Friday, October 08, 2010

Untangling the Tangled Web of LRAP and IBR

I made a comment in a thread a while back that included some information about federal loan forgiveness programs and LRAP. It got a few of us thinking that it might be worth an entire post, since this kind of analysis will likely factor into the career decisions many of you are making right now. The thrust of my comment below was basically that, given the array of loan repayment options at your disposal, your debt need not determine your career path.

Unfortunately, understanding that array of options is frustratingly difficult. I was fortunate as a 3L to have a friend on the LRAP committe, so I'll try to relate what I learned from her. Of course, this information is subject to the flaws in my brain and may be a little outdated, so the best thing to do would be to schedule an appointment with Sigrid Allen at Berkeley financial aid as soon as possible. She really knows her stuff when it comes to loan repayment, and she can give you a very clear analysis of your options.

With those caveats, here is what I know about the various programs. I have a tendency to overexplain things, but I think this stuff is complicated enough to warrant it:

INCOME BASED REPAYMENT ("IBR"): This is a program run by the federal government in which all federal student loan debt can be repaid proportionately to your income. The maximum payment is 15% of your income above the poverty line no matter what career you end up in. Unfortunately, if you make below a certain amount, your interest may eclipse your payments, meaning your debt will actually increase, even as you pay it off. (I believe the fancy economic term for this is "negative amortization." Gross.) That's why the federal government included provisions to completely wipe out the debt after a certain time.

WIPING OUT DEBT UNDER IBR: If you continue to pay off your debt at 15% of your income, after a certain amount of time, your remaining debt will be wiped out, even if it has negatively amortized (yuck. stop it.). That amount of time is 25 years for jobs in the private sector and 10 YEARS for jobs in the public sector. Determining whether a job is public or private is more complicated than you might think. These are the kinds of things you can discuss with Sigrid Allen.

I should emphasize, however, that IBR applies to ANY JOB in ANY CAREER. For example, if you really hated law school and decided to go be a teacher, you could theoretically get away with putting 15% of a teacher's salary toward your loans for ten years and then have the debt WIPED OUT. Pretty cool, right? But the legal nature of your job does play into LRAP.

LOAN REPAYMENT ASSISTANCE PROGRAM (LRAP): You all know what this is. It's probably one of the reasons you came to Berkeley. But you may not know how it all works. And given how often it changes, this is an area where my information may be outdated.

The first thing to note is that LRAP covers public interest jobs that are specifically law-related. Determining whether your job counts can be tricky and often involves lobbying, so ask around if you're not sure. Clerkships can count as public interest IF you go to a public interest job after clerking (under IBR, they count as public interest regardless). LRAP also can kick in for "low bono" jobs, where you may technically work in the private sector but the majority of your clients are low-income and traditionally underserved.

Under the current LRAP scheme, there are two possible paths:

1) TRADITIONAL LRAP: This is the old program where Berkeley pays some portion of your loans up to a certain cap as long as you work in a public interest or government job that somehow makes use of your law degree. I believe the cap was $100,000 when I was in school, but it may have gone up since then. What that means is that Berkeley will figure out your total loan payment and then cover the portion equal to satisfying $100,000 of the debt. For example (watch out, there are numbers and stuff), if your total debt was $200,000, your monthly payment was $1,000, and the cap was set at $100,000, Berkeley would pay $500 per month or one half of your total payment. Because $100,000 is half of $200,000. Get it?

Note, however, that LRAP is also income-based, so if your income is above $60,000 (or whatever the new level is), Berkeley will only pay some pro-rated portion of your loan payment UP TO THE CAP of $100,000. (I.e. instead of getting $500 per month, you would get like $350 per month and your income above $60K would be expected to cover the difference.)

The downside of traditional LRAP is the cap, which depending on how much debt you owe, could mean you are still paying a prohibitive amount of your income to loans. The upside is that you don't have to deal with negative amortization. Your monthly payment will make a steady dent in your loans, even if you do have to cover more than half of it yourself. Practically, this means you are more free to switch to the private sector, since your loans will not have been increasing like they might under the ten-year IBR plan. Make sense? So if you are the kind of person who will likely switch away from public interest somewhere between 5 and 10 years from graduating, you would likely be better off making payments through traditional LRAP.

Oh, the other plus here is that traditional LRAP can be applied to any kind of student loan, while IBR only works with loans from the federal government (although you can usually convert private loans into federal loans to take advantage of IBR). BUT, traditional LRAP does NOT cover undergraduate debt, while IBR (and the combined plan below) do. Confused yet? Read it again.

2) LRAP + IBR: Under this plan, LRAP works together with IBR. ("With our powers combined, we are Captain Payment! Captain Payment, he's our hero. Gonna reduce our debt down to zero! Earth, Wind, Water, Fire, Heart!" I apologize for everything that just happened.)

So basically, if you find a job that is both law-related and in the public interest, you can use IBR to knock your payments down to 15% of your income above the poverty line, and then LRAP will step in to pay that for you. Because 15% of your income will likely be so low, the debt cap will probably not be triggered and you will simply pay nothing for the full ten years, at which point IBR will wipe out your remaining debt, and you will have spent a full decade getting fat on government cheese.

The downside of this plan is that if you don't spend the full decade in public service, you may get hit hard with the negative amortization when you come out. In other words, if you leave the plan after less than ten years, you might come out with more debt than you started with. Avoiding this fate means either committing to the plan for a full decade or leaving after only a couple of years, because switching to the private sector makes less financial sense each year you stay on IBR while your debt rises. On the other hand, if you were leaving public service to pursue a cush private sector job, you would probably be able to handle the debt even if it had risen.

I should also note that the 10 years do NOT need to be consecutive, so that might help.

THE WEIRD WILD WORLD OF PROLONGUED UNEMPLOYMENT: And now we come to my personal track: that of the penniless Sitar player. First, I must admit that spending most of your time staring this job market in the face is pretty bleak. As you look into the abyss, the abyss looks into you. Etc. Etc. But all hope is not lost. If you can't find a job for a while, there are many options for delaying repayment on your loans, especially if they are federal loans. Again, this is a matter best discussed with Financial Aid, but suffice it to say that you can forbear or defer your loans for a long time if you are unemployed--potentially years. You can also find some crappy job to pay the bills and use IBR to reduce your payments to a manageable level while you look for something better. If all else fails, there's always People's Park.

I think that covers the basic layout. I hope you found it helpful. Feel free to supplement or correct as needed in the comments.

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31 Comments:

Anonymous Anonymous said...

As someone who saved the money to come to school beforehand, I have no idea how people justify a 225k debtload for Boalt. It's sad to see half my classmates facing 25 years of financial enslavement(IBR).

10/08/2010 2:30 PM  
Blogger Patrick said...

I cannot for the life of me figure out why 2:10 thinks saving money before law school has anything to do with the debtload for Boalt.

Did you save 225k before coming to law school? Did it take you 25 years?

Nothing in the comment follows unless the answer to both of those questions is "yes."

10/08/2010 2:33 PM  
Blogger Patrick said...

(2:30, please don't take that as snarky -- it is just that I am confused. If you did not save for 25 years, then it doesn't take 25 years to pay for Boalt. And, if you did save for 25 years, then you were just as enslaved to the cost of law school as your classmates. No?)

10/08/2010 2:35 PM  
Anonymous Anonymous said...

The difference is I earned money without being encumbered by a huge debtload, and had the chance to invest. It's a lot quicker to save that much money when you are not shelling out a huge interest payment each year just to keep the amount from growing.

10/08/2010 3:00 PM  
Anonymous penniless for the public interest said...

Thank you so much for the post! I know the info's out there (CCRA resources, LRAP page, etc) but I appreciate the plain English. My number one concern is getting on the LRAP train and then have my public interest agency's funding be blasted to smithereens the next year and losing my job and then no longer qualifying for LRAP.

Is it possible to do LRAP + IBR and then lose your job and have to work as a barista or substitute teacher and be on the IBR plan?

I mean, let's hope the recession's getting better, but when half your coworkers are working for free as they search for paying legal jobs...

... you just gotta wish folks would quit coming to law school just because they can't get hired with their BA.

10/08/2010 4:27 PM  
Anonymous Anonymous said...

Hey 2:30/3:00, how did you pay for college? I couldn't save for law school because I had about $100k in college debt. Do you think it was a bad idea for me to borrow to go to law school?

10/08/2010 4:30 PM  
Blogger McTwo said...

Spending time earning money before law school also incurs an opportunity cost. Unless you were making as much as you plan to with a JD, you were earning less per year while saving up money. If you were earning as much (or more) I do not really understand why you would go to law school at all.

At least in theory, people would be judging the cost of delaying starting a legal career against the interest incurred on their loans.

10/08/2010 4:42 PM  
Anonymous Anonymous said...

I wouldn't hedge your criticism by saying "in theory," McTwo. Any rational comparison should include the opportunity cost of working first instead of going to law school first. And if anonymous judging saver had made above 100k/year prior to enrolling, then the opportunity cost of law school is significantly higher for him/her than, say, someone who went straight to law school instead of accepting a salary of 40k.

The point from this is that the reasonableness of the decision cannot be judged in the abstract.

10/09/2010 11:52 AM  
Blogger Dan said...

Nor should it be judged anonymously in an internet forum. Most of us spent a lot of money coming to law school. That is an expensive decision whether you do it with loans, your savings account, or even your parents' savings account. We did this when the employment rate for Boalt grads was 98% and the average salary was obscene. I'm not saying that makes it a great decision, but we certainly could not have known this would happen.

In any case, here we are, so what good does it do to kick us while we're down? Does broadcasting your smug sense of superiority do that much for your self-esteem? Oh right, sorry, you were speaking out of "concern" for your fellow students. MY bad.

10/10/2010 12:12 AM  
Blogger Dan said...

[directed at 2:30, in case there was any confusion]

10/10/2010 12:13 AM  
Anonymous Anonymous said...

Thanks for a great post Dan, very informative. Any alumni out there who have more anecdotal LRAP lessons?

And 2:30, what do your comments add to the conversation? Save your self-righteous pity for someone who gives a shit.

10/10/2010 4:02 PM  
Blogger Toney said...

It does suck that while Boalt's tuition has skyrocketed, salaries have stayed the same or decreased, employment rates have gone down, and the availability of subsidized loans is stagnant.

Anyway, it'll be sad if it becomes financially infeasible to borrow, and only rich people's kids get to go to law school.

10/10/2010 8:40 PM  
Anonymous Anonymous said...

Our listserv was just spammed with declarations of a race war or something. But it turns out someone just post a "celebrate Israel" sticker on a poster. Can we get a post about liberal hysteria?

10/11/2010 11:44 AM  
Anonymous Anonymous said...

i'm an alum and off the listserv, but let me guess: liz jackson?

10/11/2010 1:11 PM  
Anonymous Anonymous said...

Yes.

From an outside perspective, this looks more like a vanilla political argument than a race-based attack.

10/11/2010 1:26 PM  
Blogger Dan said...

Haha, I think we have a tag for posts about "rabid liberals." I didn't get the email, so I don't know anything about this.

10/11/2010 1:56 PM  
Anonymous Anonymous said...

To the poster who brought up this "race war" above:

If you did indeed get the email, it clearly states that there was a variety of stickers placed on the Students for Justice in Palestine group board, (with the "celebrating israel" one put over a sign a child is holding), as well as references to bin laden and ahmedinejad and fighting islamic terrorism. It merely condemns this inflammatory vandalism and gives a shout out to a previously organized, relevant event on islamophobia.

Based on your comments, you are either a terribly poor reader (whatever), or

(much worse) you are intentionally feigning a disinterested attitude and dropping "a race war or something," comment, (while obviously failing to mention other stickers or the context of the poster on which they defame) to rally people who haven't had the chance to read the email and misinform readers of this blog.

If you have feelings on the matter by all means shout them from the mountain tops, but give the rest of us a little respect and don't intentionally mislead to anonymously promote your political feelings (it nearly went without saying, but the hyperbole purpose of using "race war"? you punk)

10/11/2010 2:42 PM  
Anonymous Anonymous said...

2:42: In general, I agree with you. However, the announcement itself was inflammatory and misleading. For example, it is misleading to refer to anti-Palestinian sentiment as "racist" since Palenstinians do not compose a "race" any more than Germans do.

10/11/2010 2:56 PM  
Anonymous Anonymous said...

the email did not refer to the incident against Palestinians as racist. in fact, it seemed to go out of its way to avoid doing so ("hate vandalism," "anti-palestinian" etc). The term 'racism' was used only once, in a byline, quote, "against racism everywhere."

If you are going to use one (just one?) example to back up your claim that the email itself was inflammatory or misleading, you might want to make sure the example holds under even the lightest of pressures

10/11/2010 3:25 PM  
Blogger Toney said...

11:44 -

I agree this sounds like the usual histeria, but could you please post the entire email? It'd be interesting to read.

2:42 -

Settle down. What he said was: "Our listserv was just spammed with declarations of a race war or something. But it turns out someone just post a 'celebrate Israel' sticker on a poster.", which reeks of sarcastic exaggeration through and through, and not a "rally" like you say.

10/11/2010 3:52 PM  
Blogger James said...

Anti-Islamic graffiti on pro-Palestinian, pro-peace signage is certainly bigoted.

I'm glad that this sort of messaging sounds like "the usual histeria" (sic).

Violence against Muslims and people associated with Muslims is a serious issue in the United States and in California. This was directed vandalism against those who support Palestinians.

It is bizarre that people feel the need to create bumper stickers that read, "Fight Islamic Terrorism." As if this wasn't something that our government and governments around the world spend billions of dollars on every year.

10/11/2010 4:23 PM  
Anonymous Anonymous said...

Did anyone else not realize we need to write a 750 word personal statement for LRAP? That's surprisingly long.....ugh.

10/11/2010 6:07 PM  
Anonymous Anonymous said...

Anyone who thinks that an anonymously posted sticker presents a direct threat to anything needs to switch to decaf.

10/11/2010 6:07 PM  
Anonymous Anonymous said...

right on 6:07! anyone complaining about anonymous vandalism or its implications, or even referencing it as a problem, even when its related to a matter of group-based discrimination, or when it occurs on our campus, or anything else! needs to seriously switch to decaf!

right on! (and lol at your decaf comment!)

10/11/2010 11:11 PM  
Blogger McTwo said...

Anonymous 2:42 said:
"If you have feelings on the matter by all means shout them from the mountain tops, but give the rest of us a little respect and don't . . . anonymously promote your political feelings. . . ."

Isn't there some sort of cliche about a pot calling a kettle black? Not that I disagree with the poster's overall point, but how about anonymous posters don't condemn other people for being anonymous posters?

10/11/2010 11:36 PM  
Blogger James said...

It's not the same. Anonymous people defacing pro-peace signs with anti-Islamic stickers is different than someone anonymously saying that anti-Islamic bigotry is bad.

The difference should be clear.

10/12/2010 2:01 PM  
Blogger McTwo said...

You aren't drawing the proper comparison James.

The comparison is an anon saying putting up the stickers is not bigotry (or, more precisely, calling it bigotry is "liberal hysteria"), versus an anon saying putting up the stickers is bigotry.

10/12/2010 2:14 PM  
Anonymous Anonymous said...

Sorry Mctwo, you are the one who has made the improper comparison.

I will try to break it down: Someone defaced a pro-palestinian, pro-peace board with pro-israel and islamic terror stickers. A boalt student forwarded an email which referenced and condemned this defacement. Someone here anonymously referred to that email as calling for a "race war" and suggested it was liberal hysteria. Another commenter anonymously criticized that posting as a misleading political attack.

No one has said that putting up the stickers wasn't bigotry (unless you want to give an overly generous reading to the "race war" poster). I also think a careful reading shows that no one has attacked anonymity, only used it as a descriptor. Which is good, because "mctwo" seems fairly anonymous

10/12/2010 4:34 PM  
Blogger McTwo said...

I dare say I am not very anonymous at all, judging by the number of McAnythings at Boalt.

But, I took anon's "to anonymously promote your political feelings" comment to refer to characterizing the email as suggesting race war, as compared to referring to the stickers on the poster. If that is incorrect, I stand corrected.

10/12/2010 5:20 PM  
Anonymous Nathan said...

This is a good post that goes over a lot of the options. I think the negative amortization and LRAP's inability to help students deal with that is understated.

LRAP and other loan repayment schemes make the most sense when students are provided correct incentives. For instance, since IBR is calculated by Adjusted Gross Income, a student in the LRAP/IBR combo has an incentive to maximize AGI up to $65,000 and forgo other important investments like retirement savings.

The thing that bothers me is that the traditional track is the best deal for anyone, but since fees shot up huge percentages, lots of people who planned to be near the cap will not be. Ironically, those with less than 100,000 in debt are eligible for about $1,200/month in debt service assistance while those in IBR max out at about $650/month or so. Those with the most need get the least potential assistance.

10/18/2010 3:59 PM  
Anonymous Anonymous said...

Great post Dan. One addendum: Last I checked, the old LRAP, i.e. Dan's Option #1 (100k cap, 10 year repayment plan, no risk of negative amortization) is only an option for class of 2011 and older. Current 2Ls and 1Ls, its IBR or nothing.

11/09/2010 9:30 AM  

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