College Cost Reduction and Access Act of 2007

Sections 203 and 401 of the law introduce Income-Based Repayment (IBR) and a Public Service Loan Forgiveness Program (PSLF) for federal loans. While separate, these programs can be combined to make a career in government or the non-profit sector possible for many. IBR and federal loan forgiveness can be incredible benefits to those who choose low paying careers in government or public service, but they can have a huge cost to those who initially choose IBR but earn too much later or choose a career that renders them ineligible for forgiveness. It is an “all or nothing” forgiveness. Beware of things that seem too good to be true. As folks say, “The devil is in the details” and the details are very important here.

INCOME-BASED REPAYMENT

Income-Based Repayment option took effect on July 1, 2009. It allows borrowers of Federal Direct, Stafford, Grad PLUS and Federal Consolidation loans to repay their loans on the basis of their income at the time of repayment (Income-Based Repayment or IBR). IBR is not available for PLUS Loans made to parents or Consolidation loans that include Parent PLUS loans or private loans, state loans and other loans not guaranteed by the federal government.

IBR essentially sets a cap on federal loan repayments at a percentage of your discretionary income where discretionary income is the difference between adjusted gross income (AGI) and 150% of the federal poverty line that corresponds to your family size and the state in which you reside. If the annual payment on a loan amortized on a 10-year basis exceeds 15% of the amount by which your Adjusted Gross Income (AGI) exceeds 150% of the poverty level applicable to your family size, you are considered to be experiencing economic hardship and are eligible for IBR. If you earn below 150% of the poverty level for your family size, your payment will be 0. If you earn more than 150% of the poverty level for your family size, your loan payment will be capped at 15% of whatever you earn above that amount. For married borrowers, if they file their federal taxes as “married- filing separately” only the AGI of the individual borrower counts. 

The formula would look like:

Maximum annual payment = AGI (Adjusted Gross Income) minus (appropriate poverty level x 1.5) x 0.15 Maximum monthly payment = Maximum annual payment divided by 12

The Federal poverty level for a family of one in 2009 is $10,830. Therefore, 150% of the poverty level for a family of one currently is $16,245.

For Example:

In NYC, a single resident taxpayer grossing $50,000 annually will net about $3,000 monthly. If the borrower borrowed $100,000 at a weighted average rate of 7.5% ($61,500 in Stafford and $38,500 in Grad PLUS), annual payments would be about $14,244 on a regular 10- year repayment schedule or $1,187 per month

Now, using the new IBR Plan, the repayments for that same borrower with the same income of $50,000 would look like this.

$50,000 Adjusted Gross Income
-$16,245 (150% of poverty level for family of 1)
$33,755 Earnings above 150% of poverty level
$33,245
x 15%
$4,987 (annual loan repayment) or $416 per month

This is a great deal and is the lowest available federal repayment option for this particular borrower. It may not be for every borrower, though. At higher incomes and/or lower debt levels there may be better options.

At the end of 25 years, any outstanding principal and accrued interest is forgiven on all loans, except Parent PLUS loans. Under current law, the amount forgiven is taxable.

What happens as income increases? What if the borrower with $100,000 eligible debt earns more than $110,275?

The annual payment would revert to $14,244 ($1,187 monthly) – the original 10-year amortization amount. The length of time in repayment would depend on the amount of the outstanding principal balance plus any capitalized interest at that time. The capitalized interest would come from negative amortization. Negative amortization occurs when the monthly payments do not even cover the interest that is outstanding on the loan. In the example above, the interest that accrues annually on $100,000 at 7.5% is $7,500. If the total annual payments are $4,987, the difference – $2,513 annually – would be added to the loan principal and the borrower now owes $102,513 at the end of the first year.  The government will forgive any unpaid interest on the subsidized federal loans for three years of IBR payments, but it will still take the borrower longer than the original 10 years to repay the loan.

LOAN FORGIVENESS FOR PUBLIC SERVICE EMPLOYEES

Section 203 of the CCRAA applies to borrowers with high debt and low income, regardless of the nature of the job or jobs. Section 401 of the law created a Federal Public Service Loan Forgiveness Program (PSLF) designed to help borrowers who plan to work in public service for ten years or more.

PSLF, in effect since July 1, 2009, applies to Federal Direct Loans, including Ford Federal Direct, Federal Direct Grad PLUS and Federal Direct Consolidation Loans. Graduates who have borrowed through FFELP (Stafford, Grad PLUS, Consolidation) would have to consolidate their FFELP Loans into a Federal Direct Consolidation Loan in order to be eligible for this program. Graduates who have already consolidated through the FFELP Federal Consolidation Loan Program may “reconsolidate” into a Direct Consolidation Loan to take advantage of this program.

What is considered a Public Service Job?

A public service job is defined as : “(i) a full-time job in emergency management, government (excluding time served as a member of Congress), military service, public safety, law enforcement, public health (including nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations, as such terms are defined by the Bureau of Labor Statistics), public education, social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy on behalf of low-income communities at a nonprofit organization), early childhood education (including licensed or regulated childcare, Head Start, and State funded prekindergarten), public service for individuals with disabilities, public service for the elderly, public library sciences, school-based library sciences and other school-based services, or at an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of such Code; or (ii) teaching as a full-time faculty member at a Tribal College or University as defined in section 316(b) and other faculty teaching in high-needs subject areas or areas of shortage, including nurse faculty, foreign language faculty, and part-time faculty at community colleges), as determined by the Secretary.” This is a very broad definition of public service employment.

Under this loan forgiveness program, the Department of Education will cancel the balance of principal and interest due for any borrower who is employed in a public service job and has been employed during the time he or she has made each of 120 payments on the Direct or Direct Consolidation Loan. If the borrower has made 120 payments either under a standard 10-year repayment plan, under  IBR, or under an Income-Contingent Plan (ICR) under direct consolidation, and has any principal and interest outstanding, that amount is forgiven. Loan payments made under the Graduated, Extended or Income Sensitive Repayment Plans do not count toward the 120 payments. Again, for the first three years under IBR, any interest payments due on the subsidized portion of the Federal Stafford Loans) that are not covered by the borrower’s payments are forgiven by the federal government.

The amount of loans forgiven at the end of 120 monthly payments is NOT taxable. 

• Full-text of the College Cost Reduction and Access Act of 2007   
• www.ed.gov/DirectLoan
• www.federalstudentaid.ed.gov
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