Understanding Income-Driven Repayment Plans: IDR Details and Benefits

1. Session 27 Income-Driven Repayment Plans/Pay As You Earn (PAYE) Ian Foss and Barbara Hoblitzell | Nov-Dec. 2016 U.S. Department of Education 2016 FSA Training Conference for Financial Aid Professionals

2. The Rise of IDR

3. Details Of Income-driven Repayment (IDR) Plans 3

4. The Plans Revised Pay As You Earn (REPAYE) 2015 Pay As You Earn (PAYE) 2009 Income-Based Repayment Plan (IBR) 2009 Income-Contingent Repayment Plan (ICR) 1994

5. Eligible Borrowers IBR REPAYE PAYE ICR Eligible Loan Show Need Recent Borrower

6. Eligible Loan Programs ICR IBR REPAYE PAYE Direct Loans FFELP Perkins

7. Eligible Loan Type ICR IBR PAYE REPAYE Loan received as student Loan received as parent Consolidation (no parent loans) Consolidation (parent loans)

8. Payment Amounts Most IDR plans have two formulas – for those that do, borrowers always pay the lesser of the two.

9. Interest Subsidy Benefits 50% of negative amortization No time limit After 3 years, 50% of negative amortization 100% of negative amortization For first 3 years under plan Only during negative amortization Subsidized loans Only No subsidy REPAYE [U] REPAYE [S] ICR IBR PAYE 9

10. Interest Capitalization Capitalization caused by conversion is limited to 10% of balance Capitalization of negative amortization interest is limited to 10% of balance Interest accruing due to negative amortization is capitalized annually Normal rules apply (upon expiration of deferment/forbearance) Interest capitalizes when leaving the plan While normal rules suspended, only trigger is conversion to standard plan amount ICR IBR REPAYE PAYE While payment is income-based, normal rules are suspended 10

11. Loan Forgiveness 25 years ICR IBR REPAYE: Any grad loans 20 years PAYE REPAYE: All undergrad loans Amount forgiven is income for tax purposes. 11

12. Billy Borrower 12

13. Billy Borrower • Is single with no dependents and lives in DC • Has $65,500 in Direct Loan debt ($23,000 of which is subsidized), which has a weighted average interest rate of 4.5% • Borrowed for graduate school to get an MSW • Has an AGI of $40,000 that rises at 5% per year

14. ICR

15. IBR

16. PAYE/“new” IBR

17. REPAYE

18. StudentAid.gov/Repayment-Estimator 18

19. Characteristics of IDR Borrowers As of November 11, 2016. Includes borrowers with federally held loans. Includes borrowers who are delinquent. Excludes borrowers who are in deferment or forbearance.

20. Application Process 20

21. Process Overview Step Three Step Four Step Five Step One Step Two Step Six Submit AGI or ADOI Select reason for submitting form Select plan, if submitting form to initially apply Certify family size Provide information about spouse, if applicable Determine what kind of documentation to submit 04 05 06 01 02 03 21

22. Characteristics of IDR Applicants Includes all borrowers who have federally held loans and who submitted an IDR application in past 12 months. Data is from latest application. * Has only been an option since December 2015. † Self-reported data in response to prompt about working for government or not-for-profit. Only asked in electronic application.

23. Spouses Almost all married borrowers provide spouse’s income documentation Only used by servicer when relevant Exception for those who are separated or cannot access spouse’s income

24. Spouses

25. Billy gets Married in Year 5 • Spouse has $20,000 in income, and $40,000 in Direct Loans, all of which are unsubsidized, and which has an interest rate of 4.5% • Billy and his spouse decide to file separately

26. Effect of Billy’s Marriage

27. In Year 6, Spouse Pays Off

28. Spouses & REPAYE If a spouse’s income is excluded from calculation: • The borrower’s spouse is not counted in family size • If the spouse has eligible loans, the spouse’s loans are not considered in the monthly payment amount adjustment

29. Tax Filing Status of IDR Applicants Includes all borrowers who have federally held loans and who submitted an IDR application in past 12 months. Data is from latest application.

30. Income Documentation

31. Income Documentation

32. Who submits what? Includes all borrowers who have federally held loans and who submitted an IDR application in past 12 months. Data is from latest application.

33. Failing to recertify

34. Billy Doesn’t Recertify – Year 4

35. Outreach Efforts 35

36. Email campaign (REPAYE) • There’s a new IDR plan (REPAYE) where all DL student borrowers can set payments at 10% of income • Over March – April, 2016 emailed over 3 million • Cohorts: • In delinquency • In hardship deferment or forbearance • Not in IDR, but started/completed prior application or indicated interest in counseling • Borrowers with FFEL Program loans

37. Email campaign (REPAYE) • 4.7% of borrowers in control group applied for IDR by July 2016 • 5.1% of borrowers who received email applied for IDR by July 2016 • A single email led 6,000 more borrowers to enroll in IDR • Those borrowers have $300 million in outstanding debt • Effectiveness of targeting messages to each group was not as clear • More work to do

38. Resources 38 38

39. Resources • StudentAid.gov/IDR – Information • StudentLoans.gov – Application • StudentAid.gov/repayment-estimator – Calculator • StudentLoans.gov/repay – 5 steps or less to a student loan solution • http://go.usa.gov/cu8aV - Blog on choosing IDR plans

40. StudentLoans.gov/repay

41. Questions Ian.Foss@ed.gov Barbara.Hoblitzell@ed.gov