IBR and ICR Options to help borrowers manage repayment

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1 IBR and ICR Options to help borrowers manage repayment Course outline Similarities of IBR and ICR plans Overview of IBR plan Overview of ICR plan Summary Upcoming changes Resources 1

2 Staggering growth of student loans IBR and ICR plans Considers a borrower s income, family size, and total amount borrowed Results in a lower monthly payment that is adjusted annually Provides forgiveness of remaining balance after 25 years (300 qualifying payments) Under current IRS rules, the amount of debt discharged is treated as taxable income Counts payments made toward the 120 required payments for Public Service Loan Forgiveness 2

3 Income based repayment (IBR) What is income based repayment (IBR)? Newest repayment plan available to FFELP and DL borrowers on or after July 1, 2009 Must have a partial financial hardship (PFH) when selecting IBR Provides interest subsidy on subsidized loans for up to 3 years if IBR payment is less than accrued interest on those loans 3

4 Eligible loans Stafford SLS Grad PLUS Federal Consolidation loans that include only student loans Stafford, SLS, Grad PLUS, Perkins, HPSL, HEAL, and FISL loans Ineligible loans Parent PLUS loans Consolidation loans that include Parent PLUS loans Private education loans Defaulted loans 4

5 Key terms Partial financial hardship (PFH) Borrower s annual payment amount using the standard 10 year repayment plan / 12 15% of borrower s (Adjusted Gross Income 150% of poverty line amount) / 12 Based on income and family size 5

6 PFH A borrower s PFH is determined based on the greater of either: The original loan balance when the borrower initially entered repayment or The current loan balance at the time the borrower requests IBR Adjusted Gross Income (AGI) AGI = gross income deductions (IRS definition) IBR and married borrower's filing status: Married/joint: both spouses AGI are considered in determining payment amount Both the borrower s and spouse s eligible loans are used in determining whether each borrower has a PFH Married/separate: only the borrower's AGI is considered in determining payment amount Borrower must provide permission for IRS to disclose AGI and "other tax return information" annually 6

7 Family size Includes borrower, spouse, children, unborn children if receiving >50% support, and others who live with the borrower and receive >50% support during that year Support includes money, gifts, loans, housing, food, clothes, car medical and dental care and payment of college costs Defaults to one (1) if borrower does not provide required information Borrower must certify family size annually Applying for IBR 7

8 Application process Borrowers may apply by completing either: Paper application available with the loan holder Electronic IBR (e IBR) application available on studentloans.gov website E IBR application is available for borrowers with at least one Direct loan or FFEL loan associated with a federal loan servicer IBR payment amount When borrower requests IBR, loan holder determines if borrower meets definition of PFH Monthly payment amount = 15% of (AGI 150% Poverty line for family size) 12 8

9 IBR payment amount Payment amount less than $5.00 = $0 payment amount due Payment amount between $5.00 and $10.00 = $10.00 payment amount due Qualifying for subsequent years Borrower s eligibility and IBR monthly payment is re evaluated evaluated annually Borrower must submit IBR forms to holder each year If borrower fails to submit IBR forms, holder required to recalculate the borrower s monthly payment 9

10 Repayment terms Once in IBR, repayment can extend beyond 10 years regardless of the amount of the eligible debt Borrower can elect to remain in IBR even when he or she no longer meets PFH Borrower is not locked into IBR, but could have consequences if he or she voluntarily leaves the plan Income contingent contingent repayment (ICR) 10

11 What is income contingent repayment (ICR)? Repayment plan available only to DL borrowers Borrower does not have to meet any specific eligibility criteria to qualify If borrower payment doesn t cover interest, unpaid interest is capitalized annually up to 10% of the original loan amount Excess interest above the 10% cap continues to accrue but is not capitalized Eligible loans Direct Subsidized Direct Unsubsidized Direct Student PLUS loans Direct Consolidation Loans made since July 1, 2006 (can include a Direct Parent PLUS loan) 11

12 Ineligible loans FFELP Program loans Direct Parent PLUS loans Direct Parent PLUS Consolidation loans Private education loans Federal Perkins Loans, HEAL loans or other health education loans Defaulted loans Key terms 12

13 AGI AGI = gross income deductions If a borrower is married, the spouse s income must be used when calculating AGI If a borrower is married, but separated, the spouse s income is not used for AGI purposes Family size Includes borrower and spouse, and children if they receive > 50% support Includes other people if they now live with borrower, and they now receive > 50% support and they will continue receiving this support Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, payment of college costs If family size changes, must provide information to ED servicer 13

14 Discretionary income AGI minus the federal poverty line that corresponds to the family size and state Income percentage factor (IFP) A factor used in the ICR repayment amount formula that corresponds to a borrower s income and marital status The factors are adjusted annually to reflect changes in inflation 14

15 Applying for ICR Application process Borrowers may apply by completing ED s Repayment Plan Selection Form Form outlines all available FDLP repayment plans Borrower can select ICR as provided in Section 2 and complete other corresponding sections Form and necessary documentation must be submitted to the federal loan servicer 15

16 ICR payment amount The amount the borrower would repay is based on the borrower's Direct Loan debt when the borrower's first loanentersrepayment repayment This basis for calculation does not change unless: The borrower obtains another Direct Loan or The borrower and the borrower's spouse obtain approval to repay their loans jointly ICR payment amount Annual payment amount is the lesser of: 20 % of discretionary income OR Amount borrower would pay annually over 12 years using standard amortization multiplied by an income percentage factor that corresponds to the borrower s AGI 16

17 ICR payment amount Payment amount of $0 = $0 payment amount due Payment amount greater than $0 up to $5.00 = $5.00 payment amount due Payment amounts greater than $5.00 are equal to the amount that results from the calculation. Subsequent year repayment amount Repayment can extend beyond 10 years Borrower signs consent for IRS information for 5 years at a time Annual evaluation may result in monthly payment going up or down depending on annual income or change in family size In most cases, borrower can leave ICR and choose a dff different payment plan 17

18 Summary Examples of monthly payments Interest rate = 6.8% AGI $30,000 Family size = 1 Standard Income Based Income Contingent $15, 000 loan debt $173 Min: $166 Max: $173 Yr. 1: $118 Max: $148 $30,000 loan debt $345 Min: $166 Max: $345 Yr. 1: $236 Max: $296 $60,000 loan debt $890 Min: $166 Max: $553 Yr. 1: $314 Max: $593 18

19 IBR and ICR Comparisons Comparison IBR ICR Loan program eligibility FFELP and FDLP FDLP Consolidation loans that include a Direct Parent PLUS loan Not eligible Eligible Monthly payment Usually lower than ICR Usually higher than IBR Monthly payments may be less than accrued interest Yes Yes Interest subsidy (if monthly payment doesn t cover interest) 3 years of interest subsidy No interest subsidy Potential borrower benefits More manageable monthly payments Avoidance of delinquency and default Healthier credit history Remaining principal and interest is forgiven after 25 years of payments Possibility of Public Service Loan Forgiveness 19

20 Factors borrowers should consider More interest could be paid over time Repayment py period could be more than 10 years Annual submission of information on income and family size to prove continued eligibility for reduced payments under IBR and ICR is required Upcoming changes 20

21 Upcoming changes Recently proposed rules create a new ICR A plan that advances IBR changes that will take effect in 2014: Caps annual payments for an eligible new borrower at 10% of discretionary income (AGI minus 150% of the poverty line) Forgives any loan balance after 20 years of making payments Upcoming changes (cont d.) Recently proposed rules provide greater transparency for borrowers New notifications New disclosures Streamline application process Draft combined IBR/ICR request form currently going through OMB approval process 21

22 Resources Resources Federal Student Aid Repaying your Loans loansed Forgiveness, cancellation, and discharge loans/forgivenesscancellation 22

23 2010 Texas Guaranteed Student Loan Corporation To order additional copies, or to request permission to reproduce any of the information provided, please call TG Communications at (800)