Repayment Plans: Facts, Myths, and the Income-Driven “Muddle”

1. Repayment Plans: Facts, Myths, and the Income-Driven “Muddle” Moderator: Colleen Slattery, Missouri Higher Education Loan Authority Speakers: Ed Brandt, Xerox Education Services, LLC Betsy Mayotte, American Student Assistance 2016 Knowledge Symposium November 7 – 9, Sheraton Downtown, Nashville, TN

2. Repayment Plans: Facts, Myths, and the Income-Driven “Muddle” Options to help borrowers manage repayment

3. Agenda • Overview of repayment plans—key features • Income-driven repayment (IDR) plans • Helpful tips to assist borrowers • Resources

4. Repayment plans overview

5. What repayment plans are available? “One-size fits all” plans: • Standard • Graduated • Extended “Income-Driven Repayment” (IDR) plans: • Income-Sensitive (FFEL only) • Income-Based (FFEL and Direct Loans) • Income-Contingent (Direct Loans only) • Pay as You Earn (Direct Loans only) • Revised Pay as You Earn (Direct Loans only)

6. “One Size Fits All” Plans • Standard (“automatic”) • Equal monthly payments • Maximum 10-year repayment term (FSL and PLUS) • Maximum 30-year repayment term (Consolidation) • Graduated • Payments start smaller; increase at regular intervals • Same loan type-based maximum terms as Standard • No single payment can be more than 3 times greater than any other under the plan • Extended (fixed or graduated) • For borrowers with over $30,000 in debt • Up to 25 year repayment term (all loan types)

7. Income-Sensitive Plan (ISR) • Payments increase or decrease based on annual income • Minimum payment = monthly interest • No single payment can be more than 3 times greater than any other under the plan • Extends existing repayment term by up to five years (via mandatory administrative forbearance)

8. IDR plans Primarily intended for borrowers: • Entering repayment with high student loan debt relative to income • Having difficulty making payments under 10-year Standard repayment plan • In need of a long-term solution for managing repayment • Seeking Public Service Loan Forgiveness (Direct Loans only)

9. IDR plans overview • Income-Contingent Repayment (ICR) • Lesser of 20% of discretionary income or fixed payment amount over 12 years • Payments adjusted annually based on income and family size • Maximum 25-year repayment term

10. IDR plans overview • Income-Based Repayment (IBR) • Generally 15% of discretionary income, but never more than the 10-year Standard repayment plan amount • 10% of income for new borrowers on/after 7/1/14 • Payments adjusted annually based on income and family size • Interest may be subsidized for first 3 years • Maximum 25-year repayment term • 20-year term for new borrowers on/after 7/1/14 Note: borrowers must “show need” to qualify for IBR

11. IDR plans overview • Pay As You Earn (PAYE) and IBR for “new” Direct Loan borrowers • Generally 10% of discretionary income, but never more than the 10-year Standard repayment plan amount • Payments adjusted annually based on income and family size • Interest may be subsidized for first 3 years • Maximum 20-year repayment term Note: borrowers must “show need” to qualify for IBR and PAYE

12. IDR plans overview • Revised Pay As You Earn (REPAYE) • Generally 10% of discretionary income • Payments adjusted annually based on income and family size • Interest may be subsidized • Maximum 20-year repayment term if repaying only undergraduate loans • Maximum 25-year repayment term if repaying any graduate loans Note: under current IRS rules, the forgiven amount under any IDR plan is considered taxable income

13. Alternative Plan (Direct Only) • Available to borrowers who can sufficiently demonstrate that no other available plan is affordable for them. • Is what REPAYE borrowers enter when they fail to renew timely • Only two clear limitations: • 30-year maximum term from when loan first entered repayment, not including deferment/forbearance • Negatively amortizing interest capitalizes, but only up to 10% of original repayment balance

14. Direct Consolidation • Generally allows borrowers, particularly FFELP borrowers, to expand repay plan eligibility • Also allows FFELP borrowers to begin to qualify for PSLF • However, restarts forgiveness payment counter

15. Ten helpful tips to assist borrowers with IDR plans

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17. “I want to sign up for the Obama Forgiveness Program!”

18. Borrower communication How does a borrower learn about options to repay federal student loans? • MPN • Entrance and exit counseling • Disclosures (e.g., repayment, delinquency, difficulty making payments letter, etc.) • Schools • Numerous websites: ED, schools, servicers, guarantors • ED’s communication campaigns

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20. “I no longer want to be on an Income-Driven plan. How can I get a different plan?”

21. Exiting an IDR Plan (continued) If on IBR: • Borrower initially placed on the Standard plan, under whatever maximum term their loan type dictates • Remaining term = what borrower had when they entered IBR plan MINUS repayment months elapsed under IBR • Borrower must make one payment under the Standard plan before they can move to their preferred plan (if different) • Borrower can make one required payment under a reduced-payment forbearance, if standard payment unaffordable • Unpaid accrued interest capitalizes

22. Exiting an IDR Plan (continued) If on ISR: • Repayment continues under borrower’s preferred plan • Remaining term = what borrower had when they entered ISR. If on PAYE or REPAYE: • Repayment continues under borrower’s preferred plan • No intervening Standard plan payment required • Remaining term = what borrower had left when they entered IDR MINUS repayment months elapsed under IDR • Unpaid accrued interest capitalizes

23. Exiting an IDR Plan If on ICR: • Repayment continues under borrower’s preferred plan • No intervening Standard plan payment required • Remaining term = what borrower had left when they entered IDR MINUS repayment months elapsed under IDR • Unpaid accrued generally does not capitalize, at least at the time the borrower leaves the plan

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25. “The IDR application is too long and complicated!”

26. Read, read, read…and follow the instructions!!!

27. Apply online, when possible Source: Department of Education, 2015 FSA Conference

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29. “I checked the box to request that my servicer place me in the IDR plan with the lowest monthly payment. What if I qualify for more than one plan?”

30. IDR plan selection • A FFELP borrower is only eligible for IBR or ISR • If a Direct Loan borrower qualifies for more than one plan, or if the borrower wants the servicer to determine a plan, ED requires the servicer to use the following order in choosing a plan: • REPAYE (if repayment period is 20 years) • PAYE • REPAYE (if repayment period is 25 years) • IBR • ICR

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32. “It’s my wife’s loan, why do I have to supply my income?”

33. Adjusted gross income (AGI) Borrower must provide AGI annually ICR, IBR and PAYE—for married borrower: Married/file joint: * generally, both spouses’ AGI are considered in determining payment amount * Exception: if borrower is separated, or is not reasonably able to access spouse’s income information, borrower can provide alternative documentation of just his/her income For IBR and PAYE only—both the borrower’s and spouse’s eligible loans are used in determining PFH Married/file separate: only the borrower's AGI is considered in determining payment amount

34. AGI (continued) REPAYE—for married borrower Both incomes are considered when calculating AGI, regardless of tax filing status * Exception: if borrower is separated, or is not reasonably able to access the spouse’s income information, borrower can provide alternative documentation of just his/her income

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36. “I applied for IBR to repay my FFELP loans but my servicer said I don’t qualify.”

37. IBR plan • Borrowers must show need—have a partial financial hardship—to qualify for IBR • Calculated monthly payment amount under the 10-year Standard plan must be GREATER than the payment calculated under the IBR plan • 15% (for IBR) of borrower’s discretionary income (AGI – 150% of poverty line amount for family size) ÷ 12 • FFELP borrower who doesn’t have a PFH may request deferment, forbearance, and/or ISR

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39. “I consolidated my FFELP loans into a Direct Consolidation loan for purposes of IDR forgiveness. What do you mean all the payments I’ve made don’t count towards forgiveness?”

40. Direct consolidation • Borrowers with FFELP loans are only eligible for IBR, unless they consolidate those loans into a Direct Consolidation Loan • Beware—upon consolidation, the forgiveness clock restarts! • Only payments made on the new Direct Consolidation Loan count towards forgiveness • Remaining balance is forgiven if loans aren’t fully repaid at the end of the repayment period • 10 years for PSLF • 20 or 25 years for IDR

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42. “What’s negative amortization?”

43. Benefits of interest subsidy • Under most IDR plans, if borrower’s monthly payment does not cover all interest that accrues, ED may pay the difference • Generally for first three consecutive years of repayment under IDR plan, longer under REPAYE • Borrowers also ask how this subsidy works if they pay more than what is due • The subsidy amount remains the same so the extra comes off of principal

44. Interest subsidy Source: Department of Education, 2015 FSA Conference

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46. “I’m on IBR but my payment just went super high! What happened?”

47. Annual certification • Under all IDR plans, required monthly payment amount may increase or decrease • Borrower must “recertify” income and family size each year • Income and family size information must be provided even if there has been no change in income or family size! • Servicer will send a reminder notice when it’s time for borrower to recertify

48. Annual certification Borrower will use the Income-Driven Repayment Plan Request form to: Initially apply to repay under an IDR plan Meet annual income documentation requirement Request the recalculation of the monthly payment amount due to a change in borrower’s financial circumstances Change to a different IDR plan

49. Consequences of failing to recertify Source: Department of Education, 2015 FSA Conference

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