One of the advantages LIPP offers over many loan repayment assistance programs (LRAPs) is that it repays your loans on the standard 10-year term. This can make a big difference in your debt, because the repayment term of your loans determines both the monthly payment and the speed with which you will pay down the outstanding balance on your loans.
The LRAPs at some law schools require you to repay your loans on an extended term, such as 15 years. This means that your monthly payment (and hence the amount of your LRAP benefit) will be lower, and you will make slower progress paying down the balance of your loans. In the examples below, Program A calculates its benefits on a loan repayment term of 15 years.
Many schools have LRAPs that require participation in the Federal Public Service Loan Forgiveness Program. This type of program is much less flexible than LIPP. In order to have an outstanding loan balance to qualify for forgiveness under the Federal Program after 10 years, you must repay your loans on the federal Income Based Repayment (IBR) plan, which establishes a much lower monthly payment and a much longer repayment period. Consequently, your monthly payment can be insufficient to cover the accruing interest on your loans, meaning that you will make no progress toward paying down your outstanding balance. It is also an all-or-nothing benefit: if you spend less than 10 years in public service, you will receive no forgiveness benefit and your outstanding loan debt may increase due to a phenomenon called “negative amortization” (see below), even though the school’s LRAP may be covering the full monthly payment due under the IBR plan. In the examples below, Program B calculates its benefits based on the IBR plan.
Each example below assumes a $50,000 salary after graduation, and shows how the monthly LRAP benefit covered by the program varies depending on how the program calculates the loan repayment term.
|INCOME||DEBT AT GRADUATION||MONTHLY PAYMENT AT 10-YEAR TERM (A)||MONTHLY PAYMENT COVERED (B)||MONTHLY LRAP BENEFIT RECEIVED|
(a) based on an overall interest rate of 5% on loans for LIPP and Program A which allow for private loan borrowing; Program B is based on federal loan interest rates that vary per each loan borrowed
(b) actual monthly payment covered on a 10-year term for LIPP, a 15-year term for Program A, and under the IBR payment plan for Program B
Note that the LIPP participant receives a substantially larger benefit because Programs A and B are calculating lower monthly payments for their participants. Even if those programs offer to cover “all” such recalculated payments, the monthly benefit received is lower. As the table above shows, in the case of Program A the benefit covers only 74% ($1,538 divided by $2,070) of the payment due on a 10-year term. The participant in Program A must decide either to make up the $532 difference between actual and covered payments out of pocket, or repay the loans more slowly on an extended term. This is true to an even greater extent for the participant in Program B; because the covered loan payment does not even cover the accruing interest on loans, the outstanding debt actually increases over time due to “negative amortization,” meaning that the unpaid interest is added to the outstanding loan balance. The participant in Program B will only realize a benefit by completing a full 10 years in eligible public service positions and qualifying for forgiveness of the outstanding amount.
Here is how this difference in covered payments plays out over time, in terms of how much progress participants make in repaying loans under the various programs:
|REMAINING DEBT AFTER 1 YEAR IN PROGRAM||REMAINING DEBT AFTER 3 YEARS IN PROGRAM||REMAINING DEBT AFTER 5 YEARS IN PROGRAM||OUT OF POCKET PAYMENT OVER 5 YEARS||NET BENEFIT OVER 5 YEARS|
After 5 years, a LIPP participant will have $36,178 less outstanding debt than a participant starting with a comparable debt level and income in Program A. Due to the “negative amortization effect,” a participant in Program B will have a higher outstanding loan debt after 5 years, and must remain in a public service job for 5 more years in order to realize any forgiveness benefit. The real benefit received (outstanding debt repaid minus out-of-pocket payment) is substantially higher for the LIPP participant.
This demonstrates why, for those at low incomes who want job choice flexibility while making real progress repaying loans, LIPP offers the best form of protection.