understanding loan repayment plans and alternative repayment

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Understanding Loan Repayment Plans and Alternative Repayment. Ron Hancock, Nelnet Christine Passer, Southwestern Michigan College. Session Outline. Grace Periods Direct Loan and FFEL Repayment Plans Emphasis on Income Driven Plans Other Repayment Strategies School Perspective. - PowerPoint PPT Presentation

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Understanding Loan Repayment Plans and Alternative RepaymentRon Hancock, NelnetChristine Passer, Southwestern Michigan CollegeMASFAA 2013

October 6th 9th, 2013

Indianapolis, IndianaSession OutlineGrace Periods

Direct Loan and FFEL Repayment PlansEmphasis on Income Driven Plans

Other Repayment Strategies

School Perspective

Grace PeriodsAfter 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 PeriodOf 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 CounselingDuring the grace period loan servicers:Continue to establish a relationship with the borrowerUpdate and enhance borrower contact infoPromote self-service through the webDiscuss repayment plan optionsDiscuss consolidation optionsUnderstanding Repayment Plans

Student borrowers may repay their student loans through one of several repayment plans:Standard Repayment PlanGraduated Repayment PlanExtended Repayment PlanIncome-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 PlanThe Graduated Repayment Plan may be beneficial if the borrowers 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 exampleA 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 paymentsMinimum payment of $50 for Fixed ExtendedMaximum repayment period is 25 years

Income Driven Repayment PlansIncome-Driven Plans - OverviewThree main plansIncome-Contingent Repayment Plan (ICR) 1994Direct Loan Program onlyMore information available at StudentAid.gov/ICRIncome-Based Repayment Plan (IBR) 2009Available in both the Direct Loan and FFEL ProgramMore information available at StudentAid.gov/IBRPay As You Earn Plan 2012Direct Loan Program onlyFor new borrowers in FY 2008 who receive new loans in FY 2012Modeled on IBR, incorporating statutory IBR changes scheduled to take effect for new borrowers in 2014More information available at StudentAid.gov/PayAsYouEarn10Income-Driven Plans Eligible BorrowersICR:Direct Loan borrowers with eligible loansIBR:Direct Loan and FFEL Program borrowers with eligible loans andTheir 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 loansMust be a new borrower on/after 10/1/2007 who received new loan on/after 10/1/2011 andTheir 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)1111Income-Driven Plans Eligible LoansICR:All Direct Loans are eligible except parent PLUS Loans and pre-7/1/2006 Direct PLUS Consolidation LoansDirect Consolidation Loans made on/after 7/1/2006 that repaid parent PLUS loans are eligibleIBR:All Direct and FFEL Program loans except parent PLUS loans and Consolidation Loans that repaid parent PLUS loansPay As You Earn:All Direct Loans are eligible except parent PLUS loans and Consolidation Loans that repaid parent PLUS loans1212Income-Driven Plans Payment AmountsUnder ICR, borrowers pay the lesser of:12-year standard repayment schedule multiplied by income percentage factor (payment based on loan debt and income) or20% of discretionary income (payment based only on income)Under IBR, borrowers pay the lesser of:15% of discretionary income (income-based payments) orWhat 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) orWhat they would have paid under the 10-year standard repayment plan (non-income-based payments)1313Income-Driven Plans Interest Subsidy BenefitIBR and Pay As You Earn onlyBorrower eligible when payment does not cover accruing interest on subsidized loans (negative amortization)Eligibility limited to first three consecutive years of repayment under planSubsidy amount (paid by ED) = accruing interest on subsidized loans not covered by monthly paymentBorrower must pay all interest on unsubsidized loans1414Income-Driven Plans - CapitalizationICR:During periods of negative amortization, annuallyInterest capitalizes only until principal balance is 10% greater than original principal from when borrower entered repaymentOtherwise, normal capitalization rules applyIBR:No longer qualifies for payments based on income (no longer has a partial financial hardship) orLeaves IBR entirelyPay As You Earn:No longer qualifies for payments based on income (no longer has a partial financial hardship) orLeaves Pay As You Earn entirelyInterest capitalizes only until principal balance is 10% greater than original principal amount when borrower entered plan1515Income-Driven Plans Loan ForgivenessAll three plans provide for forgivenessFor ICR and IBR, remaining balance forgiven after 25 years of qualifying repaymentFor Pay As You Earn, remaining balance forgiven after 20 years of qualifying repaymentFor all three plans, qualifying repayment includes:Payments under an income-driven planPayments 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) orEconomic hardship defermentAccording to the IRS, the forgiven amount is considered taxable income (See IRS Pub 4681)1616Income-Driven Plan Example BorrowerAnnaDrew Luck:Is single with no dependents and lives in IndianaHas 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 rate17IBR Example BorrowerUnder IBR, AnnaDrew will*:Have an initial monthly payment of $228.06Have a final monthly payment of $575.40Receive $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 IBRPay 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 AnnaDrews income each year and a 3% annual increase in the poverty guidelines.

1818Pay As You Earn Example BorrowerUnder Pay As You Earn, AnnaDrew will*:Have an initial monthly payment of $152.04Have a final monthly payment of $492.19Receive $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 $44,979.06Pay 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 AnnaDrews income each year and a 3% annual increase in the poverty guidelines.1919Borrower Example - RecapICRIBRPay As You EarnInitial Payment$397.17$228.06$152.04Final Payment$535.23$575.40$492.19Time in Repayment13 years, 8 months20 years, 2 months20 yearsTotal Paid$78,444.28$101,673.34$70,709.53Forgiveness$0$0$44,979.0610-year StandardExtended & Consolidation StandardPayment$575.40$347.04Time in Repayment10 years25 yearsTotal Paid$69,037.44$104,080.83For comparison:20Applying: Income DocumentationBorrower must submit income documentation when applyingEligibility (IBR & Pay As You Earn) and payment amount (all three plans) usually based on a borrowers AGIBorrower 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 Transcript21Applying: Income DocumentationIf 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 documentationBorrowers do not provide documentation of untaxed income, such as Supplemental Security Income or welfare22Applying: ADOI Additional ConsiderationsBorrowers who use the electronic application must follow-up with their loan holder and send in documentationIt is often difficult to know how frequently the borrower receives the income based only on the documentation23Applying: ADOI Additional ConsiderationsProjected annual income using ADOI may be higher than the borrowers AGI will beLoan holders cannot subtract out above the line deductions to income that a borrower may take when filing a tax return, which would lower AGILoan holders might only exclude pre-tax deductions from pay if they are obviousLoan holders can accept a signed statement from the borrower explaining pre-tax deductionsBorrowers may not have held the job for the entire year, but loan holders project income to cover a 12-month period24Recertifying: Income and Family SizeUnder all three plans, borrowers are required to submit updated income documentation annuallyFailure 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) andInterest capitalizationBorrowers must also annually certify their family size or a family size of one will be usedThe 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 dateBorrowers can use the electronic application to recertify their income and family size25Recertifying: Income and Family SizeBorrowers 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 calculatedLoan holders inability to determine a borrowers new payment amount by the borrowers anniversary date will no longer result in automatically increased payment amounts and capitalization of all outstanding interest2626Income-Driven Application: ElectronicHosted on the StudentLoan.gov. Borrowers can access application directly or through loan servicers websitesUses IRS Data Retrieval Tool that is used on the FAFSARetrieves the most recent tax information from two most recently completed tax yearsElectronically transmits application to loan servicerno follow-up necessary unless AGI is unavailable or borrower wants to submit alternative documentation of incomeCan be used for initial applications or annual reevaluations27

Electronic Application IRS Interface2828Income-Driven Application: PaperAvailable for borrowers who cannot or do not wish to use the electronic applicationPaper 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 income29

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 borrowers circumstances. The borrower must provide evidence of the exceptional circumstance and the terms must be within the following restrictions:maximum 30 year termminimum payment of $5.00payments cannot vary by more than 3x the smallest paymentThere are four different Direct Loan Alternative Repayment Plans:Alternative Fixed Payment, Alternative Fixed Term, Alternative Graduated, and Alternative Negative Amortization.

Public Service Loan ForgivenessPublic Service Loan Forgiveness (PSLF) provides for forgiveness of a Direct Loan borrowers remaining loan balance if the borrower:Makes 120 full, on-time payments after October 1, 2007Makes each payment under a qualifying repayment planMakes each payment while employed full-time by a qualifying organizationBorrower must also be employed by a qualifying organization at the time that the borrower applies for and receives PSLFAccording to the IRS, the forgiven amount is not treated as taxable income31PSLF Qualifying PaymentsBorrower must make 120 separate monthly payments. They:Do not need to be consecutiveMust be for the full scheduled payment under the repayment planMust be made within 15 days of the due dateMultiple, partial payments during the borrowers monthly billing cycle will qualify if they add up to equal the borrowers monthly payment amountA 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 payment3232PSLF Qualifying Repayment PlanEach of the 120 payments must be made under a qualifying repayment planQualifying repayment plans:10-year Standard Repayment PlanIBR, ICR, Pay As You Earn plans andAny other payment plan where the payment amount at least equals the 10-year Standard Repayment Plan amountNon-qualifying repayment plans include:Extended (Fixed or Graduated)Graduated andConsolidation Standard with term greater than 10-yearsIncome-driven plans are most likely to leave a remaining balance for forgiveness after 120 qualifying payments3333PSLF Eligible LoansPSLF is only for Direct LoansAll Direct Loans qualifyParent Direct PLUS Loans are eligible for PSLF, but cannot be repaid under income-driven plansBorrowers may consolidate parent PLUS Loans and repay under ICRFFEL Program and Perkins Loans do not qualify, but can be consolidated into a Direct Consolidation LoanBorrower consolidating Perkins Loans will lose Perkins-only cancellation benefits they may have otherwise been able to receivePayments 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 Loan3434Other Repayment StrategiesBorrower Tools

Repayment IncentivesDefermentsForbearancesLoan ConsolidationRepayment Incentives

Electronic DebitA 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

DefermentsDeferments 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.DefermentsEconomic Hardship Up to three years if borrower is:Receiving payment under federal or state public assistance programWorking 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 greaterServing in the Peace CorpsDefermentsMilitary 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 dateForbearancesIf 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:DiscretionaryMandatory ForbearancesDiscretionary ForbearanceFor discretionary forbearances, the lender decides whether to grant forbearance or not.A borrowe can request a discretionary forbearance for the following reasons: Financial hardshipIllnessForbearancesMandatory ForbearanceFor 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 PaymentFlexible Repayment OptionsLower Monthly PaymentsFixed Interest Rate for Life of LoanMay utilize to move FFELP loans into DL to qualify for PSLFIts FreeRons rant - bewareThe School PerspectiveContact InformationRon HancockNelnet Loan [email protected]

Christine PasserSouthwestern Michigan [email protected]