What is Income-Based Repayment?
As part of the College Cost Reduction and Access Act of 2007 (CCRAA) a new repayment option for certain federal loans called Income-Based Repayment (IBR) was introduced, IBR became available on July 1, 2009, and it can significantly reduce monthly payments for high debt/lower income borrowers. IBR can be a confusing program, and there are many nuances to making sure the program is utilized effectively. GL Advisor helps clients determine if they will qualify for IBR and monitor eligibility, understand potential savings from subsidies, and evaluate strategies to maximize the subsidy savings and loan forgiveness amount, if applicable.
How Income-Based Repayment Works
To be eligible for IBR, a borrower must first show that they have a Partial Financial Hardship (PFH). A borrower is considered to have a Partial Financial Hardship when the annual amount due on all of their eligible loans exceeds 15% of the difference between the adjusted gross income (AGI), as shown on their most recently filed federal income tax return, and 150% of the annual poverty line amount for their family size and state of residence. The annual amount due is calculated based on the amount owed on eligible loans as of the time the borrower initially entered repayment, using a standard repayment plan with a 10-year repayment period. The AGI includes a spouse’s income if the borrower is married and files a joint federal income tax return.
Once PFH is determined, payments will be adjusted based on the below calculations. The borrower will need to qualify annually for the reduced PFH payment amount; however, once the borrower is in the IBR program, they can continue to utilize the program, even if they no longer qualify for a Partial Financial Hardship.
The government will help pay the borrower’s interest on qualifying Subsidized Stafford loans for up to 3 years. In addition, after 25 years of monthly qualifying payments, any remaining balances on the applicable loans will be eligible for forgiveness by the government.
How Monthly Payments Are Calculated
Monthly payments are calculated as follows:
- PFH Payment Amount = (.15(AGI – 1.5(poverty line income)) /12
- If the PFH amount is less than $5.00, then the monthly payment amount becomes $0
- If the PFH amount is between $5 and $10, then the monthly payment amount becomes $10
Which Loans Qualify?
The following loans qualify for Income-Based Repayment: Stafford, Grad PLUS and Consolidation loans made under either the Direct Loan or FFEL program, except for loans that are currently in default, Parent PLUS Loans, or consolidation loans that repaid a Parent PLUS Loan.
What is Pay as You Earn (PAYE)?
Formerly known as ICR-A, the Pay as You Earn (PAYE) program is a new student loan repayment plan approved on December 21, 2012. It is designed much like the Federal Student Aid Calculator. Monthly payment levels are adjusted yearly depending on changes in income and family size. Once in, a borrower may continue paying under PAYE even if PFH does not apply anymore.
Which loans are eligible?
- Direct and Direct Consolidation Loans
- Private loans, Parent PLUS and FFEL loans and Direct Consolidated Loans that paid for a Parent PLUS Loan are not eligible.
As part of the College Cost Reduction and Access Act of 2007 (CCRAA) a public service loan forgiveness program was introduced. With this program, the government will forgive remaining federal debt on Direct Loans after the borrower makes 120 monthly payments while working full-time in certain public service jobs. GL Advisor helps clients determine if they will qualify and monitor eligibility, understand potential savings and risks associated with the program, and evaluate strategies to maximize the amount forgiven. This program has the potential to provide significant benefits to those planning on a career in the public sector including, but not limited to, graduates of law school, business school, both allopathic and osteopathic medical school and others.
Qualifying for Forgiveness
To qualify for Public Service Loan Forgiveness, a borrower must have made 120 eligible payments, be employed full-time at an eligible job at the time forgiveness is requested and not be in default on any of their qualifying federal loans. To request forgiveness, borrowers must submit an application and provide proof of their employment history and 120 qualifying payments. If approved, the government will forgive the remaining principal and interest on the qualifying loans. Note that loan balances are not automatically forgiven.
Which Loans Qualify?
The following loans qualify for the Public Service Loan Forgiveness: Direct Subsidized Stafford Loans, Direct Unsubsidized Stafford Loans, Direct PLUS Loans and Direct Consolidation Loans.
What Jobs Are Eligible?
The following jobs are eligible for the Public Service Loan Forgiveness program:
- Peace Corps*
- public child or family service agency
- work for a non-profit organization that falls under IRS code 501(c)(3) or 501(a)
- work for a tribal college or university
- Federal, State, local, or Tribal government organization, agency, or entity
- emergency management
- military service*
- public safety
- law enforcement*
- public interest law services*
- early childhood education (including licensed or regulated health care, Head Start, and State funded pre-kindergarten)
- public service for individuals with disabilities and the elderly
- public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations)*
- public education
- public library services
- school library or other school-based services
Note that jobs in the following areas do not qualify for Public Service Loan Forgiveness: a business organized for profit, a labor union, a partisan political organization, or an organization engaged in religious activities unless the qualifying activities are unrelated to religious instruction, worship services, or any form of proselytizing.
Borrowers must make 120 separate eligible payments to be considered for forgiveness, and eligible payments must meet the following criteria:
- must be made while employed full-time in an eligible job
- must be made after October 1, 2007
- must be on-time (i.e., within 15 days of payment due date)
- must make the full monthly scheduled payment amount due
- no lump-sum payments, except for AmeriCorps or Peace Corps payments
- the monthly amount paid must be at least as much as one of the following repayment plans: Income-Contingent Repayment, Income-Based Repayment, and a Standard 10 year term
Definition of Full-time Employment Status
For the purposes of the Public Service Loan Forgiveness program, full-time employment status is defined as either:
- An annual average of at least 30 hours per week;
- For a contractual or employment period of at least 8 months, an average of 30 hours per week; or
- Unless the qualifying employment is with two or more employers, the number of hours the employer considers full-time.
A borrower can be employed in multiple jobs to meet the full-time requirement.
* Peace Corps position means a full-time assignment under the Peace Corps Act as provided for under 22U.S.C. 2504. Military service, for uniformed members of the U.S. Armed Forces or the National Guard, means “active duty” service or “full-time National Guard duty” as defined in section 101(d)(1) and (d)(5) of title 10 in the United States Code, but does not include active duty for training or attendance at a service school. For civilians, “Military service” means service on behalf of the U.S. Armed Forces or the National Guard performed by an employee of a public service organization. Law enforcement means service performed by an employee of a public service organization that is publicly funded and whose principal activities pertain to crime prevention, control or reduction of crime, or the enforcement of criminal law. Public interest law refers to legal services provided by a public service organization that are funded in whole or in part by a local, State, Federal, or Tribal government.
Economic Hardship Deferment is a federal option that provides eligible borrowers payment relief on their federal loans. The deferment includes subsidies and historically it was widely used by doctors during their residency period.
The College Cost Reduction and Access Act of 2007 (CCRAA) introduced a new definition for economic hardship which resulted in the eligibility criteria for Economic Hardship Deferment (EHD) changing on July 1, 2009. With this change, many graduates who previously qualified for EHD may no longer qualify. Instead, some borrowers needing payment relief will rely on forbearance, which is a more costly option than EHD. The new Income-Based Repayment program is often considered the best alternative because like EHD it can result in savings from government subsidies.
However, because payments are required under the Income-Based Repayment program, some borrowers end up using forbearance when payment relief is needed. Though payments are not required during a forbearance period, the borrower will be responsible for all applicable accrued interest.
GL Advisor finds that many recent graduates are still able to qualify for EHD even as the criteria has changed. GL Advisor works with clients to ensure they make the most of all available programs. The main benefits to EHD are:
- Qualified borrowers will not need to make payments on their federal loans during the deferment period
- The government will pay the interest on the subsidized loans during the deferment period
GL Advisor looks forward to reviewing your portfolio to determine if you may be able to qualify for EHD for the upcoming year.
Federal Loan Consolidation enables borrowers to lock in a low fixed rate on variable rate Stafford Loans as well as combine and/or transfer multiple federal loans to a single lender.
Current Interest Rate on Variable Stafford Loans
On July 1, 2012, the interest rates for variable rate Stafford Loans changed slightly from the previous year. Borrowers who consolidate their variable Stafford loans between July 1, 2012 and June 30, 2013 will recognize the following rates:
- Variable Stafford loans that are currently in an in-school, grace or deferment status will lock in at 1.875%
- Variable Stafford loans that are currently in a repayment status will lock in at 2.5%
Many borrowers utilize consolidation to transfer their federal loans to the Direct Loan program in order to participate in the Public Service Loan Forgiveness program. Every borrower must evaluate their consolidation options, as timing, structuring, and benefits of loan consolidation** are unique to each borrower.
**All consolidations are done through the Federal Direct Loan program and include only federal student loans.