Federal Loan Debt Relief
Federal Loan Repayment Options
Before selecting a loan plan to help finance your legal education and before entering repayment, you should review the various repayment options available for federal loans which provide debt relief to borrowers. Legislative changes in 2007 and 2011 introduced repayment plans that could lower your monthly federal student loan payment. A second feature for those who work in full-time public service for ten years is debt forgiveness after 120 qualifying monthly payments. These loan repayment plans, known as Income Based Repayment (IBR) and Pay As You Earn (PAYE) as well as the Public Service Loan Forgiveness (PSLF) program, are briefly explained below. Students and graduates should consider the options carefully and utilize the information resources referenced to help make informed student loan management decisions.
Income-Based Repayment (IBR)
The purpose of income-based repayment (IBR) is to make student loan debt manageable by reducing monthly payments which are based on the borrower's income not their debt. . Most major types of federal student loans - except for PLUS loans for parents and Consolidation Loans that repaid PLUS loans for parents - are eligible for IBR. IBR is available in both the Direct Loan and Federal Family Education Loan (FFEL) Programs, and loan consolidation is not required. Eligibility is also based on a number of factors, including partial financial hardship, adjusted gross income, and family size.
What is partial financial hardship?
A borrower must demonstrate partial financial hardship to qualify for IBR. Partial financial hardship is when the annual amount due on a 10-year Standard Repayment Plan exceeds 15% of your discretionary income. Generally, if your annual income is less than the amount you owe in eligible federal student loans, you may be eligible for IBR.
How is discretionary income determined?
Discretionary income is the difference between the adjusted gross income for the latest income tax filing and 150% of the poverty guideline for your family size and state in which you reside. The Poverty Guidelines for the 48 contiguous states and the District of Columbia are available on the Department of Human Health and Services site.
- (AGI - 150%[Federal Poverty Guideline For Your Family Size]) = Discretionary Income
How do I calculate my IBR payment?
The IBR payment is based on your adjusted gross income, family size, and state of residence. If you are married and file a joint federal tax return with your spouse, AGI will include both your income and your spouse's income. If you are married and file separately, only your income will be used to calculate your monthly repayment amount. In general, your monthly repayment amount may increase or decrease each year based on your income and family size. Further, the monthly loan payments will never be more than 15% of your discretionary income.
To determine your estimated monthly payment*, please visit the IBR Calculator on the Federal Student Aid site.
*If you filed a joint federal income tax return and your spouse has federal student loans, you'll need your spouse's federal student loan balance to determine the 10-year standard repayment plan on the combined amount of your and your spouse's eligible loans.
What is the duration of IBR repayment?
The maximum repayment period is 25 years. Any remaining debt (including accrued but unpaid interest) is forgiven after 25 years. Please note that under current law the amount of debt forgiven is treated as taxable income. Additionally, if you work in public service and you make on-time, full monthly payments under IBR while employed full-time in public service, you may be eligible to receive loan forgiveness through the Public Service Loan Program (PSLF). This reduces the number of payments from 300 to 120 qualifying monthly payments.
Are there any disadvantages to repaying under IBR?
You may pay more interest. The low payments made possible under IBR may lead to negative amortization, which occurs when the payments do not cover the interest due. For up to three years on the subsidized loans, the Department of Education would pay the interest. On Unsubsidized loans and for periods after three years, interest would accrue and capitalize.
How can I find out more?
Additional information on the income-based plan is available on the Federal Student Aid site. If you are ready to apply, go to StudentLoans.gov.
Pay As You Earn (PAYE)
A modified version of the income-based repayment plan, the Pay As You Earn (PAYE) repayment plan helps more recent borrowers keep monthly student loan payments even more affordable. Federal student loans - except for PLUS loans for parents, Consolidation Loans that repaid PLUS loans for parents, and Federal Family Education Loan (FFEL) Program loans - are eligible for PAYE. In addition, eligibility is determined by measuring partial financial hardship, the borrower's (and, if the borrower is married, spouse's) adjusted gross income, family size, AND on a new borrower status as of October 1, 2007.
What is a new borrower?
If you receive a first disbursement of Direct Subsidized, Direct Unsubsidized, or Direct PLUS loan for graduate or professional students on or after October 1, 2011, or receive a Direct Consolidation Loan based on an application that was received on or after October 1, 2011, you are considered a new borrower. Previous borrowers of Direct Loan or FFEL loan programs, who have no outstanding balance on a as of October 1, 2007, are also considered new borrowers. Borrowers with existing debt on or after October 1, 2007 are ineligible for the PAYE plan.
What else should I know?
PAYE modifies IBR by lowering the payment cap from 15% (IBR) to 10% of a borrower's discretionary income, and forgives any remaining debt after 20 rather than 25 (IBR) years of payments. To find out whether you are eligible for Pay As You Earn, please visit the Federal Student Aid site.
Information about the PAYE program is also available at http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn
Public Service Loan Forgiveness Program (PSLF)
The Public Service Loan Forgiveness (PSLF) Program was created by Congress to encourage individuals to enter and continue to work full-time in public service jobs. Under the PSLF program, borrowers may qualify for forgiveness of the remaining balance due on their eligible federal student loans after making 120 qualifying payments while employed full-time at a qualifying public service organization.
What loans are eligible for forgiveness?
Only loans you received under the William D. Ford Direct Loan (Direct Loan) Program are eligible for PSLF. Loans received under the Federal Family Education Loan (FFEL) Program, the Perkins Loan Program, or any other student loan programs are not eligible for PSLF.
If you consolidate FFEL and/or Perkins loans in to a Direct Consolidation Loan, you may take advantage of PSLF. Please note that the payments made on the new Direct Consolidation Loan count toward the 120-month payment. Payments made prior to consolidation do not count.
If you are interested in consolidating, please visit www.loanconsolidation.ed.gov. If you do not know the type of loans borrowed, please visit the National Student Loan Data System (NSLDS).
What is a qualifying repayment plan?
To maximize your PSLF benefit, you should repay your loans on the Income-Based Repayment (IBR) Plan, Pay As You Earn (PAYE) Plan, or the Income Contingent Repayment (ICR) Plans. The 10-Year Standard Repayment Plan is another qualifying repayment plan, but provides the least benefit during the repayment period
What kinds of employment qualify?
Qualifying employment is any employment with a federal, state, or local government agency, entity, or organization; a non-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC); or a full-time AmeriCorps or Peace Corps position. The type or nature of employment with the organization does not matter for PSLF purposes. Further, the type of services that these public service organizations provide does not matter for PSLF purposes. The U.S. government has a directory that includes most government agencies and departments at http://www.usa.gov/Agencies.shtml.
A private non-profit employer that is not a tax-exempt organization under Section 501(c) (3) may be a qualifying public service organization if it provides certain specific public services. These services include emergency management, military service, public safety, or law enforcement services; public health services; public education or public library services; school library and other school-based services; public interest law services; early childhood education; public service for individuals with disabilities and the elderly. The organization must not be a labor union or partisan political organization. For a list of 501(c) (3) organizations, the IRS has a searchable database at http://www.irs.gov.app/pub-78/.
What is full-time employment?
Generally, full-time employment is based on your employer's definition of full-time. However, for PSLF purposes, full-time employment must be at least an annual average of 30 hours per week. If you have more than one employer during the same period of time, full-time employment is an annual average of at least 30 hours per week. Further, each employer must qualify as a public service organization to be included in determining whether you are on a full-time basis.
Where can I find more information about PSLF?
Additional information about the Public Service Loan Forgiveness Program is available at the Federal Student Aid site. The site includes the eligibility requirements, the process for tracking your progress, and contact information.