Author: Michelle Mohr Vodenik, Chicago-Kent College of Law, Director & Public Interest/Diversity Advisor, Career Services
Last updated: June 2009
As a public interest career counselor, I regularly hear from students who say they can’t pursue a public interest law career because of high debt. This has always discouraged me because I know that many students come to law school with the hope of taking a job upon graduation where they will engage in public service – whether as a government attorney with indigent clients or representing the state – or as a legal aid attorney with low-income clients on issues ranging from sub-standard housing to domestic violence.*
In September 2007, Congress passed the College Cost Reduction and Access Act (CCRAA). This law helps public interest lawyers by lowering monthly student loan payments on federal loans through a new repayment program (Income Based Repayment) and canceling the remaining debt after ten years while working in a public interest career. The passage of this legislation did not happen in a vacuum. It was the collective work of many individuals lobbying for a solution to what had become a crisis in the legal community - new lawyers simply could not afford to accept positions in low-paying public interest jobs and if they did accept those positions they would be forced to leave within several years due to their high debt load.
The College Cost Reduction and Access Act contains two new provisions that have the potential to assist individuals in public service positions: 1) Income Based Repayment and 2) Public Service Forgiveness.
Here is an example of how Income Based Repayment (IBR) works (courtesy of Equal Justice Works): Jane Justice owes $100,000 in qualifying debt at 6.8% interest and takes a job paying $40,000. She elects Income Based Repayment. In her first year, Jane’s monthly payment under IBR is $309, as opposed to $1151 under a standard ten year repayment plan. As Jane receives annual salary increases of 5%, her monthly payments under IBR gradually rise, until in year 10 her monthly payments are $526.
Another part of the Act is public service forgiveness. If a borrower elects IBR and makes ten years of payments while engaged in full-time public service, the unpaid balance is forgiven by the federal government. Example: Jane Justice from the example above stayed in public service for ten years and paid $49,132 during that time toward her federal student loans through the IBR plan. The federal government then cancels $118,868 (the principal and interest remaining on her loans).
The program applies to graduates working full-time in public service, whether at a non-profit tax exempt 501(c)3 organization or in a local, state or federal government position. The program applies not only to lawyers, but to social workers, public school teachers, healthcare workers, police officers, firefighters, and those in the military. Full-time is defined as 30 hours a week and the hours can be completed at more than one public service job.
All federal direct loans and federally guaranteed loans are eligible for loan forgiveness; private loans are not. The federal loans include: subsidized and unsubsidized Federal Stafford Loans, Federal Grad PLUS loans, Federal Direct Consolidation loans and Federal Perkins Loans. Perkins Loans are only eligible when part of a Federal Direct Consolidation Loan, and borrowers are urged to seek advice about the pros and cons regarding consolidating Perkins loans, as the interest on Perkins loans is heavily subsidized.
If you are currently a student and have a goal of working in public service upon graduation, you may want to avoid taking out private loans as these are not eligible for forgiveness through this program. Also note that Parent PLUS loans are not included, as opposed to Grad PLUS, which are.
If you do not know what type of loans you have, you can go to the National Student Loan Data System at http://www.nslds.ed.gov/ for a list. You will need your social security number, the first two digits of your last name, your date of birth and your 4 digit federal government provided PIN number in order to access this information. If you do not have your PIN, you can obtain it from the Department of Education at http://www.pin.ed.gov/PINWebApp/pinindex.jsp. You can also call the Federal Student Aid Information Center at 1-800-4-FED-AID.
Anyone who would like to participate in this program who has federally guaranteed student loans can consolidate them through the Direct Loan Consolidation website at http://loanconsolidation.ed.gov/. Loans that are not in the Federal Direct Loan program do not qualify for public service forgiveness and do not count towards the 120 payment/10 year requirement in order to receive loan forgiveness. In other words, if you borrowed your federal loans as a law student through a private lender and they are serviced by that lender, in order to participate in this program, you must consolidate them in the Federal Direct Loan program. You can consolidate in the Federal Direct Loan program even if you have previously consolidated your federal loans through a private lender.
Any payments you made after October 1, 2007, when the College Cost Reduction and Access Act (CCRAA) went into effect, count toward your 10 years of public service forgiveness, provided you were working full-time in a public service position and your loans were in the Federal Direct Loan program. Unfortunately, there is no grandfather clause in the legislation that allows seasoned public interest and government attorneys the opportunity to count payments made before October 1, 2007.
When you pay student loans, they are generally on a standard ten-year repayment plan. However, if you have taken out significant loans and you have a low salary, you may have a difficult time paying those loans under a standard ten year repayment plan.
One of the provisions of the College Cost Reduction & Access Act (CCRAA) is Income Based Repayment (IBR). The Education Department has established a web site to provide more information on Income Based Repayment: http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp. In addition, an IBR monthly repayment calculator is available online: http://www.ibrinfo.org/calculator.php.
Prior to the creation of IBR, Income Contingent Repayment (ICR), was the primarily option used to substantially lower student loan payments. ICR is still available, but may not provide as generous of a benefit. A calculator to determine ICR payments is available online: http://www.finaid.org/calculators/icr.phtml.
Please note that payments made on an extended payment plan do not count towards forgiveness.
There are several serious considerations for you as you decide whether to participate in this program.
Will you stay in a public service job for 10 years? There is no partial benefit to this program. If you work as a legal aid lawyer for 9 years and leave your job for a position in the private sector, you will not qualify to have your loans forgiven, unless you go back into public service work and complete one more year. The public service years of employment do not have to be consecutive, but you do have to make 120 payments while working full-time in a public service position and you must be in a public service job when you request forgiveness. Please note that after 25 years in this program, any remaining federal loans will be forgiven.
Through Income Based Repayment (IBR) or Income Contingent Repayment (ICR) you may be making monthly payments that are less than the interest on your loans. In financial terms, this is called negative amortization. If you leave the program before receiving loan forgiveness, you may owe more on your student loans than when you began to participate.
If you are married, and you are participating in Income Based Repayment (IBR), you will have to file your taxes separately from your spouse (married filing separately) in order to avoid a "marriage penalty." The "marriage penalty" would have proved a significant hardship to public interest employees in that the combined income of the borrower and spouse would be included in the calculation of income when making payment under IBR. For example, if you are earning $45,000 as a legal aid lawyer and your spouse is earning $50,000 as a teacher, your combined income would be $95,000, which would place your payments so high under IBR that there would be little benefit to you. Be aware that there are consequences to filing your taxes separately from your spouse, as the government has instituted incentives for married couples to file taxes jointly. You may want to speak with a tax advisor for further information.
On September 19, 2008, the U.S. Treasury Department confirmed in a letter to members of Congress that loan forgiveness under the College Cost Reduction and Access Act is not taxable, which alleviates one of the initial concerns with this Act.
The Public Service Loan Forgiveness program has the potential to offer considerable benefit to law school graduates who have significant student federal loan debt and low salaries, provided the individual plans to stay in a public service career working full-time for 10 years or 120 months. Hopefully, this new program will allow students the freedom to pursue a public service career and allow them to stay in those positions for many years.
For a more information and the most recent updates on the CCRAA, visit the Equal Justice Works webpage: http://www.equaljusticeworks.org/resources/student-debt-relief/default
*Decisions about student debt are highly individual. Each borrower must make his or her own decisions. This article does not offer legal advice. I have made every effort to ensure the accuracy and completeness of the information provided, however no guarantee can be made. I bear no liability for any errors or omissions, for how content is interpreted or used, or for the content of any third-party links. The United States Department of Education has not reviewed this information or its contents nor approved my interpretations.
Printed from: www.illinoislegaladvocate.org/index.cfm?fuseaction=home.dsp_Content&contentID=6427
We welcome your comments and suggestions