loan repayment options – featuring income-based repayment

Loan Repayment Options – Featuring Income-Based Repayment

Please note that this Power Point presentation is an educational tool that is speculative in nature. It is

not intended to be an exhaustive review of the Department of Education’s laws and regulations

and it not intended to provide legal advice. Materials presented in this presentation should

not be considered a substitute for actual statutory or regulatory language. Always refer to the current edition of a referenced statute, or

regulation for precise language and consult with your own attorney for legal advice.

ASA Confidential and Proprietary Information

Objective

• Review of loan repayment options

• Focus on Income Based Repayment (IBR)

– Understanding IBR

– Identifying and defining key terms

– Discussing how IBR works


• Minimum monthly payment is $50.

• Monthly payment will likely be more than $50 to ensure loan is

repaid within 10 years

• Keeps finance charges to minimum

• Most cost effective repayment option – borrower pays the lowest

amount of interest

• Default repayment plan if borrower doesn’t choose another

Standard Repayment


• Payments start smaller, $30 is the minimum monthly payment, and

gradually increase throughout repayment

• Good alternative if the borrower’s income is likely to increase in the

future

• Maximum repayment term is 10 years; however, the lender/holder

may extend the term up to 4 additional years in certain cases

Graduated Repayment


• For borrowers with more than $30,000 in loan debt

• Payment amounts can either be fixed or graduated

• Maximum repayment term is 25 years

• Minimum monthly payment is $50

• More expensive because extending repayment term increases the interest paid

Extended Repayment


IBR Background

• IBR = Income Based Repayment

• New repayment plan introduced by the College Cost Reduction and Access Act (CCRAA)

• Available to FFELP and DL borrowers July 1, 2009 who have a partial financial hardship

– Replacing options 5 & 6 on the Economic Hardship form which will no longer be available to borrowers


General

• IBR is available to those borrowers who have a

partial financial hardship (PFH)

• Monthly payments are capped at 15% of a borrowers discretionary income

• IBR offers borrowers forgiveness of debt after 25 years (300 eligible payments)


Loan EligibilityEligible Loans Ineligible Loans

•Stafford –Subsidized and Unsubsidized

•Grad PLUS•Federal Consolidation loans

–May include Perkins, HPSL and HEAL loans–May not include Parent PLUS

•SLS •ALAS

•Parent PLUS loans•Federal Consolidation loans that include a Parent PLUS loan•Perkins, HPSL, and HEAL loans unless included in a Consolidation loan•Private, state, and other loans not guaranteed by the Federal government


Partial Financial Hardship (PFH) Determination

• When a borrower’s amount due on all eligible loans (based on the standard-standard) exceeds 15% of their discretionary income

• Verified every year

• Borrower must provide permission for IRS to disclose AGI information “and other tax return information” as well as family size certification– IRS Tax Form 4506-T

• Can remain in IBR even if no longer determined to have PFH


Discretionary Income

• 15% of the difference between the borrower’s adjusted gross income (AGI) and 150% of the federal poverty level (FPL).– 15% [Monthly AGI – (150% FPL for family size)]– Monthly payments will be capped at this amount when a borrower

is experiencing a PFH

Example:

Monthly AGI = $3,600

Family Size = 3

150% FPL for Family of 3 = $2,288.75

Monthly Discretionary Income = 0.15 x (3,600 - 2,288.75)

= 0.15 x 1,311.25

= $196.69ASA Confidential and Proprietary Information

2009 Federal Annual Poverty Limits (FPL)

Number in Family / Household

Poverty Guideline 150% of poverty guideline

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

7 $33,270 $49,905

8 $37,010 $55,515

Alaska and Hawaii have higher poverty guidelines


Income Information

• Borrower’s will need to submit a Tax Form 4506-T

that will verify the borrower’s Adjusted Gross Income (AGI)

• Married borrowers:– Borrower who files married/joint tax return Both spouses’ AGI

are considered in determining payment amount• NOTE: Student loan debt is not combined

– Borrower who files married/separate tax returns Only borrower’s AGI and debt are considered in determining payment amount

• Will be evaluated annually


Family Size Information

Includes:– Borrower– Spouse– Children– Unborn children if born during the certification year, and– Others who live with the borrower and receive more than 50%

support during that year• Support includes money, gifts, loans, housing, food, clothes, car

medical and dental care, and payment of college costs

• If family size is not provided, it will be set to the default of 1– Will be evaluated annually


IBR Key Terms

Key Term – Standard-Standard

• 10 year Standard payment amount calculation

• Calculated for all borrowers when they enter repayment, regardless of what repayment plan they choose

• This amount is used to determine the eligibility of any payments made outside of IBR repayment plan that may count towards the 25 year (300 payment) forgiveness


Key Term – Permanent-Standard

• Calculates a new 10-year term on the borrower’s

outstanding principal balance at the time they enter IBR– Lenders must calculate this for borrowers immediately preceding

entering IBR

• This is the maximum payment amount the borrower will ever have to make in IBR

• Minimum monthly $50 payment


Key Term – Expedited-Standard

• Calculates the remaining term based on a standard

repayment plan, based on the loan type – Stafford and Grad PLUS = 10 years– Consolidation = up to 30 years based on original loan balance

• Calculated as soon as the borrower voluntarily elects to leave IBR plan

• Months spent in IBR are included in time spent in repayment

– ED has clarified that a borrower MUST enter an expedited-standard plan once leaving IBR, but not required to stay in that plan if there is time available in other plans


Expedited-Standard – Example 1

Loan type: StaffordTotal Eligible Loan Amount: $30,000

Entered Repayment: July 1, 2008 Amount Paid: $3,000Standard Plan Monthly Payment: $250 Outstanding: $27,000

Borrower entered IBR: July 1, 2009 Amount Paid: $7,200Borrower IBR payment: $100 Outstanding: $19,800Borrower elects to leave IBR: July 1, 2015

Expedited-StandardTime Spent in Repayment: 7 yearsTime Remaining in Standard Repayment Plan: 3 years (36 months)Monthly Payment: Outstanding Balance ÷ Time Remaining = $19,800/36 = $550

**PLEASE NOTE INTEREST RATE IS NOT INCLUDED BELOW**


Expedited-Standard – Example 2

Loan type: Stafford

Total Eligible Loan Amount: $30,000

Entered Repayment: July 1, 2008 Amount Paid: $3,000

Standard Plan Monthly Payment: $250 Outstanding: $27,000

Borrower entered IBR: July 1, 2009 Amount Paid: $10,800

Borrower IBR payment: $100 Outstanding: $16,200

Borrower elects to leave IBR: July 1, 2018

Expedited-Standard

Time Spent in Repayment: 10 years

Time Remaining in Standard Repayment Plan: 0 years

No time left: $16,200 – Due immediately

**PLEASE NOTE INTEREST RATE IS NOT INCLUDED BELOW**


How IBR works…

Borrower Application

• Must complete a Common Application

• Borrower will need to complete an IRS form 4506-T

– Authorizes lender to request borrower’s AGI from the IRS

• Borrower will need to verify Family Size

• Borrower will need to annually certify PFH eligibility


Repayment Terms in IBR

• Can extend beyond 10 years

• Lenders will need to track minimum and maximum payment amount over life of loan

• Payment application order is different than other plans

– Interest Collection Costs Late Charges Principal


PFH Eligibility and Verification

• Eligibility and minimum monthly payments are re-evaluated annually

• If a borrower fails to submit documentation they will be automatically placed on a standard repayment plan

• Even if a borrower no longer has a PFH, they may elect to remain in IBR– Borrower will be placed in a Permanent-Standard repayment plan


Recalculation of Payment Amount• Occurs when:

– Borrower no longer has a PFH

– Changes to a borrower’s financial situation

– No longer wants IBR

Borrower elects to remain in IBR:• Maximum monthly payment may not exceed Permanent-Standard

Amount• Repayment period may exceed 10 years

Borrower voluntarily elects to leave IBR:• Repayment period is limited to the remaining time they have left in

repayment– Expedited-Standard


Payment Amount Calculation

Same as discretionary income:• 15% [Monthly AGI – (150% FPL for family size)]

Amount is less than $5

• Payment = $0

Amount is greater than or equal to $5 but less than or equal to $10

• Payment = $10

Adjusted annually based on family size and AGI


General IBR Payment Calculations

From www.studentaid.ed.gov


Remember:

Apply $0 or $10 rule as applicable

http://www.studentaid.ed.gov/

$0 Payments

• Considered a payment – Borrower will be considered to be in good standing

• Cannot become delinquent

• Months with a $0 payment will be reported to consumer reporting agencies as “deferred” or “repayment”

• A borrower can not prepay a $0 monthly payment amount


Multiple Loans/Holders

• Borrower must contact each loan holder separately

• Loan holders may use NSLDS to determine amount owed on all eligible loans held by that borrower

• Loan holder will determine the IBR payment amount and prorate based on the principal amount held by that holder– Loan holder will apply to all eligible loans held, unless specified by

borrower


IBR Interest

Interest Accrual

• Accrues as normal

• Borrower’s payment under PFH may be less than interest accrued – Negative amortization

– Subsidized loans are eligible for a subsidy for the first 3 years

– Unsubsidized loans will build up and may eventually capitalize


Interest Subsidy

• If a borrower’s PFH payment is less than the amount of monthly interest accrued, ED will pay the difference for up to 3 years

• Eligible loans:– Subsidized Stafford loans

– Portion of Consolidation loan that is subsidized

• Subsidy will only occur when a borrower is on IBR

• Is applied at the loan level– Loans entering at different times will each get a full 3 years

• Subsidy will continue even if the borrower exits PFH, consolidates their loan, or misses a payment– Only exception: Period of Economic Hardship Deferment


Interest Subsidy - Example

Borrower has all Subsidized Stafford Loans

Borrower payment under IBR = $40

Monthly accrued interest = $75

ED will pay: $35

Payee July 1 August 1 September 1

Borrower None

(borrower missed)

$40 $0

Borrower enters Economic Hardship Deferment

ED $35 $35 $0


Interest Capitalization

• Unsubsidized loans, and subsidized loans after 3 year subsidy– Interest will accrue and “build up”, and in certain circumstances

will capitalize

• Capitalization will occur when:– A borrower leaves IBR voluntarily or no longer has PFH– When a borrower leaves IBR and enters an Expedited-Standard

repayment plan


IBR Information to Borrowers

New Disclosure Requirements

• Lender must provide a notice that informs borrowers of

IBR at time of:– Offering the borrower a loan

– Offering a borrower repayment options

• Notice must include:– Borrower eligibility of Income-sensitive repayment (ISR) and that the

borrower may be eligible for IBR, including through loan consolidation

– Procedures for borrower to elect ISR or IBR, and

– Where and how to obtain more information about ISR or IBR

• May be provided as a separate notice or as part of other disclosures


New Exit Counseling Requirements

• Must include information about repayment plans available

• Information specific to IBR, including:– Description and features– Sample information including average anticipated monthly

payments, and– Difference in interest paid and total payments


IBR Forgiveness

Eligibility for Forgiveness

• 25 years must have elapsed– Borrower may prepay, but must wait 25 years

– No forgiveness until July 1, 2034

• 300 eligible payments must have been made on or after July 1, 2009– May include Economic Hardship Months

• Borrower must have received a PFH IBR repayment plan at least once– Borrower does not need to be in a PFH in order for to receive forgiveness

• Currently, any loan portion forgiven will be taxable


Eligible Payments

• 300 payments may include all payments made on or after July 1, 2009 that:– PFH payment made under IBR including $0 payment amounts– Payments made at the permanent-standard amount (while in IBR)– Any payment made that is at least at the standard-standard

amount (outside of IBR umbrella)– Each month in which borrower was on an Economic Hardship

Deferment

• As long as a payment is eligible it may be counted, even if made before borrower is in IBR

• Payments do not have to be consecutive


Non-eligible Payments

• Payments made while in default

• Payments made during rehabilitation

• Payments made out of IBR less than the standard-standard amount

• Payments made under IBR umbrella (but outside of PFH) in an amount less than permanent-standard

• Payments made before July 1, 2009


Clocking 25 Years

• Begins no earlier than July 1, 2009

• Begins the date the borrower made an eligible payment or received an Economic Hardship Deferment

• Borrower who did not make payments or do not receive an Economic Hardship Deferment before receiving IBR, 25 years begins the date the borrower makes a payment under IBR

• If a borrower consolidates, 25 years restarts at the time of consolidation– Underlying loan payments (even if they are eligible payments) are not

counted


Resources

• NCHELP Website – IBR Initiatives

http://www.nchelp.org/pages/page.cfm?id=143

• IBR Implementation Guide

• 34 CFR §682.215

• HEA §493C

• www.ibrinfo.org


http://www.nchelp.org/pages/page.cfm?id=143

http://www.ibrinfo.org/

Questions?

Thank you

American Student Assistance®

100 Cambridge Street, Suite 1600Boston, MA 02114

800.999.9080617.728.4265 F A X800.999.0923 T D D

www.amsa.com

loan repayment options – featuring income-based repayment

Documents

repayment ibr

proprietary information

incomebased repayment

repayment new repayment

borrowers asa confidential

borrowers income

extending repayment

default repayment plan