Vol. 81, No. 10, October 2008
Throughout the United States, college tuition costs have risen dramatically over the past 20 years, outpacing salary increases. Law school tuition also has increased, making it particularly difficult for new and recent graduates to make ends meet. The financial difficulties are particularly acute for college and law school graduates who would prefer to work in public interest jobs; they often must choose between their passion for service in these traditionally low-paying jobs and meeting their financial obligations.
To help address the skyrocketing cost of education, in 2007 Congress passed, and President George W. Bush signed, the College Cost Reduction and Access Act (CCRAA).1 The CCRAA is intended to reduce the financial pressure on college and university graduates, including those with current student loan burdens. The law's sponsors have called it the largest public investment in higher education since the GI Bill, and six of Wisconsin's eight representatives and both of its senators supported it.
Two CCRAA sections are particularly helpful to public interest-oriented college graduates and attorneys with student loans. The CCRAA's income-based repayment and loan forgiveness provisions can be used, separately or together, to relieve a significant financial burden on people who choose public interest careers. The law will provide the most benefit to graduates with low incomes and high federal student loan debt but also may be useful to graduates with moderate incomes.
Title II, section 203 of the CCRAA establishes an income-based repayment (IBR) program.2 Although the formal IBR program goes into effect on July 1, 2009, attorneys with current loan burdens can apply for income-contingent repayment now by going to www.loanconsolidation.ed.gov and can switch to IBR in 2009. This provision of the law provides assistance to all limited-income college or law school graduates, not just those who choose public service careers.
The IBR provision caps the monthly repayment on government student loans at 15 percent of the amount by which a graduate's adjusted gross income exceeds 150 percent of the federal poverty level for the graduate's family size.3 For example, for an unmarried graduate with no dependents who earns $40,000 per year and has $100,000 in student loan debt (a not uncommon scenario for today's public interest attorneys), the IBR provision would decrease monthly student loan payments from $1,150 to $305 per month.
In addition, unlike standard student loans that have a 10-year repayment schedule, the IBR program allows repayment for up to 25 years. A graduate who has participated in the IBR program or other designated repayment programs for 25 years will be eligible to have any remaining loan balance forgiven.4
The student, and his or her spouse if applicable, must annually verify income to retain IBR eligibility.5 If the family's future income increases to the point that the family is no longer eligible to benefit from the IBR program, the lender or the graduate may adjust the monthly repayment amount so that it is equal to the regular federal student loan repayment amount that would have applied when the graduate initially elected the IBR option. The repayment term, however, can still exceed the standard 10-year repayment term.
Public Service Loan Forgiveness
The loan forgiveness provision of the CCRAA, title IV, will enable graduates who serve the public good to eliminate federal direct student loans6 after 10 years of public service.7 Like the IBR provision, the loan forgiveness provision applies to people with undergraduate student loans, as well as graduate school and law school loans.
To qualify for public service loan forgiveness, an attorney must work at a "full-time job" in such positions as "public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization) … public service for individuals with disabilities, public service for the elderly, … 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…."8
The CCRAA requires that graduates make 120 monthly student loan payments (10 years of payments) as part of the direct loan program while working full-time in a public interest, government, or nonprofit setting, after which time their loans are forgiven. The amount of the monthly loan payment can be further reduced by using the IBR program, and the public interest attorney will still qualify for the loan forgiveness program.
The 120 months of qualifying payments need not be consecutive. For example, if a graduate works at a qualifying public interest position for five years and then takes a nonqualifying position for a few years, he or she can later return to public interest work and still count the first five years of public interest employment toward the 120 months of payments necessary to have loans forgiven.
Tips to Benefit from These Programs
Lawyers should consider several guidelines to benefit from the CCRAA. Some guidelines are printed here, and others will be set forth in the Department of Education's regulations. Please consult the Department of Education or a financial aid advisor to ensure your compliance and to achieve the maximum benefit available.
- Only federal loans are eligible for the IBR and loan forgiveness programs; commercial loans will have to be repaid under the lender's normal repayment schedule. If a borrower experiences financial hardship attempting to make private loan payments, he or she must contact the lender directly.
- Attorneys with either or both undergraduate student loans and law school debt can take advantage of these provisions.
- People who have already consolidated their federal loans with private financial services companies may become eligible for the IBR and loan forgiveness programs by reconsolidating those loans through the William Ford Direct Loan Program.
- To base IBR payments on the borrower's income only, married graduates must file their income tax returns separately.9 An income tax professional can provide guidance on other consequences of using this filing status.
- Under the proposed regulations, borrowers will have to pay taxes on any amounts ultimately forgiven. For a public interest attorney earning $40,000 per year with $100,000 in loans, this could mean an additional $123,000 in taxable income when the loan balance is forgiven after 10 years of payments.
The Department of Education just closed the public comment period on the regulations implementing the CCRAA. Later this fall, the department should issue final administrative regulations, which may address concerns about the taxation of forgiven loans, requirements for married borrowers, and other issues.
Coordination with Other Loan Assistance
Both the Marquette University Law School and the U.W. Law School, and many law schools in other states, have established loan repayment assistance programs (LRAPs).
Marquette's program assists graduates who work in qualifying employment by paying 25 to 50 percent of a graduate's monthly student loan payments. The amount covered by the program depends on income and other financial factors. Participants can receive assistance for up to 10 years.
Under the U.W. Law School LRAP, an eligible student may receive a one-time payment; the availability of funds depends on the number of applicants in a given year. Dean Kenneth Davis recently introduced a proposal for improving the program, but private funding is needed to implement the proposed improvements.
Graduates of other colleges or law schools should contact their financial aid or career services offices to find out if the school's LRAP will be adjusted due to the CCRAA.