Income Based Repayment and

Public Service Forgiveness

David DahlenDirector of Student Financial Aid/Registrar

Mayo Clinic, College of Medicinedahlen.david@mayo.edu

Who is in the Audience?

• Experienced?– Know all there is about

IDRs– Attending because

there is nothing more interesting on the Agenda?

• New?– NEW to FA– Confused about IDRs? – Attending because

there nothing more interesting on the Agenda?

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Give Credit where Credit is Due

• Some, not all of these slides are from the IDR/PSLF session at the 2014 FSA Conference.

• Thank you to USDOE• All of us are smarter than any of us.

– Correct me!– Add to the conversation.

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Agenda• What is Income Driven Repayment

– Key Terms– Example– Core Concept

• Public Service Loan Forgiveness– Key Terms– Examples– Core Concepts– Proposed Changes

• Questions

How is a “standard” payment calculated?

• Amount Borrowed

• Interest Rate

• Amortization Schedule

– IDRs looks at none of these factors.

What is IDR? • Income Driven Repayment are payment options for federal student

loans that uses Income, Family Size and Location to determine payment.

• Past, Current and Future Borrowers

• Monthly payment is based on income and family size, not debt, term and interest rate.

• After 25 years; any remaining balance is forgiven

• Available for all borrowers (past, current future)

Three Main Plans• Three main plans

• Income-Contingent Repayment Plan (ICR) – 1994• Direct Loan Program only• 20% of Discretionary Income

• Income-Based Repayment Plan (IBR) – 2009• Available in both the Direct Loan and FFEL Program• 15% of Discretionary Income

• Pay As You Earn Plan (PAYE) – 2012• Direct Loan Program only• For new borrowers in FY 2008 who receive new loans in or after FY 2012• 10% of Discretionary Income• Negotiated rulemaking in 2015

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Eligible Loans:

• Eligible– Stafford (DL and FFELP), SLS, Grad PLUS, Consolidation*– Perkins; if included in a Consolidation Loan

• Not Eligible– Parent PLUS– Consolidation Loan that contain Parent PLUS– Private/Alternative Loans ~ MN SELF

AGI

• Borrower who files married/joint: both spouse’s AGI are considered in determining payment

• Borrower who files married/separate: only the borrower’s AGI is considered in determining payment amount

Family Size

• Certified Annually

• Includes borrower, spouse, children and unborn children and others who live in the household: receiving >50% support.

• Family size defaults to one (1) if borrower does not provide required information.

Who Qualifies?

• Borrowers who have enough debt relative to income (AGI) to qualify for a reduced payment.

• This is called a Partial Financial Hardship (PFH) • What does that mean?

Partial Financial Hardship (PFH)

• Occurs when the annual amount due on all of the borrower’s eligible loans (based on a 10 year payment plan) exceeds a 15% (in IBR) or 10% (in PAYE) of the difference between the borrowers adjusted gross income (AGI) and 150% of the poverty guideline for the borrower’s family size.

IBR Payment Details 15% option • First: Determine Income Protection Based on the Poverty Level

$11,770 X 1.5 = $17,655

• Second: Calculate Disposable Income: Income – 150% of Poverty Level

$51,404 - $17,655 = $33,749

• Third: Calculate Annual Student Loan PaymentDisposable income X 15%

$33,749 X .15 = $5,062.35 (annual payment)

Divide the annual payment by 12 to get the monthly payment: IBR Payment = $421.86

PAYE Payment Details 10% option

• First: Determine Income Protection Based on the Poverty Level$11,770 X 1.5 = $17,655

• Second: Calculate Disposable Income: Income – 150% of Poverty Level

$51,404 - $17,655= $33,749

• Third: Calculate Annual Student Loan PaymentDisposable income X 10%

$33,749 X .10 = $3,374.90 (annual payment)

Divide the annual payment by 12 to get the monthly payment: PAYE Payment = $281.24/month

Quick Rule

If a borrower’s “student loan debt” is more than the annual income; you probably qualify for Income Driven Repayment

Student Loan Debt includes PRIVATE LOANS!

Several IDR Options• Income Contingent

• Income Based– Any FFELP or DL Borrower

• Pay As You Earn– You are a new borrower on or after October 1, 2007;

and – You received a disbursement of a Direct Subsidized

Loan, a Direct Unsubsidized Loan, or a student Direct PLUS Loan as a graduate or professional degree student on or after October 1, 2011

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Poverty Guidelines

• 2015 Federal Poverty Guidelines for 48 contiguous states and DC

• Slightly higher amounts for residents of Alaska or Hawaii

• Quick Fact: If income is below these levels x 150%, the monthly payment with IBR would automatically be “zero”

– These months count toward the 25 year max for forgiveness

Family Size Poverty Guideline

1 $11,770

2 $15,930

3 $20,090

4 $24,250

5 $28,410

6 $32,570

7 $36,730

8 $40,890

Time for an example:

• Paul is single and has $20,000 in Federal Subsidized Stafford Loans (all debt is at 6.8%)

• Paul earns $25,000 per year

Standard Repayment

$20,000 @ 6.8% for 120 payments =$230 per month

Standard vs. IBR

Standard 10 year pmt:

$230 per month

Borrower is covering all accrued interest.

IBR Payment

$109.41 per month

Interest is $113 per monthFeds pay the difference

Principal is not reduced.

More on Paul

• Question: – What if Paul had eligible debt of $60,000?

• Answer: – His payment would still be $110 per month….

Remember income and family size determines the monthly payment.

Paul…continued

• As Paul’s salary goes up; so does his student loan payment. This will happen until the partial financial hardship is gone. Meaning; the IBR calculation yields a monthly payment of more than $230 per month (the original ten year payment).

Recalculation of Payment

• Payment Determination is reviewed annually

• If borrower no longer qualifies for PFH the maximum monthly payment must not exceed the monthly payment calculated under a 10 year repayment plan at the time the entered IRB.

How are payments applied?

• The payment is split proportionately between sub and unsub loans.

Interest Subsidy

• If the monthly payment under IBR does not cover the interest due the interest is paid on the borrower’s behalf by DOE. – SUBSIDIZED LOANS ONLY!

• 36 months maximum• Unsubsidized loans always accrue interest.

Unpaid/Accruing Interest

• After 36 months, interest on the subsidized loan is no longer paid on the borrowers behalf.

• Interest will be capitalized• Debt will grow• IRB allows borrowers to manage payments

and thereby avoid default

Forgiveness …

• Borrower must have had PFH in IBR at least once– Note…you don’t have to always be in PFH

• Borrower must have made 300 eligible payment over 25 years– Can not “pay ahead”– If you consolidate, the clock starts over– No forgiveness will be granted prior to July 1, 2034

• Any loan amount forgiven is taxable under current regulation.

Questions on IDR …

Public Service Loan Forgiveness

PSLF

Here’s a good way to think about PSLF:

Right Loans+ Right Payments (number & type)+ Right Work= Public Service Loan Forgiveness

What is PSLF? • College Cost Reduction and Access Act of 2007 created this

program

• Direct Loan Program – ONLY

• Periods of Deferment and Forbearance do not count

• Discharges any remaining debt after 10 years of full-time employment in public service.

• The borrower must have made 120 actual payments

• Payments are retroactive to October 1, 2007, if the payment was made on a Direct Loan.

What is Public Service Employment?

• Eligible Jobs Include: – Federal, State, Local, or Tribal Government

• military, public schools, police, fire fighters • But not members of Congress …

– Full-Time AmeriCorps or Peace Corps

– Tax-Exempt 501(c)(3) organization

What Kind of Payments Count?

• Standard Repayment (10 year)• Income-Driven Repayments

– Income Contingent– Income Based– Pay As You Earn

PSLF Payments

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Forgiveness

• Remember this is PSLF is only available in the Direct Loan program

• Under current rules; the amount forgiven is not a taxable event

Some Proposed Changes

• Capping Forgiveness at $57,500– Cost a lot of money!

• Only Payment made while in a PFH will count toward PLSF– Target PSLF for those who “really need it”

• Negotiated Rule Making – Happening NOW– ONE Income Driven Repayment Plan

• REPAY ~ 4-29-2015

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Questions?

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