Income-Driven Repayment Plans & Public Service Loan Forgiveness

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Transcript of Income-Driven Repayment Plans & Public Service Loan Forgiveness

  • Slide 1
  • Income-Driven Repayment Plans & Public Service Loan Forgiveness
  • Slide 2
  • Agenda Income-Driven Repayment Plans Understanding partial financial hardship Understanding IBR/Pay As You Earn the good, the bad, and the ugly Public Service Loan Forgiveness Program Overview Eligibility/Qualification Borrower Process Flow 2
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  • But first, some background. 2007 College Cost Reduction and Access Act PL 110-84 Income Based Repayment Option (IBR) Effective July 1, 2009 Defines Partial Economic Hardship Creates Federal Public Service Loan Forgiveness Program Effective October 1, 2007 First forgiveness November 1, 2017 3
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  • Who Should Consider Income-Driven Repayment Plans? Borrowers with high student loan payments relative to income Individuals who are experiencing financial difficulties but who may not qualify for other options such as deferment or forbearance Teachers with heavy debt loads against low salaries Individuals pursuing lower paid social-service careers Recent graduates managing typical federal student loan debt in low- wage jobs or unpaid internships Law graduates earning low salaries as public defenders Medical residents earning typical resident salaries 4
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  • Partial Financial Hardship (PFH) Important to understand these programs A partial financial hardship exists when : The payment calculated under the Standard 10 year amortized repayment plan is GREATER than the payment calculated under Pay As You Earn/IBR 5
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  • IDR Overview Three main plans Income-Contingent Repayment Plan (ICR) 1994 Direct Loan Program only More information available at StudentAid.gov/ICRStudentAid.gov/ICR Income-Based Repayment Plan (IBR) 2009 Available in both the Direct Loan and FFEL Program More information available at StudentAid.gov/IBRStudentAid.gov/IBR Pay As You Earn Plan (PAYE) 2012 Direct Loan Program only For new borrowers in FY 2008 who receive new loans in FY 2012 Modeled on IBR, incorporating statutory IBR changes scheduled to take effect for new borrowers in 2014 More information available at StudentAid.gov/PayAsYouEarnStudentAid.gov/PayAsYouEarn 6
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  • Eligible Borrowers IBR/PAYE IDR PlanEligible Borrowers 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) 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 Their 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) 7
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  • Eligible Loans & Payment Amounts IBR/PAYE IDR PlanEligible LoansEligible Payment Amounts Income Based Repayment All Direct and FFEL Program loans except parent PLUS loans and Consolidation Loans that repaid parent PLUS loans 15% 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 All Direct Loans are eligible except parent PLUS loans and Consolidation Loans that repaid parent PLUS loans 10% of discretionary income (income-based payments) or What they would have paid under the 10-year standard repayment plan (non-income-based payments) 8
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  • IBR Payment Amounts EXAMPLE: Borrowers AGI is $50,000 and they reside in 1 of the 48 contiguous states and a family size of 1. Poverty guideline for this example is $11,670 x 150% = $17,505 Then we subtract $17,505 from $50,000 = $32,495 which is the discretionary income $32,495 x 15% = $4,874.25 divide that figure by 12 = $406.19 9
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  • Interest Subsidies IBR/PAYE IDR PlanInterest Subsidy Income Based Repayment If the monthly IBR payment amount does not cover the interest that accrues on the loans each month, the government will pay the unpaid accrued interest on the borrowers Subsidized Stafford Loans (either Direct Loan or FFEL Loans) for up to three consecutive years from the date they began repaying under IBR or Pay As You Earn. The three years does not include periods of Economic Hardship Deferment Borrower must pay all interest on unsubsidized loans Pay As You Earn If the monthly Pay As You Earn payment amount does not cover the interest that accrues on the loans each month, the government will pay the unpaid accrued interest on the borrowers Direct Subsidized Stafford Loans for up to three consecutive years from the date they began repaying under Pay As You Earn or IBR. The three years does not include periods of Economic Hardship Deferment Borrower must pay all interest on unsubsidized loans 10
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  • Negative Amortization Negative sounds bad . And it is! Example Payments do not cover the interest due on the loans $100,000 at 6.8% = $6,800/yr = $566.67/mo PAYE @ $40k income = $190 $567-$190 = $377/mo accruing interest not paid Capitalized when leave IBR/PAYE or no longer PFH 11
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  • Loan Forgiveness IBR/PAYE Loan Forgiveness If the IBR borrower makes 25 years of qualifying payments and meets certain other requirements, any remaining balance will be cancelled (20 years for new borrowers only on/after 7/1/2014) The remaining balance is forgiven for the PAYE borrower after 20 years of qualifying repayment is considered taxable income! 12
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  • Important Reminders IBR/PAYE Must apply annually 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) 13
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  • Leaving IBR or Pay As You Earn If borrowers leave IBR and have unpaid interest, it will capitalize to principal, increasing principle balance The borrower is placed into the Standard Plan based on the term remaining for their loan type For example, Stafford/PLUS Loans will have 10 years minus the time in repayment. Consolidation Loans may have 10-30 years minus the time in repayment. Borrowers may request a reduced payment forbearance if they cannot afford the payment amount on the standard repayment plan. Borrowers who leave IBR can come back if they demonstrate "partial financial hardship". 14
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  • Income-Contingent Repayment (ICR) Does not require borrower to show PFH for eligibility Loan discharged after 25 years Each year the monthly payments are recalculated based on: AGI (spouses income will only be included if they file federal taxes jointly or are repaying under joint ICR The Family size Total amount of the borrowers Direct Loans Lesser one of the following: 12-year standard repayment schedule multiplied by income percentage factor, or 20 percent of discretionary income If payments are not large enough to cover the interest that accrues monthly, the unpaid interest is capitalized once each year The amount capitalized will not exceed 10% of original amount owed when the borrower entered repayment If the borrowers payments are not enough to cover the accruing interest, it will continue to accrue but will not be capitalized if the borrower has reached the 10% limit 15
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  • Income-Driven Repayment Examples Examples from FinAid.org calculators 16
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  • Income-Driven Repayment Examples Examples from FinAid.org calculators 17
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  • Income-Driven Repayment Application Borrowers may apply for an IDR on www.studentloans.gov or complete a paper application. www.studentloans.gov Can be used by borrowers with Direct Loans or FFEL Loans Uses IRS Data Retrieval Tool that is used on the FAFSA Retrieves the most recent tax information from two most recently completed tax years If a borrower selects a specific repayment plan that they are not eligible for, the borrower will be placed on the lowest monthly payment amount IDR plan for which they are eligible. Borrowers may apply for an IDR on www.studentloans.gov or complete a paper application. www.studentloans.gov Can be used by borrowers with Direct Loans or FFEL Loans Uses IRS Data Retrieval Tool that is used on the FAFSA Retrieves the most recent tax information from two most recently completed tax years If a borrower selects a specific repayment plan that they are not eligible for, the borrower will be placed on the lowest monthly payment amount IDR plan for which they are eligible. 18
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  • PSLF Overview The Public Service Loan Forgiveness Program (PSLF) was created to encourage individuals to enter and continue to work full- time in public service jobs. Enacted as part of College Cost Reduction and Access Act (CCRAA) of 2007 Direct Loans Only (may need to consolidate) Public Service full-time employment for 10 years 120 qualifying payments (IBR, ICR, or Standard Repayment plans only) made within 15 days of the due date only payments made after 10/1/2007 count Balance of loans forgiven not taxable (108(f)) 20
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  • Eligible Loans Direct Subsidized Loans Direct Unsubsidized Loans Direct PLUS Loans (for graduate or professional students) Direct Consolidation Loans Special Direct Consolidation Loans Other federal loans eligible if consolidated into a Direct Consolida