IBR – One Year Laterand Public Service Loan Forgiveness

EASFAA 2010May 17, 2010Stephen G BrownFordham University School of Law

What is IBR? 2007 College Cost Reduction and Access Act

PL 110-84 Income Based Repayment option

Effective July 1, 2009 Defines “Economic Hardship”

Creates Public Service Loan Forgiveness Program Effective October 1, 2007

IBR New formula for calculating monthly

payments on federal student loans FFELP or Direct Stafford, GradPLUS, Federal Consolidation

Not parent PLUS or consol. containing PLUS

Borrower experiencing “partial economic hardship”

Partial Economic Hardship Federal loan payments exceed 15% of AGI

above 150% of poverty level for family size

Huh?

Federal Loan Payments Monthly payments on Stafford, GradPLUS

and/or Federal Consolidation Loans 10 year Standard amortization

Adjusted Gross Income Prior year Adjusted Gross Income

1040 – line 37 1040A – line 21 1040EZ Line 4

If married filing jointly, both incomes* If married, filing separately, only filer (PL110-153)

Lender may accept alternative documentation Changes in income

* After July 1, 2010, both education loan debts also count

Poverty Levels 2009 48 states

Family Size Amount 150%

1 $10,830 $16,245

2 $14,570 $21,855

3 $18,310 $27,465

4 $22,050 $33,075

5 $25,790 $38,685

6 $29,530 $44,295

Monthly maximum payments AGI - (assumes family size of 1)

$30,000 $172 $40,000 $297 $50,000 $422 $60,000 $547 $70,000 $672 $80,000 $797 $90,000 $922 $100,000 $1,005

If borrower made 25 years of payments under IBR (Income Based Repayment) ICR (Income Contingent Repayment) Standard Repayment (10 year term)

and still has a balance…

The remainder is forgiven!

Interest subsidy If payments do not cover outstanding interest

Negative amortization Secretary of Education pays remaining interest

due on subsidized loans Or sub portion of Consolidation

Up to 3 years

Negative Amortization “Negative” – sounds bad

And it is! Payments do not cover the interest due on the loans $100,000 at 6.8% = $6,800/yr = $566.67/mo @ $40k income = $297 $567-297 = $270/mo accruing interest not paid

Capitalized when leave IBR or no PFH

And if I become rich and famous? May no longer be experiencing PFH May choose to leave IBR

Loans become due by end of prior repayment plan – but may switch

May choose to stay in IBR Pay original 10 year amortized payment

But may take longer than initial 10 years to repay

For example… $40,000 income = $297 payment $100,000 debt (at 6.8%) = $1,155 monthly payment 4 years of partial financial hardship Then rich and famous! Will have paid $14,907 towards loans $109,000 still due Will take 136 additional months to repay

Full disclosure – not counting -$5,202 forgiven interest on $25,500 assumed sub loan

Loan Forgiveness Yes, after 25 years (300) eligible payments

under IBR If $0 calculated payment, payment counts Currently considered a taxable event

Miscellany May apply through each of your lenders

Theory is weighted average payments May choose to Federal Direct Consolidate Prior year taxes or release (4506-T)

Questions – IBR?

Moving right along…

Loan Forgiveness forPublic Service Employees

Federal Loan Forgiveness for Public Service Greatest thing since sliced bread!

Or maybe not! Only Federal Direct Loans If FFELP borrower – MUST CONSOLIDATE Can use IBR payment plan or ICR or 10 year

Or other equaling 10 year payment 120 payments while in eligible employment

Need not be consecutive If less than 120 months, revert to original monthly

payment (10 year amortization)

Federal Loan Forgiveness for Public Service A full-time job in emergency management, government, military

service, public safety, law enforcement, public health, public education (including early childhood education), social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization), public child care, public service for individuals with disabilities, public service for the elderly, public library sciences, school‐based library sciences and other school‐based services, or at an organization that is described in section 501(c)(3) of the IRS Code and exempt from taxation, or teaching as a full-time faculty member at a Tribal College or University and other faculty teaching in high-needs areas, as determined by the Secretary.

Federal Loan Consolidation Allows students to convert former (pre July 1,

2006) variable rate FEDERAL loans into fixed rate –No private loans

Allows students to lock in “in-school” versus “in repayment” rate

Weighted average interest rate Forgiven for death/disability Deferment/forbearance Be careful of mixing

But, under IBR Negative amortization Maximum payment is original 10 year

amortized monthly payment Once no longer partially economically

hardship may have to repay for 10 (or more!) additional years!

Look familiar? AGI - (assumes family size of 1)

$30,000 $172 $40,000 $297 $50,000 $422 $60,000 $547 $70,000 $672 $80,000 $797 $90,000 $922 $100,000 $1,005

Other issues If you borrow more, more is forgiven ! How clear is the crystal ball?!? Peace Corps/Americorps Guaranteed forgiveness? Politics. Record keeping “combination of public service organizations”

What if life happens?

Stay Tuned! More to Come. Economy? Get Excited!

To watch out in the future HCERA -Health care and Education

Reconciliation Act of 2010 - P.L. 111-152

New Borrowers after July 1, 2014 PFH if payments above 10% of income above

150% of poverty level Forgiveness after 20 years, not 25

Resources studentaid.ed.gov

and fact sheets and q & a IBRinfo.org finaid.org equaljusticeworks.org

Stephen G. Brown

Fordham University

School of Law

33 West 60th Street

New York, NY 10023

212 636-7178

sbrown@law.fordham.edu