LRAP/IBR/PSLF. How does it work? Let's find out!

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Expand view Topic review: LRAP/IBR/PSLF. How does it work? Let's find out!

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nony » Mon Nov 16, 2020 1:14 pm

yeah, I saw that, and had the same reaction to it. I mean, I'd like him to be right! But I think there's a reason no one else has been arguing this yet. (Partly just that it's not going to be a live issue for a while still, of course.)

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by BlendedUnicorn » Mon Nov 16, 2020 1:13 pm

reading further, it strikes me as pretty dubious. He says that income based repayment plans should fall under the "qualified scholarships" exception on the theory that, unlike PSLF, there's no "quid pro quo." As an alternative, he also makes the Johann argument,
Even if section 108(f) does
not apply, section 108(a)(1)(B) could — COD income is excluded if the taxpayer is insolvent when
the debt is canceled. That was one reason that
Treasury excluded the COSD income in the Corinthian case.
Insolvency is defined as the excess of liabilities
over the fair market value of assets.50 The determination is made immediately before the cancellation,
and any exclusion is not greater than the amount of
the insolvency at that time.51 The upshot is that, to
have a full exclusion for the COSD income, the
borrower must be insolvent by at least the amount
of the forgiven debt. If a borrower has $50,000 in
student debt forgiven, and immediately before the
forgiveness the excess of his liabilities, including
that debt, over assets is only $1,000, then there
would still be taxable COSD income of $49,000.
If that's right, then I guess it supports the run up your debt as much as humanly possible approach.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by BlendedUnicorn » Mon Nov 16, 2020 1:08 pm

Nony wrote:
Mon Nov 16, 2020 12:27 pm
Johannes wrote:
Mon Nov 16, 2020 12:21 pm
Hey_Everybody wrote:
Mon Nov 16, 2020 10:28 am
So is that guy saying that even if you just did 25 years on REPAYE that there is actually no tax bomb? If true, seems like TLS was giving people a lot of shitty advice back in the day
Yes it’s only taxable to the extent you have net worth. I’ve said this for years now. No one understands the tax bomb properly.
That’s not what the thread says, Johannes. The guy is arguing that loan forgiveness is not taxable regardless of your net worth.
fwiw he published a paper on the topic and the argument is much more normative than his twitter thread suggests. student loan relief *should* not be taxable, and not that based on current law it is not (though he argues that treasury has the authority to make it so:

https://papers.ssrn.com/sol3/papers.cfm ... wnload=yes
Assuming the anti-Trump wave doesn’t leave the
Democrats controlling both houses of Congress,
Treasury may have to consider acting unilaterally to
exclude COSD income created by IBR, PAYE, and
REPAYE. While its legislative authority is weaker
than Treasury might prefer, there is nonetheless
sufficient authority for it to act.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nony » Mon Nov 16, 2020 12:28 pm

Johannes wrote:
Mon Nov 16, 2020 12:23 pm
Story wrote:
Mon Nov 16, 2020 11:41 am
I guess no one has gotten to the end of IBR and PAYE to actually find out whether the forgiven amount is taxed.

Anybody who commentates on this issue is essentially making a prediction about how the IRS and courts will interpret the tax code, right? I don’t know if there is a definitive “correct” answer to the question of whether IBR and PAYE forgiven amounts are taxable.
The “tax bomb” applies to all forgiven debts not just student loan debt. Plenty of case law looking at this application to non student loan debts, which is binding precedent.
Are you planning to have no net worth when your debt is forgiven, Johannes?

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nony » Mon Nov 16, 2020 12:27 pm

Johannes wrote:
Mon Nov 16, 2020 12:21 pm
Hey_Everybody wrote:
Mon Nov 16, 2020 10:28 am
So is that guy saying that even if you just did 25 years on REPAYE that there is actually no tax bomb? If true, seems like TLS was giving people a lot of shitty advice back in the day
Yes it’s only taxable to the extent you have net worth. I’ve said this for years now. No one understands the tax bomb properly.
That’s not what the thread says, Johannes. The guy is arguing that loan forgiveness is not taxable regardless of your net worth.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nony » Mon Nov 16, 2020 12:26 pm

Re: recertification - I think technically borrowers are supposed to recertify if their income “changes significantly” or the like, which includes going up as well as going down, but in practice there’s nothing that makes you do it until the next actual deadline comes round. So it’s there for people whose incomes plummet and need to get their payment reduced sooner than the next deadline, but no one is going to get dinged for not reporting an increase in pay before they have to. For instance the recertification doesn’t ask when in the last year your income changed. (And I’m in the same boat where I had a recertification deadline in April, they had notified me to recertify, then the moratorium was put in place and the deadline got lifted. They’re supposed to let me know when I need to get it done by, now.)

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Johannes » Mon Nov 16, 2020 12:23 pm

Story wrote:
Mon Nov 16, 2020 11:41 am
I guess no one has gotten to the end of IBR and PAYE to actually find out whether the forgiven amount is taxed.

Anybody who commentates on this issue is essentially making a prediction about how the IRS and courts will interpret the tax code, right? I don’t know if there is a definitive “correct” answer to the question of whether IBR and PAYE forgiven amounts are taxable.
The “tax bomb” applies to all forgiven debts not just student loan debt. Plenty of case law looking at this application to non student loan debts, which is binding precedent.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Johannes » Mon Nov 16, 2020 12:21 pm

Hey_Everybody wrote:
Mon Nov 16, 2020 10:28 am
So is that guy saying that even if you just did 25 years on REPAYE that there is actually no tax bomb? If true, seems like TLS was giving people a lot of shitty advice back in the day
Yes it’s only taxable to the extent you have net worth. I’ve said this for years now. No one understands the tax bomb properly.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nony » Mon Nov 16, 2020 12:21 pm

(Which is to say about forgiveness: I agree there’s no way to know until someone applies for forgiveness under an IDR plan and we see what the IRS does. It will also be interesting to see if most people in that position have appreciable assets or not, and whether that makes a difference. I could see going after some of Johannes’ gambling winnings investments but not going after, say, a lifelong state PD or elementary school teacher. Of course the amount of the teacher’s forgiveness would likely be a lot less, too.)

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Johannes » Mon Nov 16, 2020 12:20 pm

BeatricESQ wrote:
Wed Nov 11, 2020 4:34 pm
Nebby wrote:
Mon Oct 19, 2020 7:54 pm
FYI - y'all should call you servicers to see if the extension applies to you. My income based repayment anniversary is on January 1, so I don't qualify. The date is not when your recertification is due, but the anniversary of when you officially entered income based repayment is the reference date for whether the extension applies. My recertification deadline is 11/27, but that apparently isn't the date that matters.
So assuming the extension applies to someone, do they really not have to recertify even though their income has gone up substantially?
Correct. My income is potentially substantially higher and I have not recertified. Window has come and gone for a month or so now and nothing from my loan services.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nony » Mon Nov 16, 2020 12:15 pm

Financial aid people (and every financial source on the web, apparently) have all represented the based plans as having a tax bomb, so it’s not that people have given shitty advice. The Twitter thread is making an argument about how the law should be applied to hypothetical student loan forgiveness resulting from covid stimulus. That could well be the basis for arguments people could use in the future to challenge the tax bomb on income-based repayment plans, but it’s not clear to me that it applies to the income-based repayment plans; those plans may have different terms baked in. The safe harbor provision (ie IRS won’t go after someone who’s insolvent) makes sense, except that if you’re Johanning your way to forgiveness, the point is to be able to save money along the way, so you wouldn’t be insolvent at that point (I don’t know what the tax bomb would cost you though). The point that Congress needed to specifically exempt PSLF because there was the assumption that student loan forgiveness was free from taxation except if done for public service is interesting, but it also seems like this law all dates from before they made it (virtually) impossible to discharge student loans in bankruptcy, and obviously that’s not the same as forgiveness, I’m just not sure what has happened between now and then.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Hey_Everybody » Mon Nov 16, 2020 12:12 pm

Story wrote:
Mon Nov 16, 2020 12:07 pm
I am also confused by Brooks’s response: “ My argument is actually even more relevant for IDR...”

Isn’t IDR a large umbrella that includes IBR and PAYE?

If forgiven amounts under an “IDR plan” are non-taxable, I would think that fact implies that forgiven amounts under IBR and PAYE are non-taxable.
I think he was initially talking about whether forgiveness from the Biden administration would be taxable. His point was that student loan forgiveness isn't taxable so that's not an issue. He then clarified he thinks that applies to all IDR plans too

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Story » Mon Nov 16, 2020 12:07 pm

I am also confused by Brooks’s response: “ My argument is actually even more relevant for IDR...”

Isn’t IDR a large umbrella that includes IBR and PAYE?

If forgiven amounts under an “IDR plan” are non-taxable, I would think that fact implies that forgiven amounts under IBR and PAYE are non-taxable.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Hey_Everybody » Mon Nov 16, 2020 11:46 am

Story wrote:
Mon Nov 16, 2020 11:41 am
I guess no one has gotten to the end of IBR and PAYE to actually find out whether the forgiven amount is taxed.

Anybody who commentates on this issue is essentially making a prediction about how the IRS and courts will interpret the tax code, right? I don’t know if there is a definitive “correct” answer to the question of whether IBR and PAYE forgiven amounts are taxable.
Yeah, he initially presented his opinion as more of a fact. But clearly nobody knows for sure yet. Even if there's a very strong legal argument that non-PSLF forgiveness shouldn't be taxed, I wouldn't bank on our ultra far right judiciary buying it

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Story » Mon Nov 16, 2020 11:41 am

I guess no one has gotten to the end of IBR and PAYE to actually find out whether the forgiven amount is taxed.

Anybody who commentates on this issue is essentially making a prediction about how the IRS and courts will interpret the tax code, right? I don’t know if there is a definitive “correct” answer to the question of whether IBR and PAYE forgiven amounts are taxable.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Hey_Everybody » Mon Nov 16, 2020 11:34 am

Story wrote:
Mon Nov 16, 2020 11:04 am
I thought that if you got forgiveness through PSLF, then you got no tax bomb.

But if you got forgiveness through IBR, PAYE, or REPAYE, I thought you DID get a tax bomb? Am I wrong?
That was always my understanding, and what TLS always said. But he seems to think there shouldn't be a tax bomb period:

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Story » Mon Nov 16, 2020 11:04 am

I thought that if you got forgiveness through PSLF, then you got no tax bomb.

But if you got forgiveness through IBR, PAYE, or REPAYE, I thought you DID get a tax bomb? Am I wrong?

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Hey_Everybody » Mon Nov 16, 2020 10:28 am

So is that guy saying that even if you just did 25 years on REPAYE that there is actually no tax bomb? If true, seems like TLS was giving people a lot of shitty advice back in the day

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Kümmel » Mon Nov 16, 2020 8:45 am

interesting thread re relief and tax:

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nebby » Wed Nov 11, 2020 8:21 pm

If it applies, yes. I would call your servicer to see if it applies.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by BeatricESQ » Wed Nov 11, 2020 4:34 pm

Nebby wrote:
Mon Oct 19, 2020 7:54 pm
FYI - y'all should call you servicers to see if the extension applies to you. My income based repayment anniversary is on January 1, so I don't qualify. The date is not when your recertification is due, but the anniversary of when you officially entered income based repayment is the reference date for whether the extension applies. My recertification deadline is 11/27, but that apparently isn't the date that matters.
So assuming the extension applies to someone, do they really not have to recertify even though their income has gone up substantially?

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nebby » Mon Oct 19, 2020 7:54 pm

FYI - y'all should call you servicers to see if the extension applies to you. My income based repayment anniversary is on January 1, so I don't qualify. The date is not when your recertification is due, but the anniversary of when you officially entered income based repayment is the reference date for whether the extension applies. My recertification deadline is 11/27, but that apparently isn't the date that matters.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Johannes » Tue Oct 13, 2020 2:13 pm

Nebby wrote:
Sun Oct 11, 2020 1:27 pm
Does everyone else interpret this to mean we just don't need to recertify this year and our payments next year will be the same as this year?
Correct.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nony » Sun Oct 11, 2020 2:19 pm

Yes, that’s my understanding. My recertification is usually in the spring and they’d sent me the reminder to recertify before the first extension, and then nothing more.

Re: LRAP/IBR/PSLF. How does it work? Let's find out!

by Nebby » Sun Oct 11, 2020 1:27 pm

Does everyone else interpret this to mean we just don't need to recertify this year and our payments next year will be the same as this year?

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