MASFAA 2013October 6th – 9th, 2013Indianapolis, Indiana

Understanding Loan Repayment Plans and Alternative Repayment

Ron Hancock, NelnetChristine Passer, Southwestern Michigan College

Session Outline

Grace Periods

Direct Loan and FFEL Repayment Plans◊ Emphasis on Income Driven Plans

Other Repayment Strategies

School Perspective

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

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

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)

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.

  

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.

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

Income Driven Repayment Plans

Income-Driven Plans - OverviewThree 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

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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”)

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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

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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)

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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

unsubsidized loans14

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

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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)

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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

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IBR – Example Borrower Under IBR, AnnaDrew will*:

◊ 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’s income each year and a 3% annual increase in the poverty guidelines.

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Pay As You Earn – Example Borrower

◊ Under Pay As You Earn, AnnaDrew will*:• 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’s income each year and a 3% annual increase in the poverty guidelines.

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Borrower Example - RecapICR IBR Pay As You Earn

Initial Payment $397.17 $228.06 $152.04Final Payment $535.23 $575.40 $492.19Time in Repayment

13 years, 8 months

20 years, 2 months

20 years

Total Paid $78,444.28 $101,673.34 $70,709.53Forgiveness $0 $0 $44,979.06

10-year Standard Extended & Consolidation Standard

Payment $575.40 $347.04Time in Repayment

10 years 25 years

Total Paid $69,037.44 $104,080.83

For comparison:

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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

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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

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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

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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 period24

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

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Recertifying: Income and Family Size

Borrowers will receive educational notices about their income-driven planBorrowers will receive notice of the deadline by which they must submit income documentation and the consequences of failing to do soBorrowers 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

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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

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Electronic Application – IRS Interface

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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

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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.

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

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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 payment32

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

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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

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Other Repayment Strategies

Borrower Tools

Repayment Incentives Deferments Forbearances Loan Consolidation

Repayment Incentives

Electronic Debit◊ A 0.25% interest reduction for agreeing

to have monthly payment automatically debited from either a checking or savings account

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.

Deferments

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.

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

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

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 grant him 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

ForbearancesDiscretionary Forbearance For discretionary forbearances, the lender decides

whether to grant forbearance or not. A borrowe can request a discretionary

forbearance for the following reasons: ◊ Financial hardship◊ Illness

ForbearancesMandatory 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.

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

The School Perspective

Contact Information

Ron HancockNelnet Loan Servicingron.hancock@nelnet.net

Christine PasserSouthwestern Michigan Collegecpasser@swmich.edu