What Is Income-Contingent Repayment?

Income-Contingent Repayment, or ICR, is a repayment plan that bases the loan payments on a percentage of the borrower’s discretionary income, as opposed to the amount owed. ICR first became available in 1993, although it wasn’t used by borrowers until 1994.

ICR is one of four income-driven repayment plans. The others are Income-Based Repayment (IBR), Pay-As-You-Earn Repayment (PAYE) and Revised Pay-As-You-Earn Repayment (REPAYE). ICR generally has the highest monthly student loan payment of the four income-driven repayment plans.

Eligible Loans

ICR is only available for loans in the William D. Ford Federal Direct Loan Program (Direct Loans).

ICR is not available for loans in the Federal Family Education Loan (FFEL) or Federal Perkins Loan programs, although FFEL and Federal Perkins loans can be made eligible by including them in a Federal Direct Consolidation Loan.

Federal Parent PLUS Loans are not directly eligible for any of the income-driven repayment plans. However, if a Federal Parent PLUS Loan entered repayment on or after July 1, 2006 and is included in a Federal Direct Consolidation Loan, the consolidation loan is eligible for ICR but not any of the other income-driven repayment plans.

Loan Payments

Monthly student loan payments in ICR are based on the lower payment calculated using two formulas.

  • The primary formula, which is dominant for most borrowers, is based on 20% of discretionary income. Discretionary income is defined as the amount by which adjusted gross income (AGI) exceeds 100% of the poverty line. This is a larger percentage of discretionary income and a larger definition of discretionary income than the other income-driven repayment plans.
  • The secondary formula is based on the monthly payment under a 12-year level repayment plan multiplied by an income percentage factor (IPF). The IPF is based on the borrower’s AGI and tax filing status. The IPF ranges from slightly more than 50% for low-income borrowers to 200% for high-income borrowers. The IPF is 100% when the AGI is slightly more than $60,000. The IPF is adjusted annually, based on inflation.

ICR does not have a cap on the monthly student loan payments, so the payments will increase as income increases. (The secondary formula does not really function as a cap on the monthly student loan payments because the payment increases as income increases.)

ICR also does not have a marriage penalty. If a married borrower files federal income tax returns as married filing separately, the loan payment under ICR is based on just the borrower’s income. Otherwise, the loan payment will be based on joint income.

The minimum payment under ICR is zero if the calculated payment is zero, otherwise it is $5.

Treatment of Interest

Student loans can be negatively amortized under ICR. This means that the loan payment is less than the new interest that accrues. Any accrued but unpaid interest is capitalized annually, causing the loan balance to increase. Interest capitalization stops when the total capitalized interest reaches 10% of the loan’s original principal balance.

The federal government does not pay any of the interest under ICR, not even on subsidized loans.

Repayment Term and Loan Forgiveness

The maximum repayment term under ICR is 25 years (300 payments). It is the same for borrowers who have undergraduate and graduate loans. Any remaining debt is forgiven after 300 payments are made under ICR, including a calculated zero monthly payment.

If the borrower qualifies for Public Service Loan Forgiveness, the remaining debt is forgiven after 10 years’ worth of payments (120 payments). Assuming an AGI of $30,000, the initial monthly student loan payment in ICR will be about $285 for a family of one and about $58 for a family of four.

This increases to about $619 and $392 for an AGI of $50,000 and to about $952 and $725 for an AGI of $70,000. These payment examples assume a 2022 poverty line of $12,880 for a family of one and $26,500 for a family of four.

I am Publisher of PrivateStudentLoans.guru, a free web site about borrowing to pay for college. I am an expert on student financial aid, the FAFSA, scholarships,

Source: What Is Income-Contingent Repayment?

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Critics:

By: Ryan Lane

Income-Contingent Repayment costs more each month than other income-driven repayment plans. ICR caps payments at 20% of your discretionary income and lasts 25 years. Still, this plan may be your best income-driven choice in the following instances:

  • You have parent PLUS loans or a consolidation loan that includes parent PLUS loans.

  • You want slightly lower payments to potentially pay less interest.

All income-driven plans share some similarities: Each caps payments to between 10% and 20% of your discretionary income and forgives your remaining loan balance after 20 or 25 years of payments. Use Federal Student Aid’s Loan Simulator to see how much you might pay under different plans.

You must enroll in Income-Contingent Repayment. You can do this by mailing a completed income-driven repayment request to your student loan servicer, but it’s easier to complete the process online. You can change your student loan repayment plan at any time.

• Visit studentaid.gov. Log in with your Federal Student Aid ID, or create an FSA ID if you don’t have one.

• Select income-driven repayment plan request. Preview the form so you know what documents to have ready, like your tax return.

• Choose your plan. If you qualify for more than one income-driven repayment plan, you can be automatically placed in the plan with the lowest payment or specifically choose ICR if it makes the most sense for you.

• Complete the application. Enter the required details about your income and family. Remember to include your spouse’s information, if applicable, as it will affect your payments under ICR.

More contents:

How are income-driven payments calculated?

Income-driven repayment: Is it right for you?

What is income-driven repayment?

Student loan repayment process: Everything you need to know

How to pay off parent PLUS loans

How to get parent PLUS loan forgiveness

What is income-driven repayment?

What is income-driven repayment?

Repaying your student loan

Learn Now, Pay Later: A History of Income-Contingent Student Loans in the United States

Calculate your payment on an ICR plan

How to apply for an ICR plan

Income-Contingent Repayment and student loan forgiveness

Alternatives to an ICR plan

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Shine on Sustainable Bonds Wears Off, Especially for Riskiest Borrowers

Rising regulatory scrutiny is damping investor appetite for sustainable bonds, especially those issued by riskier companies. Bonds sold to fund environmentally friendly projects and companies generally fetch higher prices and lower yields than conventional bonds. This “greenium,” though, has been shrinking in recent weeks as global regulators forge ahead on new disclosure rules and investors start to look more closely at companies’ claims about sustainability.

The selloff is sharpest for high-yield sustainable bonds, whose price premium over comparable conventional bonds has nearly halved since early September, dropping to 0.17 percentage point from 0.30, according to ICE bond indexes. The yield on a broad index of sustainable junk-rated bonds has risen to 3.82% from 3.33% over the same period. Yields rise when prices fall.

The greenium for investment-grade bonds has shrunk, too, though more slowly, halving since April to 0.03 percentage point.

Sustainable investing—also known by the acronym ESG for its environmental, social and governance factors—has attracted hundreds of billions of dollars, but until recently there has been little consensus about what qualifies as a green asset. Money managers are increasingly worried about being duped by companies exaggerating their sustainability bona fides. They are also having to prove the claims they make to their investors about how they evaluate green investments.

In a bellwether case, the Securities and Exchange Commission is investigating whether Deutsche Bank AG’s asset-management arm lived up to claims it made about its ESG investing criteria. A whistleblower and internal emails say that only a fraction of its assets went through a sustainability assessment, contrary to the firm’s public statements. DWS has said it stands by its disclosures.

This new scrutiny is prompting some investors to be more careful when assessing sustainable bonds, particularly those sold by lower-rated issuers, which tend to be smaller and disclose less about their businesses, said Tatjana Greil Castro, a credit portfolio manager at Muzinich & Co.

“There is definitely an understanding that you cannot just slap on your tick-box approach,” she said. Market dynamics may be partly to blame, too. Inflows into sustainable-investment funds haven’t kept pace with a flood of new issuances.

Investors put $95 billion into ESG funds in the second quarter, down from $142 billion in the first, according to the latest available data from Morningstar. Meanwhile, issuance of sustainable bonds stayed relatively stable, with $295 billion in the second quarter and $299 billion in the first, according to Bloomberg New Energy Finance.

With less money earmarked for green assets spread across more deals, investors can be choosier about which to buy and can negotiate higher yields.

Sustainable debt sold by higher-rated issuers are still finding strong demand. The yield on the European Union’s first-ever common green bond has fallen from 0.45% when it was issued Oct. 12 to 0.37% as of Wednesday. Investors piled into the U.K.’s debut green bond last month, which priced at a yield of 0.87%.

But corporate borrowers, especially those with lower credit ratings, are finding less appetite for their debt in the secondary market. A green bond issued by Daimler AG was yielding 0.51% on Wednesday, compared with 0.52% for the German auto maker’s comparable conventional bond. In February, the green bond was yielding 0.16 percentage point less.

A green junk bond issued by Ardagh Metal Packaging SA was yielding 2.20% on Wednesday, up from 1.81% in mid-September.

By: Anna Hirtenstein

Anna Hirtenstein is a reporter at The Wall Street Journal in London, covering financial markets. She was previously a reporter at Bloomberg in London, an investment banker at Greentech Capital Advisors in Zurich and has also worked as a field correspondent with a focus on oil in Northern Iraq and West Africa.

Source: Shine on Sustainable Bonds Wears Off, Especially for Riskiest Borrowers – WSJ

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Related Contents:

Green and Sustainable Bonds in Emerging Markets

Investors with allocations to emerging market debt now need to understand the true impact on developing economies of long run factors like climate change and human capital development

Governments everywhere are racing to lock in historically low borrowing costs by issuing ever longer dated debt – in recent years Mexico and Argentina even managed to sell century bonds. That presents several new challenges for fixed income investors. Particularly those who own emerging market bonds.

Not only do bondholders have to weigh the usual near-term factors like political, economic and commodity cycles but, in lending money to sovereigns over such extended periods, they now also have to consider the impact of longer term trends such as climate change and social development. Both can affect creditworthiness in profound ways.

This has called for new approaches to investment thinking. Economic and financial forecasts are having to be recast with climate dynamics in mind. Meanwhile, modelled pathways of climatic change are themselves subject to expectations about future technological change as well as the evolution of political thinking in these countries. The number of moving parts only grows as investors realise they also have a role to play in shaping how governments approach making their economies sustainable and low-carbon.

It’s a complex problem. But not an insurmountable one.

The greening of EM debt

In 2015, some 17 per cent of emerging market hard currency debt had a maturity of 20 years or more. By the start of 2021, that proportion had grown to 27 per cent. Even local currency denominated emerging market debt, which tends to be shorter-dated, has moved along the maturity curve. Over the same time period, the proportion of local currency debt with a maturity of five years or longer had risen 11 percentage points to 58 per cent (1).

That shift reflects growing demand for yield from investors starved of income. But at the same time, bondholders have recognised the importance of taking a long-term view on environmental issues. This is apparent in both the appetite for green bonds – capital earmarked for environmental- or climate-related projects – and, more generally, bonds that fall under the environmental, social and governance (ESG) umbrella.

Governments are happy to meet that demand. Increasingly, they recognise the need to make efforts to mitigate climate change, and given that emerging market economies make up half the world’s output, they have a significant role to play in meeting global greenhouse gas emissions goals.

In the five years to the end of 2020, annual issuance of green, social and sustainability bonds by emerging market governments grew nearly four-fold to USD16.2 billion (2). And demand is only increasing. For instance, in the first few weeks of January, Chile met 70 per cent of its expected USD6 billion debt issuance for 2021, all in green and social bonds and it plans only to issue sustainable and green bonds during the remainder of the year (3). In September 2020, Egypt became the first Middle Eastern government to issue a green bond. It raised USD750 million to finance or refinance green projects. Investors were enthusiastic – the bond was five times oversubscribed (4).

And generally, these bonds have longer maturities than conventional fixed income securities. Some 46 per cent of USD36.8 billion of outstanding emerging market ESG bonds priced in local currency terms have a maturity of more than 10 years, while for emerging markets hard currency ESG bonds, it’s 41 per cent of USD12.9 billion of outstanding bonds (5).

These bonds allow investors to track performance, while green agendas can also help governments to improve their credit ratings, which then lifts the value of their debt, thus rewarding bond holders.

Overall, green bonds generate positive feedback effects. The rising volumes of green and sustainable bond issuance highlights investors’ willingness to take more of a long-term approach to EM investing. But at the same time, governments are being made more accountable – in order to issue these bonds, governments are having to publish their sustainability frameworks in greater detail. This additional accountability helps to mitigate political risks that are a key consideration in EM investing. Investors, however, will need to analyse and monitor developments closely to ensure proceeds are used as intended.

Indeed, green bonds are the most exciting development in emerging market financing for decades and, we think, will have an equivalent impact to the Brady bonds of the 1980s (6) – albeit this is dependent on improved disclosure and monitoring and industry standardisation of green labels.

Climate change matters (especially in EM)

For all the sovereign issuance of green bonds so far, a great deal more funding will need to be raised to limit climate change. Globally it will cost between USD1 trillion and USD2 trillion a year in additional spending to limit global warming, some 1 per cent to 1.5 per cent of worldwide GDP, according to the Energy Transitions Commission (7). And a significant part of those costs will need to be borne by emerging economies, not least because they are likely to suffer most.

By the end of this century, unmitigated climate change – entailing warming of 4.3° centigrade above pre-industrial levels – would cut per capita economic output in major countries like Brazil and India by more than 60 per cent compared to a world without climate change, according to a report by Oxford University’s Smith School sponsored by Pictet (8). Globally, the shortfall would be 45 per cent.

Limiting warming to 1.6° C would sharply reduce that hit to roughly 27 per cent of potential output per capita for the world as a whole, albeit with considerable variation among countries. While those in the tropics countries would be hit hard by the effects of drought and altered rainfall patterns, those in high latitudes, like Russia, would be relative winners as ports become less ice-locked and more territory is opened up to extractive industries and agriculture. And though China would suffer smaller overall losses than average, its large coastal conurbations would be subject to depredations caused by rising sea levels.

Integrating risks

As these effects are felt, investors will grow increasingly wary of lending to vulnerable countries. And climate change is already having an impact on developing countries’ credit ratings. In 2018, rating agency Standard & Poor’s cited hurricane risk when it cut its ratings outlook on the sovereign debt issued by the Turks and Caicos (9).

Investors could expect climate-related events, like droughts, severe storms and shifts in precipitation patterns, to push up output and inflation volatility in emerging economies during the next ten to 20 years, according to Professor Cameron Hepburn, lead author of the Oxford report.

That would represent a significant reversal for emerging market sovereign borrowers. Since the turn of the century the relative rate of growth and inflation volatilities between emerging and developed markets has halved (10), which, in turn, has reduced the risk faced by investors. Rising economic volatility would feed into sovereign risk assessments, eroding their credit profiles.

Other research from the Oxford team highlights the choices countries will need to take to remain on the path towards building a greener economy (11).

At Pictet Asset Management, we already use a wealth of ESG data – from both external and internal sources –as part of how we score countries. The environmental factors we monitor include air quality, climate change exposure, deforestation and water stress. Social dimensions include education, healthcare, life expectancy and scientific research. And governance covers elements like corruption, electoral process, government stability, judicial independence and right to privacy. Together these factors are aggregated to become one of six pillars in the country risk index (CRI) ranking produced by our economics team.

Level playing fields

We believe that ESG considerations are inefficiently reflected in emerging market asset prices. This is a consequence of the market still being at an early stage in its understanding and application of ESG factors and analysis. There is also a lack of consistent and transparent ESG data for many emerging countries. We believe that using an ESG score alone is simply not enough. Having a sustainable lens through which to examine emerging market fundamentals helps us to mitigate risk and unearth investment opportunities. We use our own ESG data and analysis and engage with sovereign bond issuers to help bring about long-term change.

Emerging market economies vary hugely in their degree of development. This complicates how investors should weigh their ESG performance – after all, richer countries are more able to make the ESG-positive policy decisions that often have high front end costs for a long tail of benefits, such as shutting down coal mines in favour of solar power.

Applying the most simplistic approach to ESG – investing on the basis of countries’ ESG rankings – would squeeze fixed income investors out of the poorest developing countries, even if they are implementing the right policies to improve their ESG standing. Instead, it’s important for investors to recognise what is possible and achievable by poorer countries and allocate funding within those constraints – understanding countries’ direction of travel in terms of ESG is critical to analysing their prospects.

One solution we are implementing at Pictet AM is to weigh ESG criteria against a country’s GDP per capita. So, for example, under our new scoring system, Angola does well on this adjusted basis despite having a low overall ranking. And the reverse is true for Gulf Cooperation Council member states.

Dynamic approaches

How governments react to long-term issues like climate change or to the challenge of developing their human capital will influence their economies’ trajectories and, ultimately, play a role in their credit ratings. Those long-term decisions are only growing in importance, not least given the scale of fiscal policies implemented in the wake of the Covid-19 pandemic. Tracking these spending programmes – through, say, the likes of the Oxford Economic Stimulus Observatory (12) – then becomes an important step towards understanding the ESG pathways governments are likely to follow.

Countries with good, well-structured policies are likely to see their credit ratings improve, which attracts investors, drawing funding into their green investment programmes and ultimately driving a virtuous investment cycle.

Engaged investors

All this implies that investors have an active role to play – they can’t just passively allocate funding based on index weightings or be purely reactive to policymakers’ decisions. The most successful investors will help steer governments towards the path that boosts their credit ratings, gives them most access to the market and improves the fortunes and potential of citizens.

Like, for instance, explaining how electricity generated by wind turbines or solar can prove to be more cost-effective over the long term if financed by green bonds than ostensibly cheaper coal extracted from a mine paid for with higher yielding conventional debt. Or how fossil fuel investments could prove to be major white elephants as these sorts of polluting assets become stranded by shifts towards cleaner energy production. Or that failing to invest enough in education is a false economy that over the long run will fail to make the most of human capital and thus depress national output – something we raised with the South African government after our meetings with our on-the-ground charitable partners in the country.

To that end, The World Bank produced in 2020 a timely guide on how sovereign issuers can improve their engagement with investors on ESG issues (13). 

This sort of intensive analysis – using everything from long run macro models down to meetings with leaders of youth clubs in impoverished districts – can also help to paint a rounded picture of what’s happening in a country. For instance, it helped to ensure that we weren’t caught off guard by the shift to populism in Argentina ahead of their last elections and allowed us to trim our positions in the country.

For emerging market investors, ensuring all of these cogs mesh correctly is a difficult proposition, especially given that the parts are moving all the time, many driven by forces that will develop over many decades. But by using the full breadth of analytical tools, independent research and shoe leather fact-finding, it’s possible to gain a deeper and more profitable insight into these markets than a simple reading of credit ratings or index weightings offers.

And, at the same time, influence policy makers to champion their country’s sustainable initiatives. Taking a sustainable approach to growth and issuing related bonds, emerging economies can fundamentally change their prospects for the better. It has the potential to be revolutionary for emerging markets and exhilarating for those of us who invest in them.

By Mary-Therese Barton

Source: Green and Sustainable Bonds in Emerging Markets | Funds Society

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How APIs Can Speed Up The Mortgage Loan Application Process

The mortgage revolution: how APIs can speed up the mortgage loan application process

The digitization and opening of banking infrastructure have marked a before and an after in the financial industry. Bank branches have given way to an online contract and operational model, where physical presence is no longer as necessary. Open banking has gone a step further, granting access to third parties so that all banking operations and transactions can be completed from other digital platforms, provided that they have the corresponding authorization and certify their security.

Mortgages, the core business of many banks, have not remained untouched by this new reality. In the vast majority of cases, it is still necessary for customers to go to the branch in person to negotiate the loan’s terms. But this form of closing contracts seems to be on its way out, since banking APIs aim to speed up the process for applying for and granting such loans.

The traditional mortgage application: a slow, paper-heavy process

The mortgage market has undergone an unprecedented transformation over the past 10 years, since the advent of the subprime mortgage crisis in 2008. Since then, and in order to avoid the terrible consequences of the burst housing bubble in the United States and Spain, different rules have been passed to protect consumers.

Financial institutions have had to adapt their processes to fit this new legislative framework, with stricter criteria for granting a mortgage: it is necessary to appraise the property for sale, to send all the documentation certifying the applicant’s solvency, to have the bank approve it according to its risk management and go to a notary public, with all the resulting costs.

Overall, the mortgage loan initiation process takes ten to fifteen days on average, although there is no legally set period. The Spanish mortgage law, which entered into force in June 2019, has extended these deadlines even further and, in some cases, they may go beyond a 30-day period.

Open banking as a catalyst for the mortgage market revolution

Given the mortgage market‘s special characteristics, applying for and granting a mortgage is one of the few banking processes that still requires the physical presence of customers at a bank branch. However, open banking and APIs can be the ultimate catalyst for opening a new path for automation.

In fact, according to the latest IRESS Intermediary Mortgage Survey 2019, 96% of respondents say that open banking in general, and the standardization of API use in particular, is beneficial when you sign up for a mortgage. Broadly speaking, users believe that this technology will promote more comfortable access to banking customers and help accelerate the process of applying for and granting mortgage loans.

A significant reduction in paperwork

During the application for a mortgage, a branch manager requests a series of documents from their customer. The customer, in turn, must gather all the information, prove that this documentation is in order and send it to the bank; the bank then performs the corresponding risk control and approves/rejects the application.

With APIs, this process can be significantly simplified. The new biometric identification elements have changed the way this documentation is presented; something that, until recently, seemed unchangeable. Coupled with the fact that, thanks to this open infrastructure, banks and other fintech companies can access data on customer solvency in an agile and simple way, and always with their consent, all these factors significantly reduce the paperwork and time spent on approving and granting these loans.

Easier to meet regulatory criteria

In June 2019, the new Spanish mortgage law came into force. It represented a major regulatory change and forced entities to adapt to new legal requirements. This new rule affected the entire process, from signing to canceling the mortgage loan, offering greater protection to customers and more transparency in contracts.

This adaptation has brought a number of associated costs, and a lot of confusion for both entities (how to adjust their business and systems to the new regulation) and for customers, who often are not aware of their rights under the new law.

APIs can be used to efficiently adapt some processes and to send or retrieve additional information in accordance with new legal requirements, and to provide it clearly and with absolute transparency to customers. These applications can run different tasks to ensure that the procedures meet the expected criteria.

A complete experience for customers

Mortgages are arguably the most complicated-to-understand banking product found in the portfolio of products of any institution’s commercial network. Numerous factors and variables are involved: Euribor, the French amortization system, the APR, the associated fees and commissions, the linked products…

In practice, understanding all these terms takes time, especially when we talk about something as important as buying a home. That is why an API can help customers find relevant information about their mortgage. In fact, APIs make it possible to implement a simulator where customers can find out in advance, quickly and 100% online, information about their mortgage’s payments, fees and commissions, the amortization scheme, and what happens if the Euribor goes up or down.

All this results in greater customer satisfaction and a new experience that expands and accelerates the ability to choose, while also increasing their satisfaction with the search process.

A use case: BBVA’s Mortgages API

BBVA’s Mortgages API allows you to offer your customers the necessary financing for the purchase of their home or obtaining for liquidity without having to leave their application. Thanks to this API, the sale process can be carried out from the house of the future buyer or from your own office, without having to go to a bank branch and handle all the paperwork in person.

Also, before applying for their mortgage, users will be able to find out important economic data, such as the minimum amount needed to apply, and to simulate different scenarios and determine their payments during the whole loan repayment period.

In short, the use of an API like BBVA Mortgages allows you to integrate an entire ecosystem necessary to simulate a mortgage with all its associated expenses into a real estate platform or any other platform, find out all its details, check if you can access it and proceed to sign up for it directly from a single application. All with transparency and without friction of any kind.

Source: The mortgage revolution: how APIs can speed up the mortgage loan application process

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College Funding Changes In The Pandemic Relief Bill

There are several student financial aid provisions in the pandemic relief package that was included in the Consolidated Appropriations Act of 2021 that passed the House and Senate on Monday, December 21, 2020.

Student Loan Relief

Student loan borrowers are disappointed that the legislation did not include an extension to the student loan payment pause and interest waiver, nor did it provide any student loan forgiveness.

The payment pause and interest waiver is set to expire on January 31, 2021. President-elect Joe Biden will be able to extend it further after he takes office on January 20, 2021. Several possible extension dates have been floated, including April 1, April 30 and September 30, but Joe Biden has not yet said anything specific about the extension, just that it is needed.

Nevertheless, there are some changes in the legislation that affect student loan borrowers. In particular, the tax-free status of employer-paid student loan repayment assistance programs (LRAPs), which was set to expired on December 31, 2020, has been extended for five years through the end of 2025. Such LRAPs will be exempt from income and FICA taxes for both the employee and the employer.

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SULA, a complicated set of limits on subsidized Federal Direct Stafford loans, has been repealed. SULA mostly affected students who transferred from a 4-year college to a 2-year college.

In addition, there have been a few changes concerning the U.S. Department of Education’s Next Generation Processing and Servicing Environment (NextGen) for federal student loans.

  • New student loan borrower accounts must be allocated to loan servicers based on their past performance and servicing capacity.
  • Borrower accounts must be reallocated from servicers for “recurring non-compliance with FSA guidelines, contractual requirements, and applicable laws, including for failure to sufficiently inform borrowers of available repayment options.” Applicable laws include consumer protection laws.
  • NextGen must allow for multiple student loan servicers that contract directly with the U.S. Department of Education.
  • NextGen must incentivize more support to borrowers at risk of delinquency or default.
  • Borrowers must be allowed to choose their loan servicer when they consolidate their federal loans.
  • The U.S. Department of Education must improve transparency through expanded publication of aggregate data concerning student loan servicer performance.

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Changes in College Tuition Tax Breaks

The legislation changes the income phaseouts for the Lifetime Learning Tax Credit (LLTC) to be the same as the income phaseouts for the American Opportunity Tax Credit (AOTC), starting with tax years that begin after December 31, 2020.

The Lifetime Learning Tax Credit will start phasing out at $80,000 for single filers and $160,000 for taxpayers who file as married filing jointly. The tax credit is fully phased out at $90,000 (single) and $180,000 (married filing jointly). Married taxpayers who file separate returns are not eligible.

For comparison, the 2020 income phaseouts for the LLTC were $59,000 to $68,000 (single) and $118,000 to $136,000 (married filing jointly).

The new income phaseouts will not be adjusted for inflation.

In addition, the legislation repeals the Tuition and Fees Deduction, effective with tax years that begin in 2021. This is a permanent repeal, so the Tuition and Fees Deduction will not be resurrected by the next tax extenders bill.

New Funding for Higher Education Emergency Relief Fund

The $81.88 billion for the Education Stabilization Fund includes

  • $54.3 billion for the Elementary and Secondary School Emergency Relief Fund
  • $22.7 billion for the Higher Education Emergency Relief Fund (HEERF)
  • $4.05 billion for the Governor’s Emergency Education Relief Fund, of which $2.75 billion has been earmarked for Emergency Assistance to Non-Public Schools

The Higher Education Emergency Relief Fund previously received $16 billion as part of the CARES Act.

The allocation formula for the HEERF funding is more complicated than the one in the CARES Act, but the allowable uses are similar. Public and private non-profit colleges are required to use at least half of the money for financial aid grants to students. Private for-profit colleges are required to use all of the money for financial aid grants to students. Colleges must provide at least the same amount of emergency financial aid grants to students as they did under the CARES Act provisions, even if their total allocation is lower.

The emergency financial aid grants to students can be used for any element of the student’s cost of attendance or for emergency costs related to the pandemic, such as “tuition, food, housing, health care (including mental health care), or child care.”

The grants must be prioritized to students with exception financial need, such as Pell Grant recipients.

The emergency financial aid grants to students are tax-free.

Most College Students Remain Ineligible for Stimulus Checks

Most college students will remain ineligible for the recovery rebate checks, also known as the stimulus checks.

The legislation includes the same restriction that limits the $600 per qualifying child to children age 16 and younger. Only 0.1% of undergraduate students are age 16 or younger.

College students who are under age 24 are also ineligible, because they can be claimed as a dependent on someone else’s federal income tax return. The remain ineligible even if they are not claimed on someone else’s tax return.

A college student might qualify if they are married and file a joint return with their spouse or if they provide more than half of their own support. About 15% of undergraduate students are married. College students who are 24 years old or older may also qualify. More than 40% of undergraduate students are 24 years old or older.

College students can still claim the $1,200 stimulus checks from the CARES Act in addition to the new $600 stimulus checks, if they are eligible.

Increase in the Maximum Pell Grant

The maximum Federal Pell Grant has been increased to $6,495 for the 2021-2022 academic year.

Eligibility criteria will be pegged to a multiple of the poverty line starting with the 2023-2024 academic year. Students will be eligible for the maximum Pell Grant if they and their parents/spouse, as applicable, are not required to file a federal income tax return or if their adjusted gross income (AGI) is less than 175% to 225% of the poverty line. The higher threshold is reserved for households involving a single parent.

FAFSA Simplification

The legislation simplifies the Free Application for Federal Student Aid (FAFSA) starting with the 2023-2024 academic year. The new FAFSA reduces the number of questions on the form by two-thirds, from 108 questions to about three dozen questions. Follow me on Twitter. Check out my website or some of my other work here

Mark Kantrowitz

Mark Kantrowitz

I am Publisher of PrivateStudentLoans.guru, a free web site about borrowing to pay for college. I am an expert on student financial aid, the FAFSA, scholarships, 529 plans, education tax benefits and student loans. I have been quoted in more than 10,000 newspaper and magazine articles about college admissions and financial aid. I am the author of five bestselling books about paying for college and have seven patents. I serve on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and am a member of the board of trustees of the Center for Excellence in Education. I have previously served as publisher of Savingforcollege.com, Cappex, Edvisors, Fastweb and FinAid. I have two Bachelor’s degrees in mathematics and philosophy from the Massachusetts Institute of Technology (MIT) and a Master’s degree in computer science from Carnegie Mellon University (CMU)

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University of California Television (UCTV)

How to pay for college is a pressing question for all applicants from the class of 2020. COVID-19 has caused financial uncertainty and many are having to rethink their plans. Jodi Okun, an expert in financial aid, joins Steven Mercer to talk about how the pandemic is impacting financial aid awards, what to do if your family’s financial situation has changed, and how to plan for the future in uncertain times. [Show ID: 35963] More from: STEAM Channel (https://www.uctv.tv/steam) UCTV is the broadcast and online media platform of the University of California, featuring programming from its ten campuses, three national labs and affiliated research institutions. UCTV explores a broad spectrum of subjects for a general audience, including science, health and medicine, public affairs, humanities, arts and music, business, education, and agriculture. Launched in January 2000, UCTV embraces the core missions of the University of California — teaching, research, and public service – by providing quality, in-depth television far beyond the campus borders to inquisitive viewers around the world. (https://www.uctv.tv)

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