Income-Driven Repayment & Public Service Loan Forgiveness Ian Foss & Nathan Arnold
Income-Driven Plans - Overview 3 • 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 (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/PayAsYouEarn
Eligible Borrowers * = partial financial hardship
Eligible Loans Parent PLUS Loans consolidated in DL prior to 7/1/2006
Payment Amounts Under ICR, borrowers pay the lesser of: Under IBR, borrowers pay the lesser of: Under Pay As You Earn, borrowers pay the lesser of:
ICR - Income Percentage Factors For more on income percentage factors in ICR, see 78 FR 33395, available at:https://federalregister.gov/a/2013-13193
Interest Subsidy Benefit On subsidized loans, borrower receives subsidy for first 3 consecutive years on IBR and Pay As You Earn during periods of negative amortization Subsidy amount = difference between amount of interest that accrues on subsidized loans and payment amount toward subsidized loans 3-year clock doesn’t stop except for Economic Hardship Deferments
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
Loan Forgiveness • 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
Billy Borrower • Billy Borrower: • Is single with no dependents and lives in DC • Has an AGI of $35,000 that rises at 5% per year and • Has $50,000 in Direct Loan debt ($23,000 of which is subsidized), all of which has a 3.86% interest rate
Applying: Electronic or Paper ADOI = “alternative documentation of income”; not AGI.
Applying: Income Documentation If borrower is married and files a joint tax return, also need ADOI of spouse.
Applying: ADOI 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 Projected annual income using ADOI is usually higher than the borrower’s AGI will be because of tax code Borrowers may not have held the job for the entire year, but loan holders project income to cover a 12-month period
Application: Electronic IBR-only launched in September 2012; incorporated ICR and Pay As You Earn in December 2012 Can be used by borrowers with ED-held loans (Direct Loans or FFEL) Can be used by borrowers with commercially held FFEL loans serviced by an entity that also services ED-held loans On StudentLoans.gov Retrieves the most recent tax information from two most recently completed tax years
Annual Life Cycle *If borrower submits documentation by hard deadline, payment amount will not change if loan servicer cannot process it before anniversary date.
Public Service Loan Forgiveness 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
PSLF – Amount of Payment • 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 • Making payment that is too large can affect borrower’s ablility to make qualifying payments in future
PSLF – Qualifying Repayment Plan Income-driven plans are most likely to leave a remaining balance for forgiveness after 120 qualifying payments
PSLF – Eligible Loans Only payments made on the Direct Consolidation Loan will qualify. PSLF is only for Direct Loans, but all Direct Loans qualify.
PSLF – Qualifying Employment Doesn’t matter what the borrower’s job duties are. Borrower can work at multiple organizations while making the required120 payments.
PSLF – Full-Time Employment Must be a full-time employee or work multiple part-time jobs that equal full time Full-time is whatever the employer considers full-time, but must be at least an annual average of 30 hours per week For borrowers working for a not-for-profit organization (501(c)(3) or otherwise) with job duties that include religious instruction, worship services, or proselytizing, the hours spent on those activities cannot be factored into meeting the full-time employee requirement
PSLF – Employment Certification On January 31, 2012, released a voluntary Employment Certification Form that borrowers can submit to the FedLoan Servicing (FLS) for a determination of whether their employment and payments qualify for PSLF For more, including Q&As, see StudentAid.gov/PublicService
PSLF – Employment Certification Employment Certification Form is not an application for forgiveness Borrower must make 120 qualifying payments after October 1, 2007, so no borrowers can qualify until 2017 at the earliest PSLF Forgiveness Application will be developed and released prior to earliest date of eligibility for PSLF
PSLF – Portfolio Through April 2014 125,033 borrowers have completed and submitted an Employment Certification Form 112,928 borrowers have been determined to be working in PSLF-qualifying employment Of the 112,928 borrowers working in qualifying employment, 80,812 have had qualifying payments calculated