Many bright-eyed and energetic first-year law students have walked through the doors of the Moritz College of Law with a vision of changing the world, helping others, and serving their communities. While many have gone on to public service careers, others have seen their dreams dashed by an unlikely villain: math. The mathematical realities of high law school debt and low-paying public-interest jobs
have forced many law graduates to realize that student loan bills, rent, and car payments quickly add up to more than the monthly salary of many public sector jobs. The fact is that many graduates need six-figure salaries to accompany their six-figure debts, and six-figure, entry-level jobs in the public sector are nonexistent.
In October 2007, the College Cost Reduction and Access Act of 2007 (CCRAA) was signed into law and is the latest in a series of laws passed that could help law and other students more easily manage the burdens of high debt. The CCRAA contains two programs that could assist law school graduates, including those who have already graduated. The first is an income-based repayment plan that is available to almost all high debt/low income borrowers. The second is a loan forgiveness plan for public service employees.
“The Act provides for the first real loan relief for lawyers who work for the government or nonprofit organizations,” said Nancy H. Rogers, Moritz dean and immediate past president of the American Association of Law Schools, which advocated for the bill’s passage. “A key portion of the bill opens the door considerably for law graduates with educational debt to take public service jobs, even if the salaries are low. They must be willing to make a financial sacrifice, of course, but it is feasible for them to take the low-paying jobs because of a ceiling on annual loan payments that is tagged to their income. Also, these people who take low-paying public-service jobs can now imagine supporting their own children’s college education because of a provision for loan forgiveness after 10 years of qualifying public service.”
Building the Framework for the CCRAA
The CCRAA is not the first law to be passed in recent years that addresses student indebtedness, and the previously passed laws are essential to CCRAA’s usefulness. The first source most students consider when financing tuition are federally backed Stafford loans, which can be subsidized (meaning the government pays the interest while the student is in school) or unsubsidized (meaning the interest compounds while the student is in school and not making payments). As most law students quickly realize, however, there is a limit on Stafford loans, which stood at $18,500 for more than a decade despite steep increases in tuition and living expenses. In the past, most students turned to private loans to make up the difference between the amount covered by Stafford loans and the total cost of attending law school.
Congress addressed this issue by passing the Higher Education Reconciliation Act of 2005. The bill raised the Stafford limit to $20,500 and, more importantly, created the Grad PLUS program, which provides federally backed loans with slightly higher interest rates than the Stafford program. Unlike the Stafford program, there is no limit on how much a student can borrow through Grad PLUS.
“What Grad PLUS does for our students is take away the need for private lenders,” said Marc Nawrocki, Moritz’s assistant director for financial aid. “We have seen a huge change in the market over the past couple of years due to new legislation and changes in the private lending marketplace.”
Federally supported, income-based repayment and forgiveness are only applicable to federally backed loans. In the past, this has been a problem for many alumni with high debt and low income. For example, the income contingent repayment option (ICR) was enacted in 1993 and set a borrower’s payment on an income-based formula and allowed for forgiveness after 25 years of payment. However, any commercial or private loans could not be included as part of the program and this meant the borrower would have to make a private loan payment on top of his or her income-based federal payment.
As passed in October, the CCRAA does two things: it provides income-based payments and allows for debt forgiveness after 10 years of public service. In essence, the bill is similar to the old ICR program, with the added benefit of more borrowers qualifying, smaller payments, and complete debt forgiveness in 10 years.
The new income-based repayment (IBR) program is available to all high debt/low income borrowers. Any law graduate can enroll in the IBR, but there will come a point when a borrower’s debt is too low, or income too high, for the program to be useful. Where that line is will depend on how much debt and income a specific borrower has and the terms of standard loan repayment. In addition, only Stafford and GRAD Plus loans can be paid under an IBR program. Borrowers who have private loans can still participate in the IBR, but their private loan payments will have to be made in addition to whatever payments are due under the IBR.
How much will payments be?
Under the IBR, student loan payments are capped at 15 percent of discretionary income, which is defined as adjusted gross income minus 150 percent of the poverty level for the borrower’s family size. For example, if a borrower has $100,000 in student loan debt and $75,000 is in the form of subsidized and unsubsidized Stafford loans at a rate of 6.8 percent and $25,000 is in the form of a Grad Plus loan with an interest rate of 8.5 percent, the borrower would owe $1,173 a month under a standard 10-year repayment plan. Under the IBR, if the borrower takes a job with a gross adjusted income of $40,000, his or her payments would drop to just $309 per month ($40,000 – $15,315=$24,685 x .15 = 3,702 /12 = $309). As the borrower’s income rises, so will his or her payments, but some of that increase will be negated by yearly increases in the poverty level. If the borrower’s income and the poverty level both rise at a rate of three percent a year, after 25 years, the borrower’s monthly payment will still be only $627, just over half of the $1,173 original payment under standard repayment. In order to stay in the program, the borrower’s payment under the program must be less than the standard repayment. If, at some point, the borrower sees an increase in income and is no longer eligible for the program, the amount of interest not paid because the payments had been capped will be capitalized into the remaining balance. The borrower will make a standard repayment, but the monthly payment will not be more than it would have been originally.
There are two ways that debt can be forgiven completely under the new laws. First, if a borrower stays in the IBR program and makes payments for 25 years, any remaining balance and interest is forgiven. Using the same facts as the example above, if the borrower stayed in the IBR program for 25 years and continued to receive 3 percent pay increases each year, he or she would still owe $145,606 dollars in principle and interest after 25 years. Under the IBR program, that $145,606 would be forgiven.
Alternatively, if the borrower works in public service for approximately 10 years, the debt is forgiven at that time. In order to qualify for debt forgiveness using the public service option, the borrower has to make 120 qualifying payments under the IBR while working full time in public service. In the legislation, the term public service appears to be defined quite broadly and would include all local, state, and federal positions, prosecutor and public defender positions, and positions with nonprofit organizations. An exact working definition, however, will not be available until the U.S. Department of Education releases regulations at a later date. Working with the same example as above, if the borrower worked in public service for 10 years, his or her loan payment after 10 years would be $403 and $129,802 would be forgiven. The mathematical realities of compounding interest explain why the government actually forgives more debt for the example borrower after 25 years than after 10 years even though the borrower made payments for an additional 15 years.
Any payments made under the old ICR program after Oct. 1, 2007 will count toward the necessary 120 payments. The actual IBR program does not begin until July 1, 2009, but borrowers who have already graduated and are making payments can consolidate into an ICR program now to start the clock ticking on the necessary 10 years of payments. In order to qualify for the public service debt forgiveness provision, borrowers must consolidate their loans into a federal direct loan (only Stafford and Grad PLUS loans are eligible). The 10 years of public service do not have to be earned consecutively. A borrower will be eligible once he or she has made 120 payments under an IBR program while working full-time in public service, regardless of whether there was a break in public service work or a break in making payments under an IBR program. For example, a borrower could work as a prosecutor for three years and make payments under an IBR program, leave for a higher paying private sector job and make payments under a standard repayment plan for two years, and then return to a public service job and make payments under an IBR program. In this example, the borrower’s three years of prior public service would count, but it would take the borrower approximately 12 years to reach debt forgiveness and the amount forgiven would be less because the borrower would have made higher payments during the two years in a standard repayment program.
Regulations and Additional Legislation Expected
There are still several questions to be answered about the CCRAA and how it will apply to individual borrowers. The U.S. Department of Education is expected to release a proposed rule with comment period prior to the legislation’s complete enactment on July 1, 2009. In addition, several additional pieces of legislation have been introduced in the U.S. Senate and U.S. House of Representatives relating to student loan forgiveness and payments.
Tags: Marc Nawrocki, Nancy Rogers