College Cost Reduction and Access Act

The College Cost Reduction and Access Act of 2007 established a new public service loan forgiveness program.

The College Cost Reduction and Access Act (CCRAA) has far reaching consequences for financing higher education. Among the many provisions, are two components relevant to law school borrowers. The Act introduces an "income based" federal loan repayment option, which limits annual loan repayments for those with high educational debt and comparatively low income. It also established loan forgiveness for public service employees who work for qualifying employers for ten year years. These two features are briefly explained below and followed by an array of sources for further information on CCRAA. Students and graduates should review their options carefully; while some participants may benefit, others may risk greater debt and extended repayment.

Income-Based Repayment (IBR)

The Income Based Repayment (IBR) option takes effect on July 1, 2009. It will allow borrowers of Federal Direct, Stafford, Grad PLUS and Federal Consolidation loans (excluding any undergrad Parent PLUS) to repay their loans on the basis of the income at the time of repayment; hence, income based repayment.

Note: IBR is not available for Parent PLUS or Federal Consolidation Loans which include Parent PLUS; it is available for Perkins loans if included in Federal Consolidation; and it is not available for private loans.

If the borrower’s annual payment on a 10 year plan exceeds 15% of the amount by which the borrower’s Adjusted Gross Income (AGI) exceeds 150% of the poverty line applicable to the borrower's family size, the borrower is eligible for Income Based Repayment. IBR limits the amount of the monthly repayment according to this formula:

• Adjusted gross income = gross income* – 150% of federal poverty level (per family size)
• Maximum annual repayment = AGI X 15%
• Maximum monthly repayment = [AGI X 15%] ÷ 12

*Married borrowers who file taxes as “married–filing separately” use borrower’s income only

Calculate your own monthly payments online at www.finaid.org/calculators by scrolling down to Loans. This site also includes an Income Based Repayment calculation.

Federal poverty levels are posted at http://aspe.hhs.gov/poverty/index.shtml#latest

Caution: Low payments made possible under IBR may lead to negative amortization. This occurs when the payments do not cover the interest due. For up to 3 years on the subsidized loans, the Department of Education would pay the interest. On unsubsidized loans and for periods after three years, interest would accrue and be capitalized.

As the borrower’s income increases, so too does the minimum annual repayment. When the minimum payments reach the 10 year repayment amount, the borrower is no longer eligible for the reduced payments of IBR.

If, at the end of 25 years of income based (or higher) repayment, the borrower still has principal and/or interest remaining, the outstanding balance, of qualifying loans, is repaid by the Department of Education or is canceled. CAUTION: The amount forgiven may be taxable.

As noted above, the IBR option will become available on July 1, 2009 for all new and existing student loans under the Federal Direct Loan Program and Feder Family Education Loan Program (FFELP). No restructuring of a loan (through Federal Consolidation or Federal Direct Consolidation) is required.

Students who enter repayment before July 1, 2009 may still use the Income Contingent Repayment (ICR) option of the Federal Consolidation Loan Program from the start of repayment and may choose the Income Based Repayment (IBR) after July 1, 2009.

Loan Forgiveness through Public Service Employment

CCRAA introduces a wide ranging Federal Loan Forgiveness for Public Service Employees. After ten years of qualified employment and loan repayment the borrower’s remaining debt would be forgiven. While this provision takes effect July 1, 2009, it does permit qualified payments made after October 1, 2007 to count toward loan forgiveness.

The act broadly defines public service employees as:

• (i) 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;

While the IBR is available to borrowers with either Direct or FFELP loans, this loan forgiveness program requires borrowers to either have borrowed Direct Loans or to consolidate their loans through the Federal Direct Consolidation Program. Thus, USF students with outstanding loans under FFELP will need to first apply for a Federal Direct Consolidation loan if they intend to take advantage of the loan forgiveness option of CCRAA. Borrowers are advised to review their federal loan history on the National Student Loan Data system ((NSLDS) to identify FFELLP loans obtained at both the undergraduate and graduate level. Access NSLDS online at http://www.nslds.ed.gov/nslds_SA/

A borrower employed in a qualified public service job while making each of the 120 payments on the Direct or Direct Consolidation Loan shall have the balance of principal and interest cancelled by the Department of Education. The borrower may make the 120 payments under a standard repayment, the income based repayment (IBR) option, or an income contingent (ICR) plan under direct consolidation. A recent ruling by the US Dept of the Treasury has determined that the forgiven amount is not taxable.

Borrowers can combine the lower repayments of IBR with the Public Service Loan Forgiveness. After 120 eligible repayments, they will be forgiven the remaining principal and interest. CAUTION: During the ten year period of 120 payments, reduced payments may cause negative amortization of unpaid interest which is added to the total loan amount. Furthermore, a borrower’s income may rise quicker than expected rendering them ineligible for IBR. And finally, the borrower may be unable to fulfill the ten year/120 payment requirement of public service employment for any number of reasons. Therefore, students should always and only borrow the minimum amount necessary, even if they feel confident of a ten year career in eligible employment.