Understanding Loan Repayment Plans and Alternative Repayment

1. Understanding Loan Repayment Plans and Alternative Repayment Ron Hancock, Nelnet Christine Passer, Southwestern Michigan College

2. Session Outline • Grace Periods • Direct Loan and FFEL Repayment Plans • Emphasis on Income Driven Plans • Other Repayment Strategies • School Perspective

3. Grace Periods • After a student graduates, leaves school or drops below half-time enrollment, there is a period of time before repayment begins. • This “grace period” will be six months for a Federal Stafford Loan (DL or FFELP) • REMINDER: Protect the Grace Period • Of borrowers who default, most do not receive the full 6-month grace period. • Schools must know when a borrower leaves and promptly report this to NSLDS

4. Servicer Repayment Counseling During the grace period loan servicers: • Continue to establish a relationship with the borrower • Update and enhance borrower contact info • Promote self-service through the web • Discuss repayment plan options • Discuss consolidation options

5. Understanding Repayment Plans • Student borrowers may repay their student loans through one of several repayment plans: • Standard Repayment Plan • Graduated Repayment Plan • Extended Repayment Plan • Income-Sensitive Repayment (FFEL Only) • Alternative Repayment Plans (Direct Loan Only) • Income Contingent Repayment (ICR) (Direct Loan Only) • Income-Based Repayment (IBR) • Pay as You Earn (Direct Loan Only)

6. Standard Repayment Plan Under this plan, the borrower will pay a fixed amount of at least $50 each month for up to 10 years. For most borrowers, this plan results in the lowest total interest paid because the repayment period is shorter than it would be under any of other repayment plan.

7. Graduated Repayment Plan The Graduated Repayment Plan may be beneficial if the borrower’s income is low when they leave school but is likely to steadily increase. Under this plan, payments start out low and then increase every two years. The minimum payment equals the amount of interest that accrues monthly for up to the maximum repayment period.   Like the Standard Plan, the maximum repayment period is 10 years for Stafford and PLUS Loans and 10-30 years for Consolidation Loans depending on the total loan indebtedness.

8. Extended Repayment Plan A borrower may choose this plan if they did not have an outstanding balance on a FFEL or Direct Loan as of October 7, 1998 or on the date they obtained a student loan after that date and have more than $30,000 in outstanding FFEL Program loans or more than $30,000 in outstanding Direct Loans. For example… • A borrower who has $35,000 in outstanding FFEL Program loans and $10,000 in outstanding Direct Loans can choose the Extended Plan for their FFELP loans, but not for their Direct Loans. • Borrower may choose to make fixed or graduated monthly payments • Minimum payment of $50 for Fixed Extended • Maximum repayment period is 25 years

9. Income Driven Repayment Plans

10. Income-Driven Plans - Overview Three main plans • Income-Contingent Repayment Plan (ICR) – 1994 • Direct Loan Program only • More information available at StudentAid.gov/ICR • Income-Based Repayment Plan (IBR) – 2009 • Available in both the Direct Loan and FFEL Program • More information available at StudentAid.gov/IBR • Pay As You Earn Plan – 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/PayAsYouEarn

11. Income-Driven Plans – Eligible Borrowers • ICR: • Direct Loan borrowers with eligible loans • IBR: • 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”)

12. Income-Driven Plans – Eligible Loans • ICR: • All Direct Loans are eligible except parent PLUS Loans and pre-7/1/2006 Direct PLUS Consolidation Loans • Direct Consolidation Loans made on/after 7/1/2006 that repaid parent PLUS loans are eligible • IBR: • All Direct and FFEL Program loans except parent PLUS loans and Consolidation Loans that repaid parent PLUS loans • Pay As You Earn: • All Direct Loans are eligible except parent PLUS loans and Consolidation Loans that repaid parent PLUS loans

13. Income-Driven Plans – Payment Amounts • Under ICR, borrowers pay the lesser of: • 12-year standard repayment schedule multiplied by income percentage factor (payment based on loan debt and income) or • 20% of discretionary income (payment based only on income) • Under IBR, borrowers pay the lesser of: • 15% of discretionary income (income-based payments) or • What they would have paid under the 10-year standard repayment plan (non-income-based payments) • Under Pay As You Earn, borrowers pay the lesser of: • 10% of discretionary income (income-based payments) or • What they would have paid under the 10-year standard repayment plan (non-income-based payments)

14. Income-Driven Plans – Interest Subsidy Benefit • IBR and Pay As You Earn only • Borrower eligible when payment does not cover accruing interest on subsidized loans (negative amortization) • Eligibility limited to first three consecutive years of repayment under plan • Subsidy amount (paid by ED) = accruing interest on subsidized loans not covered by monthly payment • Borrower must pay all interest on unsubsidizedloans

15. Income-Driven Plans - Capitalization • ICR: • During periods of negative amortization, annually • Interest capitalizes only until principal balance is 10% greater than original principal from when borrower entered repayment • Otherwise, normal capitalization rules apply • IBR: • No longer qualifies for payments based on income (no longer has a partial financial hardship) or • Leaves IBR entirely • Pay As You Earn: • No longer qualifies for payments based on income (no longer has a partial financial hardship) or • Leaves Pay As You Earn entirely • Interest capitalizes only until principal balance is 10% greater than original principal amount when borrower entered plan

16. Income-Driven Plans – Loan Forgiveness • All three plans provide for forgiveness • For ICR and IBR, remaining balance forgiven after 25 years of qualifying repayment • For Pay As You Earn, remaining balance forgiven after 20 years of qualifying repayment • For all three plans, qualifying repayment includes: • Payments under an income-driven plan • Payments under the 10-year standard repayment plan (or any other repayment plan with a payment amount at least equal to the 10-year standard plan amount) or • Economic hardship deferment • According to the IRS, the forgiven amount is considered taxable income (See IRS Pub 4681)

17. Income-Driven Plan – Example Borrower • AnnaDrew Luck: • Is single with no dependents and lives in Indiana • 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

18. IBR – Example Borrower • Under IBR, AnnaDrewwill*: • Have an initial monthly payment of $228.06 • Have a final monthly payment of $575.40 • Receive $653.16 in interest subsidy during the first three consecutive years of IBR repayment (because the payment will not cover all accruing interest on subsidized loans) • Have a payment that is no longer based on her income (no longer have a partial financial hardship) in her 16th year of IBR • Pay off her loan at the beginning of her 21st year of IBR (and therefore receive no loan forgiveness) • Pay a total of $101,673.34 on her $50,000 loan debt, compared to: • $69,037.44 under the 10-year Standard Repayment Plan or • $104,080.83 under the Extended Plan or Consolidation Standard Plan • *Assumes a 5% increase in AnnaDrew’sincome each year and a 3% annual increase in the poverty guidelines.

19. Pay As You Earn – Example Borrower • Under Pay As You Earn, AnnaDrewwill*: • Have an initial monthly payment of $152.04 • Have a final monthly payment of $492.19 • Receive $1,999.79 in interest subsidy, during all of the first three consecutive years of Pay As You Earn repayment (because the monthly payment will not cover all accruing interest on subsidized loans) • Always have a payment that is based on her income (will always have a partial financial hardship) • Receive forgiveness in the amount of $44,979.06 • Pay a total of $70,709.53 on her $50,000 loan debt, compared to: • $69,037.44 under the 10-year Standard Repayment Plan or • $104,080.83 under the Extended Plan or Consolidation Standard Plan • *Assumes a 5% increase in AnnaDrew’sincome each year and a 3% annual increase in the poverty guidelines.

20. Borrower Example - Recap For comparison:

21. Applying: Income Documentation • Borrower must submit income documentation when applying • Eligibility (IBR & Pay As You Earn) and payment amount (all three plans) usually based on a borrower’s AGI • Borrower may document AGI through: • The electronic application (uses same method as IRS data retrieval tool for the FAFSA to document AGI) • A paper copy of a 1040, 1040A, or 1040EZ (signed or unsigned) • An IRS Tax Return Transcript

22. Applying: Income Documentation • If AGI is not available or does not reasonably reflect current income, borrower can submit alternative documentation of income (ADOI) • Borrowers must provide documentation of all taxable income, e.g., pay stubs, unemployment benefits, etc. • Loan holder estimates annual taxable income based on this documentation • Borrowers do not provide documentation of untaxed income, such as Supplemental Security Income or welfare

23. Applying: ADOI – Additional Considerations • Borrowers who use the electronic application must follow-up with their loan holder and send in documentation • It is often difficult to know how frequently the borrower receives the income based only on the documentation

24. Applying: ADOI – Additional Considerations • Projected annual income using ADOI may be higher than the borrower’s AGI will be • Loan holders cannot subtract out “above the line deductions” to income that a borrower may take when filing a tax return, which would lower AGI • Loan holders might only exclude pre-tax deductions from pay if they are obvious • Loan holders can accept a signed statement from the borrower explaining pre-tax deductions • Borrowers may not have held the job for the entire year, but loan holders project income to cover a 12-month period

25. Recertifying: Income and Family Size • Under all three plans, borrowers are required to submit updated income documentation annually • Failure to submit documentation timely will lead to: • A monthly payment amount that is what it would have been on the 10-year standard repayment plan (non-income-based payment) and • Interest capitalization • Borrowers must also annually certify their family size or a family size of one will be used • The reevaluation date is based on when the borrower initially entered the plan (anniversary date) • Borrower can also submit documentation early, if their circumstances have changed, to receive a lower payment amount. This changes their anniversary date • Borrowers can use the electronic application to recertify their income and family size

26. Recertifying: Income and Family Size • Borrowers will receive educational notices about their income-driven plan • Borrowers will receive notice of the deadline by which they must submit income documentation and the consequences of failing to do so • Borrowers submitting income documentation within 10 days of the deadline will have their current payment amount maintained until income documentation is processed and new payment amount is calculated • Loan holder’s inability to determine a borrower’s new payment amount by the borrower’s anniversary date will no longer result in automatically increased payment amounts and capitalization of all outstanding interest

27. Income-Driven Application: Electronic • Hosted on the StudentLoan.gov. Borrowers can access application directly or through loan servicers’ websites • Uses IRS Data Retrieval Tool that is used on the FAFSA • Retrieves the most recent tax information from two most recently completed tax years • Electronically transmits application to loan servicer—no follow-up necessary unless AGI is unavailable or borrower wants to submit alternative documentation of income • Can be used for initial applications or annual reevaluations

28. Electronic Application – IRS Interface

29. Income-Driven Application: Paper • Available for borrowers who cannot or do not wish to use the electronic application • Paper form can be used by both Direct Loan and FFEL borrowers to request income-driven repayment plan or provide required annual documentation and can be used to submit alternative documentation of income

30. Alternative Repayment Plans (Direct Loan Only) • An alternative repayment plan may be used when the terms and conditions of other repayment plans are not adequate to accommodate a borrower’s circumstances. The borrower must provide evidence of the exceptional circumstance and the terms must be within the following restrictions: • maximum 30 year term • minimum payment of $5.00 • payments cannot vary by more than 3x the smallest payment  • There are four different Direct Loan Alternative Repayment Plans: • Alternative Fixed Payment, Alternative Fixed Term, Alternative Graduated, and Alternative Negative Amortization.

31. Public Service Loan Forgiveness • Public Service Loan Forgiveness (PSLF) provides for forgiveness of a Direct Loan borrower’s remaining loan balance if the borrower: • Makes 120 full, on-time payments after October 1, 2007 • Makes each payment under a qualifying repayment plan • Makes each payment while employed full-time by a qualifying organization • Borrower must also be employed by a qualifying organization at the time that the borrower applies for and receives PSLF • According to the IRS, the forgiven amount is not treated as taxable income

32. PSLF – Qualifying Payments • Borrower must make 120 separate monthly payments. They: • Do not need to be consecutive • Must be for the full scheduled payment under the repayment plan • Must be made within 15 days of the due date • Multiple, partial payments during the borrower’s monthly billing cycle will qualify if they add up to equal the borrower’s monthly payment amount • A borrower will not receive credit for more than one payment toward PSLF if the borrower makes a lump sum payment (e.g., makes a single payment equal to two or more full monthly payments) • Exception for AmeriCorps and Peace Corps borrowers who make lump sum payments using education award or transition payment

33. PSLF– Qualifying Repayment Plan • Each of the 120 payments must be made under a qualifying repayment plan • Qualifying repayment plans: • 10-year Standard Repayment Plan • IBR, ICR, Pay As You Earn plans and • Any other payment plan where the payment amount at least equals the 10-year Standard Repayment Plan amount • Non-qualifying repayment plans include: • Extended (Fixed or Graduated) • Graduated and • Consolidation Standard with term greater than 10-years • Income-driven plans are most likely to leave a remaining balance for forgiveness after 120 qualifying payments

34. PSLF – Eligible Loans • PSLF is only for Direct Loans • All Direct Loans qualify • Parent Direct PLUS Loans are eligible for PSLF, but cannot be repaid under income-driven plans • Borrowers may consolidate parent PLUS Loans and repay under ICR • FFEL Program and Perkins Loans do not qualify, but can be consolidated into a Direct Consolidation Loan • Borrower consolidating Perkins Loans will lose Perkins-only cancellation benefits they may have otherwise been able to receive • Payments made on loans that are later consolidated do not count toward 120 payments for PSLF. Borrower must make 120 qualifying payments on the Direct Consolidation Loan

35. Other Repayment Strategies

36. Borrower Tools • Repayment Incentives • Deferments • Forbearances • Loan Consolidation

37. Repayment Incentives • Electronic Debit • A 0.25% interest reduction for agreeing to have monthly payment automatically debited from either a checking or savings account

38. Deferments and Forbearances Borrowers may experience trouble making payments under any repayment plan. Deferment and forbearance options may be the right choice to assist them.

39. Deferments

40. Deferments • Deferments allow a borrower to postpone their monthly payment in certain circumstances. •  In-School – Unlimited for borrowers enrolled at least half-time; special parent PLUS and post-enrollment PLUS deferments for PLUS loans first disbursed on/after 7/1/2008 • Unemployment – Up to three years; based on evidence of unemployment benefits or registering with employment agency; borrower actively seeking but unable to find full-time employment in the United States. • Full-time employment is defined as at least 30 hours of work per week in a position that is expected to last at least three months.

41. Deferments • Economic Hardship – Up to three years if borrower is: • Receiving payment under federal or state public assistance program • Working full-time but earning a monthly income that is less than the minimum wage rate or 150% of the poverty guideline for your family size, whichever is greater • Serving in the Peace Corps

42. Deferments • Military Deferments • Active Duty – Available to service members during a war or other military operations (contingency operation) or national emergency for the period of service; includes national guard activated by President or Secretary of DOD • Post-Active Duty Student – May be applied for up to 13 months after active duty for members of national guard or other reserve component (includes members in retired status) who was enrolled at least half-time or within six months of that date

43. Forbearances • If a borrower can't make his scheduled loan payments, but doesn't qualify for a deferment, his loan servicer may be able to granthim a forbearance. With forbearance, he may be able to stop making payments or reduce his monthly payment for up to 12 months. Interest will continue to accrue on his subsidized and unsubsidized loans (including all PLUS loans). • There are two types of forbearances: • Discretionary • Mandatory

44. Forbearances Discretionary Forbearance • For discretionary forbearances, the lender decides whether to grant forbearance or not. • A borrowecan request a discretionary forbearance for the following reasons: • Financial hardship • Illness

45. Forbearances Mandatory Forbearance • For mandatory forbearances, if a borrower meets the eligibility criteria for the forbearance, the lender is required to grant the forbearance. • Borrowers can request a mandatory forbearance for the following reasons: • Serving in a medical or dental internship or residency program, and meet specific requirements. • The total amount owed each month for all the student loans received is 20 percent or more of total monthly gross income (additional conditions apply). • Serving in a national service position for which the borrower received a national service award. • Performing teaching service that would qualify for teacher loan forgiveness. • Qualify for partial repayment of loans under the U.S. Department of Defense Student Loan Repayment Program. • Member of the National Guard and have been activated by a governor, but not eligible for a military deferment.

46. Loan Consolidation • Benefits of Consolidation: • One Lender and One Monthly Payment • Flexible Repayment Options • Lower Monthly Payments • Fixed Interest Rate for Life of Loan • May utilize to move FFELP loans into DL to qualify for PSLF • It’s Free • Ron’s rant - beware

47. The School Perspective

48. Contact Information Ron Hancock Nelnet Loan Servicing ron.hancock@nelnet.net Christine Passer Southwestern Michigan College cpasser@swmich.edu