Income driven repayment options
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Income-Driven Repayment Options. IBR, ICR and Pay As You Earn. Note: The information contained in the presentation is not to be considered legal advice. Information is current as of April 2013. Agenda. Definitions of key terms Comparison of plans Application process Borrower example

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Income-Driven Repayment Options

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Income driven repayment options

Income-Driven Repayment Options

IBR, ICR and Pay As You Earn

Note: The information contained in the presentation is not to be considered legal advice. Information is current as of April 2013


Agenda

Agenda

Definitions of key terms

Comparison of plans

Application process

Borrower example

Summary

Resources


Implementation

Implementation

Income-Contingent Repayment (ICR)—Effective for Direct loan borrowers who are in repayment on/after July 1, 1994

Income-Based Repayment (IBR)—Effective for FFELP and Direct loan borrowers who are in repayment on/after July 1, 2009

PAY AS YOU EARN—Early implementation for eligible Direct loan borrowers as of December 21, 2012


Definitions

Definitions

Adjusted Gross Income (AGI)

  • Single borrower - borrower’s AGI reported to the IRS

  • Married borrower filing jointly - combined AGI of both spouses

  • Married borrower filing separately - borrower’s reported AGI only

    Capitalization (of Interest)

  • Adding unpaid accrued interest to the loan’s principal balance

    • Interest then accrues on the new higher principal balance


Definitions1

Definitions

Discretionary Income

AGI minus 150% (for IBR and Pay As You Earn) or 100% (for ICR) of federal poverty guideline for borrower’s family size and state of residence

Family Size

Borrower, borrower’s spouse, and borrower’s children, including unborn children

Others who live with and receive more than half of their support from the borrower


Definitions2

Definitions

Federal Poverty Guideline

  • The amount that the Department of Health and Human Services determines is the lowest income acceptable for a family of a given size to not live in poverty.

    Income-Derived Payment

  • A formula-based monthly payment calculation based on the borrower’s family size, income, and state of residence. The formula does not consider other debts or expenses, and the formula varies by repayment plan selected (and student loan amounts in some cases for ICR).


Definitions3

Definitions

Loan Forgiveness

After 20 years and 240 eligible payments (Pay As You Earn) or 25 years and 300 eligible payments (IBR and ICR), any remaining principal balance and accrued interest may be forgiven

Any forgiven amount is considered taxable income under current IRS rules


Definitions4

Definitions

Partial Financial Hardship (PFH)

  • Required for initial repayment under IBR and Pay As You Earn, and to retain an income-derived payment in subsequent years

  • A PFH exists when the annual amount due on the borrower’s eligible loans, as calculated under the 10-year standard repayment plan, exceeds 15% (for IBR) or 10% (for Pay As You Earn) of the borrower’s discretionary income

  • PFH not applicable to ICR


Definitions5

Definitions

Temporary Interest Subsidy

  • If the monthly payment does not cover accrued interest on subsidized loans or portions of Consolidation loans that are subsidized, ED pays the accruing interest

    • Only available for up to the first consecutive 36 months of IBR or Pay As You Earn repayment

    • Periods of economic hardship deferment do not count toward the total 36 months


Comparison of plans

Comparison of plans


New borrower requirement

“New” Borrower Requirement

For purpose of Pay As You Earn, a new borrower is one who:

Has no outstanding balance on a Direct or FFELP loan as of October 1, 2007, or has no outstanding balance on a Direct or FFELP loan when he or she obtains a new loan on or after October 1, 2007,

AND

Receives a disbursement of a Direct subsidized Stafford, unsubsidized Stafford, or Grad PLUS loan on or after October 1, 2011; or receives a Direct Consolidation Loan based on an application received on or after October 1, 2011.

Exception: An individual is not a new borrower if the Direct Consolidation Loan repays Direct Loans or FFELP loans that otherwise made the borrower ineligible, i.e., loans made prior to October 1, 2007.


Income driven repayment options

Partial financial hardship (PFH)

15% (for IBR) or 10% (for Pay As You Earn) of borrower’s (Adjusted Gross Income – 150% of poverty line amount) ÷ 12

Borrower’s annual payment amount using the standard 10-year repayment plan ÷ 12

  • Based on income and family size

Note: A PFH is not required for the ICR plan.


Payment amounts

Payment Amounts

  • Under IBR and Pay As You Earn, borrower’s monthly payment depends on whether borrower has a PFH that year

  • Years with PFH:

    • IBR payment is 15% of discretionary income

    • Pay As You Earn payment is 10% of discretionary income

  • Years without PFH:

    • Payment is a 10-year standard payment amount


Payment amounts cont d

Payment Amounts (cont’d.)

  • Under ICR, borrower’s monthly payment is the lesser of:

    • 20% of discretionary income (monthly payment based only on income)

      OR

    • 12-year standard repayment schedule multiplied by income percentage factor (monthly payment based on loan debt and income)

      For more on income percentage factors in ICR, see Federal Register available at: https://federalregister.gov/a/2012-12420


Payment amounts cont d1

Payment Amounts (cont’d.)

Under IBR and Pay As You Earn

  • Payment less than $5.00 = $0 payment amount due

  • Payment between $5.00 and $10.00 = $10.00 payment amount due

  • Payment greater than $10.00 = exact amount that results from calculation

    Under ICR

  • Payment of $0 = $0 payment amount due

  • Payment greater than $0 up to $5.00 = $5.00 payment amount due

  • Payment greater than $5.00 = exact amount that results from calculation


Application process

Application Process


Income driven repayment options

Application process

  • Common form to request these plans—IBR/PAYE/ICR Repayment Plan Request

  • Borrowers may complete:

    • Paper application to their loan holder

    • Electronic application process

      • For borrowers with ED-held loans, form available on StudentLoans.gov website (borrowers can access application directly or through ED-servicers’ websites)

      • For FFELP borrowers, loan holders will instruct borrowers when electronic process is available


Interest capitalization

Interest Capitalization

Unpaid interest is added to the loan’s principal amount:

  • When the borrower no longer has a PFH or fails to timely submit the annual reapplication information

    AND

  • When the borrower chooses to leave the IBR or Pay As You Earn repayment plan completely

    Note: IBR has no limit on the amount of interest that can be capitalized. However, as long as the borrower remains under ICR or Pay As You Earn, the amount of interest capitalized cannot exceed a maximum of 10% of the loan balance.


Loan forgiveness

Loan Forgiveness

  • All three plans provide for forgiveness of any remaining balance of principal and interest.

    • For IBR and ICR, after 25 years of qualifying payments (300 payments)

    • For Pay As You Earn, after 20 years of qualifying payments (240 payments)

  • Forgiveness clock is restarted if loans are consolidated once borrower begins any of the income-driven plans

  • Under current IRS rules, all forgiven amounts are considered taxable income


Borrower example

Borrower example


Borrower example1

Borrower example

Source: U.S. Department of Education: 2012 FSA Conference

  • Billy Borrower:

    • Is single with no dependents

    • Lives in Washington

    • 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

      *Assumes a 5% increase in Billy’s income each year and a 3% annual increase in poverty guidelines


Borrower example2

Borrower example

For comparison:

Source: U.S. Department of Education; 2012 FSA Conference


Summary

Summary


Income driven repayment plans

Income-Driven Repayment Plans

Primarily intended for borrowers who are:

  • Entering repayment with high student loan debt relative to income

  • Earning lower salaries as they begin their careers

  • Having difficulty making payments under Standard repayment plan


Potential borrower benefits

Potential borrower benefits

More manageable monthly payments

Avoidance of delinquency and default

Healthier credit history

Remaining principal and interest is forgiven after 20 or 25 years of qualifying payments

Possibility of Public Service Loan Forgiveness after making 10 years of qualifying payments while employed full-time in a public service job


Income driven repayment options

Without PSLF:

With PSLF:

Source: Department of Education; 2012 FSA Conference


Borrower considerations

Borrower Considerations

Repayment period could be more than 10 years

More interest could be paid over time

Requires annual submission of information on income and family size to prove continued eligibility for reduced payments


Resources

Resources


Resources1

Resources

  • NCHER Income-Driven Repayment Plan Comparison Chart http://c.ymcdn.com/sites/www.ncher.us/resource/collection/DACA245A-5783-4EC0-92F3-991881CD4F0C/IncomeDrivenCompChart02132013.pdf

  • New ED Repayment Calculators available at:

    https://studentloans.gov/myDirectLoan/repaymentEstimatorLoginRedirect.action


Resources2

Resources

  • FSA Web pages for repayment plan information http://studentaid.ed.gov/repayloans/understand/plans

  • IBR/PAYE/ICR Repayment Plan Request Form http://c.ymcdn.com/sites/www.ncher.us/resource/collection/9243F7D2-0FA5-4FE4-AF49-68FBF3013D3F/GEN-12-22.pdf

    • Available on the StudentLoans.gov Web site

    • GEN-12-22: http://ifap.ed.gov/dpcletters/GEN1222.html

  • HHS link for Poverty Guideline: http://aspe.hhs.gov/poverty/


Resources3

Resources

  • November 1, 2012 Final Regulations—add and/or revise provisions for ICR, IBR and Pay As You Earn

    http://www.ncher.us/resource/resmgr/elibraryregsmatrix11-20/2012-26348.pdf

  • IBR

    • October 23, 2008 Implementing Final Regulations

      http://www.ncher.us/resource/resmgr/elibraryregsmatrix01-10/FR10232008CCRAAFinalRule.pdf


Resources4

Resources

  • Pay As You Earn

    • 12/07/2012 Notice of early implementation http://c.ymcdn.com/sites/www.ncher.us/resource/collection/F4557694-F10E-46E4-8C58-B876569C7163/FR120712PAYEEarlyImp.pdf

    • 12/21/2012 Electronic announcement http://ifap.ed.gov/eannouncements/122112LSIPayAsYouEarnPlanIBRnICR.html

    • 01/11/2013 Electronic announcement http://ifap.ed.gov/eannouncements/011113LSIPOC4FFELendersandLenderServicersInterestedinElectronicIBRPay.html


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