income-based repayment interest, special allowance and lars

Income-Based Repayment

Interest, Special Allowance and LaRS

Presenters:

Robert (Bob) SandlinNTHEA/HESC

Ed Brandt ACS, Inc.

Amanda RobertsWestern States Learning

Corporation

Team FFELP IBR Workgroup Consist of over 40 NCHELP and SLSA

members Representatives from 24 member

organizations Two calls weekly

Subcommittee calls in between weekly Worked with the Common Manual Policy

Committee on reviewing draft policies

Team FFELP IBR Workgroup Eight (8) Subcommittees

LaRS Disclosures Partial Financial Hardship documentation Deferment/Forbearance/Capitalization Forms IRS Reporting Default Claim Filing and Rehabilitation Training

Team FFELP IBR Workgroup Workgroup Co-Chairs –

Wanda Hall, Edfinancial Services whall@edfinancial.com Bob Sandlin, NTHEA HESC rsandlin@nthea.com Rob Sommer, Sallie Mae robert.a.sommer@salliemae.com

Course Outline What is IBR? Eligible Loans Key Terms Interest Accrual Special Allowance

What is IBR? IBR is a new repayment plan introduced

by the College Cost Reduction and Access Act (CCRAA)

New repayment plan for borrowers designed to help borrowers experiencing a “partial financial hardship”

Available to FFELP and DL borrowers beginning July 1, 2009

Eligible loan types Available for:

Stafford, FISL, SLS, Grad PLUS, ALAS, and federal Consolidation loans that do not include Parent PLUS loans.

Perkins, HPSL, and HEAL, loans are eligible if included in a FFELP or DL Consolidation loan

Eligible loan types Not available for:

Parent PLUS loans or Consolidation loans that include Parent PLUS loans

Private (or "alternative") student loans, state loans, and other loans not guaranteed by the federal government

Loans in default

KEY TERMS

What is partial financial hardship (PFH)? Based on income and family size Occurs when the annual amount due on

all of the borrower's eligible loans (as calculated under a standard 10-year repayment plan) exceeds 15% of the difference between the borrower's adjusted gross income (AGI) and 150% of the poverty guideline for the borrower's family size and state of residence

Standard-Standard Payment amount calculated when the

borrower initially enters repayment based on a 10-year term, regardless of loan type

Will need to calculate this amount regardless of whether or not the borrower chooses the standard repayment plan when initially entering repayment

Subject to minimum $50 monthly payment.

Permanent-Standard Payment amount calculated immediately

preceding entering IBR on loan balance outstanding

Based on a new 10-year term This is the maximum payment amount the

borrower will ever be required to make, unless the borrower requests to leave the IBR plan

Subject to $50 minimum monthly payment.

Expedited-Standard Payment amount calculated once a

borrower voluntarily elects to leave the IBR plan

Amount is calculated using the remaining term based on a standard repayment plan, based on loan type (maximum of 10 years for Stafford and GradPLUS, maximum of up to 30 years for Consolidation loans, based on original loan balance)

Unlike a deferment or forbearance, the months spent in IBR are not excluded when recalculating terms upon leaving IBR completely

INTEREST ACCRUAL

Interest Accrual

Interest accrues as normal

Subject to negative amortization - borrower’s payment amount under a Partial Financial Hardship (PFH) may be less than the accrued interest

What to do with the difference?

Interest Accrual

On the unsubsidized loans, the unpaid interest will simply accrue and, in certain circumstances, capitalize.

HOWEVER…

Interest Accrual

On the subsidized loans, if the portion of the scheduled monthly PFH payment amount attributable to those loans is less than the monthly accrued interest on those loans, the Department will pay the difference, for up to three years

Interest Accrual

After three years, the unpaid accrued interest on the subsidized loans, like the interest on the unsubsidized loans, will accrue and, at the appropriate times, capitalize.

Interest Capitalization

Interest must be capitalized: When borrower leaves PFH voluntarily or no

longer has a PFH When borrower leaves IBR to go to

Expedited-Standard

3-year Interest Subsidy

Interest subsidy applies: Only while the borrower is on IBR.

To both subsidized Stafford loans and the subsidized portion of Consolidation loans

3-year Interest Subsidy

Three-year period begins when the borrower is first placed on the IBR plan

Applies at the loan level, so loans that enter IBR at different times will each get the full three years.

3-year Interest Subsidy

Consolidation Loan Rule: If borrower consolidates after having

already entered IBR, each underlying loan will retain the number of subsidy months already used. The Consolidation loan will not get a fresh three years.

Will need to track the interest subsidy at the underlying loan level.

3-year Interest Subsidy

3-year period continues unabated, even if the borrower exits PFH or, as previously stated, consolidates their loan after having already entered PFH

Only one exception: Periods of Economic Hardship Deferment

3-year Interest Subsidy

EXAMPLE:

Borrower enters IBR on 1/1/10 (Stafford loan).

Leaves PFH on 12/31/10. Consolidates on 1/1/11. Hardship Deferment from 1/1/12 - 12/31/12. Student Deferment from 1/1/13 – 5/31/16. When does the 3-year clock stop?

3-year Interest Subsidy

EXAMPLE (continued):

Three-year subsidy period would expire on 12/31/13.

Would go from 1/1/10 – 12/31/11, and from 1/1/13 – 12/31/13.

One-year Hardship Deferment from 1/1/12 – 12/31/12 is only interruption.

3-year Interest Subsidy

The interest subsidy is not contingent upon the borrower actually making any particular payment, even if the scheduled monthly payment amount under PFH is greater than $0.00.

Possible exception: the borrower makes excess payments.

3-year Interest Subsidy

POSSIBLE TRACKING MECHANISMS:

The LaRS Subcommittee has developed some possible tracking methods for this interest subsidy.

Awaiting responses from the Department on the outstanding issues associated with this interest subsidy.

3-year Interest Subsidy

BILLING MECHANISM:

Quarterly, as part of the LaRS process

What is the trigger?

IBR – 3-year Interest Subsidy

Billing occurs if, at the end of the quarter, the borrower:o Had been in IBR for at least one month

of the quarter;o Was still within the 3-year window for

some or all of the quarter; ando Had a monthly interest accrual on their

subsidized loans which exceeded the monthly payment amount on those loans.

Possible LaRS Changes

So that the Department can track the costs associated with IBR, the industry has recommended some new billing codes for loans on IBR.

These are currently under review by the Department.

SPECIAL ALLOWANCE

Special Allowance

During periods of PFH, lenders can bill the Department for Special Allowance not only on the average daily principal balance, but on the average daily balance of unpaid accrued interest as well.

Special Allowance

Lenders may not bill for Special Allowance on the unpaid accrued interest during periods of Permanent-Standard payment.

Special Allowance

Special Allowance is billed based on the average daily accrued interest amount.

Average daily accrued interest is computed by totaling up the unpaid accrued interest for each day of the quarter on which the borrower was in a PFH and dividing this total by the number of days in the quarter.

IBR – Special Allowance

EXAMPLE: 1st Quarter 2010

Borrower on PFH from 1/1/10 through 1/6/10

Interest accrued at $5.00/day PFH payment of $10 posted on 1/4/10

(applies to interest accrued through 1/3)

What is the Average Daily Accrued Interest for this quarter?

IBR – Special Allowance

EXAMPLE (continued):

1/1/10: $5.001/2/10: $10.001/3/10: $5.00 ($15.00 - $10.00 int payment)1/4/10: $10.001/5/10: $15.001/6/10: $20.00

$5 + $10 + $5 + $10 + $15 + $20 = $65.00

IBR – Special Allowance

EXAMPLE (continued):

Divide $65 by the number of days (90) in the quarter:

$65 90 = $0.72

Special Allowance

YES, YOU CAN! For as long as the borrower

remains on PFH, you can carry over the outstanding accrued interest to the next quarter and factor it into that quarter’s Average Daily Accrued Interest.

Special Allowance

NO, YOU CAN’T! In cases where the borrower entered

PFH with interest outstanding (and not capitalized), you cannot include that outstanding interest in the Average Daily Accrued Interest calculation.

Agencies may want to track the IBR interest separately.

Special Allowance

NO,YOU CAN’T (Part II)

If any portion of an IBR-eligible Consolidation loan paid off a Health Education Assistance Loan (HEAL), you may not include the interest accrued on that portion in the average daily calculation either.

Special Allowance

WELL, MAYBE YOU CAN… During the three-year interest subsidy

period, while the borrower is on PFH, you may be able to include the interest allocated to the government bucket in the Average Daily Accrued Interest calculation?

This is still being worked out with the Department.

Special Allowance

When paying Special Allowance on the average daily accrued interest, the Department will use the same formula applicable to the loan itself, but with an interest rate of 0%

IBR – Special Allowance

EXAMPLE:

Stafford loan, first disbursed on 9/1/05, purchased with taxable funds. We’ll assume a SAP code of CB.

Average 3-month Commercial Paper (CP) rate = 3.5%

What would the SAP rate be?

IBR – Special Allowance

EXAMPLE (continued):

Formula would be: Average 3-month CP rate + 2.34% - interest rate, divided by 4

3.5% + 2.34% - 0.00% 4 = 1.46%

IBR – Special Allowance

EXAMPLE (continued):

Finally, multiply Average Daily Accrued Interest by the Special Allowance rate:

$0.72 x 1.46% = $0.0105

Special Allowance

Average Daily Accrued Interest, like the Average Daily Balance, is subject to retroactive account adjustments.

IBR – Special Allowance

EXAMPLE:

Using our earlier example, let’s say a payment of $10 was applied retroactive to 1/5/10, covering interest accrued through 1/4/10.

This would reduce the outstanding accrued interest for 1/4/10, 1/5/10, and 1/6/10 by $10 each day.

What is the Average Daily Accrued Interest adjustment for the 3/31/10 quarter?

IBR – Special Allowance

SOLUTION (short method):

Multiply daily adjustment (-$10) by number of days affected (3) and divide by number of days in the quarter:

(-$10) x 3 90 = (-$0.33)

IBR – Special Allowance

SOLUTION (long method):Re-do entire sequence and compare results:

1/1/10: $5.001/2/10: $10.001/3/10: $5.00 ($15.00 - $10.00 int payment)1/4/10: $0.00 ($10.00 - $10.00 retro pmt)1/5/10: $5.001/6/10: $10.00

$5 + $10 + $5 + $0 + $5 + $10 = $35.00

IBR – Special Allowance

SOLUTION (long method): Divide $35 by the number of days

(90) in the quarter:

$35 90 = $0.39

Subtract old result ($0.72) from new result:

$0.39 - $0.72 = -$0.33

Special Allowance

LaRS REPORTING MECHANISM: New SAP Codes?

OR

Same SAP code as the Average Daily Balance, but with an interest rate of .00?

Dear Partner Letter anticipated

Forgiveness Claims & LaRS If forgiveness claim is not filed by day

60, any ongoing billing to the government deferment interest subsidy and special allowance (on both the principal and accrued interest) must stop.

Questions?