gender studies (which is, I don't doubt, exactly what you want to avoid).

Grim said...

So, rather, what you want is a policy like the voucher policy: individual choice of majors and providers, provided that you can get into the school on merit and stay there on merit. All we do is accredit the schools to make sure they hold to general standards of excellence.

Cass said...

Having worked my own way through college (I paid 100% of my tuition myself) on what I earned, I'm not at all in favor of free education.

I mostly tutored to earn my tuition, and from what I saw the vast majority of students don't work hard unless they have some personal skin in the game.

We appreciate what we have to work for and earn for ourselves. What others pay for, not so much.

Grim said...

I went on scholarship, myself, so that I graduated without student loans from undergrad school -- a scholarship funded for excellent students by the Georgia Lottery. It was Zell Miller's idea, and frankly I think it's had much to do with transforming Georgia into the economic powerhouse it is today. Lower taxes and regulations help too, but a highly-educated workforce is nothing to sneeze at.

I think it was an excellent investment -- of lottery funds, too, so that no one was asked to pay for it except on a voluntary basis.

Grim said...

And of course, since the scholarship required a 3.0 minimum average, one did have to work for it and earn it. You could only be eligible if you'd worked pretty hard in High School, and you had to keep it up through the four years of college.

E Hines said...

The term you used, Grim, was gift, which is different from my tax money being brokered by government for an education.

I have no objection to my tax money going for vouchers on pretty much any of the voucher models currently extant. However, a gift is my money going directly from me to the final recipient. And yeah, I'm going to call the shots concerning how my money gets spent in that circumstance.

Eric Hines

Grim said...

That's an admirably feudal attitude.

Tom said...

I don't know about free uni. Some European countries like Germany do that and it seems to work, from what I've heard.

I do think it could be one good, though only partial, answer to lowering medical expenses. If med school was free, then doctors could charge less.

Grim said...

Well, it's a good answer to a number of things. In general, getting a good education is hard. If we limit the 'free' to those who earn it through hard work, and to schools that are of proven quality, we should want to find essentially everyone both capable of doing that hard work and interested enough to do it. We should want all such people to get the education they want, so they can perform at a higher level both as citizens and economically.

E Hines said...

It also would help to reduce the demand for that limited and inflexible supply. That, though, requires a cultural change that'll be hard to achieve.

Going to college, getting a degree, isn't the be-all and end-all to life, or to success. There shouldn't be a stigma attached to not having a degree.

The trades are critical to any economy, and there needs to be a proper...education...and respect for that training and for those who do that sort of work.

What we used to call VoTech and OO, and a lot of what Community Colleges/Junior Colleges, did would be fine for a lot of folks. I'd be fine with my voucher money going to that sort of schooling, too.

The reduced demand for college would drop prices there, too.

Eric Hines

Grim said...

Going to college, getting a degree, isn't the be-all and end-all to life, or to success. There shouldn't be a stigma attached to not having a degree.

I have no problem with either of these statements! Certainly you are familiar with my interest in the success of the ordinary working man in living a good life. For me, the measure of success for an economy is partially how well it helps ordinary working folk achieve their own ends -- not just some educated elite.

Still, there are reasons why we should want to fully educate those who happen to have both the aptitude and the internal drive to succeed. It's good for the society as a whole if the citizens who have the knack and the heart are well-educated and prosperous. That's how you get better citizens, and more engaged ones.

The big flaw in the plan from my perspective, in other words, isn't the forgiveness of debts. It's the shunting of people into non-profit work by limiting debt-forgiveness to that sector. Of course we should want these well-educated people to go into whatever sector in which they happen to excel. They might be doctors, as Tom said. They might be engineers in a private space industry. They might be damned good citizens on the local school board, pushing for a voucher system that grants informed choice among excellent options. They might go on to become sergeants in the National Guard, or officers of the line.

Tom said...

I tend to agree that if we're offering free uni, free trade schools would be good as well.

And I agree with Grim, it's wrong to limit people to non-profit work. I'm not sure whether or not debt forgiveness is a good thing in this case, but that makes it far worse.

Anonymous said...

Personally I think higher education should be free as are secondary and primary education

TANSTAFL. There is no such thing as "free" education and I rather dislike having a gun pointed at my head through taxation to pay for other children's education. I've got three children at home whose education I am funding out of my own pocket. My wife and I do it better and cheaper by far - $2500 for three kids vs $29,328 for three children in Alabama. http://febp.newamerica.net/k12/AL

The premise that education is an innate right that requires action on my part is false. Education is a great good. It is a responsibility for parents to provide for the education of their children, but it is not my responsibility to provide for other children. Now, if you want to ASK me to help educate orphans or those truly needy, I will go along with that thought.

Ymar Sakar said...

It is to our common benefit overall: a more-educated citizenry is better than not.

Education is not indoctrination. Until you fix the indoc problem, you won't get any education, no matter who's gifting what to whom.

E Hines said...

I have no problem with either of these statements! Certainly you are familiar with my interest in the success of the ordinary working man in living a good life.

We have no fundamental disagreement here, just our usual quibbling around the edges.

Regarding debt forgiveness not being limited to nonprofits, I have a problem with debt forgiveness. We have bankruptcy laws that, pre-Dodd-Frank and pre-bailout before that, worked just fine. Currently, a (n ex-) student debtor can't discharge his student loan that he cannot repay through bankruptcy. This is nonsense; one type of loan or borrower shouldn't get treatment different from that of the run of the mill loan/borrower.

Let the student loan borrower make his claim of insolvency in bankruptcy court, and let the creditor(s) recoup something; the student shouldn't be able to slide out from under his debt just because he doesn't feel like paying on it any more.

Eric Hines