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Information about the College Cost Reduction and Access Act

These frequently asked questions are designed to help students determine if and how the College Cost Reducation and Access Act of 2007 will affect their federal student loan payments.

The CCRAA was signed into law on September 27, 2007. It is important to consider this law as having TWO separate and distinct components:

  • Income Based Repayment Plan (Section 203) - If your debt is high and your income is low, regardless of whether you work in public service, you are entitled to pay back your federal loans through the Income Based Repayment plan (IBR), beginning July 1, 2009 and the remainder of your debt will be forgiven after 25 years.
  • Loan Forgiveness (Section 401) - If you work full-time in public service (broadly defined – see below) for a cumulative 10 years, at the end of the 10 years (or after you have made 120 qualifying payments while working in public service) the remainder of your Federal Direct Consolidation loans will be forgiven.

SECTION 203: INCOME BASED REPAYMENT (IBR)

My income is low and my debt is high, but I am not working in public service, does the new law help me?

Yes. Congress has created a cap through the IBR on the amount of loan payments you will have to make each month. The cap is based on the following formula: 15% of the amount by which your Adjusted Gross Income (AGI) exceeds 150% of poverty.

Example: 150% of the poverty guideline for a family of one is $15,600.

Your household AGI is $40,000.

The maximum you will have to pay annually is 15% of the amount by which $40,000 exceeds $15,600. Therefore, you will not have to pay more than $305 per month: 15% of $24,400 ($40,000 minus $15,600) or $3,660.

How do I know if I am eligible for the cap?

IBR is available to borrowers with a “Partial Financial Hardship.” Partial Financial Hardship exists when a borrower’s annual student loan payment under a 10-year standard repayment plan (the amount necessary to repay the original loan in full over ten years of equal monthly payments) is greater than 15% of the amount by which the borrower’s AGI (and that of a spouse if applicable if taxes are filed jointly) exceeds 150% of poverty.

Example: 150% of the poverty guideline for a family of one is $15,600.

Your household AGI is $40,000.

Therefore, your income exceeds 150% of poverty by $24,400. 15% of $24,400 is $3,660. If your annual loan payment under a standard 10-year plan exceeds $3,660 ($305 per month), you are eligible for the IBR cap.

What is Adjusted Gross Income?

AGI includes all gross income adjusted by certain allowed deductions, such as the IRA deduction, student loan interest deduction and alimony paid.

Which loans are eligible for IBR?

All federally guaranteed loans are eligible including:

  • Federal Perkins Loans
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • Federal Grad PLUS loans (but not Parent PLUS loans)
  • Federal Direct Consolidation Loan

Private loans are not eligible.

What happens if the monthly payment does not even cover the interest on the loan?

The government will forgive any unpaid interest for three years for Subsidized Federal Stafford Loans only. The rest of the interest is capitalized (added to principal). If the principal and interest are not paid in full under IBR after 25 years of payment, the remaining principal and interest will be forgiven.

When can I begin making payments under IBR?

You can request to pay back your loans through IBR beginning on July 1, 2009.

What if at some point I no longer qualify for IBR?

Your monthly payment will increase, but it cannot exceed the amount you would have paid under a 10-year standard plan before you chose IBR.

What’s the catch?

If you are married AND file your taxes jointly with your spouse, there is a “marriage penalty” - your spouse’s income will be considered in determining whether you are eligible for IBR and how much you are required to pay under IBR. (If a married spouse files a separate income tax return, the spouse's income will be excluded from your income when calculating repayment terms.)

SECTION 401: PUBLIC SERVICE FORGIVENESS

How does loan forgiveness work?

The federal government will cancel any remaining federal debt after 10 years or 120 Federal Direct payments (whichever is longer) while the borrower is engaged in full-time public service. These 120 payments do not have to be consecutive.

How is public service defined?

Broadly! 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 IRS Code and exempt from taxation, or teaching as a full-time faculty member at a Tribal College or University and other faculty teaching in high-needs areas.

What loans can be forgiven?

For purposes of this Act, only Federal Direct (as opposed to Federal Family Education Loan Program, or FFELP) Loans) can be forgiven. However, if you have non-Direct FFELP loans, you can consolidate into Federal Direct Loan Program (or, if you’ve already consolidated all federal loans into a FFELP Federal Consolidation Loan, re-consolidate into Federal Direct Consolidation Loan in order to take advantage of the new law).

Will my private loans also be forgiven?

No. Private loans will not be forgiven.

My loans are all consolidated but not in the Federal Direct program, what do I need to do?

In order to take advantage of Section 401, you will need to re-consolidate your loans into the Federal Direct program. The earliest opportunity to re-consolidate was July 1, 2008 and your payments won’t count toward the 120 until you are in the Federal Direct program.

I thought I could only re-consolidate if I am in default?

The law provides an exception to this. You can re-consolidate in order to take advantage of the forgiveness program. It is not required that you already have a job in public service - only that you plan to enter public service.

I am already consolidated in the Federal Direct program, when can I start counting my public service work toward forgiveness?

October 1, 2007.

I have been working in public service for the past 9 years; do I only have to work in public service for one more year?
No. The forgiveness program begins on October 1, 2007. Your previous 9 years of employment in the public sector will not count. In other words, the 120 payments must be made after October 1, 2007. Note also that your 120 payments must be made under a specific payment plan to qualify, either: 1) IBR, 2) ICR, or 3) the standard 10-year plan.

I graduated and entered loan repayment before October 2007, how can I take advantage of the new law?

For Section 203 - effective July 1, 2009, you can begin paying back your federal loans through IBR. For Section 401 - if you have Federal Direct loans and are working in public service your monthly payments in the ICR or standard plan post October 1, 2007 will count toward the 120 payments required for forgiveness. If you are not in the Federal Direct program, you must consolidate into Federal Direct before your payments will count toward forgiveness. You can consolidate into Federal Direct now. You can re-consolidate into Federal Direct beginning July 1, 2008.

I graduated after October 2007 but before July 2008, how can I take advantage of the new law?

For Section 203 - federal loan borrowers may elect the ICR option while waiting for the July 1, 2009 start date for IBR. For Section 401 - if you have Federal Direct loans and are working full-time in public service your monthly payments in the ICR or standard plan post October 1, 2007 will count toward the 120 payments required for forgiveness. If you are not in the Federal Direct program, you must consolidate into Federal Direct before your payments will count toward forgiveness. You can consolidate into Federal Direct upon graduation. You can re-consolidate into Federal Direct beginning July 1, 2008.

I graduated after July 1, 2008, but before July 1, 2009, how can I take advantage of the new law?

For Section 203 - federal loan borrowers may elect the ICR option while waiting for the July 1, 2009 start date for IBR. For Section 401 - if you have Federal Direct loans and are working full-time in public service your monthly payments in the ICR or standard plan post October 1, 2007 will count toward the 120 payments required for forgiveness. If you are not in the Federal Direct program, you must consolidate into Federal Direct before your payments will count toward forgiveness. You can consolidate into Federal Direct upon graduation. You can re-consolidate into Federal Direct beginning July 1, 2008.

I graduate after July 1, 2009, how can I take advantage of the new law?

The law will be fully effective. For Section 203 - borrowers may elect IBR to pay back federal loans. For Section 401 - if you have Federal Direct loans and are working full-time in public service your monthly payments post October 1, 2007 will count toward the 120 payments required for forgiveness. If you are not in the Federal Direct program, you must consolidate into Federal Direct before your payments will count toward forgiveness. You can consolidate into Federal Direct upon graduation. You can re-consolidate into Federal Direct beginning July 1, 2008.

Where can I learn more?

* The information is intended to be used as a general guideline, and is subject to modifications. Please contact your Financial Aid office and lenders for specific information regarding the applicability of CCRAA to your educational loans.
 

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