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The Basics – and Crystal Ball Gazing Federal Income Driven Repayment and Loan Forgiveness

The Basics – and Crystal Ball Gazing Federal Income Driven Repayment and Loan Forgiveness. EASFAA 2014 Lori Moore Access Group Stephen Brown Fordham Law School. Who Cares !. President Obama 2015 budget proposal. http://www2.ed.gov/about/overview/budget/budget15/summary/15summary.pdf

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The Basics – and Crystal Ball Gazing Federal Income Driven Repayment and Loan Forgiveness

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  1. The Basics – and Crystal Ball GazingFederal Income Driven Repayment and Loan Forgiveness EASFAA 2014 Lori Moore Access Group Stephen Brown Fordham Law School

  2. Who Cares !

  3. President Obama 2015 budget proposal • http://www2.ed.gov/about/overview/budget/budget15/summary/15summary.pdf • Extends PAYE to all borrowers • Eliminates standard payment cap under PAYE • So high income borrowers pay equitable share of their earnings • Calculates income for married borrowers on combined household income • Caps PSLF at aggregate loan limit for independent undergrads - $57,500 • Establishes 25 year forgiveness for borrowers with balances above $57,500 • Up from 10? Up from 20? • Prevents payments made under non –income driven payment plans to be used for PSLF • Assure forgiveness for students with the greatest need • Caps amount of interest that can accrue when borrowers payment is insufficient to cover interest costs

  4. Rep Dave Camp’s Republican tax proposal for 2015 • Repeals 108(f)

  5. New America Foundation • DeLisle and Holt • Brookings (Brown Center on Education Policy) • Akers and Chingos

  6. Focus on undergrad and tuition costs • Brookings - old data - undergrad • Grad/Prof students probably primary beneficiaries – afterthought? • Post 2006 Grad PLUS ?! • No immediate changes ! • Cloudy Crystal Ball

  7. Goals for this session… • Understanding “partial economic hardship” • Understanding IBR and PAYE - the good, the bad and the ugly . . . • and how it relates to your students! • Understanding Federal Public Service Loan Forgiveness • Overall goal: To be more effective and comfortable with your students!

  8. Some background… • 2007 College Cost Reduction and Access Act • PL 110-84 • Income Based Repayment option • Effective July 1, 2009 • Defines “Partial Economic Hardship” • Creates Public Service Loan Forgiveness Program • Effective October 1, 2007 • First forgiveness November 1, 2017

  9. Direct Loan MPN OMB NO. 1845-0007 • Income-Based Repayment (IBR) Plan – Under this plan, your required monthly payment amount will be based on your income during any period when you have a partial financial hardship. Your monthly payment amount may be adjusted annually. The maximum repayment period under this plan may exceed 10 years. If your loan is not repaid in full after you have made the equivalent of 25 years of qualifying monthly payments and at least 25 years have elapsed, you may qualify for cancellation of any outstanding balance on your loans. To initially qualify for this plan and to continue to make income-based payments, you must have a partial financial hardship. • An IBR Plan calculator is available at www.direct.ed.gov. The calculator evaluates your eligibility for the IBR Plan and estimates your initial IBR Plan payment amount. The calculator is for informational purposes only. Your servicer will make the official determination of your eligibility and payment amount.

  10. Direct Loan MPN • A public service loan forgiveness program is also available. Under this program, the remaining balance due on your eligible Direct Loan Program loans may be cancelled after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed in certain public service jobs.

  11. Election year changes • President Obama introduces “New” ICR(a) program – PAYE (Pay as You Earn) • Announced by Campaign Oct 24, 2011 • Subjected to Negotiated Rulemaking • Final Rules issued Nov 1, 2012 • Effective December 23, 2012 • Oops…Removed interest subsidy on Graduate/Professional Loans effective July 1, 2012

  12. Figuring all of this out…

  13. Aggregate Loan Limits • Dependent Undergrads $31,000 • Independent Undergrads $57,500 • Graduate/Professional $138,500 • Plus Grad PLUS! • $357 • $662 • Priceless!

  14. Estimated Net Income Table(Single Earner, No Dependents, NYC Resident,)

  15. Economic Hardship • Borrower in repayment is experiencing partial economic hardship when… • Loan payments on ten year amort exceed15% of income above 150% of poverty level • PAYE 10 % if income above 150% • Borrower experiencing partial economic hardship may elect to pay under IBR or PAYE (if eligible)

  16. Poverty Levels 2014

  17. Monthly Payments - 2014

  18. PAYE monthly payment amounts for larger families…

  19. Minimum Loans for PFH (2014)

  20. WOW !

  21. Now that we have your attention… • The details !

  22. Income Driven Federal Repayment • IBR and PAYE formulas for calculating monthly payments on federal student loans • FFELP or Direct for IBR • Direct, Stafford, Grad PLUS, Federal Consolidation • Not parent PLUS or consolidation loan containing PLUS • Borrower experiencing “partial economic hardship”

  23. PAYE eligibility requirements • “New Borrower” as of October 1, 2007 • No outstanding balance on FFELP or Direct as of October 1, 2007 or no outstanding balance on FFELP or Direct Loan when you received new loan after 10/1/07 • Received disbursement of Direct Loan after October 1, 2011 • October 1, 2011 includes Direct Consolidation Loan • DIRECT LOANS ONLY !

  24. IMPORTANT • Must apply annually to IBR and PAYE! • Online - studentloans.gov • Release prior year tax forms electronically • Must affirm that “The information on my prior year tax form substantially represents my current financial situation” or similar • Can use alternative documentation of income form if prior year tax form inaccurate (paper)

  25. Economic Hardship • Borrower in repayment is experiencing partial economic hardship when… • Loan payments exceed 15% of income above 150% of poverty level • PAYE 10 % if income above 150% • Borrower experiencing partial economic hardship may elect to pay under IBR or PAYE Yes, you have seen this before!

  26. 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 • Proposed changes going forward

  27. Federal Loan Payments IBR • Monthly payments on FFELP or Federal Direct Loans, • Stafford, • Grad PLUS and/or • Federal Consolidation Loans • DIRECT ONLY FOR PAYE

  28. 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

  29. 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 = $187 (PAYE 2014) • $567-187 = $380/mo accruing interest not paid • Capitalized when leave IBR or PAYE or no Partial Financial Hardship

  30. Loan Cancellation • Yes, after enough eligible payments under IBR or PAYE • If $0 calculated payment, payment counts • Currently considered a taxable event

  31. IBR after 25 years • 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, BUT taxable!

  32. PAYE after 20 years • If borrower made 20 years of payments under • PAYE (Pay as You Earn) • IBR (Income Based Repayment) • ICR (Income Contingent Repayment) • Standard Repayment (10 year term) • and still has a balance… The remainder is forgiven, BUT taxable!

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

  34. For example… • $40,000 income = $187 payment • $100,000 debt (at 6.8%) = $1,151 monthly payment • 4 years of partial financial hardship • Then rich and famous! • Will have paid $8,677 towards loans * • $118,631still due • Will take 155 additional months to repay • * Assumes 3% increase in poverty level, 0% increase in income

  35. Questions – IBR or PAYE • Moving right along…

  36. Federal Public Service Loan Forgiveness

  37. 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.

  38. Too much text… • Full Time • Government • Federal, State, local, tribal • Non-Profit • 501(c)3 corporation • Perhaps other “public service” for other types of employers

  39. Federal Loan Forgiveness for Public Service • Greatest thing since sliced bread! • Or maybe not! • Only Federal Direct Loans • Can use PAYE, IBR, ICR or 10 year standard • Or other with minimum 10 year amort payment • 120 payments while in eligible employment • Need not be consecutive • IBR and PAYE -If no PFH, revert to original monthly payment (10 year amortization) • Not a taxable event

  40. Remember… • Negative amortization • Maximum payment is original 10 year amortized monthly payment • Once no longer partially economically hardship may have to repay for more than 10 more years!

  41. Look Familiar? Monthly Payments - 2014

  42. Other issues • Moral Hazard • If you borrow more, more is forgiven ! • How clear is the crystal ball?!? • Guaranteed forgiveness? Politics. • Proposals from earlier slides • “combination of public service organizations” • What if life happens?

  43. How does it all fit? • If 120 months in PSLF job • All is good • If need for absolute lowest payment • PAYE • Then increase payments as income increases

  44. A real student ? • JD Salary: 60,000 Marital Status: Single Dependent: 1 Career Plans: Legal Aid Society - help poor people Total Education Loan Debt: = 271,500 Date of 1st Loan: 6/2/2008

  45. $271,500 debt • $1,538 monthly accruing interest at 6.8% • IBR = $535 • PAYE = $356 • 10 year = $3,124 • Net income = $ 3,464

  46. Resources • studentaid.ed.gov • and fact sheets and Q&A • finaid.org • GREAT calculators! • equaljusticeworks.org

  47. Have we exhausted you yet? • Questions • Comments • Snide Remarks

  48. Lori A. Moore Manager, Financial Literacy & Member Services Representative Access Group , Inc lmoore@accessgroup.org Stephen G. Brown Fordham University School of Law sbrown@law.fordham.edu

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