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IBR – One Year Later and Public Service Loan Forgiveness

IBR – One Year Later and Public Service Loan Forgiveness. EASFAA 2010 May 17, 2010 Stephen G Brown Fordham University School of Law. What is IBR?. 2007 College Cost Reduction and Access Act PL 110-84 Income Based Repayment option Effective July 1, 2009 Defines “Economic Hardship”

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IBR – One Year Later and Public Service Loan Forgiveness

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  1. IBR – One Year Laterand Public Service Loan Forgiveness EASFAA 2010 May 17, 2010 Stephen G Brown Fordham University School of Law

  2. What is IBR? • 2007 College Cost Reduction and Access Act • PL 110-84 • Income Based Repayment option • Effective July 1, 2009 • Defines “Economic Hardship” • Creates Public Service Loan Forgiveness Program • Effective October 1, 2007

  3. IBR • New formula for calculating monthly payments on federal student loans • FFELP or Direct • Stafford, GradPLUS, Federal Consolidation • Not parent PLUS or consol. containing PLUS • Borrower experiencing “partial economic hardship”

  4. Partial Economic Hardship • Federal loan payments exceed 15% of AGI above 150% of poverty level for family size • Huh?

  5. Federal Loan Payments • Monthly payments on Stafford, GradPLUS and/or Federal Consolidation Loans • 10 year Standard amortization

  6. Adjusted Gross Income • Prior year Adjusted Gross Income • 1040 – line 37 • 1040A – line 21 • 1040EZ Line 4 • If married filing jointly, both incomes* • If married, filing separately, only filer (PL110-153) • Lender may accept alternative documentation • Changes in income • * After July 1, 2010, both education loan debts also count

  7. Poverty Levels 2009 48 states

  8. Monthly maximum payments • AGI - (assumes family size of 1) • $30,000 $172 • $40,000 $297 • $50,000 $422 • $60,000 $547 • $70,000 $672 • $80,000 $797 • $90,000 $922 • $100,000 $1,005

  9. If borrower made 25 years of payments under • IBR (Income Based Repayment) • ICR (Income Contingent Repayment) • Standard Repayment (10 year term) • and still has a balance… The remainder is forgiven!

  10. Interest subsidy • If payments do not cover outstanding interest • Negative amortization • Secretary of Education pays remaining interest due on subsidized loans • Or sub portion of Consolidation • Up to 3 years

  11. Negative Amortization • “Negative” – sounds bad • And it is! • Payments do not cover the interest due on the loans • $100,000 at 6.8% = $6,800/yr = $566.67/mo • @ $40k income = $297 • $567-297 = $270/mo accruing interest not paid • Capitalized when leave IBR or no PFH

  12. And if I become rich and famous? • May no longer be experiencing PFH • May choose to leave IBR • Loans become due by end of prior repayment plan – but may switch • May choose to stay in IBR • Pay original 10 year amortized payment • But may take longer than initial 10 years to repay

  13. For example… • $40,000 income = $297 payment • $100,000 debt (at 6.8%) = $1,155 monthly payment • 4 years of partial financial hardship • Then rich and famous! • Will have paid $14,907 towards loans • $109,000 still due • Will take 136 additional months to repay • Full disclosure – not counting -$5,202 forgiven interest on $25,500 assumed sub loan

  14. Loan Forgiveness • Yes, after 25 years (300) eligible payments under IBR • If $0 calculated payment, payment counts • Currently considered a taxable event

  15. Miscellany • May apply through each of your lenders • Theory is weighted average payments • May choose to Federal Direct Consolidate • Prior year taxes or release (4506-T)

  16. Questions – IBR? • Moving right along…

  17. Loan Forgiveness forPublic Service Employees

  18. Federal Loan Forgiveness for Public Service • Greatest thing since sliced bread! • Or maybe not! • Only Federal Direct Loans • If FFELP borrower – MUST CONSOLIDATE • Can use IBR payment plan or ICR or 10 year • Or other equaling 10 year payment • 120 payments while in eligible employment • Need not be consecutive • If less than 120 months, revert to original monthly payment (10 year amortization)

  19. Federal Loan Forgiveness for Public Service • A full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education (including early childhood education), social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization), public child care, public service for individuals with disabilities, public service for the elderly, public library sciences, school‐based library sciences and other school‐based services, or at an organization that is described in section 501(c)(3) of the IRS Code and exempt from taxation, or teaching as a full-time faculty member at a Tribal College or University and other faculty teaching in high-needs areas, as determined by the Secretary.

  20. Federal Loan Consolidation • Allows students to convert former (pre July 1, 2006) variable rate FEDERAL loans into fixed rate –No private loans • Allows students to lock in “in-school” versus “in repayment” rate • Weighted average interest rate • Forgiven for death/disability • Deferment/forbearance • Be careful of mixing

  21. But, under IBR • Negative amortization • Maximum payment is original 10 year amortized monthly payment • Once no longer partially economically hardship may have to repay for 10 (or more!) additional years!

  22. Look familiar? • AGI - (assumes family size of 1) • $30,000 $172 • $40,000 $297 • $50,000 $422 • $60,000 $547 • $70,000 $672 • $80,000 $797 • $90,000 $922 • $100,000 $1,005

  23. Other issues • If you borrow more, more is forgiven ! • How clear is the crystal ball?!? • Peace Corps/Americorps • Guaranteed forgiveness? Politics. • Record keeping • “combination of public service organizations” • What if life happens?

  24. Stay Tuned! • More to Come. • Economy? • Get Excited!

  25. To watch out in the future • HCERA -Health care and Education Reconciliation Act of 2010 - P.L. 111-152 • New Borrowers after July 1, 2014 • PFH if payments above 10% of income above 150% of poverty level • Forgiveness after 20 years, not 25

  26. Resources • studentaid.ed.gov • and fact sheets and q & a • IBRinfo.org • finaid.org • equaljusticeworks.org

  27. Stephen G. Brown Fordham University School of Law 33 West 60th Street New York, NY 10023 212 636-7178 sbrown@law.fordham.edu

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