Weird Federal Student Loans & Mortgage Question

[loviedovie]

Hi all,

Question: 

I'm about to buy a house with my fiance. Should I do it in my own name? Or create an LLC? 

The reason I ask: 

On my current student loan program I may be hit with a $500k tax bill in 12 years and I don't know whether the IRS would be able to take my house at that time. Does anyone know that? If I create an LLC does that shield assets from being siezed? 

My basic stats: 

• My annual income is $250k (I was able to double it during COVID via promotions and raises, at a W2 job I've held for about 9 years)
• My monthly Federal Student Loan payment under the Pay As You Earn plan is 10% of my adjusted gross (pre-tax) income, so about $2k/month.
• Given my income this still leaves enough left for mortagage, so my DTI just is fine and I've already been told by the lenders I'll have no issue getting a mortgage. 

Here is where it gets weird:

• I borrowed about $250k of private loans for my grad school program with the understanding that I could consolidate upon graduation to an interest rate of ~1.7% and pay them off over time. (I could have afforded this in my career.)
• Unfortunately the federal government acquired my student loans just before I graduated, which made me ineligible for private loan consolidation.
• The federal consolidation rate for grad plus loans was something like 10%. (I'd have never taken loans to begin with had I known there would be a rate like that.)
• For the first few years my income was low, and I couldn't afford the straight repayment amount with such high interest so I signed up for IBR (15% of income for 25 years, then forgiveness)
• Around 2016 at the guidance of the federal loan officers I switched to Pay As You Earn (10% of income for 20 years, then forgiveness)
• Unfortunately I was told only afterward that switching programs adds the unpaid accrued interest of the old loan to the principle to the new loan, ballooning the loan to something like $600k
• So now the interest is adding about $75k a year to the balance of the loan (more each year)
• Which means - by the time my loan is "forgiven" in 12 years I'll have repaid nearly 200% of the amount I borrowed, yet the "forgiven" amount will be >$1M and I will be hit with whatever the tax rate is for that as my annual income that year (maybe $500k?)
• I will not have $500k handy to pay that, unless the IRS takes my 401k, or my house

Does anyone have any ideas, other than - go back in a time machine to never take loans in the first place? People say "get a lawyer" but every lawyer I've consulted says "that can't be right, it sounds like you're confused" until I show them the paper trail and then they are just stunned. 

Thoughts? 

-lovie

[pizzadude]

---

@loviedovie wrote:

Hi all,

Question: 

I'm about to buy a house with my fiance. Should I do it in my own name? Or create an LLC? 

The reason I ask: 

On my current student loan program I may be hit with a $500k tax bill in 12 years and I don't know whether the IRS would be able to take my house at that time. Does anyone know that? If I create an LLC does that shield assets from being siezed? 

My basic stats: 

• My annual income is $250k (I was able to double it during COVID via promotions and raises, at a W2 job I've held for about 9 years)
• My monthly Federal Student Loan payment under the Pay As You Earn plan is 10% of my adjusted gross (pre-tax) income, so about $2k/month.
• Given my income this still leaves enough left for mortagage, so my DTI just is fine and I've already been told by the lenders I'll have no issue getting a mortgage. 

Here is where it gets weird:

• I borrowed about $250k of private loans for my grad school program with the understanding that I could consolidate upon graduation to an interest rate of ~1.7% and pay them off over time. (I could have afforded this in my career.)
• Unfortunately the federal government acquired my student loans just before I graduated, which made me ineligible for private loan consolidation.
• The federal consolidation rate for grad plus loans was something like 10%. (I'd have never taken loans to begin with had I known there would be a rate like that.)
• For the first few years my income was low, and I couldn't afford the straight repayment amount with such high interest so I signed up for IBR (15% of income for 25 years, then forgiveness)
• Around 2016 at the guidance of the federal loan officers I switched to Pay As You Earn (10% of income for 20 years, then forgiveness)
• Unfortunately I was told only afterward that switching programs adds the unpaid accrued interest of the old loan to the principle to the new loan, ballooning the loan to something like $600k
• So now the interest is adding about $75k a year to the balance of the loan (more each year)
• Which means - by the time my loan is "forgiven" in 12 years I'll have repaid nearly 200% of the amount I borrowed, yet the "forgiven" amount will be >$1M and I will be hit with whatever the tax rate is for that as my annual income that year (maybe $500k?)
• I will not have $500k handy to pay that, unless the IRS takes my 401k, or my house

Does anyone have any ideas, other than - go back in a time machine to never take loans in the first place? People say "get a lawyer" but every lawyer I've consulted says "that can't be right, it sounds like you're confused" until I show them the paper trail and then they are just stunned. 

Thoughts? 

-lovie

---

First let me say that this is probably the wrong forum to ask questions about how to shield assets from the IRS.  Also I think you're maybe overestimating your potential future tax liabilities on the forgiven amount, as the current maximum IRS tax bracket is 37%.

But if you do really have such a large tax bomb looming then you should probably talk with a CPA / tax attorney about a strategy for reducing future tax liabilities.  You have 10+ years so hopefully this would be enough time to save / plan accordingly.   Also assuming you'll be married in the future then you and your spouse are both liable for the same taxes if filing jointly. 

I will add that the IRS is generally very easy to work with on setting up a repayment plan.   As long as you're making payments they're not likely to do anything like filing a lien against property, etc..

[loviedovie]

Thanks Pizzadude, this is really reassuring. I will take your advice on getting a CPA/tax attorney. I live in California so the state income tax is pretty hefty on top of the federal and it's all a bit scary to navigate all of this on top of being a first time home buyer. Will dig in on the research. Fingers crossed.