How to calculate amortization for income-based student loan repayment
January 17, 2022 7:11 AM Subscribe
I am interested in the nuts and bolts of an income-driven plan on an LRAP (Loan Repayment Assistance Program).
After much research and two meetings with a financial aid counselor, I believe I understand the basics of the program for the particular school in question: First, the school determines the student contribution on the basis of the student's income. Then the school, in effect, lends the student the money to make the payments (the school writes the student a check for the payments every six months, and the student uses that money to make the payments).
FIRST, the idea of "vestment" after 3 years:
If the student stays in the program for 3 years (36 payments)(a kind of "vestment"), these loans are forgiven by the school (but that is not called forgiveness, so the student does not have to pay taxes on that forgiven money).
If the student leaves the program before the 3 years are up, the student must not only pay the school back for all the money the school has laid out, but also must pay additional interest to the school (rather than the gift it is after 3 years, it is now a loan).
NEXT, what happens after the first 3 years?
The student continues to get twice-yearly checks from the school for the amount of the income-based payments. This continues if the student stays in the program for the full 10 years of the loan. At that point, the Federal Government steps in, under their PSLF program, and, one hopes, decides that the student has met all requirements and forgives the loans completely. (I know that PSLF has been extremely screwed up, but we're operating for the purposes of this question as if the problems have been fixed and PSLF will come through).
Okay, all of that was background. Here is where my question comes in:
The student has been making their required payments (using the school's money) all along. However, the student decides at some point between years 3 and years 10 to LEAVE the income-based LRAP program to do something that does NOT qualify for this income-based forgiveness program (if we must say, it's public interest work that is required, and now the student doesn't want to do that anymore).
*The student has been making the proper payments, but really they have been INADEQUATE payments. They have been payments in an amount determined by their INCOME (hence, the name), which is considered a SMALL income (because they are in public service) rather than determined by what is actually OWED to the government. Therefore, as every month has gone by, they have been paying LESS than what would be necessary to stay on track with their loan repayment.
This has been considered a fine thing to do, because the assumption is that, after ten years, the loans will be forgiven, INCLUDING all the principal AND this excess interest that has been accumulating throughout the years.
HOWEVER, NOW, the student is leaving the program EARLY -- BEFORE all this accounting, after ten years, would have settled him up.
And, not only is there excess interest that has been accruing, there is also the fact that, in this plan (like a mortgage), you only start paying off the principal of the loan in earnest after a number of years have gone by. Therefore, if the student leaves the plan early, the student may not have paid back much or any of the principal of the loan!
Now, back to the additional interest that has accrued. This, I understand, is called NEGATIVE AMORTIZATION. The school in question says that, if the student leaves the program early (but AFTER the 3-year "vestment" period), they will help "settle up" the student by writing a one-time check for the amount of that negative amortization so that the student can pay it back (however, the counselor was a bit UNCLEAR about whether that check would be for the FULL amount of the negative amortization, but suggested that the student's part would not be too terrible (not the way you want to go into a loan assistance program, but okay).
HOWEVER --- and here my question is actually coming!! ---
I want to have a schedule of how much principal vs interest the student is paying back, month by month (or even year by year), WITHIN this income-based program. In other words, I have a mortgage, and I can easily look up my amortization schedule, telling me every month for 30-gulp years how much of my monthly payment is principal, and how much is interest. I can also easily look up an amortization schedule for a regular student loan repayment schedule (with no forgiveness). They tell you, month by month, for the ten years, how much of your payment is principal and how much is interest.
When I asked the school financial aid counselor where I could find such a schedule for the income-based repayment plan, he said it depends on the student's contribution and, of COURSE, on the student's income, which would probably CHANGE from year to year, so he couldn't tell me. I understand this, BUT I want to have SOME idea of what's going on regarding principal vs interest for an income-based repayment plan, even if it is going to be yearly ESTIMATES and we can't predict the future entirely.
WHY?? because I want to know that, if the student left this repayment program after, say, 5 years, would he have made even a DENT in the principal of the loan? how about after 6 years? In other words, I want to answer the question, "How many years does the student have to stay in the income-based repayment program in order to have a CHANGE of it being worth it?" Because if he stays in the program for, say, 6 years, and leaves, and is left with MOST (??how much??we can't say) of the excess interest being paid off by the school BUT NONE of the principal having been paid off, what has he gained other than a DELAY in paying back the loans?
So my question is: how can I look up various salaries & various student contributions and play around with numbers to get SOME KIND OF A BALLPARK ESTIMATE of how many years the student would have to remain in this program to get ANY benefit in paying off his loans IF he does NOT remain in the program for the full 10 years?
THAT'S the question. Thank you.
(I have a subsidiary question, too, am I allowed? okay, the student has a "student contribution," which the school is paying, but who is paying the difference between the student contribution and the FULL monthly payment? If, on a regular 10-year repayment program, the student would have to pay, say, $2000 a month, but now his student contribution is, say, $500 a month, and the school is lending him the money to pay that, WHAT'S HAPPENING with the OTHER "$1500 a month of the monthly payment? I ask this because the fact that I don't understand this suggests to me that I really know NOTHING about how this (LRAP, actually), income-based program works (after two long meetings with a counselor and reading the school's LRAP website and doing a LOT of research).
TL;DR obviously
After much research and two meetings with a financial aid counselor, I believe I understand the basics of the program for the particular school in question: First, the school determines the student contribution on the basis of the student's income. Then the school, in effect, lends the student the money to make the payments (the school writes the student a check for the payments every six months, and the student uses that money to make the payments).
FIRST, the idea of "vestment" after 3 years:
If the student stays in the program for 3 years (36 payments)(a kind of "vestment"), these loans are forgiven by the school (but that is not called forgiveness, so the student does not have to pay taxes on that forgiven money).
If the student leaves the program before the 3 years are up, the student must not only pay the school back for all the money the school has laid out, but also must pay additional interest to the school (rather than the gift it is after 3 years, it is now a loan).
NEXT, what happens after the first 3 years?
The student continues to get twice-yearly checks from the school for the amount of the income-based payments. This continues if the student stays in the program for the full 10 years of the loan. At that point, the Federal Government steps in, under their PSLF program, and, one hopes, decides that the student has met all requirements and forgives the loans completely. (I know that PSLF has been extremely screwed up, but we're operating for the purposes of this question as if the problems have been fixed and PSLF will come through).
Okay, all of that was background. Here is where my question comes in:
The student has been making their required payments (using the school's money) all along. However, the student decides at some point between years 3 and years 10 to LEAVE the income-based LRAP program to do something that does NOT qualify for this income-based forgiveness program (if we must say, it's public interest work that is required, and now the student doesn't want to do that anymore).
*The student has been making the proper payments, but really they have been INADEQUATE payments. They have been payments in an amount determined by their INCOME (hence, the name), which is considered a SMALL income (because they are in public service) rather than determined by what is actually OWED to the government. Therefore, as every month has gone by, they have been paying LESS than what would be necessary to stay on track with their loan repayment.
This has been considered a fine thing to do, because the assumption is that, after ten years, the loans will be forgiven, INCLUDING all the principal AND this excess interest that has been accumulating throughout the years.
HOWEVER, NOW, the student is leaving the program EARLY -- BEFORE all this accounting, after ten years, would have settled him up.
And, not only is there excess interest that has been accruing, there is also the fact that, in this plan (like a mortgage), you only start paying off the principal of the loan in earnest after a number of years have gone by. Therefore, if the student leaves the plan early, the student may not have paid back much or any of the principal of the loan!
Now, back to the additional interest that has accrued. This, I understand, is called NEGATIVE AMORTIZATION. The school in question says that, if the student leaves the program early (but AFTER the 3-year "vestment" period), they will help "settle up" the student by writing a one-time check for the amount of that negative amortization so that the student can pay it back (however, the counselor was a bit UNCLEAR about whether that check would be for the FULL amount of the negative amortization, but suggested that the student's part would not be too terrible (not the way you want to go into a loan assistance program, but okay).
HOWEVER --- and here my question is actually coming!! ---
I want to have a schedule of how much principal vs interest the student is paying back, month by month (or even year by year), WITHIN this income-based program. In other words, I have a mortgage, and I can easily look up my amortization schedule, telling me every month for 30-gulp years how much of my monthly payment is principal, and how much is interest. I can also easily look up an amortization schedule for a regular student loan repayment schedule (with no forgiveness). They tell you, month by month, for the ten years, how much of your payment is principal and how much is interest.
When I asked the school financial aid counselor where I could find such a schedule for the income-based repayment plan, he said it depends on the student's contribution and, of COURSE, on the student's income, which would probably CHANGE from year to year, so he couldn't tell me. I understand this, BUT I want to have SOME idea of what's going on regarding principal vs interest for an income-based repayment plan, even if it is going to be yearly ESTIMATES and we can't predict the future entirely.
WHY?? because I want to know that, if the student left this repayment program after, say, 5 years, would he have made even a DENT in the principal of the loan? how about after 6 years? In other words, I want to answer the question, "How many years does the student have to stay in the income-based repayment program in order to have a CHANGE of it being worth it?" Because if he stays in the program for, say, 6 years, and leaves, and is left with MOST (??how much??we can't say) of the excess interest being paid off by the school BUT NONE of the principal having been paid off, what has he gained other than a DELAY in paying back the loans?
So my question is: how can I look up various salaries & various student contributions and play around with numbers to get SOME KIND OF A BALLPARK ESTIMATE of how many years the student would have to remain in this program to get ANY benefit in paying off his loans IF he does NOT remain in the program for the full 10 years?
THAT'S the question. Thank you.
(I have a subsidiary question, too, am I allowed? okay, the student has a "student contribution," which the school is paying, but who is paying the difference between the student contribution and the FULL monthly payment? If, on a regular 10-year repayment program, the student would have to pay, say, $2000 a month, but now his student contribution is, say, $500 a month, and the school is lending him the money to pay that, WHAT'S HAPPENING with the OTHER "$1500 a month of the monthly payment? I ask this because the fact that I don't understand this suggests to me that I really know NOTHING about how this (LRAP, actually), income-based program works (after two long meetings with a counselor and reading the school's LRAP website and doing a LOT of research).
TL;DR obviously
So my question is: how can I look up various salaries & various student contributions and play around with numbers to get SOME KIND OF A BALLPARK ESTIMATE of how many years the student would have to remain in this program to get ANY benefit in paying off his loans IF he does NOT remain in the program for the full 10 years?
It's a sensible question, but since every school has a different program, I don't think such a thing could exist.
Because if he stays in the program for, say, 6 years, and leaves, and is left with MOST (??how much??we can't say) of the excess interest being paid off by the school BUT NONE of the principal having been paid off, what has he gained other than a DELAY in paying back the loans?
OK, grown folk talk time.
These programs exist to help graduates take low-paid public interest jobs. Without them, until such time as you'd qualify for PSLF, you'd be (a) barely denting, at best, and negatively amortizing, at worst, on your federal loans on an IDR plan anyway (that is, the LRAP program is piggybacking on the federal assistance already available and that you'd be using anyway); and (b) doing god-knows-what to manage any private loans.
So "simply" being able to delay repayment until you're better able to is actually a benefit. (Any time you can delay repayment of debt without accruing interest north of the cost of funding is a benefit.) But (assuming you "vest"), you are also paying less on a month-to-month basis while in your public interest job than you would if you had that job without LRAP and were only on an IDR plan.
If you are leaving the program because you've gotten a well-paying legal job or married an affluent spouse, then you no longer need this benefit and can get to repaying your loans like everyone else who's taken a nice private-sector job or has married comfortably.
From your questions, I'm inferring that you are extremely anxious about the size of the debt involved and whether you can manage it post-graduation. This is an extremely reasonable concern. But I think you're aiming the concern at the wrong place. The real way going to Gotham University Law ends up being a real catastrophe in the ordinary course is if you must take out large loans and can't find a job or can only find a low-paying private-sector job. This happened to far too many law school graduates even of prestigious schools in 2007-2009, and it was a disgrace to the profession. It happens less often now, but I can't tell you it isn't a risk. I can't tell you it would be unreasonable to choose a lower-ranked school and no or very minimal debt instead of a higher-ranked school with substantial debt.
But if your problem is that you might get a public-sector job, be able to live a decent if definitely modest existence with LRAP assistance, and then decide to jump to being counsel somewhere and earning a respectable salary and having to repay most of the loans that way...that's not really a catastrophe. It's loan repayment. It's only happening because you're considered to have a salary that can support repayment. One can reasonably dispute the margins of that calculation, but you're not going to go bankrupt.
If your overriding goal is to be able to take a public interest job without any real worries about debt and you haven't managed to get a very good offer from a top school, then you need to drop down the prestige ladder until you get an offer that doesn't require meaningful borrowing. The further down you drop, the harder it will be to get the more competitive public interest jobs, but not everyone is interested in that rat race, anyway, especially outside the major cities. There's no shame in that. If you don't have a family financial backstop, law school debt is a real risk and only fools would take it on lightly.
posted by praemunire at 9:20 AM on January 17, 2022 [1 favorite]
It's a sensible question, but since every school has a different program, I don't think such a thing could exist.
Because if he stays in the program for, say, 6 years, and leaves, and is left with MOST (??how much??we can't say) of the excess interest being paid off by the school BUT NONE of the principal having been paid off, what has he gained other than a DELAY in paying back the loans?
OK, grown folk talk time.
These programs exist to help graduates take low-paid public interest jobs. Without them, until such time as you'd qualify for PSLF, you'd be (a) barely denting, at best, and negatively amortizing, at worst, on your federal loans on an IDR plan anyway (that is, the LRAP program is piggybacking on the federal assistance already available and that you'd be using anyway); and (b) doing god-knows-what to manage any private loans.
So "simply" being able to delay repayment until you're better able to is actually a benefit. (Any time you can delay repayment of debt without accruing interest north of the cost of funding is a benefit.) But (assuming you "vest"), you are also paying less on a month-to-month basis while in your public interest job than you would if you had that job without LRAP and were only on an IDR plan.
If you are leaving the program because you've gotten a well-paying legal job or married an affluent spouse, then you no longer need this benefit and can get to repaying your loans like everyone else who's taken a nice private-sector job or has married comfortably.
From your questions, I'm inferring that you are extremely anxious about the size of the debt involved and whether you can manage it post-graduation. This is an extremely reasonable concern. But I think you're aiming the concern at the wrong place. The real way going to Gotham University Law ends up being a real catastrophe in the ordinary course is if you must take out large loans and can't find a job or can only find a low-paying private-sector job. This happened to far too many law school graduates even of prestigious schools in 2007-2009, and it was a disgrace to the profession. It happens less often now, but I can't tell you it isn't a risk. I can't tell you it would be unreasonable to choose a lower-ranked school and no or very minimal debt instead of a higher-ranked school with substantial debt.
But if your problem is that you might get a public-sector job, be able to live a decent if definitely modest existence with LRAP assistance, and then decide to jump to being counsel somewhere and earning a respectable salary and having to repay most of the loans that way...that's not really a catastrophe. It's loan repayment. It's only happening because you're considered to have a salary that can support repayment. One can reasonably dispute the margins of that calculation, but you're not going to go bankrupt.
If your overriding goal is to be able to take a public interest job without any real worries about debt and you haven't managed to get a very good offer from a top school, then you need to drop down the prestige ladder until you get an offer that doesn't require meaningful borrowing. The further down you drop, the harder it will be to get the more competitive public interest jobs, but not everyone is interested in that rat race, anyway, especially outside the major cities. There's no shame in that. If you don't have a family financial backstop, law school debt is a real risk and only fools would take it on lightly.
posted by praemunire at 9:20 AM on January 17, 2022 [1 favorite]
I think this is a great project for a spreadsheet! If you memail me, I can send you a sample one. Source- I sometimes teach a finance class, with a unit on amortization.
posted by Valancy Rachel at 5:51 PM on January 17, 2022
posted by Valancy Rachel at 5:51 PM on January 17, 2022
I can't do the math for you (if I could do math, I wouldn't have become a lawyer). But I can tell you this:
I borrowed the full amount of tuition, room and board for law school. I have been on an income-driven repayment plan for 8 years, with my expected PSLF forgiveness date in early 2024. I have a relatively high (just barely into 6 figures) income for public interest work, and I've made every payment required of me (until the pandemic started and everyone's payments went to zero, but also no interest accrued). My current loan balance, the balance I expect to see forgiven in 2 years, is 34% higher than the balance I owed at graduation. That's just how low the IDR payments are as compared to the 10 year repayment plan payments, even with a reasonably high public interest salary. The balance goes up because interest accrues on the unpaid balance and your payments aren't even enough to cover that interest payment most months.
I am not worried, because I can't imagine working for a for-profit company ever, and my PSLF contract is really clear, and I expect to earn repayment before whoever comes after Biden decides to change the program. But if you think you may not want a public interest career for at least the next 10 years, this might not be the right repayment path for you.
(edited to adjust the number after double checking)
posted by decathecting at 7:21 PM on January 18, 2022 [1 favorite]
I borrowed the full amount of tuition, room and board for law school. I have been on an income-driven repayment plan for 8 years, with my expected PSLF forgiveness date in early 2024. I have a relatively high (just barely into 6 figures) income for public interest work, and I've made every payment required of me (until the pandemic started and everyone's payments went to zero, but also no interest accrued). My current loan balance, the balance I expect to see forgiven in 2 years, is 34% higher than the balance I owed at graduation. That's just how low the IDR payments are as compared to the 10 year repayment plan payments, even with a reasonably high public interest salary. The balance goes up because interest accrues on the unpaid balance and your payments aren't even enough to cover that interest payment most months.
I am not worried, because I can't imagine working for a for-profit company ever, and my PSLF contract is really clear, and I expect to earn repayment before whoever comes after Biden decides to change the program. But if you think you may not want a public interest career for at least the next 10 years, this might not be the right repayment path for you.
(edited to adjust the number after double checking)
posted by decathecting at 7:21 PM on January 18, 2022 [1 favorite]
For trying to figure out what my payment will be with different salaries under PSLF, I plug various numbers into here. Agreed that it's infuriating that a better reference aside from this multi-step calculator doesn't seem to be available.
posted by Theiform at 7:18 PM on July 18, 2022
posted by Theiform at 7:18 PM on July 18, 2022
This thread is closed to new comments.
posted by DMelanogaster at 7:14 AM on January 17, 2022