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Income-Driven Repayment Options IBR, ICR and Pay As You Earn 1 Note: The information contained in the presentation is not to be considered legal advice.

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Presentation on theme: "Income-Driven Repayment Options IBR, ICR and Pay As You Earn 1 Note: The information contained in the presentation is not to be considered legal advice."— Presentation transcript:

1 Income-Driven Repayment Options IBR, ICR and Pay As You Earn 1 Note: The information contained in the presentation is not to be considered legal advice. Information is current as of April 2013

2 Agenda Definitions of key terms Comparison of plans Application process Borrower example Summary Resources 2

3 Implementation Income-Contingent Repayment (ICR)Effective for Direct loan borrowers who are in repayment on/after July 1, 1994 Income-Based Repayment (IBR)Effective for FFELP and Direct loan borrowers who are in repayment on/after July 1, 2009 PAY AS YOU EARNEarly implementation for eligible Direct loan borrowers as of December 21,

4 Definitions Adjusted Gross Income (AGI) Single borrower - borrowers AGI reported to the IRS Married borrower filing jointly - combined AGI of both spouses Married borrower filing separately - borrowers reported AGI only Capitalization (of Interest) Adding unpaid accrued interest to the loans principal balance –Interest then accrues on the new higher principal balance 4

5 Definitions Discretionary Income AGI minus 150% (for IBR and Pay As You Earn) or 100% (for ICR) of federal poverty guideline for borrowers family size and state of residence Family Size Borrower, borrowers spouse, and borrowers children, including unborn children Others who live with and receive more than half of their support from the borrower 5

6 Definitions Federal Poverty Guideline The amount that the Department of Health and Human Services determines is the lowest income acceptable for a family of a given size to not live in poverty. Income-Derived Payment A formula-based monthly payment calculation based on the borrowers family size, income, and state of residence. The formula does not consider other debts or expenses, and the formula varies by repayment plan selected (and student loan amounts in some cases for ICR). 6

7 Definitions Loan Forgiveness After 20 years and 240 eligible payments (Pay As You Earn) or 25 years and 300 eligible payments (IBR and ICR), any remaining principal balance and accrued interest may be forgiven Any forgiven amount is considered taxable income under current IRS rules 7

8 Definitions Partial Financial Hardship (PFH) Required for initial repayment under IBR and Pay As You Earn, and to retain an income-derived payment in subsequent years A PFH exists when the annual amount due on the borrowers eligible loans, as calculated under the 10-year standard repayment plan, exceeds 15% (for IBR) or 10% (for Pay As You Earn) of the borrowers discretionary income PFH not applicable to ICR 8

9 Definitions Temporary Interest Subsidy If the monthly payment does not cover accrued interest on subsidized loans or portions of Consolidation loans that are subsidized, ED pays the accruing interest Only available for up to the first consecutive 36 months of IBR or Pay As You Earn repayment Periods of economic hardship deferment do not count toward the total 36 months 9

10 Comparison of plans 10

11 CriteriaIBRPay As You EarnICR Who qualifies Direct & FFELP Loan borrowers who have a partial financial hardship (PFH) New borrowers as of 10/1/2007 who have a PFH; AND receive a Direct Loan disbursement or Direct Consolidation Loan on/after 10/1/2011 Direct Loan borrowers Eligible Loans - Direct & FFEL Stafford Loans (sub & unsub) - Direct & FFEL Grad PLUS - Direct & FFEL Consolidations that did not repay parent PLUS Loans - Direct Stafford Loans (sub & unsub) - Direct Grad PLUS Loans - Direct Consolidation Loans that did not repay Direct and/or FFEL parent PLUS Loans - Direct Stafford Loans (sub & unsub) - Direct Grad PLUS Loans - Direct Sub & Unsub Consolidation Loans, including Direct Unsub Consolidation Loans made on/after 7/1/2006 that repaid Direct and/or FFEL parent PLUS Loans Ineligible Loans - Defaulted Direct & FFEL Loans - Direct & FFEL parent PLUS Loans - Perkins Loans - Private Loans - HEAL Loans - Direct & FFEL Consolidation Loans that repaid parent PLUS Loans - Defaulted Direct Loans - Direct parent PLUS Loans - Perkins Loans - Private Loans - HEAL Loans - All FFELP Loans (including FFELP loans owned by ED) - Direct Consolidation Loans that repaid Direct and/or FFEL parent PLUS Loans - Defaulted Direct Loans - Direct parent PLUS Loans - Perkins Loans - Private Loans - HEAL Loans - All FFELP Loans (including FFELP loans owned by ED) - Direct PLUS Consolidation Loans made prior to 7/1/2006 that repaid Direct and/or FFEL parent PLUS Loans 11

12 New Borrower Requirement For purpose of Pay As You Earn, a new borrower is one who: Has no outstanding balance on a Direct or FFELP loan as of October 1, 2007, or has no outstanding balance on a Direct or FFELP loan when he or she obtains a new loan on or after October 1, 2007, AND Receives a disbursement of a Direct subsidized Stafford, unsubsidized Stafford, or Grad PLUS loan on or after October 1, 2011; or receives a Direct Consolidation Loan based on an application received on or after October 1, Exception: An individual is not a new borrower if the Direct Consolidation Loan repays Direct Loans or FFELP loans that otherwise made the borrower ineligible, i.e., loans made prior to October 1,

13 Partial financial hardship (PFH) Based on income and family size Borrowers annual payment amount using the standard 10-year repayment plan ÷ 12 15% (for IBR) or 10% (for Pay As You Earn) of borrowers (Adjusted Gross Income – 150% of poverty line amount) ÷ 12 Note: A PFH is not required for the ICR plan.

14 Payment Amounts Under IBR and Pay As You Earn, borrowers monthly payment depends on whether borrower has a PFH that year Years with PFH: –IBR payment is 15% of discretionary income –Pay As You Earn payment is 10% of discretionary income Years without PFH: –Payment is a 10-year standard payment amount 14

15 Payment Amounts (contd.) Under ICR, borrowers monthly payment is the lesser of: –20% of discretionary income (monthly payment based only on income) OR –12-year standard repayment schedule multiplied by income percentage factor (monthly payment based on loan debt and income) For more on income percentage factors in ICR, see Federal Register available at: https://federalregister.gov/a/ https://federalregister.gov/a/

16 Payment Amounts (contd.) Under IBR and Pay As You Earn Payment less than $5.00 = $0 payment amount due Payment between $5.00 and $10.00 = $10.00 payment amount due Payment greater than $10.00 = exact amount that results from calculation Under ICR Payment of $0 = $0 payment amount due Payment greater than $0 up to $5.00 = $5.00 payment amount due Payment greater than $5.00 = exact amount that results from calculation 16

17 Application Process 17

18 Application process Common form to request these plans IBR/PAYE/ICR Repayment Plan Request Borrowers may complete: – Paper application to their loan holder – Electronic application process – For borrowers with ED-held loans, form available on StudentLoans.gov website (borrowers can access application directly or through ED-servicers websites) – For FFELP borrowers, loan holders will instruct borrowers when electronic process is available 18

19 Interest Capitalization Unpaid interest is added to the loans principal amount: When the borrower no longer has a PFH or fails to timely submit the annual reapplication information AND When the borrower chooses to leave the IBR or Pay As You Earn repayment plan completely Note: IBR has no limit on the amount of interest that can be capitalized. However, as long as the borrower remains under ICR or Pay As You Earn, the amount of interest capitalized cannot exceed a maximum of 10% of the loan balance. 19

20 Loan Forgiveness All three plans provide for forgiveness of any remaining balance of principal and interest. –For IBR and ICR, after 25 years of qualifying payments (300 payments) –For Pay As You Earn, after 20 years of qualifying payments (240 payments) Forgiveness clock is restarted if loans are consolidated once borrower begins any of the income-driven plans Under current IRS rules, all forgiven amounts are considered taxable income 20

21 Borrower example 21

22 Borrower example Billy Borrower: Is single with no dependents Lives in Washington Has an AGI of $35,000 and Has $50,000 in Direct Loan debt ($23,000 of which is subsidized), all of which has a 6.8% interest rate *Assumes a 5% increase in Billys income each year and a 3% annual increase in poverty guidelines 22 Source: U.S. Department of Education: 2012 FSA Conference

23 Borrower example ICRIBRPay As You Earn Initial Payment$397.17$228.06$ Final Payment$535.23$575.40$ Time in Repayment 13 years, 8 months 20 years, 2 months 20 years Total Paid$78,444.28$101,673.34$70, Forgiveness$0 $44, year StandardExtended & Consolidation Standard Payment$575.40$ Time in Repayment10 years25 years Total Paid$69,037.44$104, For comparison: Source: U.S. Department of Education; 2012 FSA Conference

24 Summary 24

25 Income-Driven Repayment Plans Primarily intended for borrowers who are: Entering repayment with high student loan debt relative to income Earning lower salaries as they begin their careers Having difficulty making payments under Standard repayment plan 25

26 Potential borrower benefits More manageable monthly payments Avoidance of delinquency and default Healthier credit history Remaining principal and interest is forgiven after 20 or 25 years of qualifying payments Possibility of Public Service Loan Forgiveness after making 10 years of qualifying payments while employed full-time in a public service job 26

27 ICRIBRPay As You Earn Time in Repayment 13 years, 8 months 20 years, 2 months 20 years Total Paid$78,444.28$101,673.34$70, Plan Forgiveness $0 $44, ICRIBRPay As You Earn Time in Repayment 10 years Total Paid for PSLF $55,952.61$37,222.34$24, PSLF Amount$19,858.58$45,711.82$57, Without PSLF: With PSLF: Source: Department of Education; 2012 FSA Conference

28 Borrower Considerations Repayment period could be more than 10 years More interest could be paid over time Requires annual submission of information on income and family size to prove continued eligibility for reduced payments 28

29 Resources 29

30 Resources NCHER Income-Driven Repayment Plan Comparison Chart CA245A EC0-92F CD4F0C/IncomeDrivenCompChart pdf CA245A EC0-92F CD4F0C/IncomeDrivenCompChart pdf New ED Repayment Calculators available at: https://studentloans.gov/myDirectLoan/repaymentEstim atorLoginRedirect.action 30

31 Resources FSA Web pages for repayment plan information IBR/PAYE/ICR Repayment Plan Request Form F7D2-0FA5-4FE4-AF49-68FBF3013D3F/GEN pdf F7D2-0FA5-4FE4-AF49-68FBF3013D3F/GEN pdf –Available on the StudentLoans.gov Web site –GEN-12-22: HHS link for Poverty Guideline: 31

32 Resources November 1, 2012 Final Regulationsadd and/or revise provisions for ICR, IBR and Pay As You Earn 20/ pdf IBR –October 23, 2008 Implementing Final Regulations 10/FR CCRAAFinalRule.pdf 32

33 Resources Pay As You Earn –12/07/2012 Notice of early implementation F F10E-46E4-8C58- B876569C7163/FR120712PAYEEarlyImp.pdf F F10E-46E4-8C58- B876569C7163/FR120712PAYEEarlyImp.pdf –12/21/2012 Electronic announcement arnPlanIBRnICR.html arnPlanIBRnICR.html –01/11/2013 Electronic announcement ndersandLenderServicersInterestedinElectronicIBRPay.ht ml ndersandLenderServicersInterestedinElectronicIBRPay.ht ml 33


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