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Is the forgiven amount with the PSFL program liable for taxes? IBR or REPAYE?

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  • Travis @ Student Loan Planner
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    I’m in my last year of fellowship and been doing the PSLF program on IBR payments for almost 5 years.  I’m trying to decide if I should switch to REPAYE program.  I’ve read many articles on REPAYE and when I finish my fellowship and make real money my monthly payments should go down since to my knowledge REPAYE calculates at only 10% of discretionary income.  IBR which I’m currently on calculates at 15% of discretionary.

    This article tell the difference but not sure if 100% accurate

    https://www.usnews.com/education/blogs/student-loan-ranger/2015/11/04/a-side-by-side-comparison-of-3-income-based-repayment-plans

     

    My concern with switching to REPAYE is it says in some articles that the Forgiven Loan Balance will be a taxable event.  My forgiven balance could be close to 500K since it’s currently 477K with 7.9% and my payment once finished with fellow will barely cover my interest expense.  When I’m an attending based off of 250K income my IBR payment monthly will be about 2800 per month and with REPAYE about 1800 per month.

    Does anyone know if the forgiven balance will be taxable by the IRS?  Some articles say PSLF forgiven balance is not taxable and other say it is.  Of course I realize the tax laws or programs may change but want to decide if I should switch into REPAYE or stay in IBR.

    My biggest question is the tax consequences.

    Thanks for everyone’s time and input

     
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    If you have been paying for 5 years already then you most likely had an FFEL loan outstanding as of Oct 1 2007 hence no PAYE eligibility.

    If you owe more than $300,000, you'll probably never hit the 10 year standard cap anyway so you should switch. If it's less than that or you have a spouse whose income factors into the calculation, you need to check that before switching and blowing through the cap.

    Technically 10 year standard payments count towards PSLF so in theory you could switch to REPAYE then switch to 10 year when the payments get too high, but no one knows yet if they'll allow it bc we haven't seen forgiven balances as of yet.

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  • The White Coat Investor
    replied
    PSLF is not taxable. IBR/PAYE/REPAYE forgiveness is. And after 20-25 years, the tax bill is going to be awful similar to the original debt anyway. It's typically not a great option for this site's readers, unlike PSLF where you might only have to make 4-7 years of payments to get tax-free forgiveness of an amount similar to your original debt.

    Leave a comment:


  • DMFA
    replied
    PSLF: not taxable

    Federal income-driven repayment (RePAYE, PAYE, IBR) forgiveness: taxable and an awful idea. Paying 6.8% for 20 years, only to get a tax bomb? I can't fathom a situation in which that would be preferable.

    RePAYE does not cap its payments at the 10-year standard amount like IBR does, so be mindful of that.

    If you're not paying that debt anyway (i.e.doing PSLF), then do whatever gives you the least paid over the life of the loan. Calculate it out. From where I'm standing, RePAYE+PSLF looks good. PAYE might be okay as well if your income isn't high enough yet to have your payment be over the 10-year standard amount, but will become over it soon.

    Leave a comment:


  • Is the forgiven amount with the PSFL program liable for taxes? IBR or REPAYE?

    I'm in my last year of fellowship and been doing the PSLF program on IBR payments for almost 5 years.  I'm trying to decide if I should switch to REPAYE program.  I've read many articles on REPAYE and when I finish my fellowship and make real money my monthly payments should go down since to my knowledge REPAYE calculates at only 10% of discretionary income.  IBR which I'm currently on calculates at 15% of discretionary.

    This article tell the difference but not sure if 100% accurate

    https://www.usnews.com/education/blogs/student-loan-ranger/2015/11/04/a-side-by-side-comparison-of-3-income-based-repayment-plans

     

    My concern with switching to REPAYE is it says in some articles that the Forgiven Loan Balance will be a taxable event.  My forgiven balance could be close to 500K since it's currently 477K with 7.9% and my payment once finished with fellow will barely cover my interest expense.  When I'm an attending based off of 250K income my IBR payment monthly will be about 2800 per month and with REPAYE about 1800 per month.

    Does anyone know if the forgiven balance will be taxable by the IRS?  Some articles say PSLF forgiven balance is not taxable and other say it is.  Of course I realize the tax laws or programs may change but want to decide if I should switch into REPAYE or stay in IBR.

    My biggest question is the tax consequences.

    Thanks for everyone's time and input

     
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