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

Posted: Mon Nov 16, 2020 12:26 pm
by Nony
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!

Posted: Mon Nov 16, 2020 12:27 pm
by Nony
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!

Posted: Mon Nov 16, 2020 12:28 pm
by Nony
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!

Posted: Mon Nov 16, 2020 1:08 pm
by BlendedUnicorn
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!

Posted: Mon Nov 16, 2020 1:13 pm
by BlendedUnicorn
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!

Posted: Mon Nov 16, 2020 1:14 pm
by Nony
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.)