Friday, February 12, 2010

How Will UVA's LRAP Follow Income Based Repayment?

A few years ago, Congress passed the College Cost Reduction Act. As July 2009, one part of the act that went into effect was income-based repayment (IBR). For those who don't know, IBR works to reduce ones (quite possibly astronomical) monthly loan payments into amounts that are more affordable given income:
IBR uses a kind of sliding scale to determine how much you can afford to pay on your federal loans. If you earn below 150% of the poverty level for your family size, your required loan payment will be $0. If you earn more, your loan payment will be capped at 15 percent of whatever you earn above that amount. Except for the highest earners, that usually works out to less than 10 percent of your total income.
So, basically one's loan payments would be reduced such that they are no more than 15% of one's income above the federal poverty line (this is a simplification of the program - there are some very specific provisions - including some that relate to interest on loans that I am ignoring for convenience). This feature dove-tails quite nicely with another new federal program created by the same piece of legislation: the Public Service Loan Forgiveness Program. Essentially, if you (1) work for 10 years in some kind of public service; and (2) make your loan payments (including IBR payments) in those ten years, then your total debt is forgiven at the end of ten years.

Now, as most of you know, UVA has its own loan repayment assistance program, which is called the Loan Repayment Assistance Program (LRAP). Basically, the UVA program currently works as follows:

Graduates who earn less than $35,000 per year are presumed unable to pay their Law School education loans. They receive 100 percent assistance for the year. Those who earn $35,000 or more are presumed able to pay one-half of their income above $35,000. For example, if a graduate has an annual loan payment of $10,000 and earns $40,000, the program would require the graduate to contribute $2,500 each year (half of what the graduate earns over $35,000) and the Program would provide $7,500 each year. For married graduates, spousal income may be taken into account in calculating benefits.

Notice that the UVA program is based on the graduate's annual loan payment - but what if the annual loan payment is reduced by IBR as discussed above, which seems probable given the salaries of many public interest lawyers? It would seem, at least by the description of the program's website, that the forgiveness would be applied to the already reduced payments. If this is true, it's kind of a double-edged sword for graduates in that position: On the one hand the overall payment is (possibly much) lower; on the other hand, the graduate is getting less of their debt paid down by the school than if he or she did not have an IBR-modified payment. Of course, the last point might not matter so much if the graduate is planning on staying in public service for ten years and getting the debt forgiven entirely (otherwise, the debt would be forgiven entirely in 25 years).

This raises another question: will loan assistance from UVA affect count as income for federal tax purposes and affect a graduate's IBR payments for the next year? A cursory glance at the mechanics of this all - which, again, are fairly complicated, so don't quote us on this - suggests that the answer is "yes". According to this site, IBR is based on your Adjusted Gross Income (AGI) from the prior tax year. Payments from UVA LRAP program are most likely income under 26 U.S.C. § 61(a)(12) because they are applied to the cancellation of indebetness (is this right, tax gurus?). So, the graduate next year would have higher income in the amount of LRAP payments and thus would likely have higher IBR monthly payment amounts.

This may be all moot, because as has been noted earlier the LRAP program is being retooled to make it "more generous" than the one currently in existence. But for now, this appears to be the situation . . .

We welcome your thoughts on this, particularly from folks that might understand the nuances of these programs better than we do.

IBRinfo: Income Based Repayment and Public Service Loan Foregiveness


Anonymous said...
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Anonymous said...

C+ (thx LLM curve fodder)