Income-Based Repayment Interest, Special Allowance and LaRS

Western States Learning Corporation Presenters: Robert (Bob) Sandlin NTHEA/HESC Ed Brandt ACS, Inc. Amanda Roberts Western States Learning Corporation

Team FFELP IBR Workgroup Consist of over 40 NCHELP and SLSA members Representatives from 24 member organizations Two calls weekly Subcommittee calls in between weekly Worked with the Common Manual Policy Committee on reviewing draft policies

Team FFELP IBR Workgroup Eight (8) Subcommittees LaRS Disclosures Partial Financial Hardship documentation Deferment/Forbearance/Capitalization Forms IRS Reporting Default Claim Filing and Rehabilitation Training

Team FFELP IBR Workgroup Workgroup Co-Chairs – Wanda Hall, Edfinancial Services whall@edfinancial.com Bob Sandlin, NTHEA HESC rsandlin@nthea.com Rob Sommer, Sallie Mae robert.a.sommer@salliemae.com

Course Outline What is IBR? Eligible Loans Key Terms Interest Accrual Special Allowance

What is IBR? IBR is a new repayment plan introduced by the College Cost Reduction and Access Act (CCRAA) New repayment plan for borrowers designed to help borrowers experiencing a “partial financial hardship” Available to FFELP and DL borrowers beginning July 1, 2009

Eligible loan types Available for: Stafford, FISL, SLS, Grad PLUS, ALAS, and federal Consolidation loans that do not include Parent PLUS loans. Perkins, HPSL, and HEAL, loans are eligible if included in a FFELP or DL Consolidation loan

Eligible loan types Not available for: Parent PLUS loans or Consolidation loans that include Parent PLUS loans Private (or "alternative") student loans, state loans, and other loans not guaranteed by the federal government Loans in default

Key Terms

What is partial financial hardship (PFH)? Based on income and family size Occurs when the annual amount due on all of the borrower's eligible loans (as calculated under a standard 10-year repayment plan) exceeds 15% of the difference between the borrower's adjusted gross income (AGI) and 150% of the poverty guideline for the borrower's family size and state of residence 682.215(a)

Standard-Standard Payment amount calculated when the borrower initially enters repayment based on a 10-year term, regardless of loan type Will need to calculate this amount regardless of whether or not the borrower chooses the standard repayment plan when initially entering repayment Subject to minimum $50 monthly payment.

Permanent-Standard Payment amount calculated immediately preceding entering IBR on loan balance outstanding Based on a new 10-year term This is the maximum payment amount the borrower will ever be required to make, unless the borrower requests to leave the IBR plan Subject to $50 minimum monthly payment.

Expedited-Standard Payment amount calculated once a borrower voluntarily elects to leave the IBR plan Amount is calculated using the remaining term based on a standard repayment plan, based on loan type (maximum of 10 years for Stafford and GradPLUS, maximum of up to 30 years for Consolidation loans, based on original loan balance) Unlike a deferment or forbearance, the months spent in IBR are not excluded when recalculating terms upon leaving IBR completely

Interest Accrual

Interest Accrual Interest accrues as normal Subject to negative amortization - borrower’s payment amount under a Partial Financial Hardship (PFH) may be less than the accrued interest What to do with the difference?

Interest Accrual On the unsubsidized loans, the unpaid interest will simply accrue and, in certain circumstances, capitalize. HOWEVER…

Interest Accrual On the subsidized loans, if the portion of the scheduled monthly PFH payment amount attributable to those loans is less than the monthly accrued interest on those loans, the Department will pay the difference, for up to three years

Interest Accrual After three years, the unpaid accrued interest on the subsidized loans, like the interest on the unsubsidized loans, will accrue and, at the appropriate times, capitalize.

Interest Capitalization Interest must be capitalized: When borrower leaves PFH voluntarily or no longer has a PFH When borrower leaves IBR to go to Expedited-Standard

3-year Interest Subsidy Interest subsidy applies: Only while the borrower is on IBR. To both subsidized Stafford loans and the subsidized portion of Consolidation loans

3-year Interest Subsidy Three-year period begins when the borrower is first placed on the IBR plan Applies at the loan level, so loans that enter IBR at different times will each get the full three years.

3-year Interest Subsidy Consolidation Loan Rule: If borrower consolidates after having already entered IBR, each underlying loan will retain the number of subsidy months already used. The Consolidation loan will not get a fresh three years. Will need to track the interest subsidy at the underlying loan level.

3-year Interest Subsidy 3-year period continues unabated, even if the borrower exits PFH or, as previously stated, consolidates their loan after having already entered PFH Only one exception: Periods of Economic Hardship Deferment

3-year Interest Subsidy EXAMPLE: Borrower enters IBR on 1/1/10 (Stafford loan). Leaves PFH on 12/31/10. Consolidates on 1/1/11. Hardship Deferment from 1/1/12 - 12/31/12. Student Deferment from 1/1/13 – 5/31/16. When does the 3-year clock stop?

3-year Interest Subsidy EXAMPLE (continued): Three-year subsidy period would expire on 12/31/13. Would go from 1/1/10 – 12/31/11, and from 1/1/13 – 12/31/13. One-year Hardship Deferment from 1/1/12 – 12/31/12 is only interruption. Of course, again, the Department would still pay the subsidized loan interest during the Hardship Deferment period as well. Again, as mentioned previously, the consolidation of the loan on 1/1/11 would not cause the three-year clock to re-start. Incidentally, the Department would potentially make “repayment interest” payments on the borrower’s subsidized loans only from 1/1/10 – 12/31/10, since that’s the only time within the three-year period for which the borrower was on PFH. The clock does not stop just because the borrower is not on PFH and in a position to benefit from the interest subsidy.

3-year Interest Subsidy The interest subsidy is not contingent upon the borrower actually making any particular payment, even if the scheduled monthly payment amount under PFH is greater than $0.00. Possible exception: the borrower makes excess payments. If the borrower pays only the scheduled payment amount, or anything less than that, the Department will pay the full difference between the scheduled payment amount and the accrued interest amount.

3-year Interest Subsidy POSSIBLE TRACKING MECHANISMS: The LaRS Subcommittee has developed some possible tracking methods for this interest subsidy. Awaiting responses from the Department on the outstanding issues associated with this interest subsidy.

3-year Interest Subsidy BILLING MECHANISM: Quarterly, as part of the LaRS process What is the trigger?

IBR – 3-year Interest Subsidy Billing occurs if, at the end of the quarter, the borrower: Had been in IBR for at least one month of the quarter; Was still within the 3-year window for some or all of the quarter; and Had a monthly interest accrual on their subsidized loans which exceeded the monthly payment amount on those loans.

Possible LaRS Changes So that the Department can track the costs associated with IBR, the industry has recommended some new billing codes for loans on IBR. These are currently under review by the Department.

Special Allowance

Special Allowance During periods of PFH, lenders can bill the Department for Special Allowance not only on the average daily principal balance, but on the average daily balance of unpaid accrued interest as well.

Special Allowance Lenders may not bill for Special Allowance on the unpaid accrued interest during periods of Permanent-Standard payment.

Special Allowance Special Allowance is billed based on the average daily accrued interest amount. Average daily accrued interest is computed by totaling up the unpaid accrued interest for each day of the quarter on which the borrower was in a PFH and dividing this total by the number of days in the quarter. Once this is done for all of the eligible loans within a particular grouping, the resulting value must be rounded to the nearest whole dollar.

IBR – Special Allowance EXAMPLE: 1st Quarter 2010 Borrower on PFH from 1/1/10 through 1/6/10 Interest accrued at $5.00/day PFH payment of $10 posted on 1/4/10 (applies to interest accrued through 1/3) What is the Average Daily Accrued Interest for this quarter?

IBR – Special Allowance EXAMPLE (continued): 1/1/10: $5.00 1/2/10: $10.00 1/3/10: $5.00 ($15.00 - $10.00 int payment) 1/4/10: $10.00 1/5/10: $15.00 1/6/10: $20.00 $5 + $10 + $5 + $10 + $15 + $20 = $65.00

IBR – Special Allowance EXAMPLE (continued): Divide $65 by the number of days (90) in the quarter: $65  90 = $0.72 If this were somehow the only loan in PFH for this quarter, you would then round the $0.72 result to an even $1.00 before reporting it to the Department on LaRS.

Special Allowance YES, YOU CAN! For as long as the borrower remains on PFH, you can carry over the outstanding accrued interest to the next quarter and factor it into that quarter’s Average Daily Accrued Interest.

Special Allowance NO, YOU CAN’T! In cases where the borrower entered PFH with interest outstanding (and not capitalized), you cannot include that outstanding interest in the Average Daily Accrued Interest calculation. Agencies may want to track the IBR interest separately.

Special Allowance NO,YOU CAN’T (Part II) If any portion of an IBR-eligible Consolidation loan paid off a Health Education Assistance Loan (HEAL), you may not include the interest accrued on that portion in the average daily calculation either. This is due to the fact that the HEAL portion of a Consolidation does not qualify for government interest benefits to begin with.

Special Allowance WELL, MAYBE YOU CAN… During the three-year interest subsidy period, while the borrower is on PFH, you may be able to include the interest allocated to the government bucket in the Average Daily Accrued Interest calculation? This is still being worked out with the Department. There is no exclusionary language in the Final Regs which indicates that this interest could not be included in the Average Daily Accrued Interest calculation; in fact, the regulation [682.215(b)(7)] states “the special allowance payment…is calculated on the principal balance of the loan and any accrued interest unpaid by the borrower.”

Special Allowance When paying Special Allowance on the average daily accrued interest, the Department will use the same formula applicable to the loan itself, but with an interest rate of 0% The Department agreed that it was punitive to require the lenders to bill for Special Allowance as though the accrued interest was capitalized; in other words, to bill for Special Allowance using the normal formula, with the accrued interest added to the principal balance. The industry successfully argued that, since the accrued interest, when not capitalized, is not an interest-bearing amount, it should not be reported as such for Special Allowance purposes. And we should not have to pay Excess Interest Rebates on interest we have not realized yet.

IBR – Special Allowance EXAMPLE: Stafford loan, first disbursed on 9/1/05, purchased with taxable funds. We’ll assume a SAP code of CB. Average 3-month Commercial Paper (CP) rate = 3.5% What would the SAP rate be?

IBR – Special Allowance EXAMPLE (continued): Formula would be: Average 3-month CP rate + 2.34% - interest rate, divided by 4 3.5% + 2.34% - 0.00%  4 = 1.46%

IBR – Special Allowance EXAMPLE (continued): Finally, multiply Average Daily Accrued Interest by the Special Allowance rate: $0.72 x 1.46% = $0.0105

Special Allowance Average Daily Accrued Interest, like the Average Daily Balance, is subject to retroactive account adjustments. For example, if you apply a payment retroactive to a date in the previous quarter, you would need to adjust the average daily accrued interest for that quarter accordingly and report a billing decrease on the next LaRS report.

IBR – Special Allowance EXAMPLE: Using our earlier example, let’s say a payment of $10 was applied retroactive to 1/5/10, covering interest accrued through 1/4/10. This would reduce the outstanding accrued interest for 1/4/10, 1/5/10, and 1/6/10 by $10 each day. What is the Average Daily Accrued Interest adjustment for the 3/31/10 quarter?

IBR – Special Allowance SOLUTION (short method): Multiply daily adjustment (-$10) by number of days affected (3) and divide by number of days in the quarter: (-$10) x 3  90 = (-$0.33)

IBR – Special Allowance SOLUTION (long method): Re-do entire sequence and compare results: 1/1/10: $5.00 1/2/10: $10.00 1/3/10: $5.00 ($15.00 - $10.00 int payment) 1/4/10: $0.00 ($10.00 - $10.00 retro pmt) 1/5/10: $5.00 1/6/10: $10.00 $5 + $10 + $5 + $0 + $5 + $10 = $35.00

IBR – Special Allowance SOLUTION (long method): Divide $35 by the number of days (90) in the quarter: $35  90 = $0.39 Subtract old result ($0.72) from new result: $0.39 - $0.72 = -$0.33 If this were somehow the only loan in PFH for this quarter, you would then round the $0.72 result to an even $1.00 before reporting it to the Department on LaRS.

Dear Partner Letter anticipated Special Allowance LaRS REPORTING MECHANISM: New SAP Codes? OR Same SAP code as the Average Daily Balance, but with an interest rate of .00? Dear Partner Letter anticipated The Department has so far steered away from new SAP codes, so the industry has proposed some ideas for Part III of the LaRS report based on second option. If the second option is indeed enacted, lenders will, in theory, need to report the Average Daily Accrued Interest amount under the repayment SAP code (on Stafford loans first disbursed on/after 7/1/95). This is because the borrower’s account, under PFH, is technically in repayment, even if the payment amount is zero.

Forgiveness Claims & LaRS If forgiveness claim is not filed by day 60, any ongoing billing to the government deferment interest subsidy and special allowance (on both the principal and accrued interest) must stop.

Questions?