Interested in pursuing a career in public service after law school?
Worried that your salary won’t allow you to pay your monthly loans and afford food, rent, and gas?
Help Is Here!
In September 2007, President Bush signed the College Cost Reduction and Access Act of 2007 (“CCRAA”) into law. The basics of the CCRAA:
May allow you to pay your monthly loans at a greatly reduced rate * May completely forgive your federal loans after 25 years of reduced payments** May completely forgive your federal loans after 10 years of reduced payments and “public service” **
* Qualifying for a reduced rate depends upon an equation covered below ** Only applicable federal law school and undergraduate loans qualify
Why the CCRAA is so Important
The Numbers:
80% ‐ Percentage of students that borrow to pay for law school $78,763 ‐ Average amount borrowed at private law school $51,056 – Average amount borrowed at public schools 65% ‐ Percentage of students that bring undergraduate debt into law school ($45,000 average)
The Life of a New Public Service Lawyer (before the CCRAA)
Public School Graduate Average Starting Salary Estimated Monthly Take Home Pay Estimated Monthly Loan Payment Monthly Available Income for Food, Transportation, Housing and Savings + $38,000 + $2,100 - $630 Private School Graduate + $38,000 + $2,100 - $1,013
+ $1,481
+ $1,098
“How Do I Qualify For Reduced Payments?”
The CCRAA uses a program called Income‐Based Repayment (IBR) The Idea – To help high‐debt/low‐income borrowers afford their monthly (or yearly) loan payments
The Equation: Repayment based on 15% of borrower’s discretionary income 15% x (yearly adjusted gross income – 150% of poverty level)/ 12 months = your reduced monthly payment under IBR Poverty Level: depends upon family size and city you live in. See www.IRS.gov
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Continued: “How Do I Qualify . . .”
Qualifying – After doing the equation, if your monthly payment is lower than it would be under a ten‐year repayment plan, then you qualify for reduced payments under IBR Note: Reduced payments under IBR will not be available until July 1, 2009 Note: Interest continues to accrue while you use IBR to make lower monthly payments, but the interest is not added to the principal unless and until you are no longer eligible for IBR Note: Borrowers do not need to work as lawyers to qualify for IBR’s reduced payments
Forgiveness Under IBR
If you make reduced payments through IBR for 25 years, the federal government will forgive your remaining federal loans* after the 25th year
See slide 9 for more details
* Qualifying Loans: Stafford and GRAD PLUS, but not Parent PLUS. Perkins loans may also apply Note: Borrowers do not need to work as lawyers to qualify for forgiveness under IBR
Here’s an Example
Joe’s Debt: $100,000 Joe’s Income: $40,000 Poverty Level in Joe’s Area: $10,210 Joe Owes (10‐year plan): $1,155 per month
Joe is a recent Law School Grad who has $100,000 worth of Law School debt
Under IBR, Joe Now Owes:
15% x ($40,000 ‐ 15,315)/12 months = $309 p/month Joe Gets a 3% raise in his second year = $318 p/month After 10 Years: $403 p/month 25 Years: $627 p/month
Graph of IBR Forgiveness
(Borrower enrolled in IBR for 25 years, but did not work in public service for 10 years)
Starting Annual Income Salary (AGI) Increases Monthly Monthly Monthly IBR IBR IBR Payments, Payments, Payment Year 1 Year 10 s, Year 25 $246 $309 $434 $496 $321 $403 $566 $729 $500 $627 $881 $1151 Total paid as of Year 25 $107,655 $135,000 $189,688 $213,228 Amount Forgiven after Year 25 $162,345 $134,858 $68,012 $1,777
$35,000 $40,000 $50,000 $55,000
3% 3% 3% 4%
Note: Numbers based on a single borrower with $100,000 in debt at 6.8% (standard repayment would require monthly payments of $1151 for 10 years, totaling $138,097)
“When Am I No Longer Eligible for Reduced Payments Under IBR?”
When the amount due (each month) exceeds the standard plan, you no longer qualify for reduced payments
Then, you simply pay under a standard payment plan, based on the original amount owing, not the higher new balance
“If I Do Not Use IBR or If I Start and Stop Using IBR, Do I Still Qualify for Debt Forgiveness?”
Yes, payments made in a standard plan count towards the 10‐year public service requirement for debt forgiveness* But, at the end of the 10 years, you only get forgiveness of the portion that you did not pay for, in the years that you were making reduced payments
* “Public Service”/ICR debt forgiveness covered further below
“How Do I Qualify For Debt Forgiveness After 10 Years?”
You must make 120 payments after October 1, 2007, while employed full‐time in a “public service” job
120 monthly payments = 10 years
These payments can be the low payment required by IBR, the somewhat higher payments under a different plan called “income‐ contingent” repayment (ICR), or a standard 10‐year repayment program
But, to the extend that you use a standard 10‐year repayment program, there will be no balance for the government to forgive after 10 years Note: Borrowers need not work as lawyers to qualify for forgiveness Note: ICR is a faster‐pay formula than IBR, so there will be less interest accrued in the long run. ICR is also available immediately.
Continued on next slide
Cont’d: “How Do I Qualify For Debt Forgiveness After 10 Years?”
“Public service”: The term includes all full‐time employment by government agencies (including emergency management and law enforcement) and tax exempt organizations, i.e. 501(c)(3)’s
Note: Over the next year, the Dept. of Education will issue regulations that determine how broadly (or narrowly) this term will be interpreted
Loan category: To use ICR, borrowers must have Federal Direct Loans or Federal Direct Consolidation Loans Consolidation:
Federal Direct Loan recipients do not need to consolidate. Federal Family Education Loan (FFEL) recipients must consolidate into a Federal Direct Consolidation Loan for their subsequent payments to qualify towards the 10 years for public service forgiveness. See www.ed.gov
“What Loans Can Be Forgiven under the CCRAA?”
Eligible Government Loans:
Stafford Loans Grad PLUS (for cost of attendance minus other estimated financial assistance) Perkins loans may also qualify
Ineligible Government Loans:
Parent PLUS (parents borrow to help pay for your education expenses)
Graph of ICR Forgiveness Borrowers
(Borrower who performed 10 years of public service)
Starting Income (AGI) $35,000 $40,000 $50,000 $55,000 Annual Increases Monthly Monthly Total Payments, Payments, paid year 1 year 10 during 10 years $246 $309 $434 $496 $321 $403 $566 $729 $33,850 $42,448 $59,644 $72,715 Amount Forgiven after 10 years $134,150 $125,552 $108,356 $56,019
3% 3% 3% 4%
Note: Numbers based on a single borrower with $100,000 in debt at 6.8% (standard repayment would require monthly payments of $1151 for 10 years, totaling $138,097)
Here’s a Public Service Example
Jane owes: $200,000* Jane makes: $42,000 (3.5% annual increase) Jane’s 1st year monthly payment: $334 Jane’s 10th year monthly payment: $466 Total 10 year repayment: $45,572 Total Forgiven After Year 10: $288,428
* Prior educational debt must be consolidated into a “federal direct consolidation loan” before qualifying for ICR’s 10‐year forgiveness
Jane took out loans for undergrad and graduate studies, before attending law school.
10‐Year Forgiveness Recap
After 120 qualifying monthly payments and full-time “public service” work, your federal loans will be completely forgiven 10 years of “public service” do not have to be consecutive You do not have to receive reduced payments for all ten years to qualify for 10-year forgiveness of the remaining balance The term “public service” has not been fleshed out in regulations yet, but by statute includes full-time employment for government agencies and tax-exempt 501(c)(3) organizations
Since IBR is not fully available until July 1, 2009, borrowers may make reduced payments at a higher level under ICR, and the amount not paid because of ICR can be forgiven after ten years of service. Speak with a financial aid professional for further information.
IBR Reduced Payment Recap
IBR was created to help borrowers working in low‐income jobs to afford their monthly loan payments Monthly IBR repayments based upon 15% of the borrower’s discretionary income:
.15 times (yearly salary minus 150% of the poverty level) / 12 months = monthly payment
If the IBR payment is lower than payment under a traditional plan, you qualify for IBR Interest accrues on the principal debt while enrolled in IBR but is not capitalized until the borrower leaves ICR, which limits compounding The federal government will forgive qualifying remaining qualifying debt after the 25th year, even without public service
What Can I Do To Help?
Toolkit: Visit abanet.org/lsd/legislation soon to find the Law Student Division’s toolkit on IBR/ICR
The toolkit will help you to inform students at your school about how IBR and ICR can work for them
ABA Day: Join the Law Student Division April 16‐17 for the ABA’s lobbying day on Capitol Hill in Washington, D.C.
Email our Division Delegates (contact information below)
Personal Story: Visit abanet.org/lsd/legislation to tell your personal story on important issues facing law students
Conclusion
Hopefully this slideshow gives you a basic understanding of the College Cost Reduction and Access Act of 2007 Consult with your school’s Financial Aid Department before deciding to repay through IBR or ICR because each borrower has a different financial situation and to find out about Congressional updates to these programs For a more in depth look at these programs, please read Georgetown Law Professor Philip Schrag’s Hofstra Law Review Article: http://www.law.georgetown.edu/news/releases/documents/Forgi veness_000.pdf For more information, please visit abanet.org/lsd/legislation
Thank You’s
The Law Student Division (ABA‐LSD) thanks the following persons for collaborating to create this presentation and for helping to coordinate our loan repayment lobbying efforts:
Ken Goldsmith, ABA Legislative Counsel Philip Schrag, Professor of Law at Georgetown University and Vice Chair of the Committee on Government Relations and Student Financial Aid of the ABA’s Section of Legal Education ABA‐LSD Delegates and Chairs over the past seven years Patty Brennan, ABA Law Student Division Director Carol Simmons, ABA Marketing and Technology Manager
Marc Baranov, Southwestern Law School : mbaranov@swlaw.edu Ashley Ligas, Florida State University: abadelegateligas@gmail.com Chris Sprowls, Stetson University: chris.sprowls@gmail.com