Income-Driven Repayment Options

IBR, ICR and Pay As You Earn

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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• Summary• Resources

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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

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DefinitionsAdjusted 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

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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

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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). 6

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

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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

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Definitions

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Comparison of plans

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Criteria

IBR Pay As You Earn ICR

Who qualifies

Direct & FFELP Loan borrowers who have a partial financial hardship (PFH)

“New” borrowers as of 10/1/2007 who have a PFH; AND receive a Direct Loan disbursement or Direct Consolidation Loan on/after 10/1/2011

Direct Loan borrowers

Eligible Loans

- Direct & FFEL Stafford Loans (sub & unsub)

- Direct & FFEL Grad PLUS- Direct & FFEL

Consolidations that did not repay parent PLUS Loans

- Direct Stafford Loans (sub & unsub)

- Direct Grad PLUS Loans- Direct Consolidation

Loans that did not repay Direct and/or FFEL parent PLUS Loans

- Direct Stafford Loans (sub & unsub)

- Direct Grad PLUS Loans- Direct Sub & Unsub

Consolidation Loans, including Direct Unsub Consolidation Loans made on/after 7/1/2006 that repaid Direct and/or FFEL parent PLUS Loans

Ineligible Loans

- Defaulted Direct & FFEL Loans

- Direct & FFEL parent PLUS Loans

- Perkins Loans- Private Loans- HEAL Loans- Direct & FFEL

Consolidation Loans that repaid parent PLUS Loans

- Defaulted Direct Loans- Direct parent PLUS Loans- Perkins Loans- Private Loans- HEAL Loans- All FFELP Loans (including FFELP loans owned by ED)- Direct Consolidation Loans that repaid Direct and/or FFEL parent PLUS Loans

- Defaulted Direct Loans- Direct parent PLUS Loans- Perkins Loans- Private Loans- HEAL Loans- All FFELP Loans (including FFELP loans owned by ED)- Direct PLUS Consolidation Loans made prior to 7/1/2006 that repaid Direct and/or FFEL parent PLUS Loans

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“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. 12

Partial financial hardship (PFH)

• Based on income and family size

Borrower’s annual

payment amount using the standard

10-year repayment plan ÷ 12

15% (for IBR) or 10% (for Pay As

You Earn) of borrower’s

(Adjusted Gross Income – 150% of poverty line amount) ÷ 12

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

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

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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

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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 16

Application Process

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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 18

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.

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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

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Borrower example

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Borrower example

• 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

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

Borrower example ICR IBR Pay As You

Earn

Initial Payment

$397.17 $228.06 $152.04

Final Payment $535.23 $575.40 $492.19

Time in Repayment

13 years, 8 months

20 years, 2 months

20 years

Total Paid $78,444.28 $101,673.34 $70,709.53

Forgiveness $0 $0 $44,979.06

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10-year Standard

Extended & Consolidation Standard

Payment $575.40 $347.04

Time in Repayment

10 years 25 years

Total Paid $69,037.44 $104,080.83

For comparison:

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

Summary

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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

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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

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ICR IBR Pay As You Earn

Time in Repayment

13 years, 8 months

20 years, 2 months

20 years

Total Paid $78,444.28 $101,673.34 $70,709.53

Plan Forgiveness

$0 $0 $44,979.06

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ICR IBR Pay As You Earn

Time in Repayment

10 years 10 years 10 years

Total Paid for PSLF

$55,952.61 $37,222.34 $24,814.89

PSLF Amount $19,858.58 $45,711.82 $57,189.97

Without PSLF:

With PSLF:

Source: Department of Education; 2012 FSA Conference

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

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Resources

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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

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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/

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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

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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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