Understanding Federal Loan
Repayment and Public Service
Loan Forgiveness
Anne Del Plato, Nelnet
Scott Orris, Navient
NYSFAAA Conference, October 2014
Discussion Topics
• Grace Periods
• Servicer Repayment Counseling
• Brief review of Standard (and other repayment plans)
• Income Driven Repayment Plans
• Other Repayment Options
– Consolidation
– Deferment / Forbearance
• Questions
Grace Periods
• After a student graduates, leaves school or drops below halftime 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)
• Two versions now
– Pay as You Earn (Direct Loan Only)
Repayment Estimator
Available on StudentLoans.gov.
6
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 - Overview
Three 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
– Income-Based Repayment Plan (IBR) – 2014
• New borrowers on/after July 1, 2014 (will be comparable to Pay as You Earn in
terms of payment amounts and forgiveness timeframe)
– 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
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”)
IBR for New Borrowers on or after July 1, 2014
• New borrower means an individual who has no outstanding balance on a Direct Loan
Program or FFEL Program loan on July 1, 2014, or who has no outstanding balance on
such a loan on the date he or she obtains a loan after July 1, 2014.
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”)
Income-Driven Plans –
Eligible Loans
• ICR:
– All Direct Loans are eligible except parent PLUS Loans and pre7/1/2006 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
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
• 10% of discretionary income for new borrowers on or after
July 1, 2014
– 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)
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 loans
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
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 and IBR (new borrowers on/after July 1,
2014), 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)
Income-Driven Plan –
Example Borrower
• Jim James
• Is single with no dependents and lives in Texas
• 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
Partial Financial Hardship calculation
Single borrower with no dependents living in Texas
Eligible student loan debt
$50,000 @ 6.8%
Annual Loan Payment Amount (Standard)
$6,900 ($575 per month)
Adjusted Gross Income
$35,000
HHS Poverty Guideline (family size of 1 in 48
contiguous states and D.C.)
$11,170
•15% x (AGI – 150% of Poverty Amount)
•.15 x (35,000 – (1.5 (11,170))
•.15 x (35,000 – 16,755)
•.15 x 18,245 = 2,737
•$2,737 annual or $228 per month
•Borrower exhibits PFH since standard loan payment amount exceeds
calculated amount under IBR plan
IBR – Example Borrower
• Under IBR, Jim 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 his income (no longer have a
partial financial hardship) in his 16th year of IBR
– Pay off his loan at the beginning of his 21st year of IBR (and therefore receive
no loan forgiveness)
– Pay a total of $101,673.34 on his $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 Jim’s income each year and a 3% annual increase in the poverty guidelines.
Pay As You Earn –
Example Borrower
–Under Pay As You Earn, Jim 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 his 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 his $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 Jim’s income each year and a 3% annual increase in the poverty guidelines.
Borrower Example - Recap
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
Borrower Example - Recap
For comparison:
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
Sample IBR Monthly Payments
Sample Pay as You Earn Monthly Payments
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
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
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
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 period
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
Recertifying:
Income and Family Size
•Borrowers will receive educational notices about their income-driven plan
•Borrowers will receive notice of the deadline by which they must submit
income documentation and the consequences of failing to do so
•Borrowers 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
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
Income-Driven Application:
Electronic
• Hosted on the StudentLoans.gov website. 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
Reason for Request
34
Spouses
35
Link to IRS?
36
IRS Link
37
Result of IRS Link
38
Populating the Application
39
Which Income Documentation?
40
Selecting a Repayment Plan
41
Select a Repayment Plan
42
Annual Life Cycle – New Regulations
•
•
Regulations published on 11/1/2012 at 77 FR 66087
(available at: https://federalregister.gov/a/201226348)
Effective 7/1/2013; federal loan servicers
implemented 12/31/2012
Month 9
Month 2
Month 0
Month 1
Borrower
applies:
2/14/2013
Borrower
enters plan:
3/1/2013
Borrower
receives
educational
notice about
plan:
3/2/2013
Borrower
receives
request to
submit new
income
documentati
on:
11/26/2013
Month 10
Month 11
Month 12
Soft
deadline:
1/25/2014
Hard
deadline*:
2/4/2014
Anniversary
date:
3/1/2014
*If borrower submits documentation by hard
deadline, payment amount will not change if loan
servicer cannot process it before anniversary date.
43
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
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 payment
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 10year 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
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
Loan Consolidation
A Direct Consolidation Loan allows the borrower to consolidate
(combine) multiple federal student loans into one loan. The result is a
single monthly payment instead of multiple payments.
Loan consolidation can greatly simplify loan repayment by centralizing
multiple loans into one bill. It can lower monthly payments by giving
the borrower up to 30 years to repay the loans.
The borrower may be able to switch from variable interest rate loans to
a fixed interest rate.
Loan Consolidation
Application Steps – Applicant
Through the completion of the Federal Direct Consolidation Loan Application and
Promissory Note, a borrower will confirm the loans that they want to consolidate and
agree to repay the new Direct Consolidation Loan.
• The electronic application on StudentLoans.gov consist of five steps:
1. Choose Loans & Servicer
2. Repayment Plan Selection
3. Terms & Conditions
4. Borrower & Reference Information
5. Review & Sign
Loan Consolidation
Key features of the electronic application:
• NSLDS lookup performed and information about an applicant’s federal education
loans will populate the application
• Ability to delay processing of the application if applicant has at least one loan still in
grace
• Option to choose the federal servicer to complete the consolidation
• Ability to select a repayment plan for the consolidation loan. Applicants interested
in one of the income-driven repayment plans will be able to complete the electronic
request process
Loan Consolidation
Borrowers should carefully consider whether loan consolidation is the
best option.
• If they increase the length of the repayment period, they'll also make
more payments and pay more in interest.
• They should compare their current monthly payments to what monthly
payments would be if they consolidated their loans.
• Borrowers also should consider the impact of losing any borrower
benefits offered with the original loans.
Loan Discharge Programs
• Death
• Total and Permanent Disability
• Closed School
• False Certification of Student Eligibility or Unauthorized
Payment
• Unpaid Refund
• Discharge in Bankruptcy (in rare cases)
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 allow a borrower to postpone their monthly
payment in certain circumstances. Some include:
•
•
•
•
In-School
Unemployment
Economic Hardship
Military
During a deferment, the borrower does not need to make
payments.
Deferments
• During a deferment, a borrower does not need to make payments. What’s
more, depending on the type of loan, the federal government may pay the
interest on the loan during a period of deferment (subsidized loans).
– The government may pay the interest on your Federal Perkins Loan,
Direct Subsidized Loan, and/or Subsidized Federal Stafford Loan.
• The government does not pay the interest on unsubsidized loans (or on
any PLUS loans).
• The borrower is responsible for paying the interest that accrues
(accumulates) during the deferment period, but payment is not due
during the deferment period.
• If the borrower doesn’t pay the interest on the loan during deferment, it
may be capitalized (added to the principal balance), and the amount paid
in the future will be higher.
Forbearances
A borrower who is willing but unable to make payments and does not meet
the qualifications for a deferment may request forbearance.
• Forbearance allows a borrower to temporarily postpone payments for a
specified period of time.
• The forbearance will eliminate any delinquency that currently exists on
the account but won’t reverse any derogatory credit information
previously reported.
• The borrower is responsible for the interest that accrues during a
forbearance. Recommendation: pay at least the interest, as it accrues
during forbearance.
Thank you!
Scott Orris
Navient
Anne Del Plato
Nelnet
Senior Client Relationship
Manager
scott.orris@navient.com
Regional Director, Partner
Solutions
anne.delplato@nelnet.net
717-412-0985(t)
717-736-3023(c)
518-285-6236(t)
518-369-8477(c)
Navient.com
NelnetLoanServicing.com