Loan Repayment Options – Featuring Income-Based Repayment

1. Loan Repayment Options – Featuring Income-Based Repayment

2. Please note that this Power Point presentation is an educational tool that is speculative in nature. It is not intended to be an exhaustive review of the Department of Education’s laws and regulations and it not intended to provide legal advice. Materials presented in this presentation should not be considered a substitute for actual statutory or regulatory language.  Always refer to the current edition of a referenced statute, or regulation for precise language and consult with your own attorney for legal advice. ASA Confidential and Proprietary Information

3. Objective • Review of loan repayment options • Focus on Income Based Repayment (IBR) • Understanding IBR • Identifying and defining key terms • Discussing how IBR works ASA Confidential and Proprietary Information

4. StandardRepayment • Minimum monthly payment is $50. • Monthly payment will likely be more than $50 to ensure loan is repaid within 10 years • Keeps finance charges to minimum • Most cost effective repayment option – borrower pays the lowest amount of interest • Default repayment plan if borrower doesn’t choose another ASA Confidential and Proprietary Information

5. Graduated Repayment • Payments start smaller, $30 is the minimum monthly payment, and gradually increase throughout repayment • Good alternative if the borrower’s income is likely to increase in the future • Maximum repayment term is 10 years; however, the lender/holder may extend the term up to 4 additional years in certain cases ASA Confidential and Proprietary Information

6. Extended Repayment • For borrowers with more than $30,000 in loan debt • Payment amounts can either be fixed or graduated • Maximum repayment term is 25 years • Minimum monthly payment is $50 • More expensive because extending repayment term increases the interest paid ASA Confidential and Proprietary Information

7. IBR Background • IBR = Income Based Repayment • New repayment plan introduced by the College Cost Reduction and Access Act (CCRAA) • Available to FFELP and DL borrowers July 1, 2009 who have a partial financial hardship • Replacing options 5 & 6 on the Economic Hardship form which will no longer be available to borrowers ASA Confidential and Proprietary Information

8. General • IBR is available to those borrowers who have a partial financial hardship (PFH) • Monthly payments are capped at 15% of a borrowers discretionary income • IBR offers borrowers forgiveness of debt after 25 years (300 eligible payments) ASA Confidential and Proprietary Information

9. Loan Eligibility ASA Confidential and Proprietary Information

10. Partial Financial Hardship (PFH) Determination • When a borrower’s amount due on all eligible loans (based on the standard-standard) exceeds 15% of their discretionary income • Verified every year • Borrower must provide permission for IRS to disclose AGI information “and other tax return information” as well as family size certification • IRS Tax Form 4506-T • Can remain in IBR even if no longer determined to have PFH ASA Confidential and Proprietary Information

11. Discretionary Income • 15% of the difference between the borrower’s adjusted gross income (AGI) and 150% of the federal poverty level (FPL). • 15% [Monthly AGI – (150% FPL for family size)] • Monthly payments will be capped at this amount when a borrower is experiencing a PFH Example: Monthly AGI = $3,600 Family Size = 3 150% FPL for Family of 3 = $2,288.75 Monthly Discretionary Income = 0.15 x (3,600 - 2,288.75) = 0.15 x 1,311.25 = $196.69 ASA Confidential and Proprietary Information

12. 2009 Federal Annual Poverty Limits (FPL) Alaska and Hawaii have higher poverty guidelines ASA Confidential and Proprietary Information

13. Income Information • Borrower’s will need to submit a Tax Form 4506-T that will verify the borrower’s Adjusted Gross Income (AGI) • Married borrowers: • Borrower who files married/joint tax return  Both spouses’ AGI are considered in determining payment amount • NOTE: Student loan debt is not combined • Borrower who files married/separate tax returns  Only borrower’s AGI and debt are considered in determining payment amount • Will be evaluated annually ASA Confidential and Proprietary Information

14. Family Size Information Includes: • Borrower • Spouse • Children • Unborn children if born during the certification year, and • Others who live with the borrower and receive more than 50% support during that year • Support includes money, gifts, loans, housing, food, clothes, car medical and dental care, and payment of college costs • If family size is not provided, it will be set to the default of 1 • Will be evaluated annually ASA Confidential and Proprietary Information

15. IBR Key Terms

16. Key Term – Standard-Standard • 10 year Standard payment amount calculation • Calculated for all borrowers when they enter repayment, regardless of what repayment plan they choose • This amount is used to determine the eligibility of any payments made outside of IBR repayment plan that may count towards the 25 year (300 payment) forgiveness ASA Confidential and Proprietary Information

17. Key Term – Permanent-Standard • Calculates a new 10-year term on the borrower’s outstandingprincipal balance at the time they enter IBR • Lenders must calculate this for borrowers immediately precedingentering IBR • This is the maximum payment amount the borrower will ever have to make in IBR • Minimum monthly $50 payment ASA Confidential and Proprietary Information

18. Key Term – Expedited-Standard • Calculates the remaining term based on a standard repayment plan, based on the loan type • Stafford and Grad PLUS = 10 years • Consolidation = up to 30 years based on original loan balance • Calculated as soon as the borrower voluntarily elects to leave IBR plan • Months spent in IBR are included in time spent in repayment • ED has clarified that a borrower MUST enter an expedited-standard plan once leaving IBR, but not required to stay in that plan if there is time available in other plans ASA Confidential and Proprietary Information

19. Expedited-Standard – Example 1 **PLEASE NOTE INTEREST RATE IS NOT INCLUDED BELOW** Loan type: Stafford Total Eligible Loan Amount: $30,000 Entered Repayment: July 1, 2008 Amount Paid: $3,000 Standard Plan Monthly Payment: $250 Outstanding: $27,000 Borrower entered IBR: July 1, 2009 Amount Paid: $7,200 Borrower IBR payment: $100 Outstanding: $19,800 Borrower elects to leave IBR: July 1, 2015 Expedited-Standard Time Spent in Repayment: 7 years Time Remaining in Standard Repayment Plan: 3 years (36 months) Monthly Payment: Outstanding Balance ÷ Time Remaining = $19,800/36 = $550 ASA Confidential and Proprietary Information

20. Expedited-Standard – Example 2 **PLEASE NOTE INTEREST RATE IS NOT INCLUDED BELOW** Loan type: Stafford Total Eligible Loan Amount: $30,000 Entered Repayment: July 1, 2008 Amount Paid: $3,000 Standard Plan Monthly Payment: $250 Outstanding: $27,000 Borrower entered IBR: July 1, 2009 Amount Paid: $10,800 Borrower IBR payment: $100 Outstanding: $16,200 Borrower elects to leave IBR: July 1, 2018 Expedited-Standard Time Spent in Repayment: 10 years Time Remaining in Standard Repayment Plan: 0 years No time left: $16,200 – Due immediately ASA Confidential and Proprietary Information

21. How IBR works…

22. Borrower Application • Must complete a Common Application • Borrower will need to complete an IRS form 4506-T • Authorizes lender to request borrower’s AGI from the IRS • Borrower will need to verify Family Size • Borrower will need to annually certify PFH eligibility ASA Confidential and Proprietary Information

23. Repayment Terms in IBR • Can extend beyond 10 years • Lenders will need to track minimum and maximum payment amount over life of loan • Payment application order is different than other plans • Interest  Collection Costs  Late Charges  Principal ASA Confidential and Proprietary Information

24. PFH Eligibility and Verification • Eligibility and minimum monthly payments are re-evaluated annually • If a borrower fails to submit documentation they will be automatically placed on a standard repayment plan • Even if a borrower no longer has a PFH, they may elect to remain in IBR • Borrower will be placed in a Permanent-Standard repayment plan ASA Confidential and Proprietary Information

25. Recalculation of Payment Amount • Occurs when: • Borrower no longer has a PFH • Changes to a borrower’s financial situation • No longer wants IBR Borrower elects to remain in IBR: • Maximum monthly payment may not exceed Permanent-Standard Amount • Repayment period may exceed 10 years Borrower voluntarily elects to leave IBR: • Repayment period is limited to the remaining time they have left in repayment • Expedited-Standard ASA Confidential and Proprietary Information

26. Payment Amount Calculation Same as discretionary income: • 15% [Monthly AGI – (150% FPL for family size)] Amount is less than $5 • Payment = $0 Amount is greater than or equal to $5 but less than or equal to $10 • Payment = $10 Adjusted annually based on family size and AGI ASA Confidential and Proprietary Information

27. General IBR Payment Calculations Remember: Apply $0 or $10 rule as applicable From www.studentaid.ed.gov ASA Confidential and Proprietary Information

28. $0 Payments • Considered a payment – Borrower will be considered to be in good standing • Cannot become delinquent • Months with a $0 payment will be reported to consumer reporting agencies as “deferred” or “repayment” • A borrower can not prepay a $0 monthly payment amount ASA Confidential and Proprietary Information

29. Multiple Loans/Holders • Borrower must contact each loan holder separately • Loan holders may use NSLDS to determine amount owed on all eligible loans held by that borrower • Loan holder will determine the IBR payment amount and prorate based on the principal amount held by that holder • Loan holder will apply to all eligible loans held, unless specified by borrower ASA Confidential and Proprietary Information

30. IBR Interest

31. Interest Accrual • Accrues as normal • Borrower’s payment under PFH may be less than interest accrued – Negative amortization • Subsidized loans are eligible for a subsidy for the first 3 years • Unsubsidized loans will build up and may eventually capitalize ASA Confidential and Proprietary Information

32. Interest Subsidy • If a borrower’s PFH payment is less than the amount of monthly interest accrued, ED will pay the difference for up to 3 years • Eligible loans: • Subsidized Stafford loans • Portion of Consolidation loan that is subsidized • Subsidy will only occur when a borrower is on IBR • Is applied at the loan level • Loans entering at different times will each get a full 3 years • Subsidy will continue even if the borrower exits PFH, consolidates their loan, or misses a payment • Only exception: Period of Economic Hardship Deferment ASA Confidential and Proprietary Information

33. Interest Subsidy - Example Borrower has all Subsidized Stafford Loans Borrower payment under IBR = $40 Monthly accrued interest = $75 ED will pay: $35 ASA Confidential and Proprietary Information

34. Interest Capitalization • Unsubsidized loans, and subsidized loans after 3 year subsidy • Interest will accrue and “build up”, and in certain circumstances will capitalize • Capitalization will occur when: • A borrower leaves IBR voluntarily or no longer has PFH • When a borrower leaves IBR and enters an Expedited-Standard repayment plan ASA Confidential and Proprietary Information

35. IBR Information to Borrowers

36. New Disclosure Requirements • Lender must provide a notice that informs borrowers of IBR at time of: • Offering the borrower a loan • Offering a borrower repayment options • Notice must include: • Borrower eligibility of Income-sensitive repayment (ISR) and that the borrower may be eligible for IBR, including through loan consolidation • Procedures for borrower to elect ISR or IBR, and • Where and how to obtain more information about ISR or IBR • May be provided as a separate notice or as part of other disclosures ASA Confidential and Proprietary Information

37. New Exit Counseling Requirements • Must include information about repayment plans available • Information specific to IBR, including: • Description and features • Sample information including average anticipated monthly payments, and • Difference in interest paid and total payments ASA Confidential and Proprietary Information

38. IBR Forgiveness

39. Eligibility for Forgiveness • 25 years must have elapsed • Borrower may prepay, but must wait 25 years • No forgiveness until July 1, 2034 • 300 eligible payments must have been made on or after July 1, 2009 • May include Economic Hardship Months • Borrower must have received a PFH IBR repayment plan at least once • Borrower does not need to be in a PFH in order for to receive forgiveness • Currently, any loan portion forgiven will be taxable ASA Confidential and Proprietary Information

40. Eligible Payments • 300 payments may include all payments made on or after July 1, 2009 that: • PFH payment made under IBR including $0 payment amounts • Payments made at the permanent-standard amount (while in IBR) • Any payment made that is at least at the standard-standard amount (outside of IBR umbrella) • Each month in which borrower was on an Economic Hardship Deferment • As long as a payment is eligible it may be counted, even if made before borrower is in IBR • Payments do not have to be consecutive ASA Confidential and Proprietary Information

41. Non-eligible Payments • Payments made while in default • Payments made during rehabilitation • Payments made out of IBR less than the standard-standard amount • Payments made under IBR umbrella (but outside of PFH) in an amount less than permanent-standard • Payments made before July 1, 2009 ASA Confidential and Proprietary Information

42. Clocking 25 Years • Begins no earlier than July 1, 2009 • Begins the date the borrower made an eligible payment or received an Economic Hardship Deferment • Borrower who did not make payments or do not receive an Economic Hardship Deferment before receiving IBR, 25 years begins the date the borrower makes a payment under IBR • If a borrower consolidates, 25 years restarts at the time of consolidation • Underlying loan payments (even if they are eligible payments) are not counted ASA Confidential and Proprietary Information

43. Resources

44. NCHELP Website – IBR Initiatives http://www.nchelp.org/pages/page.cfm?id=143 • IBR Implementation Guide • 34 CFR §682.215 • HEA §493C • www.ibrinfo.org ASA Confidential and Proprietary Information

45. Questions? Thank you

46. 800.999.9080 617.728.4265 F A X 800.999.0923 T D D www.amsa.com American Student Assistance® 100 Cambridge Street, Suite 1600 Boston, MA 02114