Direct Loan Income-Driven Repayment Plans

Direct Loan Income-Driven Repayment Plans Rose Mary Stelma College Foundation, Inc. April 2013

Before We Talk About Income-Driven Repayment Plans . . . . . . Do you know what types of repayment plans are available for Direct Loans – NOT just the income-driven plans?

Repayment Plans For Direct Loans • Standard • Graduated • Extended • Alternative • Income-Based Repayment (IBR) • Income-Contingent Repayment (ICR) • Pay As You Earn

Repayment Plans • Not all loans qualify for all repayment plans • All loans must be repaid under the same plan unless the loan type doesn’t qualify for the plan

Income-Driven Plans • Income-Contingent Repayment (ICR) • Income-Based Repayment (IBR) • Pay As You Earn

Income-Driven Plans – Quick Overview • Income-Contingent (ICR) – 1994 • Direct Loan Program only • Income-Based Repayment (IBR) – 2009 • Direct Loan and FFEL • Pay As You Earn – 2012 • Direct Loan Program only • New borrowers on/after 10/1/2007 who receive a disbursement on/after 10/1/2011

Income-Contingent Repayment • Direct Loan borrowers with eligible loans • FFEL borrowers do notqualify for ICR • FFEL has Income Sensitive Repayment Plan

ICR - Direct Loans That Qualify • All Direct Loans are eligible except • Parent PLUS Loans • Pre-7/1/2006 Direct PLUS Consolidation Loans • Direct Consolidation Loans made on or after 7/1/2006 that repaid parent PLUS loans are eligible

ICR -Payment • Under ICR, borrowers pay the lesser of: • 12-year standard repayment schedule multiplied by income percentage factor (payment based on loan debt and income) or • 20% of discretionary income (payment based only on income)

ICR – Discretionary Income • Borrower’s AGI minus 100% of the poverty guideline for the borrower’s state and family size • Example Borrower’s AGI $25,000 100% of poverty guideline $10,000 Discretionary Income $15,000

ICR - Forgiveness • Remaining balance forgiven after 25 years of qualifying repayment • According to the IRS, the forgiven amount is considered taxable income

ICR - Qualifying Payments • Qualifying Payments include: • Payments made under an income-driven plan • Payments under the 10-year standard repayment plan (or any other repayment plan with a payment amount at least equal to the 10-year standard plan amount) or • Economic hardship deferment

Income-Based Repayment • Direct Loan and FFEL Program borrowers with eligible loans and • Their payments would be lower on IBR relative to what would have been paid under the 10-year standard repayment plan (called “partial financial hardship”)

IBR – Loans That Qualify • All Direct and FFEL Program loans except • Parent PLUS loans • Consolidation Loans that repaid parent PLUS loans

IBR - Payment • Under IBR, borrowers pay the lesser of • 15% of discretionary income (income-based payments) or • What they would have paid under the 10-year standard repayment plan (non-income-based payments)

IBR – Discretionary Income • Borrower’s AGI minus 150% of the poverty guideline for the borrower’s state and family size • Example Borrower’s AGI $20,000 150% of poverty guideline $15,000 Discretionary Income $ 5,000

IBR - Forgiveness • Remaining balance forgiven after 25 years of qualifying repayment • According to the IRS, the forgiven amount is considered taxable income

IBR – Qualifying Payments • Qualifying Payments include: • Payments made under an income-driven plan • Payments under the 10-year standard repayment plan (or any other repayment plan with a payment amount at least equal to the 10-year standard plan amount) or • Economic hardship deferment

Pay As You Earn • Direct Loan borrowers with eligible loans • Must be a new borrower on/after 10/1/2007 who received new loan on/after 10/1/2011 and • Payments would be lower on Pay As You Earn relative to what would have been paid under the 10-year standard repayment plan (called “partial financial hardship”)

Pay As You Earn – Direct Loans That Qualify • All Direct Loans are eligible except • Parent PLUS loans • Consolidation Loans that repaid parent PLUS loans

Pay As You Earn - Payment • Pay the lesser of • 10% of discretionary income (income-based payments) or • What they would have paid under the 10-year standard repayment plan (non-income-based payments)

Pay As You Earn – Discretionary Income • Borrower’s AGI minus 150% of the poverty guideline for the borrower’s state and family size • Example Borrower’s AGI $25,000 150% of poverty guideline $15,000 Discretionary Income $10,000

Pay As You Earn – Forgiveness • Remaining balance is forgiven after 20 years of qualifying repayment. • According to the IRS, the forgiven amount is considered taxable income

Pay As You Earn – Qualifying Payments • Qualifying Payments include: • Payments made under an income-driven plan • Payments under the 10-year standard repayment plan (or any other repayment plan with a payment amount at least equal to the 10-year standard plan amount) or • Economic hardship deferment

Recap of ICR Payment Amount • ICR - borrowers pay the lesser of: • 12-year standard repayment schedule multiplied by income percentage factor (payment based on loan debt and income) or • 20% of discretionary income (payment based only on income) • For more on income percentage factors in ICR, see 77 FR 30266, available at: https://federalregister.gov/a/2012-12420

Recap of IBR Payment Amount • Under IBR, borrowers pay the lesser of: • 15% of discretionary income (income-based payments) or • What they would have paid under the 10-year standard repayment plan (non-income-based payments)

Recap of Pay As You Earn Payment Amount • Under Pay As You Earn, borrowers pay the lesser of: • 10% of discretionary income (income-based payments) or • What they would have paid under the 10-year standard repayment plan (non-income-based payments)

IBR/Pay As You Earn/ICR Plan Request Form – Electronic and Paper • Borrower Demographics • Name • Address • SSN • Telephone Numbers • Email Address

IBR/Pay As You Earn/ICR Plan Request Form • Borrower can select plans for DL and FFEL • IBR • Pay As You Earn • ICR • I request that my loan holder determine which of the above plans I am eligible for, and place me on the plan with the lowest monthly payment amount.

Borrower Income • Servicer uses borrower’s Adjusted Gross Income (AGI) when calculating discretionary income • Copy of most recently filed federal income tax return or IRS tax return transcript – last two most recently completed years

Income Documentation • Uses same IRS data retrieval tool as FAFSA • Married borrowers requesting joint ICR who file separately must both provide a tax return

Alternative Documentation of Income • If borrower did not file a federal income tax return OR • If AGI does not reasonably reflect borrower’s current income OR • If servicer asked borrower to provide alternative documentation of income

IBR/Pay As You Earn/ICR Plan Request Form • No taxable income – sign the form and submit • Alternative documentation of income • One piece for each source of income (borrower and spouse if applicable) • Pay stub, letter from employer listing income, interest or bank statements, dividend statements, signed explanation listing income sources and name and address of the source

IBR/Pay As You Earn/ICR Plan Request Form • Provide spouse information if • Filed a joint tax return and your spouse has eligible loans • Joint Direct or FFEL Consolidation Loan obtained with spouse. • Borrower and spouse have Direct Loans and both want to repay under the joint ICR option.

Family Size • Borrowers must also annually certify their family size • If the family size question is blank, the loan servicer assumes a family size of one

Recertification • Under all three plans, borrowers are required to submit updated income documentation annually • Failure to submit documentation timely will lead to: • A monthly payment amount that is what it would have been on the 10-year standard repayment plan (non-income-based payment) and • Interest capitalization

Recertification • Loan Servicer provides a notice of deadline for submission of income documentation and consequences of failure to provide • If borrower submits documentation within 10 days of deadline, servicer will maintain current payment amount until documentation is processed

Applying for Income-Driven Repayment Plans • Borrower can also submit documentation early, if their circumstances have changed, to receive a lower payment amount. • This changes the borrower’s anniversary date

Regulatory References • Final regulations published: November 1, 2012 • Effective date: July 1, 2013 • These provisions were implemented early.

StudentLoans.gov • Enhanced loan counseling information • Repayment estimator resources • Excellent tool for borrowers

Direct Loan Income-Driven Repayment Plans