Partial Financial Hardship 8/11/2014. Disadvantages of income-driven plans. Interest and capitalization benefits accompany the income-driven plans

Transcription

1 Income-Driven Plan Payment Amount Comprehensive Student Loan Training Series Income-Contingent The lesser of: 20 percent of discretionary income, or what borrower would pay on a fixed payment over the course of 12 years, adjusted according to income Session Two of Four August 2014 Income-Based 15 percent of discretionary income, but never more than (for those who are not new borrowers* the 10-year Standard Plan amount on or after July 1, 2014) Pay As You Earn Plan (for those who are new borrowers on Oct 1, 2007 and borrowed on or after Oct 1, 2011) Income-Based (for those who are new borrowers* on or after July 1, 2014) 10 percent of discretionary income, but never more than the 10-year Standard Plan amount 10 percent of discretionary income, but never more than the 10-year Standard Plan amount Loan Type IBR Pay As You Earn ICR Direct Subsidized Loans Eligible Eligible Eligible Direct Unsubsidized Loans Eligible Eligible Eligible Direct PLUS Loans made to graduate or Eligible Eligible Eligible professional students Direct PLUS Loans made to parents Not eligible Not eligible Eligible if consolidated* Direct Consolidation Loans that did not Eligible Eligible Eligible repay any PLUS loans made to parents Direct Consolidation Loans that repaid PLUS loans made to parents Not eligible Not eligible Eligible if consolidated* Subsidized Federal Stafford Loans (from the Eligible Eligible if consolidated*eligible if consolidated* FFEL program) Unsubsidized Federal Stafford Loans (from Eligible Eligible if consolidated*eligible if consolidated* the FFEL program) FFEL PLUS Loans made to graduate or professional students Eligible Eligible if consolidated*eligible if consolidated* FFEL PLUS Loans made to parents Not eligible Not eligible Eligible if consolidated* FFEL Consolidation Loans that did not repayeligible Eligible if consolidated*eligible if consolidated* any PLUS loans made to parents FFEL Consolidation Loans that repaid PLUS Not eligible Not eligible Eligible if consolidated* loans made to parents Federal Perkins Loans Eligible if consolidated* Eligible if consolidated*eligible if consolidated* ICR Original IBR PAYE/IBR 2014 Interest and capitalization benefits accompany the income-driven plans No subsidy Annual interest capitalization 10% cap on interest capitalization 3 year subsidy No capitalization unless no PFH or leaves IBR No limit on amount of capitalization 3 year subsidy No capitalization unless no PFH or leaves PAYE 10% cap on interest capitalization Disadvantages of income-driven plans Negative amortization means lots of interest adds up Payments are based on AGI reported on tax returns so married people must sometimes trade off tax benefits for student loan benefits Possibility of substantial tax liability upon forgiveness Paperwork like you ve never seen Partial Financial Hardship Required debt to income ratio in order to qualify to choose IBR or PAYE 1

2 Married student loan borrowers must choose: File taxes jointly and have monthly payment based on joint AGI and combined student debt, or File taxes separately and have monthly payment based on individual AGI and individual student debt Disadvantages to a married filing separately tax status Tax rate is generally higher than it would be on a joint return. Cannot take the credit for child and dependent care expenses in most cases, and the amount that can be excluded from income under an employer's dependent care assistance program is limited. Cannot take the earned income credit. Cannot take the exclusion or credit for adoption expenses in most cases. Cannot take the education credits, including the deduction for student loan interest. Deductions for contributions to a traditional IRA are reduced or eliminated if income is more than a certain amount, and this amount is much lower for married individuals who file separately. Hunter and Juan-Carlos Gomez Juan-Carlos earns $45,000 as a police officer. His wife Hunter earns $60,000 as a veterinarian. Juan-Carlos and Hunter have no children. Juan-Carlos owes $25,000 on his eligible federal student loans Hunter owes $75,000 on her loans (Hunter owes 75 percent of the total marital student loan debt). Tax Filing Status Comparing Taxation Adjusted Gross Income Annual Tax Due Jointly $102,500 $14,439 $14,439 Separately Hers: $60,000 Difference His: Hers: $45,000 $9,401 His: $5,660 $15,061 Combined Annual Tax Due Filing jointly saves $622 on this year s tax payment. Tax Filing Status Jointly Separately Difference Monthly IBR Payment Hers: $743 (75% of total) Hers: $459 His: $248 (25% of total) Combined Monthly IBR Payment $991 $11,892 His: $272 $731 $8,772 Combined Annual IBR Payment Filing jointly Filing jointly requires $260 requires $3,120 more monthly in more annually in student loan student loan payments payments Community property Alternative Documentation of Income for married couples 2

3 Although AGI is driven by federal tax return, family size is not. Although AGI is driven by federal tax return, family size is not. This means that borrowers can count a spouse in your family size even if you choose to file separate tax returns. According to federal regulations, family size is determined by counting: The borrower The spouse Children if the children receive more than half their support from the borrower Other individuals if they (1) live with the borrower and (2) receive more than half their support from the borrower and will continue to receive this support for the year the borrower certifies family size. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. Recent Law Graduate Tatiana borrows $100,000 to finance her legal education. She borrows $61,500 in unsubsidized Stafford loans at a 6.8% interest rate. She also borrows $38,500 in GradPLUS loans at a 7.9%. Imagine that following graduation, Tatiana works in private practice in a mid-sized law firm. Her starting salary is $60,000 and she gets 4% annual salary increases. Plan Standard 10-year term Consolidation 30-year term Income-Based Tatiana in private employment Monthly Payment (Year One) Years in Total Payments $ $140,881 N/A $ $245,583 N/A Total Forgiven Taxable as income $ $209,362 $64,644 Pay As You Earn $ $102,257 $142,743 AGI $54,000; 3% annual increases; family size = 1 What about people who want to save the world? Even if it means forgoing income 3

4 Public Service Loan Forgiveness is earned by making payments 1. Make the right kind of payments, 120 qualifying payments Public Service Loan Forgiveness in Five Steps 2. on the right kind of loans, 3. while working in the right kind of job. 4. Repeat 120 times. 5. Prove it. Plan Standard 10-year term Tatiana in a Public Service Career Monthly Payment (Year One) Years in Total Payments $ $140,881 N/A Total Forgiven Not taxable! Loan Assistance Programs and Loan Forgiveness Consolidation 30-year term $ $245,583 N/A School-Based LRAPs State-Based LRAPs Employer LRAPs Income-Based $ $68,438 $107,812 Pay As You Earn $ $45,625 $129,375 Public Service Loan Forgiveness Profession specific programs Income-driven repayment plan forgiveness AGI $54,000; 3% annual increases; family size = 1 Career related loan repayment assistance programs Perkins cancelation Peace Corps AmeriCorps Teachers Military Medical Legal Teacher Loan Forgiveness Program No outstanding balance on a federal loan as of October 1, 1998 Not in default Employed as a full-time teacher for five consecutive, complete academic years, at least one of which was after the academic year In schools that serve low income families $5,000 and $17,500 limits 4

5 Military specific provisions Perkins cancellation Limits on Interest Accrual Military Service Deferment Active Duty Student Deferment Extended grace, in-school deferments, and forbearance periods Rehabilitation and consolidation out of default requirements relaxed Waiver of some collection requirements Service Members Civil Relief Act Medical National Health Service Corps Loan Program for licensed primary care medical, dental, and mental and behavioral health providers who are employed or seeking employment at approved sites. Students to Service Loan Program for allopathic and osteopathic medical students in their fourth year at an accredited medical school. State Loan Program for primary care providers in participating States. Perkins cancellation Full-time teacher in a designated elementary or secondary school serving students from low-income families Full-time teacher at any school of math, science, foreign languages, bilingual education, or other fields designated as teacher shortage areas Full-time special education teacher (includes teaching children with disabilities) in a public or other nonprofit elementary or secondary school Full-time qualified professional provider of early intervention services for the disabled Full-time employee of a public or nonprofit child- or family-services agency providing services to high-risk children and their families from low-income communities Full-time nurse or medical technician Full-time law enforcement or corrections officer Full-time staff member in the education component of a Head Start Program Vista or Peace Corps volunteer (up to 70%) Active duty service member in the U.S. Armed Forces (up to 50% in areas of hostilities or imminent danger) Public Service Loan Forgiveness is earned by making payments 120 qualifying payments $100,000 debt, $54,000 AGI - increasing 3%, family size: 1 Without PSLF IBR Pay AsYou Earn Time in 25 years 20 years Income Totaldriven Paid $209,362 $102,257 forgiveness is taxable Forgiveness as income! $64,644 $142,743 With PSLF IBR Pay As You Earn Time in 10 years 10 years Total Paid $68,438 $45,625 But PSLF is NOT taxable as income - Forgiveness wow $107,812 $129,375 Five Steps to Public Service Loan Forgiveness 5

6 Remember these 5 steps: 1. Make the right kind of payments, 2. on the right kind of loans, 3. while working in the right kind of job. 4. Repeat 120 times. 5. Prove it. The right kind of job 501(c)(3) Non-profit Local State Federal Tribal organizations entities AmeriCorps Position Peace Corps Public Service Organization agencies contractors Full-time The right kind of payments Income driven repayment NOT long term repayment plans be cautious about standard repayment terms 6

7 on the right kind of loan ONLY FEDERAL DIRECT For Public Service Loan Forgiveness (and Pay As You Earn), FFEL loans MUST be consolidated into federal direct Federal Direct The one and only RIGHT kind of loan Repeat 120 times FFEL, Perkins Must be consolidated into Could Federal become Directright, but only if you take action Private, alternative, commercial, bar study loan WRONG and can t ever be right Prove it 7

8 Prove it verify income & family size annually certify employment annually Must be in qualifying employment when each of 120 payments are made, AND when applying for forgiveness, AND when forgiveness is granted apply for forgiveness The word of the day is: STATUS 8