PSLF + (IBR, ICR, or PAYE)=Awesome!

In my previous post, I presented the general requirements of PSLF (type of repayment plans that qualify, qualifying employment, etc.).  In this post, I will illustrate how awesome PSLF can be for those under IBR, ICR, or PAYE. Payments made under the Standard Repayment plan also count towards PSLF for one reason: some people on IBR or PAYE might one day make lots of money (yea for them!). With a high income, they might no longer have a “partial financial hardship” as defined by the government. If they no longer have a “partial financial hardship,” they will be put back on the Standard Plan. PSLF allows Standard payments to qualify so these people don’t miss out on the forgiveness after 120 qualifying payments.

Here’s an example. Let’s say that I spend the next seven years earning a salary that leaves me with a partial financial hardship in relation to my loan balance. During those seven years, I’ve made payments under IBR and worked at a job that qualifies for PSLF. Then, in my eighth year, I get a wonderful new job (still one that qualifies for PSLF) with a high salary. This new salary no longer leaves me with a partial financial hardship, so I’d get placed on Standard Repayment. After three more years of payments, I’d qualify for loan forgiveness under PSLF. Nice! Now, if I were on the Standard Repayment plan for all 120 qualifying payments, technically there would be no balance left to forgive.

So, here are some numbers! If I have $100,000.00 in student loans (with a 6.8% interest rate), file my taxes singly, have a family size of 1, and a starting AGI of $45,000.00, here is the breakdown:

*Standard Repayment: $1,151.00 per month for 120 months, ending balance of zero (no forgiveness)

*Income-Based Repayment: $334.00 per month to start. Let’s say, for the purposes of easy math, that my income and monthly payments stay the same for 10 years. I’d pay a total of $40,080.00 over the course of 10 years. The remaining balance (plus any accrued interest) would be forgiven tax-free if I had worked at a qualifying public service job for the entire 10 years.

Damn, that is some good stuff. People who qualify for PAYE would save even more money than under IBR. Currently, there is no cap on the amount that is forgiven under PSLF. Some legislators want to change this for future borrowers. Bah.

If you feel depressed about your student loan balance, I suggest going to the repayment calculator here and pretending you qualify for PSLF immediately. It’s better than drinking a bottle of wine, in my opinion.

An introduction to Public Service Loan Forgiveness (PSLF)

PSLF is music to my ears. It is my savior, my comforter, and my redeemer. I didn’t mean to be sacrilegious there, but this program is a way to rid oneself of student loan debt after 10 years (120 payments). I’m giving it lots of props and hopes. Still, it is not a panacea. This program has many requirements that must be followed exactly. Currently, it’s also an “all or nothing” deal; there is no partial forgiveness. Forgiveness is a sweet thing, though, since it is (currently) NOT considered to be taxable income :) Note my image of a zero above...that is my goal in ten year.....owing exactly zero dollars.

PSLF has been in the news a great deal lately. Still, some people have never heard of it, and others confuse it with a repayment plan such as IBR, PAYE, ICR, etc. It is confusing….very confusing. PSLF is a program rather than a plan. Here are the basics…

*What is it? From studentaid.ed.gov:

“The PSLF Program is intended to encourage individuals to enter and continue to work full-time in public service jobs. Under this program, you may qualify for forgiveness of the remaining balance due on your William D. Ford Federal Direct Loan Program (Direct Loan Program) loans after you have made 120 qualifying payments on those loans while employed full-time by certain public service employers. Since you must make 120 qualifying payments on your eligible federal student loans after October 1, 2007 before you qualify for the loan forgiveness, the first forgiveness will not be granted until October 2017.”

*What loans are eligible?

            -William D. Ford Federal Direct Loan (Direct Loans). This includes Direct Subsidized and Unsubsidized Loans, Direct Consolidation Loans, Direct PLUS loans made to graduate and professional students.

What types of payment plans qualify for PSLF?

*Income-Based Repayment (IBR)

*Income-Contingent Repayment (ICR)

*Pay-As-You-Earn (PAYE)

*Standard Repayment Plan

*Any other repayment plan where your monthly payment amount equals or exceeds what you would pay under a 10-Year Standard Repayment Plan 

What type of job counts as  “qualifying employment?”

*A federal, state, local, or tribal government organization, entity, or agency 

*A public child or family service agency

*A tribal college

*A university

*A non-profit, tax-exempt organization with 501(c) (3) IRS designation

*A private non-profit (not a labor union or partisan political organization) that provides at least one of the following public services:

           -Emergency management

           -Military service         

           -Law enforcement

           -Public interest law services

-Early childhood education (licensed and regulated health care, Head Start, and state-funded pre-kindergarten)  

-Public services for individuals with disabilities and public services for the elderly

-Public health (nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and healthcare support occupations) 

-Public education

-Public library services

-School library or other school-based services

The specific job you do for one of these organizations does not matter. For example, teachers, teacher aids, cafeteria workers, and administrators who work for a public school could all qualify for PSLF.

In order to have “qualifying employment” for PSLF, you must also meet the government’s definition of “full-time.” Per studentloans.ed.gov, “for PSLF purposes, that definition must be at least an annual average of 30 hours per week. For purposes of the full-time requirement, your qualifying employment at a not-for-profit organization does not include time spent participating in religious instruction, worship services, or any form of proselytizing. 
If you are a teacher, or other employee of a public service organization, under contract for at least eight out of 12 months, you meet the full-time standard if you work an average of at least 30 hours per week during the contractual period and receive credit by your employer for a full year's worth of employment. 
If you are employed in more than one qualifying part-time job simultaneously, you may meet the full-time employment requirement if you work a combined average of at least 30 hours per week with your employers.”

This is a pretty sweet deal. I'll include more on the specifics later!

Next on the docket is PAYE (Pay-As-You-Earn)!

Pay-As-You-Earn is great for new borrowers who qualify: you pay 10% of your discretionary for up to 20 years, and then your remaining balances is forgiven. As of now, the forgiven amount is considered to be taxable income. However, people on this payment plan may also qualify for Public Service Loan Forgiveness if they work in a public service job. In order to qualify for PAYE, you must meet the following requirements per studentaid.ed.gov:

“For Pay As You Earn, you also must be a new borrower as of Oct. 1, 2007,

and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You are a new borrower if you had no outstanding balance on a Direct

Loan or FFEL Program loan when you received a Direct Loan or FFEL Program loan on or after Oct. 1, 2007.”

The following loans are eligible for PAYE:

*Direct Subsidized Loans

*Direct Unsubsidized Loans

*Direct Plus Loans made to graduate or professional students

*Direct Consolidation Loans that did not repay any PLUS loans made to parents

The following loans are eligible for PAYE only if they are consolidated into a Direct Consolidation Loan:

*Subsidized and Unsubsidized Federal Stafford Loans (from FFEL program)

*FFEL Consolidation Loans that did not repay any PLUS loans made to parents

*Federal Perkins Loans

The following loans are NOT eligible for PAYE:

*Direct Consolidation Loans that repaid PLUS loans made to parents

*FFEL PLUS loans made to parents

*FFEL Consolidation Loans that repaid PLUS loans made to parents

As with IBR, PAYE has the following benefits:

1.     Have your own income alone count towards PAYE, or include your spouse’s income. If you file your taxes married filing separately, only your income will be used to calculate your monthly payment. You will likely lose out on some tax benefits if you file separately instead of married filing jointly.

2.     You can always pay more than your monthly payment if you want to pay the loan down more quickly.

3.     The government will pay the interest on your subsidized loans for up to three consecutive years if your payments do not cover interest.

4.     You may also qualify for Public Service Loan Forgiveness while under PAYE.

5.     If you are unemployed or have a very low income, your PAYE monthly payment may be calculated at $0.00. These “payments” still count towards the 20 years of payments until forgiveness.

Let’s use the repayment calculator at https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

See how this payment plan can work. With a Direct Unsubsidized loan balance of $100,000.00 and an interest rate of 6.8%, a single person with an AGI of $45,000.00 would have a Standard payment of $1,151.00 per month.

*Under IBR, payments would start at $344.00 per month, and the estimated total paid is $218, 372.00. The forgiveness is $37, 066.00. If we figure a 20% tax on the forgiveness amount ($7,413.20), the total amount one would pay is $225,785.20.

*Under PAYE, payments would start at $229.00 per month, and the estimated total paid is $100, 298.00. The projected forgiveness is $135, 702.00. If we estimate a 30% tax on this forgiveness amount ($30,089.40), the total amount one would pay is $130,387.40.

Assuming that one is not also doing PSLF, one could save almost $100,000.00 by going on PAYE rather than IBR. Does this sound strange? It is…because interest. The monthly payments that many people on IBR and PAYE have don’t begin to cover interest.

Not everyone qualifies for PAYE, but the Obama Administration wants to expand this program to include more people. See: http://askheatherjarvis.com/blog/expanding-pay-as-you-earn-by-negotiated-rulemaking

Advocating for Yourself in the Midst of Ignorance

Less than a week ago, I was on the phone with my loan servicer. I called because one of my loans was under Standard repayment instead of IBR. I grit my teeth as I listened navigated through the automated menu. Per usual, the elevator music was less than stellar. Finally, a representative picked up my call. The conversation went something like this:

            Rep: Hi, how can I help you today Nadja? 

            Me: I’d like to have loan number XXYY placed on Income-Based Repayment please, just like my other loans. I filled out the yearly renewal through studentloans.gov over a month ago. 

            Rep: Let me take a look at your file. 

            Me: Thank you.

            Rep: Well, it appears that loan XXYY is a GradPlus loan. Those aren’t eligible for IBR, so that’s why it’s on Standard. 

            Me: Sir, I beg your pardon, but GradPlus loans made to students are eligible for IBR. (Note: I was looking at studentloans.gov’s repayment plan section as I spoke to him)

            Rep: I’m sorry Ma’am, but they are not. 

            Me: Sir, I’m looking at the official government website right now. The detailed explanation of IBR’s eligible loans includes GradPlus. Could I please speak to a supervisor? 

            Rep: Well, let me see if I can help you first. Can I put you on hold?

            Me: Sure. (By this point, I was frustrated. About three minutes later the rep came back onto the phone.

            Rep: I’m sorry about that. It appears that GradPlus loans are eligible for IBR. Well, you learn something new everyday. I’ll take care of it now. Your IBR repayment schedule for that loan should be processed in about 10 business days.

            Me: Thank you. I appreciate it. Have a good day.

            Rep: You too, Ma’am.

           

I’m sure you’ve had a similarly frustrating conversation with your loan servicer, or servicers. Thankfully, I have only one. Your loan servicer holds a great deal of power over your loan: they process your repayment paperwork, payments, and track eligibility for various repayment programs and loan forgiveness plans. 

            The representatives often get things wrong. Many are great, but many don’t know all the ins and outs of federal student loans. It’s quite scary. Servicers may not even take responsibility for their mistakes. See:

http://thecollegeinvestor.com/157/fedloan-servicing-the-worst-student-loan-servicer/

http://alleducationmatters.blogspot.com/2011/06/borrower-receives-misinformation-about.html

So, what can you do?

*Be informed about your loans and your options. 

*Keep notes of all phone conversations with reps. Make note of the rep’s name. Take screen caps of your “paperless inbox” if your servicer has one.

*Download statements as PDFs and keep them in a secure place. Some servicers will delete your financial information if your loan gets transferred to another. 

*Ask to speak to a supervisor if the representative seems to be giving you incorrect information. 

*If a supervisor doesn’t help, contact the Dept. of Ed. Ombudsman here:

http://alleducationmatters.blogspot.com/2011/06/borrower-receives-misinformation-about.html

*Submit a complaint to the CFPB here: 

http://www.consumerfinance.gov/students/

*Check back with your loan servicer and make sure they do what they said they would. Be a squeaky, annoying wheel.

Do you have any frustrating stories to share? Feel free to comment below!

IBR (I Be Ready) for Income-Based Repayment

I be ready for IBR. I must be ready, since this is the payment plan I am under. I also hope you are ready, since this is a very long post! IBR is a becoming a very popular repayment program among recent and upcoming graduates. In many ways, it is friendlier and offers more benefits than ICR.

First, I should clarify some things about IBR. According to studentloans.gov, there are actually two types of IBR programs: traditional IBR and new IBR. Traditional IBR is for those who are NOT new borrowers as of July 1, 2014. New IBR is for those who are new borrowers as of July 1, 2014. Per studentloans.gov, “you are a new borrower if you have no outstanding balance on a William D. Ford Federal Direct Loan (Direct Loan) Program or Federal Family Education Loan (FFEL) Program loan when you received a Direct Loan on or after July 1, 2014.” Essentially, if you didn’t have any federal loans before July 1, 2014 and begin borrowing on or after July 1, 2014, then you qualify for new IBR. I’ll be discussing that in the next post.

Here’s the breakdown on traditional (not “new” IBR) Income-Based-Repayment.

*The monthly payment amount is about 15% of your discretionary income, but never more than the 10-year Standard Repayment Plan. Payments are calculated based upon your income (AGI) and family size. Your overall loan balance does not factor into your monthly payments.

*Your discretionary income is, “or Income-Based Repayment and Pay As You Earn, discretionary income is the difference between your income and 150 percent of the poverty guideline for your family size and state of residence. For Income-Contingent Repayment, discretionary income is the difference between your income and 100 percent of the poverty guideline for your family size and state of residence. The poverty guidelines are maintained by the U.S. Department of Health and Human Services and are available at www.aspe.hhs.gov/poverty.”

*Adjusted Gross Income (AGI) is, “your or your family's wages, salaries, interest, dividends, etc., minus certain deductions from income as reported on a federal income tax return.”

*Payments are made for 25 years, after which point the remaining balance is forgiven. Currently, the forgiven amount is considered as taxable income.

*The following loan types are eligible for IBR: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Plus Loans made to graduate and professional students, Direct Consolidation Loans that did not repay any PLUS loans made to parents, Subsidized Federal Stafford Loans (from FFEL program), Unsubsidized Federal Stafford Loans (from FFEL program), FFEL PLUS Loans made to graduate or professional students, FFEL Consolidation Loans that did not repay any PLUS loans made to parents, Federal Perkins Loans (only if consolidated!).

*You can apply online for IBR at studentloans.gov, or with a paper application provided by your loan servicer. The online option is the quickest and easiest….I also wouldn’t necessarily trust some loan servicers.

*You must submit yearly information about your income in the form of a tax return or through alternative documentation (such as pay stubs). If you do not submit this paperwork annually, you will be put on the Standard Repayment Plan until the documentation is received and processed.

*In order to be eligible for IBR, you must have a partial financial hardship. This is “an eligibility requirement for the Income-Based Repayment (IBR) and Pay As You Earn plans.
For IBR, a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 15 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live.
For Pay As You Earn, a circumstance in which the annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 10 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live.
For both plans, the amount that would be due under a 10-year Standard Repayment Plan is calculated based on the greater of the amount owed on your eligible loans when you originally entered repayment, or the amount owed at the time you selected the IBR or Pay As You Earn plan.”

So, that is a lot to read and take in. I get it. I thought about breaking a discussion of IBR into chunks, but that would fragment the information. I’ll go into greater depth about various aspects of IBR in later posts. In summary, IBR is a good option for those with high amounts of debt relative to their income. If you have a partial financial hardship as defined above, and have the right type of loans, you may apply for the program. IBR also can work in conjunction with Public Service Loan Forgiveness (another huge topic, another post). Here is an example of how IBR can work:

1.     With a total debt burden of $100,000.00 and an interest rate of 6.8%, the Standard Repayment would be $1,151.00 per month for a total of 120 months. The total paid would be $138,096.00. In this scenario, one pays $38,096.00 in interest over the life of the loan.

Under IBR, the monthly payments would be lower. With an AGI of $45,000 and a family size of 1, the first payments would be $344.00 per month. Assuming an increase in income of 5% per year and a 3.3% poverty line increase (also annually), the final payments will be $1,151.00. Payments are made for 25 years. The total amount paid is $218, 372.00. The amount of interest paid is $118, 372.00. The projected forgiveness amount is $37,066.00.

IBR costs a great deal more money than Standard Repayment over time. I encourage you to go to the following site to play with the repayment calculators.

https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

You can estimate your loan amount or sign in and use your actual loan balance for the calculations. Your payments will go down as your family size increases, and they will go up as your income increases. There are too many variables to address in this post.

There are some other benefits to IBR. In addition to the lower monthly payment, you can:

1.     Have your own income alone count towards IBR, or include your spouse’s income. If you file your taxes married filing separately, only your income will be used to calculate your monthly payment. You will likely lose out on some tax benefits if you file separately instead of married filing jointly.

2.     You can always pay more than your monthly payment if you want to pay the loan down more quickly.

3.     The government will pay the interest on your subsidized loans for up to three consecutive years if your payments do not cover interest.

4.     You may also qualify for Public Service Loan Forgiveness while under IBR.

5.     If you are unemployed or have a very low income, your IBR monthly payment may be calculated at $0.00. These “payments” still count towards the 25 years of payments until forgiveness.

There is much more to IBR. I will cover the various pros and cons in more depth in future posts. If you cannot afford your student loan payments, then consider IBR instead of deferment or forbearance. Do some research, play with the calculators, and consider what is best for you.

An intro to the acronyms of loan repayment: ICR, IBR, PAYE, LOLZ.

I may not have written this blog if I only had $26,000 in student debt. I would instead be paying under standard repayment, merrily going along through life. Many undergraduates and graduate students have much more than $26,000 in student loan debt. For example, an undergraduate with a degree from a private university may have $50,000 in student debt. Students who pursue a M.A. or PhD may end up with $50,000 to $150,000 in total debt. Medical students and law students regularly accrue $200,000 and above. These large balances make it difficult (if not impossible) to repay under the standard repayment plan.

Most of these students are not living the high life: they live in modest apartments, drive old cars, rarely eat out, and forego putting money into retirement. I know this because my colleagues and I lived like this while in grad school. Time is the enemy since the interest rate for graduate and professional students often exceeds 6%. Compound interest that capitalizes increases the student loan burden far beyond what we initially borrowed. Advanced degrees can take 5-10 years to complete. Most federal loans are unsubsidized, meaning that interest accrues while the student is in school. I had the option of paying the interest while enrolled in school, but doing that and keeping a roof over my head was impossible.

 Standard and Graduated repayment plans are calculated based upon the amount owed. For someone with a balance of $150,000.00 (Unsubsidized, Federal Direct) and an interest rate of 6.8%, the Standard monthly payment would be $1,726.00. After 120 payments of $1,726.00, a total of $207,144.85 would be paid. That is the initial $150,000.00 and $57,144.85 in interest. Ouch, ouch, ouch. Per this loan calculator, one would need a job that pays $207,000 to ensure that this monthly payment is 10% of one’s income. Unless one is a doctor or lucky lawyer, that type of salary is very rare for an entry-level job.

So, what is a student with a high student loan balance and low income supposed to do? Some say, “Just pay it. Work three jobs if you have to.” True, that is one solution, although burning one’s self out hardly healthy. Thankfully, the government has in place loan repayment options that are calculated from one’s income, family size, and marital status. These payment plans are called income-driven repayment plans. The options are: ICR (Income-Contingent Repayment), IBR (Income-Based Repayment), and PAYE (Pay-As-You-Earn). So, so many acronyms to deal with!

I’m going to introduce these one at a time since each plan has unique qualifiers, benefits, and downsides. These programs are great, but also very complex. First on the docket is ICR. ICR stands for Income-Contingent Repayment. Under this repayment plan, your monthly payment will be calculated based upon your AGI (Adjusted Gross Income), family size, and total loan debt burden. The loans eligible for this are Direct Subsidized and Unsubsidized loans, Direct PLUS loans (made to students), and Direct Consolidation Loans. Per studentloans.gov, the “Income-Contingent Repayment (ICR) plan is a repayment plan with monthly payments that are the lesser of (1) what you would pay on a 12-year standard repayment plan multiplied by an income percentage factor or (2) 20 percent of your discretionary income divided by 12. Discretionary income for this plan is the difference between your adjusted gross income and the poverty guideline amount for your state of residence and family size.”

Let’s say that the same student above, with a high balance of $150,000 (with a 6.8 % interest rate) wanted an affordable monthly payment. One option is the Income-Contingent Repayment plan. If this person had an AGI (Adjusted Gross Income) of $35,000, and was single, his first 12 monthly payments would be $389.00. Assuming that his income increased by 5% per year (not likely in this economy!), his payments would rise accordingly for 300 months (25 years), for final payments of $934.00. Any remaining balance after 25 years is forgiven.

The total amount paid during this time would be $245,651.00, but these payments would have been going entirely towards interest! The projected forgiveness is $182,451.00. Forgiveness is a nice thing, but it comes at a cost. Per current tax law, this $182,451 will be considered as taxable income at the end of 25 years. Predicting that tax burden is difficult, but a person on ICR should save up about $40,000 to $60,000 to pay off this tax bill. Under ICR, this student will pay $245,651.00 plus tax (here estimated at $50,000), making a total of $295,651.00. The ICR plan costs an additional $88,506.15 than the Standard Repayment Plan.

For some, ICR sounds like a raw deal. Why pay an extra $88k over the life of the loan? The answer comes in the package of an affordable monthly payment. If a student can afford the Standard payment, then that’s great. However, if she cannot afford it, then it is necessary to go on an affordable payment plan to avoid default. Avoiding default is crucial! Under ICR, she could pay more (as she can afford) to reduce the amount of interest she pays over the 25 years.

There are many variables that could influence the monthly payments, total amount paid, and projected forgiveness. The scenario above illustrates the positive aspects of ICR as well as its possible downsides. The above example I encourage you to go to this site to play with the repayment calculator. You can either use hypothetical loan balances, or use your own by signing in.

https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

Next up is IBR (Income-Based Repayment)….an option that is usually friendlier than ICR.