EASFAA 2014 Lori Moore Access Group Stephen Brown Fordham Law School The Basics – and Crystal Ball Gazing Federal Income Driven Repayment and Loan Forgiveness EASFAA 2014 Lori Moore Access Group Stephen Brown Fordham Law School

Who Cares !

President Obama 2015 budget proposal http://www2.ed.gov/about/overview/budget/budget15/summary/15summary.pdf Extends PAYE to all borrowers Eliminates standard payment cap under PAYE So high income borrowers pay equitable share of their earnings Calculates income for married borrowers on combined household income Caps PSLF at aggregate loan limit for independent undergrads - $57,500 Establishes 25 year forgiveness for borrowers with balances above $57,500 Up from 10? Up from 20? Prevents payments made under non –income driven payment plans to be used for PSLF Assure forgiveness for students with the greatest need Caps amount of interest that can accrue when borrowers payment is insufficient to cover interest costs

Rep Dave Camp’s Republican tax proposal for 2015 Repeals 108(f)

New America Foundation Brookings (Brown Center on Education Policy) DeLisle and Holt Brookings (Brown Center on Education Policy) Akers and Chingos

Focus on undergrad and tuition costs Brookings - old data - undergrad Grad/Prof students probably primary beneficiaries – afterthought? Post 2006 Grad PLUS ?! No immediate changes ! Cloudy Crystal Ball

Goals for this session… Understanding “partial economic hardship” Understanding IBR and PAYE - the good, the bad and the ugly . . . and how it relates to your students! Understanding Federal Public Service Loan Forgiveness Overall goal: To be more effective and comfortable with your students!

Some background… 2007 College Cost Reduction and Access Act PL 110-84 Income Based Repayment option Effective July 1, 2009 Defines “Partial Economic Hardship” Creates Public Service Loan Forgiveness Program Effective October 1, 2007 First forgiveness November 1, 2017

Direct Loan MPN OMB NO. 1845-0007 Income-Based Repayment (IBR) Plan – Under this plan, your required monthly payment amount will be based on your income during any period when you have a partial financial hardship. Your monthly payment amount may be adjusted annually. The maximum repayment period under this plan may exceed 10 years. If your loan is not repaid in full after you have made the equivalent of 25 years of qualifying monthly payments and at least 25 years have elapsed, you may qualify for cancellation of any outstanding balance on your loans. To initially qualify for this plan and to continue to make income-based payments, you must have a partial financial hardship. An IBR Plan calculator is available at www.direct.ed.gov. The calculator evaluates your eligibility for the IBR Plan and estimates your initial IBR Plan payment amount. The calculator is for informational purposes only. Your servicer will make the official determination of your eligibility and payment amount.

Direct Loan MPN A public service loan forgiveness program is also available. Under this program, the remaining balance due on your eligible Direct Loan Program loans may be cancelled after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed in certain public service jobs.

Election year changes President Obama introduces “New” ICR(a) program – PAYE (Pay as You Earn) Announced by Campaign Oct 24, 2011 Subjected to Negotiated Rulemaking Final Rules issued Nov 1, 2012 Effective December 23, 2012 Oops…Removed interest subsidy on Graduate/Professional Loans effective July 1, 2012

Figuring all of this out…

Aggregate Loan Limits Dependent Undergrads $31,000 Independent Undergrads $57,500 Graduate/Professional $138,500 Plus Grad PLUS! $357 $662 Priceless!

Estimated Net Income Table (Single Earner, No Dependents, NYC Resident,) Gross Income Net Monthly (NYS) $50,000 $55,000 $3,227 $60,000 $3,464 $65,000 $3,701 $70,000 $3,938 $75,000 $4,175 $80,000 $4,412 $85,000 $4,649 $90,000 $4,885 $95,000 $5,114 $100,000 $5,339 $105,000 $5,563 $110,000 $5,804

Economic Hardship Borrower in repayment is experiencing partial economic hardship when… Loan payments on ten year amort exceed15% of income above 150% of poverty level PAYE 10 % if income above 150% Borrower experiencing partial economic hardship may elect to pay under IBR or PAYE (if eligible)

Poverty Levels 2014 Family Size Amount 150% 1 $11,670 $17,505 2 $15,730 $23,595 3 $19,790 $29,685 4 $23,850 $35,775 5 $27,910 $41,865 6 $31,970 $47,955

Monthly Payments - 2014 AGI IBR PAYE $30,000 $156 $104 $40,000 $281 $187 $50,000 $406 $271 $60,000 $531 $354 $70,000 $656 $437 $80,000 $781 $521 $90,000 $906 $604 $100,000 $1,031 $687

PAYE monthly payment amounts for larger families… Family Size Annual AGI 1 2 3 4 5 $30,000 $104 $53 $3 $0 $40,000 $187 $137 $86 $35 $50,000 $271 $220 $169 $119 $72 $60,000 $354 $303 $253 $202 $155 $70,000 $437 $387 $336 $285 $239 $80,000 $521 $470 $419 $369 $322 $90,000 $604 $553 $503 $452 $405 $100,000 $687 $637 $586 $535 $489 $110,000 $771 $720 $669 $619 $572

Minimum Loans for PFH (2014) Income IBR Min Loans PAYE Min loans $30,000 $13,573 $9,049 $40,000 $24,435 $16,290 $50,000 $35,297 $23,532 $60,000 $46,159 $30,773 $70,000 $57,021 $38,014 $80,000 $67,883 $45,256 $90,000 $78,745 $52,497 $100,000 $89,607 $59,738 $110,000 $100,469 $66,980

WOW !

Now that we have your attention… The details !

Income Driven Federal Repayment IBR and PAYE formulas for calculating monthly payments on federal student loans FFELP or Direct for IBR Direct, Stafford, Grad PLUS, Federal Consolidation Not parent PLUS or consolidation loan containing PLUS Borrower experiencing “partial economic hardship”

PAYE eligibility requirements “New Borrower” as of October 1, 2007 No outstanding balance on FFELP or Direct as of October 1, 2007 or no outstanding balance on FFELP or Direct Loan when you received new loan after 10/1/07 Received disbursement of Direct Loan after October 1, 2011 October 1, 2011 includes Direct Consolidation Loan DIRECT LOANS ONLY !

IMPORTANT Must apply annually to IBR and PAYE! 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)

Economic Hardship partial economic hardship when… Borrower in repayment is experiencing partial economic hardship when… Loan payments exceed 15% of income above 150% of poverty level PAYE 10 % if income above 150% Borrower experiencing partial economic hardship may elect to pay under IBR or PAYE Yes, you have seen this before!

Adjusted Gross Income Prior year Adjusted Gross Income 1040 – line 37 1040A – line 21 1040EZ Line 4 If married filing jointly, both incomes* If married, filing separately, only filer (PL110-153) Lender may accept alternative documentation Changes in income After July 1, 2010, both education loan debts also count Proposed changes going forward

Federal Loan Payments IBR Monthly payments on FFELP or Federal Direct Loans, Stafford, Grad PLUS and/or Federal Consolidation Loans DIRECT ONLY FOR PAYE

Interest subsidy If payments do not cover outstanding interest Negative amortization Secretary of Education pays remaining interest due on subsidized loans Or sub portion of Consolidation Up to 3 years

Negative Amortization “Negative” – sounds bad And it is! Payments do not cover the interest due on the loans $100,000 at 6.8% = $6,800/yr = $566.67/mo @ $40k income = $187 (PAYE 2014) $567-187 = $380/mo accruing interest not paid Capitalized when leave IBR or PAYE or no Partial Financial Hardship

Loan Cancellation Yes, after enough eligible payments under IBR or PAYE If $0 calculated payment, payment counts Currently considered a taxable event

The remainder is forgiven, IBR after 25 years If borrower made 25 years of payments under IBR (Income Based Repayment) ICR (Income Contingent Repayment) Standard Repayment (10 year term) and still has a balance… The remainder is forgiven, BUT taxable!

The remainder is forgiven, PAYE after 20 years If borrower made 20 years of payments under PAYE (Pay as You Earn) IBR (Income Based Repayment) ICR (Income Contingent Repayment) Standard Repayment (10 year term) and still has a balance… The remainder is forgiven, BUT taxable!

And if I become rich and famous? May no longer be experiencing PFH May choose to leave IBR or PAYE Loans become due by end of prior repayment plan – but may switch May choose to stay in IBR or PAYE Pay original 10 year amortized payment But may take longer than initial 10 years to repay

For example… 4 years of partial financial hardship $40,000 income = $187 payment $100,000 debt (at 6.8%) = $1,151 monthly payment 4 years of partial financial hardship Then rich and famous! Will have paid $8,677 towards loans * $118,631still due Will take 155 additional months to repay * Assumes 3% increase in poverty level, 0% increase in income

Questions – IBR or PAYE Moving right along…

Federal Public Service Loan Forgiveness Finally…the moment most of you have been waiting for…we’re going to talk about Forgiveness for Public Service Employees Unlike IBR where your loans can be in either the FFEL or DL program, your loans MUST be in the DL program in order to qualify for Public Service Loan Forgiveness 36

Federal Loan Forgiveness for Public Service A full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education (including early childhood education), social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization), public child care, public service for individuals with disabilities, public service for the elderly, public library sciences, school‐based library sciences and other school‐based services, or at an organization that is described in section 501(c)(3) of the IRS Code and exempt from taxation, or teaching as a full-time faculty member at a Tribal College or University and other faculty teaching in high-needs areas, as determined by the Secretary.

Too much text… Full Time Government Non-Profit Federal, State, local, tribal Non-Profit 501(c)3 corporation Perhaps other “public service” for other types of employers

Federal Loan Forgiveness for Public Service Greatest thing since sliced bread! Or maybe not! Only Federal Direct Loans Can use PAYE, IBR, ICR or 10 year standard Or other with minimum 10 year amort payment 120 payments while in eligible employment Need not be consecutive IBR and PAYE -If no PFH, revert to original monthly payment (10 year amortization) Not a taxable event

Remember… Negative amortization Maximum payment is original 10 year amortized monthly payment Once no longer partially economically hardship may have to repay for more than 10 more years!

Look Familiar? Monthly Payments - 2014 AGI IBR PAYE $30,000 $156 $110 $40,000 $281 $187 $50,000 $406 $270 $60,000 $531 $355 $70,000 $656 $437 $80,000 $781 $520 $90,000 $906 $604 $100,000 $1,031 $687

Other issues Moral Hazard How clear is the crystal ball?!? If you borrow more, more is forgiven ! How clear is the crystal ball?!? Guaranteed forgiveness? Politics. Proposals from earlier slides “combination of public service organizations” What if life happens?

How does it all fit? If 120 months in PSLF job All is good If need for absolute lowest payment PAYE Then increase payments as income increases

A real student ? JD Salary: 60,000 Marital Status: Single Dependent: 1 Career Plans: Legal Aid Society - help poor people Total Education Loan Debt: = 271,500 Date of 1st Loan: 6/2/2008

$271,500 debt $1,538 monthly accruing interest at 6.8% IBR = $535 PAYE = $356 10 year = $3,124 Net income = $ 3,464

Resources studentaid.ed.gov finaid.org equaljusticeworks.org and fact sheets and Q&A finaid.org GREAT calculators! equaljusticeworks.org

Have we exhausted you yet? Questions Comments Snide Remarks

Lori A. Moore Stephen G. Brown Manager, Financial Literacy & Member Services Representative Access Group , Inc lmoore@accessgroup.org Stephen G. Brown Fordham University School of Law sbrown@law.fordham.edu