Income-Driven Repayment Plans & Public Service Loan Forgiveness

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

But first, some background……… College Cost Reduction and Access Act  PL  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,

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

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

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

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

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

IBR Payment Amounts EXAMPLE: Borrower’s 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, divide that figure by 12 = $

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 borrower’s 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 borrower’s 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

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 $40k income = $190 –$567-$190 = $377/mo accruing interest not paid –Capitalized when leave IBR/PAYE or no longer PFH 11

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

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

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 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

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 (spouse’s income will only be included if they file federal taxes jointly or are repaying under joint ICR –The Family size –Total amount of the borrower’s 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 borrower’s 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

Income-Driven Repayment Examples Examples from FinAid.org calculators 16

Income-Driven Repayment Examples Examples from FinAid.org calculators 17

Income-Driven Repayment Application Borrowers may apply for an IDR on or complete a paper application. 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 or complete a paper application. 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

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 Consolidation Loan, including:  FFEL Subsidized/Unsubsidized Stafford Loans  FFEL PLUS Loans for graduate or professional students  FFEL Consolidation Loans (excluding joint spousal consolidation loans)  Federal Perkins Loans  Title VII Health Professions and Nursing Loans Alternative/Commercial Loans are NOT eligible loans for PSLF 21

Qualified Employment Full-time employment in any position with a public service organization –Not including staff of for-profit contractors working for public service organizations Full-time AmeriCorps or Peace Corps position Eligible Employer Examples Hospitals NGOs Foundations Research Institutes Government Charitable Organizations Universities 22

Definition of Public Service Organization A federal, state, local, or Tribal government organization, agency, or entity (includes most public schools, colleges and universities); A public child or family service agency; A non-profit organization under section 501(c)(3) of the Internal Revenue Code that is exempt from taxation under section 501(a) of the Internal Revenue Code (includes most not-for- profit private schools, colleges, and universities); A Tribal college or university; or A private non-profit organization (that is not a labor union or a partisan political organization) that provides a specific public service. 23

Definition of “Full-time” Employment For purposes of eligibility for PSLF, full-time employment is defined as: Working in qualifying employment in one or more jobs for the greater of:  An annual average of at least 30 hours per week (or for a contractual or employment period of at least 8 months, an average of 30 hours per week); or  Unless the employment is with two or more employers, the number of hours the employer considers full-time Employer-provided vacation or leave time is equivalent to hours worked in determining whether you meet the full-time employment requirement. This includes leave taken for a qualifying condition under the Family and Medical Leave Act of Note: When determining full-time public service employment at a not-for-profit organization you may not include time spent participating in religious instruction, worship services, or any form of proselytizing. 24

Identifying Qualifying Employers Check with the employer regarding their classification (government, non-profit, etc.) Depending on employer type, public websites are available: Contact FedLoan Servicing if unsure 25

Eligible Repayment Plans 26 not available on Direct PLUS Loans for parents or Direct Consolidation Loans that paid a PLUS Loan for a parent Income-Based Repayment (IBR) Plan not available on Direct PLUS Loans for parents or Direct PLUS Consolidation Loans Income-Contingent Repayment (ICR) Plan not available on Direct PLUS Loans for parents or Direct Consolidation Loans that paid a PLUS Loan for a parent Pay As You Earn Repayment Plan with a 10-year repayment period Standard Repayment Plan with payments that are at least equal to the monthly payment amount that would have been required under the Standard Repayment Plan with a 10- year repayment period Any other Direct Loan Program Repayment Plan

Qualifying Payments 27 Must have been made after October 1, 2007 Must be on-time (no later than 15 days after the scheduled due date) Must be made each month (satisfying the monthly installment amount that was due for that month) Must be made when the loan is not in a default status

Forgiveness Under PSLF Eligibility for forgiveness of an outstanding balance on an eligible Direct Loan occurs if the borrower: Is not in default Makes 120 separate, full monthly payments (after 10/1/07), within 15 days of due date Makes payments under one or more PSLF-specified repayment plans Is full-time employee of public service organization while making required payments and at time forgiveness is requested and granted Not a taxable event 28

PSLF Examples Examples from FinAid.org calculators 29

PSLF Examples 30

Borrow Process Flow Borrower receives form packet, which is standard with all servicers, and includes a cover letter, Employment Certification Form and instructions. Borrower submits Employment Certification Form. Employer is approved public service organization. Borrower receives approval notification. Eligible loans are transferred to FedLoan Servicing, if applicable. Borrower receives notification of qualifying payments made with all prior servicers. The borrower will be reminded annually, via , to submit a new ECF if employed with a qualifying public service organization since the last ECF was submitted. 31

Payment Tracking for Eligible Borrowers 32

Partnering with Schools Borrower Toolkits for outreach to current and past student borrowersBorrower Toolkits Reporting Available  Customized communications showing the number of borrowers for your institution who have submitted an Employment Certification Form  Student detail information through the FedLoan Servicing School Portal Training resources and personalized supportTraining resources  Presentation available for download  Sector-based, personalized support 33

Counseling Eligible Borrowers The first step is to determine what the student is doing after school. If a career in public service is being pursued, PSLF eligibility should be explored. If PSLF is being considered, the borrower should:  Determine eligibility for income-driven repayment plans (IBR,ICR and Pay As You Earn)  Consolidate any FFELP loans under Direct Consolidation  Make payments on time 34

Current Student Toolkit Considering a career in Public Service? Contains: Student Handout Various Web and Print Ads Sample Student Sample Social Media Posts Alumni toolkit is also available! 35

School and Borrower Resources PSLF Fact Sheet and Q&As: Borrower Information and Employment Certification Form from FedLoan Servicing: PSLF Borrower Toolkits: service-loan-forgiveness-toolkit.shtmlhttp:// service-loan-forgiveness-toolkit.shtml PSLF Fact Sheet for Financial Aid Professionals CFBP Public Service Toolkit: CFBP Action Guide for Employees: employees.pdf employees.pdf 36

Additional Resources Repayment Schedule Estimator Repayment Options Repayment Calculators Federal Student Aid (FSA) Repayment Information Department of Health and Human Services Poverty Guidelines