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Working for Fairness

Public Service Provisions of the College Cost Reduction and Access Act of 2007 (P.L. 110-84)

Thursday, July 17, 2008

  • By: David Loetz
  • Organization: Iowa Legal Aid

What is the College Cost Reduction and Access Act of 2007?

The College Cost Reduction and Access Act of 2007 is a federal law containing a variety of provisions relating to post-secondary education. Many of these provisions relate to the financing of post-secondary education.


Why should public interest attorneys care about the act?

The act directly benefits public interest lawyers in two specific ways. First, the act provides for income-based payments on certain federally-backed student loans. Second, the act provides for the forgiveness of certain Federal Direct student loans.

Income-Based Student Loan Repayment

Which "federally-backed" student loans are eligible for Income-Based Repayment?

Most Federal Family Education Loans (FFEL) qualify for Income-Based Repayment. This includes Subsidized Stafford loans, Unsubsidized Stafford loans, GradPLUS loans, and Federal Direct Consolidation loans.

Parents Loans for Undergraduate Students (ParentPLUS) are not eligible unless they were made to a graduate student for that student's use.

Perkins loans are included if they are consolidated into a Federal Direct Consolidation Loan. (Note: Perkins loans may be eligible for other loan forgiveness or cancellation provisions. After consolidation, Perkins loans would no longer be eligible under those provisions, so borrowers should consider their own situation before consolidating.)


Aren't federally-backed student loans already eligible for Income-Based Repayment schedules?

Certain federally-backed student loans are currently eligible for "Income Contingent Repayment." However, the new "Income-Based Repayment" option will result in lower payments for those eligible. Payments under the Income-Based Repayment Plan are capped at 15% of disposable income. Disposable income is defined as adjusted gross income minus 150% of the poverty level for the individual's household size.

For comparison purposes, the current "Income Contingent Repayment Plan" caps student loan payments at 20% of disposable income. The current "Income Contingent Repayment Plan" also defines disposable income as adjusted gross income minus 100% of the poverty level for the individual's household size.


What about my spouse's income?

A spouse's income will be included when determining an individual's adjusted gross income if the individual files a joint federal tax return. An individual may exclude their spouse's income if the individual and their spouse file separate federal tax returns. Note that spouses in community property states may be subject to having their spouse's income counted. Also note that a spouse's student loans are not considered when determining the amount of the individual's student loan debt. This may result in a "marriage penalty" for spouses filing joint federal tax returns.


What happens to unpaid interest under the Income-Based Repayment Plan?

Payments under the Income-Based Repayment Plan are applied first to interest then to fees then to principal.

Unpaid interest on subsidized loans will be paid by the Secretary of Education for up to three years. Other unpaid interest is capitalized if and when an individual leaves the Income-Based Repayment Plan (or no longer has a partial financial hardship). It is not clear that the borrower must repay interest paid by the Secretary.

Unpaid principal is deferred if not paid.


Are there any drawbacks to Income-Based Repayment?

Income-Based Repayment normally results in smaller payments but a longer repayment schedule. This will result in additional interest charges. All of this additional interest will be eligible for forgiveness under the loan forgiveness provisions of the act assuming that it remains unpaid at the end of the applicable repayment period. For those that may not be eligible for loan forgiveness, the increased interest charges may be a significant cost to participation in the income-based repayment option.

The Income-Based Repayment Plan also provides that student loan payments will increase as income increases. The maximum payment after leaving the Income-Based Repayment Plan will not exceed the payment that would have been required had the individual entered into a 10 year Standard Repayment Plan at the outset. Individuals automatically leave Income-Based Repayment when their payments reach those that would have been required had the individual entered into a 10 year Standard Repayment Plan at the outset. However, this may result in payments for more than 10 years and more money paid in interest payments.


When does Income-Based Repayment begin?

The Income-Based Repayment option will be available after July 1, 2009.

Graduates in 2009 will be allowed to choose the Income-Based Repayment option within two months of graduation. Individuals with qualifying loans that are already in repayment will be able to switch to Income-Based Repayment after July 1, 2009.


How can I determine what my payments would be under a Income-Based Repayment Plan?

There are tools available on the internet to estimate what your student loan payments would be under the Income-Based Repayment Plan. One such tool is available at http://www.finaid.org/calculators/ibr.phtml.


What if I have more questions?

The Equal Justice Works website [ http://www.equaljusticeworks.com/ ] contains additional information on Income-Based Repayment. The website also contains helpful links to a number of other articles and websites. You may also contact David Loetz at Iowa Legal Aid's Southeast Regional Office in Ottumwa.

Student Loan Forgiveness

What student loans are eligible for forgiveness under this act?

In general, Federal Direct Loans are eligible for student loan forgiveness. These loans can be forgiven after ten years of payments while engaged in public interest employment. These loans can also be forgiven after 25 years of payments under the Income-Based Repayment option, regardless of the nature of an individual's employment.


What if I don't have Federal Direct Loans?

With limited exceptions, Federal Direct Consolidation Loans are also eligible for forgiveness under this program.

After July 1, 2008, individuals will have an opportunity to reconsolidate their student loans in order to take advantage of the provisions of this law. Typically, borrowers must have at least one Federal Direct Stafford loan or at least one Family Education Loan (Stafford, Perkins, PLUS, etc.) to be eligible for a Federal Direct Consolidation loan. It seems likely that federally guaranteed loans could be reconsolidated into Federal Direct Consolidation loans. It is not clear that non-guaranteed consolidation loans would be eligible for reconsolidation.

Individuals should be cautious when determining which loans to include in a Federal Direct Consolidation Loan. The inclusion of ineligible loans may make the new Federal Direct Consolidation Loan ineligible for student loan forgiveness.


What qualifies as "public interest employment"?

A public service job is defined as a full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education (including early childhood education), social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization), public child care, 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 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 areas, as determined by the Secretary.


What is "full-time" employment?

Generally, "full-time" employment is defined as working an average of more than thirty (30) hours a week. However, if the employer defines "full-time" as more than an average of thirty (30) hours worked per week, the employer's definition of "full-time" is controlling.


How do I meet the ten year employment requirement?

To qualify for the loan forgiveness provisions of this law, individuals must complete 10 years of qualifying public service after the law took effect on October 1, 2007.

The ten years of qualifying public service employment need not be with a single employer. Periods of employment with qualifying employers may be combined to meet the 10 year employment requirement. Likewise, the 10 years need not be consecutive. However, you must be both working in a public interest field and making qualifying payments for a total of 120 months in order to qualify for student loan forgiveness.


What about AmeriCorps?

Time spent in full-time employment through AmeriCorps can count toward the ten (10) year employment requirement. If the "Segel Education Award" received for Americorp service is used to make a lump sum payment on a qualifying loans, it can substitute for regular monthly payments that would have otherwise been paid by the AmeriCorps member. It cannot substitute for more than twelve such payments.


How do I prove that I have met the ten year public service employment requirement?

At this point in time, it would be advisable to retain your own proof of employment and your own proof that you made student loan payments during the time of your public service employment.

It is still unclear what proof of public service employment and student loan payments will be required.


What is a "qualifying student loan payment"?

To qualify of the loan forgiveness provisions of this law, individuals must make 120 payments on their Federal Direct Loans while working in a qualifying public service job. Only payments made after October 1, 2007 will be counted toward the required 120 payments.

Payments must be made under a Standard Repayment plan, an Income Contingent Repayment Plan, an Income-Based Repayment Plan, or under another repayment plan requiring payments of not less than those that would be required under a 10 year Standard Repayment Plan.


Are there any drawbacks to student loan forgiveness?

There may be tax consequences to student loan forgiveness. Normally, debt that is forgiven counts as income for tax purposes in the year that it is forgiven. Federal tax law excludes forgiven student loan debt from income when that debt is forgiven by a qualifying lender for a qualifying reason. However, current federal law seems to require that the loan forgiveness provision was contemplated and included in the loan agreement at the time that the loan was made. Likewise, state law may treat forgiven student loan debt as income in the year that it is forgiven. National groups are working on making the debt forgiveness from the federal loan forgiveness program non-taxable.


What if I have more questions?

The Equal Justice Works website contains additional information on this public interest student loan forgiveness program. The website also contains helpful links to a number of other articles and websites. You may also contact David Loetz in Iowa Legal Aid's Southeast Regional Office in Ottumwa.

Examples of Repayment and Loan Forgiveness Amounts

I. Typical Borrower with $100,000 in debt who DOES NOT complete ten years of public service employment

If this borrower enters a standard repayment plan, the borrower will pay $1173 monthly for ten years. The total amount repaid would be $140,726.

If this borrower made $55,000 in beginning salary and chose Income-Based Repayment, the borrower would pay $496 in the first year of repayment. Assuming that the borrower got 4% raises each year, the borrower's payments would gradually grow. By year 10, the borrower's payments would be $729 per month. In year 23, the borrower's payments would be $1173 per month. The borrower would finish making payments in year 23. The total amount repaid would be $230,086. There would be no loan balance left to forgive in year 25.

If this borrower made $40,000 in beginning salary and chose Income-Based Repayment, the borrower would pay $309 in the first year of repayment. Assuming that the borrower got 4% raises each year, the borrower's payments would gradually grow. By year 10, the borrowers payments would be $462 per month. In year 25, the borrower's payments would be $893 per month. The borrower would pay a total payment of $166,119. At the end of year 25, the borrower would have a loan balance of $110,239 that would be eligible for forgiveness.

II. Typical Borrower with $75,000 in debt who DOES NOT complete ten years of public service employment

If this borrower enters a Standard Repayment Plan, the borrower will pay $863 monthly for ten years. The total amount repaid would be $103,572.

If this borrower made $55,000 in beginning salary and chose Income-Based Repayment, the borrower would pay $496 in the first year of repayment. Assuming that the borrower got 4% raises each year, the borrower's payments would gradually grow. By year 10, the borrower's payments would be $729 per month. In year 15, the borrower's payments would be $863 per month. The borrower would finish making payments in year 15. The total amount repaid would be $129,163. There would be no loan balance left to forgive in year 25.

If this borrower made $40,000 in beginning salary and chose Income-Based Repayment, the borrower would pay $309 in the first year of repayment. Assuming that the borrower got 4% raises each year, the borrower's payments would gradually grow. By year 10, the borrowers payments would be $462 per month. In year 25, the borrower's payments would be $866 per month. The borrower would pay a total payments of $165,767. At the end of year 25, the borrower would have a loan balance of $14,979 that would be eligible for forgiveness.

III. Typical Borrower with $100,000 in debt who DOES complete ten years of public service employment

If this borrower enters a Standard Repayment Plan, the borrower will pay $1173 monthly for ten years. The total amount repaid would be $140,726.

If this borrower made $55,000 in beginning salary and chose Income-Based Repayment, the borrower would pay $496 in the first year of repayment. Assuming that the borrower got 4% raises each year, the borrower's payments would gradually grow. By year 10, the borrower's payments would be $729 per month. The total amount repaid in ten years would be $72,715. At the end of year 10, the borrower would have a loan balance of $99,009 that would be eligible for forgiveness.

If this borrower made $40,000 in beginning salary and chose Income-Based Repayment, the borrower would pay $309 in the first year of repayment. Assuming that the borrower got 4% raises each year, the borrower's payments would gradually grow. By year 10, the borrowers payments would be $462 per month. The total amount repaid in ten years would be $45,701. At the end of year 10, the borrower would have a loan balance of $126,548 that would be eligible for forgiveness.

IV. Typical Borrower with $75,000 in debt who DOES complete ten years of public service employment

If this borrower enters a Standard Repayment Plan, the borrower will pay $863 monthly for ten years. The total amount repaid would be $103,572.

If this borrower made $55,000 in beginning salary and chose Income-Based Repayment, the borrower would pay $496 in the first year of repayment. Assuming that the borrower got 4% raises each year, the borrower's payments would gradually grow. By year 10, the borrower's payments would be $729 per month. The total amount repaid in ten years would be $72,715. At the end of year 10, the borrower would have a loan balance of $46,463 that would be eligible for forgiveness.

If this borrower made $40,000 in beginning salary and chose Income-Based Repayment, the borrower would pay $309 in the first year of repayment. Assuming that the borrower got 4% raises each year, the borrower's payments would gradually grow. By year 10, the borrowers payments would be $462 per month. The total amount repaid in ten years would be $45,701. At the end of year 10, the borrower would have a loan balance of $80,264 that would be eligible for forgiveness.


V. Additional Information Regarding Professor Schrag's Estimated Repayment and Loan Forgiveness Amounts

All of these calculations assume that the first $75,000 in student loans have a 6.8% interest rate. The calculations assume that the remaining $25,000 in student loans have a 8.5% interest rate.

Prof. Philip Schrag has calculated anticipated payment schedules at different income and debt levels. His tables have been reproduced in part by Equal Justice works at their website. http://www.equaljusticeworks.com/files/monthly_payments.pdf

Prof Schrag's complete law review article can be found at Georgetown University's website.
http://www.law.georgetown.edu/news/releases/documents/Forgiveness_000.pdf

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