When student loan doesn't make sense

I was lucky enough to graduate from a college without taking out any student loan. Well, I may have paid for it by working too many hours, which may have caused me to neglect on my studies. However, I know many Americans come out with more than they can handle. So, here is a simple look at how much your net income will change when you take out a student loan and try to pay for it in 10 years, or on IBR (Income based Repayment). IBR is obviously the most preferable choice if you don't mind paying for your student loan for 25 years. Keep in mind that I don't know the details on the qualifications, other than it's income based.

I spent enough time as is on numbers, and I kept it as simple as possible. For instance, I didn't include tax breaks. Which could make a big difference at the end. I just wanted to compare the yearly difference and the net compared to other hourly rate in lower income brackets. I also put 20% net tax payout, but that obviously can be higher or lower depending on an individual's income. Also, Taxes and IBR will differ based on whether you are married, and filed a joint tax return or not.

The chart on top shows hourly wages, 40 hours worked yearly salary, after tax at 20% net tax paid, and "Single Tax 20%" column minus 5% interest rate at 10 year repayment plan.

This chart shows minimum wage to below 30K a year as 2% wage increment.

Above is Single filed IBR at 5%.

As you can see IBR will make you confused and dazed. When you have 30K in student loan and make 30K a year there is no difference of Net pay. However, as you make more money, you don't benefit at all as you have less student loan debt. When you make 35K a year and have 30K student loan debt, your net income drops to 15,240 a year in comparison to 21,960 a year with 30K a year income. However, you actually don't lose any net  at all when you have 45K in debt with 35K a year. So, in this case it pays to have more debt!

Now going back to the 1st chart above. 10 year repayment plan just doesn't make any sense if you can qualify for IBR. Even at the end value, not accounting inflation (well, if we account inflation then IBR will be much more ahead), if you are steadily making 40K then it will look like this:

40K income, 30K student loan:

10 year repayment: 38,400 total payoff at 5% rate

IBR at 25 years at 5%: 34,800

Difference: 3,600. But mainly, you pay in 15 years extra. If you account inflation then difference may be much higher.

40K income, 45K student loan:

10 year repayment: 57,274.80

IBR at 25 years at 5%: 34,800

Difference: 22,474.80. That's 18,874.80 saving by borrowing more. Basically you have now collected free money. I won't even go to 60K student loan debt since IBR will keep you at the same rate. Therefore saving is much more.

There are many unclear parts in IBR. It states in guidelines that in first three years government will cover the excess interest if your monthly IBR payment is lower than interest accumulated each month. If so, what happens when that 3 year is over? I would imagine you will have to cover it. So, website that I put in numbers to get IBR does not look too convincing. I am not too sure if you can actually qualify with 40K a year income. Overall, try to get IBR, because it make sense. However, another issue is that if you have more income down the road, you no longer qualify.

Below is a link to more detail information about IBR:

http://studentaid.ed.gov/students/attachments/siteresources/IBRQ&A_template_123109_FINAL.pdf

Also, you go to college thinking that you'll make good money. So, IBR kind of play against that. If you make more money then obviously 10 year plan is only option or other repayment options.

Ok, so that being said. When you look at 10 year repayment plan, you could potentially lose 3 to 5 dollars per hour for next 10 years! Of course, this is based on belief that an individual without college degree can make 30K by the time they turn 22 or 23.

At the end, of course, you are not able to obtain jobs that you would like without higher education in modern days.