IBR and Federal Student Loan Forgiveness

IBR and Federal Student Loan Forgiveness Understanding These New Options Copyright, 2010 by Access Group, Inc. All rights reserved.

Looking Ahead What happens after graduation? Does loan have a GRACE period? YES (e.g., Stafford, Perkins) NO (e.g., Grad PLUS, Consolidation) Repayment begins after grace period: 6 months Stafford 9 months Perkins Repayment resumes after graduation Start making payments Postpone repayment

Deferment and Forbearance Options to Postpone Payments May be able to get temporary relief if you re unable to make minimum monthly payment(s) Likely option include: Deferment Temporary postponement of your monthly student loan payments Forbearance Temporary postponement or reduction of your monthly student loan payments Contact loan holder/servicer for more information

Comparison of Repayment Plans Options Payment Structure Maximum Payment Period Additional Features Standard Fixed 10 years - Highest initial payment - Lowest total interest - No negative amortization Graduated Tiered 10 years - Interest only payments initially - Payments increase incrementally - No negative amortization - Monthly payments can t be more than three times greater than any other payment ( 3 times rule ) Extended Fixed or tiered 25 years - Lowest initial payment without considering income - No negative amortization - To qualify in FFELP: - FFELP debt must be > $30,000 - New FFELP borrower 10/7/98 Income Sensitive Income Based (IBR) Adjusted annually based on: - Total gross income Adjusted annually based on: - Household AGI - Household size - Poverty guideline - State residence 15 years - Subject to 3 times rule - No negative amortization 25 years - Payment is 15% of disposable income if experiencing partial financial hardship - Eligibility/payment amount reevaluated annually - Negative amortization allowed

Income-Based Repayment (IBR)

IBR Plan General Terms Can be used to repay: Federal Stafford Loans Federal Grad PLUS Loans (not Parent PLUS) Federal Consolidation Loans (not including payoff of Parent PLUS) Must have Partial Financial Hardship (PFH) to enter IBR plan Payment while in PFH is based on: Household AGI Household size HHS Federal Poverty Guideline for your state

IBR Plan Household AGI & Household Size Household Adjusted Gross Income (AGI) Your AGI Spouse s AGI (if married), but only if you file a joint federal income tax return NOTE: Eligible debt will include spouse s eligible debt if AGI included Household size You Spouse (if married) Dependent children residing in household Other dependents living in household who receive at least 50% of their support from borrower

IBR Plan Partial Financial Hardship (PFH) PFH exists when: Annual loan payment using Standard 10-yr Fixed Plan based on greater of debt: At repayment ( Standard-Standard ) OR When IBR selected ( Standard-Permanent ) > 15% of household s disposable AGI ( PFH amount)

Total AGI Disposable Income Portion of AGI Available for Loan Payment in IBR AGI available for other expenses AGI available for IBR loan payment (15% of disposable ) AGI needed to cover basic needs (150% of poverty line) Calculators are available at: MappingYourFuture.Org, IBRinfo.org

IBR Approx. Maximum AGI Needed to Qualify for IBR at Specified Debt (2010 Poverty Guidelines) Debt AGI $5,000 $20,848 $10,000 $25,451 $15,000 $30,055 $20,000 $34,658 $25,000 $39,261 $30,000 $43,864 $35,000 $48,467 $40,000 $53,071 $45,000 $57,674 $50,000 $62,277 $55,000 $66,880 $60,000 $71,484 Debt Assumptions: - Interest rate = 6.8% - Household size of 1 residing in 48 contiguous states AGI $65,000 $76,087 $70,000 $80,690 $75,000 $85,293 $80,000 $89,896 $85,000 $94,500 $90,000 $99,103 $95,000 $103,706 $100,000 $108,309 $105,000 $112,912 $110,000 $117,516 $115,000 $122,119 $120,000 $126,722 $125,000 $131,325

IBR Approx. Maximum AGI Needed to Qualify for IBR at Specified Debt (2010 Poverty Guidelines) Debt AGI $130,000 $135,929 $135,000 $140,532 $140,000 $145,135 $145,000 $149,738 $150,000 $154,341 $155,000 $158,945 $160,000 $163,548 $165,000 $168,151 $170,000 $172,754 $175,000 $177,357 Debt Assumptions: - Interest rate = 6.8% - Household size of 1 residing in 48 contiguous states AGI $180,000 $181,961 $185,000 $186,564 $190,000 $191,167 $195,000 $195,770 $200,000 $200,374 $205,000 $204,977 $210,000 $209,580 $215,000 $214,183 $220,000 $218,786 $225,000 $223,390

IBR Plan Estimated PFH Monthly Payment in 2010 AGI Monthly Payment HH Size = 1 Monthly Payment HH Size = 2 $0 $0 $0 $10,000 $0 $0 $20,000 $47 $0 $30,000 $172 $102 $40,000 $297 $227 $50,000 $422 $352 $60,000 $547 $477 $70,000 $672 $602 $80,000 $797 $727 $90,000 $922 $852 $100,000 $1,047 $977 Assume borrower resides in 48 states

Sample IBR Calculation Using 2010 Poverty Guideline-$40,000 AGI Federal Stafford Loan debt $60,000 $100,000 $150,000 Estimated monthly payment (Standard plan @ 6.8% - 10 yrs) $690 $1,151 $1,726 [1] Annual amount due ([1] 12) $8,280 $13,812 $20,712 [2] Household size 1 Household AGI $40,000 [3] Poverty line for household size $10,830 [4] 150% of poverty line (1.5 [4]) $16,245 [5] AGI 150% of poverty line ([3] - [5]) $23,755 [6] 15% of (AGI - 150%) value (0.15 [6]) $3,563 [7] Partial Fin. Hardship: YES or NO YES, if [7] is less than [2] NO, if [7] is equal to/greater than [2] YES YES YES IBR monthly payment ([7] 12) $297 $297 $297 Maximum AGI permitted in this example to qualify for IBR $71,445 $108,325 $154,325

Sample IBR Calculation Using 2010 Poverty Guideline-$60,000 AGI Federal Stafford Loan debt $60,000 $100,000 $150,000 Estimated monthly payment (Standard plan @ 6.8% - 10 yrs) $690 $1,151 $1,726 [1] Annual amount due ([1] 12) $8,280 $13,812 $20,712 [2] Household size 1 Household AGI $60,000 [3] Poverty line for household size $10,830 [4] 150% of poverty line (1.5 [4]) $16,245 [5] AGI 150% of poverty line ([3] - [5]) $43,755 [6] 15% of (AGI - 150%) value (0.15 [6]) $6,563 [7] Partial Fin. Hardship: YES or NO YES, if [7] is less than [2] NO, if [7] is equal to/greater than [2] YES YES YES IBR monthly payment ([7] 12) $547 $547 $547 Maximum AGI permitted in this example to qualify for IBR $71,445 $108,325 $154,325

IBR Plan More Details Once in IBR plan, monthly payment is lesser of: 10 year amortized payment Partial Financial Hardship amount Monthly payment can be less than accrued interest (it allows for negative amortization) Unpaid interest accruing on subsidized Stafford debt is subsidized for up to first 3 years in IBR plan IBR repayment period can extend beyond 10 years Loan cancellation will occur after 25 years in IBR

Beware of Negative Amortization AGI = $40,000 in 2010 Federal Stafford Loan debt $60,000 $100,000 $150,000 Estimated monthly payment (Standard plan @ 6.8% - 10 years) $690 $1,151 $1,726 Interest paid in 1 st month $340 $567 $850 Principal paid in 1 st month $350 $584 $876 Resulting principal balance $59,650 $99,416 $149,124 Comparison with IBR payment, if eligible IBR payment in 1 st month $297 $297 $297 Resulting principal balance $60,000 $100,000 $150,000 Unpaid interest after 1 st payment $43 $270 $553 Minimum AGI needed to eliminate negative amortization AGI needed with IBR to pay all accrued interest $43,445 $61,605 $84,245 Resulting IBR payment in 1 st month $340 $567 $850

IBR Plan What happens when PFH ends? Borrower can: Remain in IBR paying Standard-Permanent amount until debt is repaid Exit IBR Initially must use Standard Repayment Plan New monthly payment is based on debt remaining amortized over the number of months remaining in original 10-year period when loan(s) first entered repayment ( Standard-Expedited amount) Must remain on this plan for at least one billing period, then can switch to a different plan (e.g., Extended Repayment)

IBR Loan Cancellation After 25 Years Any outstanding eligible FFEL or Direct loan balance (other than Parent PLUS) is cancelled after 25 years. To qualify, borrower must have been economically challenged during ALL of the 25 year repayment period. To be economically challenged, borrower must have used IBR during a portion of the repayment period, AND when not in the IBR plan borrower: Made monthly loan payments using Income Contingent Repayment (ICR), or Made monthly payments at least equal to the Standard- Standard amount, or Were in an Economic Hardship deferment. Any loan amount that is cancelled may be taxable in the calendar year in which it is cancelled.

IBR Plan Application Process Must submit following documents Income Based Repayment Plan request form Request for Transcript of Tax Return (if reqeusted) Must submit alternative information if no federal tax return filed in previous tax year or reported AGI doesn t reflect current income IBR Plan Alternative Documentation of Income Additional documentation may be required For example, copy of tax return, pay stubs, other documentation of current income

IBR Pros and Cons Potential Pros Lowest initial monthly loan payment Possible to exclude spouse s income ED will pay unpaid interest on subsidized Stafford for up to 3 yrs Loan cancellation after 25 years of eligible payments Entitlement Potential Cons Increased interest will accrue and may have negative amortization If married might need to file separate tax returns Unpaid interest will be capitalized at some point Annual income and family size verification required Monthly payments could change each year

IBR A Few Things to Consider Can reduce minimum monthly payment Will increase total cost of debt Does not replace Income Sensitive or Income Contingent Repayment options Extended Repayment is an option that avoids negative amortization and annual income verification

Comparing Payment Plans $100,000 Stafford Loan Balance Standard Graduated Extended IBR ISR Monthly Payment $1,151 $567 (2 yrs) $1,353 (8 yrs) $694 $297 (1 st yr) $567 (1 st yr) Maximum Payment Period 10 yrs 10 yrs 25 yrs n/a n/a Total Paid $138,096 $143,530 $208,222 n/a n/a Assumptions: - 6.80% fixed interest rate - No payment incentives - For IBR: - Household AGI = $40,000 in year 1-2010 Poverty Guideline for household size of 1 = $10,830 - For ISR: - Household AGI = $40,000 in year 1, 4% of income used

Federal Student Loan Forgiveness Programs

Federal Student Loan Forgiveness Programs for Public Interest and Public Sector Attorneys Loan Forgiveness for Public Service Employees (PSLF) Other programs (subject to annual federal budget appropriation) John R. Justice Student Loan Repayment Program (JRJ) Civil Legal Assistance Attorney Student Loan Repayment Program (CLAAP)

Loan Forgiveness for Public Service Employees (PSLF)

Public Service Loan Forgiveness Direct Loan Forgiveness Program Borrower will qualify for loan forgiveness if Federal Direct Loans are not in default, and Worked full-time for a total of 120 months in a qualifying public service position on or after October 1, 2007, and Made 120 qualifying loan payments on Federal Direct Loans during period of qualifying public service employment.

Public Service Loan Forgiveness General Provisions Effective for qualifying monthly Direct Loan payments made on or after October 1, 2007 Loans eligible for forgiveness are limited to: Federal Direct Stafford Loans Federal Direct Grad PLUS Loans Federal Direct Consolidation Loans Any amount cancelled in this program will NOT be taxable in the calendar year it is cancelled

Public Service Loan Forgiveness Reconsolidation in Direct Allows borrowers to reconsolidate any existing FFELP Federal Consolidation Loan (FCL) in the Federal Direct Loan Program to take advantage of the new public service loan forgiveness program

Public Service Loan Forgiveness Qualifying Employment In general, it s full-time employment in: 501(c)(3) organization that is exempt from taxation under section 501(a) of the Internal Revenue Code of 1986, or Government (federal, state, local, tribal) agency Full-time employment is defined as greater of: 30 hours/week, or Employer s definition of full-time

Public Service Loan Forgiveness Qualifying Payment Requirements Borrower must be working full-time in an eligible public service position, AND Make qualifying payments using: Income Contingent Repayment, or Income Based Repayment, or Standard 10-year Fixed Repayment plan, or Other plan, but monthly payment must be at least equal to amount required using Standard 10-year Fixed Repayment plan

Public Service Loan Forgiveness Additional Eligibility Provisions 120 months do NOT have to be consecutive Borrower must be working full-time in qualifying public service position at time of forgiveness Loan payments made on any loan prior to October 1, 2007 do NOT count toward the 120- month requirement Loan payments on non-eligible loans (e.g., FFELP loans, Federal Perkins Loans) do NOT count toward 120-month requirement

Public Service Loan Forgiveness Sample Benefit Scenario (AGI = $40,000) Eligible federal student loan debt $60,000 Estimated monthly payment-standard Plan $690 Principal balance after 10 years $0 Total amount paid after 10 years $82,858 Comparison with IBR Plan Assumed starting AGI in year 1 $40,000 Assumed Annual Growth Rate in AGI 3% Assumed Annual Increase in Poverty Line 3% Assumed Annual CPI 3% IBR monthly payment in 1 st month $297 IBR monthly payment in 120 th month (max) $387 Assumed AGI in year 10 $52,191 Total interest paid in IBR over 10 years $39,135 Total principal paid using IBR over 10 years $1,713 Total accrued interest forgiven after 10 years $961 Total principal forgiven after 10 years $58,287 Total amount forgiven after 10 years $59,248

Public Service Loan Forgiveness Points to Ponder Borrower required to work full-time in a qualifying public service position for at least 120 months Borrower must make qualifying monthly loan payments during the entire 10 year period of public service employment Value added benefits of FFEL vs. DL

Public Service Loan Forgiveness Pros and Cons Potential Pros May make it possible financially to pursue public service career Portion of debt may be forgiven Entitlement Potential Cons Not a guaranteed benefit All or nothing benefit; must put in full 10 years Only Direct Loans can be forgiven Will there be debt left to forgive? No confirmation that employment qualifies

Public Service Loan Forgiveness Steps to Participate Refinance FFELP loans in the Federal Direct Loan Program at: www.loanconsolidation.ed.gov Select either IBR or Income Contingent Repayment (ICR) plans Start making payments Keep good records regarding public service employment history

Public Service Loan Forgiveness Employment Records to Keep Suggest borrowers keep the following: Evidence you worked full-time every month you made an eligible loan payment Documentation of what your employer(s) consider full-time employment Documentation that your employer(s) is/are an eligible employer (i.e., 501(c)(3) organization or government agency)

John R. Justice Student Loan Repayment Program (JRJ)

JRJ Program Loan repayment assistance for state and federal public defenders and state prosecutors Must agree to remain employed as public defender or prosecutor for at least three (3) years Repayment benefits cannot exceed $10,000/calendar year and $60,000 in aggregate Funding must be allocated equally between prosecutors and public defenders with priority given to those least able to repay their loans Governor-designated state agency must solicit applications from eligible recipients Subject to federal budget appropriation: $10 million in FY10

JRJ Program Eligibility Criteria Eligible loans (FFELP or Direct) Federal Stafford Federal Grad PLUS (not Parent PLUS) Federal Consolidation (can t include Parent PLUS) Eligible public defender attorneys are either: Full-time employees of a state or unit of local government (including tribal), or Full-time employees of a nonprofit organization operating under a contract with a state or unit of local government who provides legal representation to indigent persons in criminal or juvenile delinquency cases

Civil Legal Assistance Attorney Student Loan Repayment Program (CLAAP)

CLAAP Program Loan repayment assistance for full-time civil legal aid attorneys Must agree to remain employed as civil legal aid attorney for at least three (3) years Repayment benefits cannot exceed $6,000/calendar year and $40,000 in aggregate Cannot receive benefits from both CLAAP and PSLF programs for same service Program is administered by U.S. Department of Education Subject to federal budget appropriation: $5 million in FY10

CLAAP Program Eligibility Criteria Eligible loans (FFELP or Direct) Federal Stafford Federal Grad PLUS (not Parent PLUS) Federal Consolidation (can t include Parent PLUS) Eligible attorneys are either: Working full-time for a non-profit organization that provides legal assistance on civil matters to low-income individuals without a fee, OR Working full-time for a protection and advocacy system or client assistance program receiving federal funding under specific section of the U.S. Code.

A Few Final Comments...

Repayment Plans Federal Student Loan Programs Standard (Fixed) Repayment Graduated Repayment Extended Repayment Income-Sensitive Repayment (FFELP); Income Contingent Repayment (Direct) Income-Based Repayment Choice of a repayment plan may depend on eligibility. Once a plan is chosen it can be changed to a different plan once a year provided the borrower qualifies for that plan.

For more information IBR and Federal Loan Forgiveness U.S. Department of Education provides information about IBR at: StudentAid.ed.gov Equal Justice Works has information about both programs at: EqualJusticeWorks.org Project on Student Debt has created a special Website specifically about IBR at: IBRinfo.org Calculators are available at: FinAid.Org/calculators, IBRinfo.org, MappingYourFuture.Org

For more information about loan repayment options, visit: AccessGroup.Org