College Cost Reduction and Access Act

Overview

Recent legislation, known as the College Cost Reduction and Access Act (CCRAA), helps public service lawyers in two ways:

  1. Created a new loan repayment option, Income Based Repayment, which will allow borrowers to pay lower monthly payments on their federal student loans.
  2. Established a loan forgiveness program for borrowers who plan to work full time for at least 10 years in a public service job.

Income Based Repayment Plan (IBR)

Income Based Repayment limits a borrower's monthly payment to 15% of their discretionary income. Discretionary income is defined as a borrower's adjusted gross income (AGI) minus 150% of the poverty level applicable to the borrower's family size.

Borrowers will qualify for the income based repayment plan as long as their calculated annual IBR payment is less than the annual amount due under the Standard Repayment option. The Standard Repayment is the 10 year repayment plan where borrowers pay a fixed amount each month which include both principal and interest.

Eligibility for the income based repayment plan will be determined annually. The unpaid balance of the loan will be forgiven after 25 years of consecutive income based repayment. Under current tax law, the amount of loan forgiven will be a taxable event.

Example:

Borrower Details
Annual Gross Income (AGI) = $45,000;
Loan Amount (LA)= $80,000;

Program Definitions
Monthly Standard Repayment (MSR) = $939.21;
Poverty Level (PL) = $10,210 (Family Size = 1)

Calculation
ValueFormulaCalculationResult
Annual Standard Repayment Amount (ASR)MSR x 12 months$939.21 x 12$11,270.52
150% of Poverty Level (APL)PL x 150%$10,210 x 1.50$15,315
Discretionary Income (DI)
(Amount AGI exceeds 150% of poverty level)
AGI - APL$45,000 - $15,315$29,685
Annual Income Based Repayment (AIBR)
(15% of discretionary income)
DI x 15%$29,685 x 0.15$4,452.75
Monthly Income Based Repayment (MIBR)AIBR / 12 months$4,452.75 / 12$371.06

Conclusion
The borrower qualifies for IBR because their calculated annual payment under Income Based Repayment is $4,452.75 which is less than the annual Standard Repayment amount of $11,270.52.

You can apply for IBR directly with your lender.  Lender and servicer information for all of your federal loans is availablee on the National Student Loan Data System at www.nslds.ed.gov.  Detailed information on IBR is available at www.IBRinfo.org

Public Service Loan Forgiveness

Effective October 1, 2007, borrowers employed in a qualifying public service job can have their remaining loan balance forgiven after making 120 payments under any combination of income-contingent, income-based or standard repayment plans. The public service does not need to be continuous, however, only payments made while employed full-time in public service will count toward the forgiveness plan. You also must be employed in public service and cannot be in default on any federal student loans at the time the balance of the loan is forgiven.

The current definition of public service jobs is very broad. Although it is subject to change in the future, the actual CCRA text defines public service jobs 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 and other school-based services, or at an organization that is described in section 501(c)(3) or the Internal Revenue Code of 986 and exempt for taxation under section 501(a) of the code; or teaching as a full-time faculty member at a Tribal College or University and other faculty teaching in high-needs areas as determined by the Secretary."

Types of Loans Eligible for Public Service Loan Forgiveness

There are two types of federal loan programs, The Federal Family Education Program (FFELP) and the Federal Direct Loan Program. FFELP is the government guaranteed student loan program and Direct Loan is the Department of Education's student loan program. Through both programs students may borrow the subsidized and unsubsidized Stafford loans and Graduate PLUS Loan.

The loan forgiveness is available only through the Federal Direct Loan Program. Any federal loans borrowed while attending Temple were borrowed through FFELP, not the Federal Direct Loan Program. Therefore, you will need to consolidate your federal loans into the Federal Direct Consolidation Loan Program to take advantage of the public service forgiveness plan. The federal Stafford loan, federal Perkins Loan and Graduate PLUS loan are eligible for the forgiveness plan. Federal Stafford Loans and Perkins Loans borrowed while in undergraduate or graduate programs are also eligible. However, the Parent PLUS loan (available only to undergraduate students) and Private Loans are not eligible.

Loan Repayment Options under the Public Service Loan Forgiveness

There are many repayment options available through Direct Loan Consolidation. However, only payments made under any one or any combination of the following repayment options can be used toward the forgiveness plan.

Standard Repayment is the 10 year repayment plan where borrowers pay a fixed amount each month which include both principal and interest.

Please note: Although payments made in the standard repayment plan can be applied to the 120 payment requirement, if you plan to work in the public interest job for 10 years, it will be of no benefit to remain in the standard repayment program for the full ten years, since there will be no remaining balance for the government to forgive after you have made 120 payments.

Income Contingent Repayment (ICR) is the current option available to borrowers that allows the borrower to pay monthly payments that are based on the borrower's income, loan amount, and family size. This payment plan can be extended to 25 years. Currently, any remaining balance after 25 years is forgiven. Depending on a borrower's income, it is possible for the payments in the income contingent payment plan to be higher than it would be in the standard repayment.

Income Based Repayment (IBR) limits a borrower's monthly payment to 15% of the borrower's discretionary income. This payment plan is designed to be more favorable to lower income borrowers and have lower monthly payments than both the standard and income contingent repayment plans.

Payments made through other Direct Loan repayment options that are at least equal to the amount required under the standard plan may also count toward the required 120 payments.

Sample Repayment Comparison for single person with Adjusted Gross Income of $45,000

  Gross Loan Amount Standard Repayment Income Contingent Income-Based
Example 1 $61,500 $710.11 $579.83 $371.06
Example 2 $80,000 $939.21 $579.83 $371.06
Example 3 $100,000 $1180.50 $579.83 $371.06

Example 1: Based on Stafford loan with 6.875% fixed interest rate.

Example 2: Based on $59,500 Stafford loan with 6.875% fixed interest rate, and $20,500 Grad PLUS with 8/5% fixed interest rate.

Example 3: Based on $70,000 Stafford Loan with 6.875% fixed interest and $30.0000 Grad PLUS with 8.5% fixed interest rate.

Options For Starting The Public Service Loan Forgiveness Plan

You will need to contact Direct Loans at http://loanconsolidation.ed.gov/borrower/bapply.html or 800-557-7392, to consolidate your federal loans into their Direct Loan Consolidation program and start the public service loan forgiveness program. You can only consolidate loans that are in repayment status. Therefore, current students will have to wait until they graduate before they can consolidate their federal loans.

If you have not yet consolidated your federal loans or only consolidated some of your federal loans

If all of your federal loans were borrowed through FFELP, you can begin the forgiveness plan right away by consolidating your loans through the Direct Loan Consolidation Program and selecting the income contingent repayment plan. Then, on July 1, 2009, you can change your repayment plan to the income-based repayment (if you want a lower monthly payment), which you will continue with until you have reached the 120 payments required for loan forgiveness.

If you have already consolidated all of your federal loans

FFELP borrowers who previously consolidated their loans are allowed to re-consolidate their loan into the federal Direct Loan Consolidation program. However, you must specifically state you are consolidating to enter into the public service forgiveness plan or you will not be allowed to consolidate. You will have the option of requesting IBR, the income contingent repayment plan or the standard repayment plan.

Application for Loan Forgiveness

Borrowers will need to apply for loan cancellation. The Department of Education will have the loan cancellation application available before October 2017, which is the earliest any borrower can apply for loan cancellation under the Public Service Loan Forgiveness Program.

Tax Implications

Under current tax law, the amount of the loan which is forgiven at the end of the 120 payment period could be a taxable event. However, it is believed that this will be changed before any borrowers are affected so that it will not be a taxable event.

More information