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Publication Date: July 1, 2008
FRPart: IV
Page Numbers: 37693-37725
Summary: NPRM; Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program
Posted on 07-01-2008
This Federal Register is in PDF Format
[Federal Register: July 1, 2008 (Volume 73, Number 127)]
[Proposed Rules]
[Page 37693-37725]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jy08-15]
[[Page 37693]]
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Part IV
Department of Education
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34 CFR Parts 674, 682, and 685
Federal Perkins Loan Program, Federal Family Education Loan Program,
and William D. Ford Federal Direct Loan Program; Proposed Rule
[[Page 37694]]
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DEPARTMENT OF EDUCATION
34 CFR Parts 674, 682, and 685
[Docket ID ED-2008-OPE-0009]
RIN 1840-AC94
Federal Perkins Loan Program, Federal Family Education Loan
Program, and William D. Ford Federal Direct Loan Program
AGENCY: Office of Postsecondary Education, Department of Education.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan
(Perkins Loan) Program, Federal Family Education Loan (FFEL) Program,
and William D. Ford Federal Direct Loan (Direct Loan) Program
regulations. These proposed regulations are needed to implement
provisions of the Higher Education Act of 1965 (HEA), as amended by the
College Cost Reduction and Access Act of 2007 (CCRAA).
DATES: We must receive your comments on or before August 15, 2008.
ADDRESSES: Submit your comments through the Federal eRulemaking Portal
or via postal mail, commercial delivery, or hand delivery. We will not
accept comments by fax or by e-mail. Please submit your comments only
one time, in order to ensure that we do not receive duplicate copies.
In addition, please include the Docket ID at the top of your comments.
Federal eRulemaking Portal: Go to: http://
www.regulations.gov to submit your comments electronically. Information
on using Regulations.gov, including instructions for accessing agency
documents, submitting comments, and viewing the docket, is available on
the site under ``How To Use This Site.''
Postal Mail, Commercial Delivery, or Hand Delivery. If you
mail or deliver your comments about these proposed regulations, address
them to Nikki Harris, U.S. Department of Education, 1990 K Street, NW.,
room 8033, Washington, DC 20006-8502.
Privacy Note: The Department's policy for comments received from
members of the public (including those comments submitted by mail,
commercial delivery, or hand delivery) is to make these submissions
available for public viewing on the Federal eRulemaking Portal at
http://www.regulations.gov. All submissions will be posted to the
Federal eRulemaking Portal without change, including personal
identifiers and contact information.
FOR FURTHER INFORMATION CONTACT: Nikki Harris, U.S. Department of
Education, 1990 K Street, NW., room 8033, Washington, DC 20006-8502.
Telephone: (202) 219-7050 or via the Internet at: Nikki.Harris@ed.gov.
If you use a telecommunications device for the deaf, call the
Federal Relay Service (FRS), toll free, at 1-800-877-8339.
Individuals with disabilities can obtain this document in an
alternative format (e.g., Braille, large print, audiotape, or computer
diskette) on request to the contact person listed under FOR FURTHER
INFORMATION CONTACT.
SUPPLEMENTARY INFORMATION:
Invitation To Comment
As outlined in the section of this notice entitled ``Negotiated
Rulemaking,'' significant public participation, through three public
hearings and four negotiated rulemaking sessions, has occurred in
developing this notice of proposed rulemaking (NPRM). Therefore, in
accordance with the requirements of the Administrative Procedure Act,
the Department invites you to submit comments regarding these proposed
regulations on or before August 15, 2008. To ensure that your comments
have maximum effect in developing the final regulations, we urge you to
identify clearly the specific section or sections of the proposed
regulations that each of your comments addresses and to arrange your
comments in the same order as the proposed regulations.
We invite you to assist us in complying with the specific
requirements of Executive Order 12866, including its overall
requirements to assess both the costs and the benefits of the intended
regulation and feasible alternatives, and to make a reasoned
determination that the benefits of this intended regulation justify its
costs. Please let us know of any further opportunities we should take
to reduce potential costs or increase potential benefits while
preserving the effective and efficient administration of the programs.
During and after the comment period, you may inspect all public
comments about these proposed regulations by accessing Regulations.gov.
You may also inspect the comments in person in room 8033, 1990 K
Street, NW., Washington, DC between the hours of 8:30 a.m. and 4 p.m.
Eastern Time, Monday through Friday of each week except Federal
holidays.
Assistance to Individuals With Disabilities in Reviewing the Rulemaking
Record
On request, we will supply an appropriate aid, such as a reader or
print magnifier, to an individual with a disability who needs
assistance to review the comments or other documents in the public
rulemaking record for these proposed regulations. If you want to
schedule an appointment for this type of aid, please contact the person
listed under FOR FURTHER INFORMATION CONTACT.
Negotiated Rulemaking
Section 492 of the HEA requires the Secretary, before publishing
any proposed regulations for programs authorized by title IV of the
HEA, to obtain public involvement in the development of the proposed
regulations. After obtaining advice and recommendations from the
public, including individuals and representatives of groups involved in
the Federal student financial assistance programs, the Secretary must
subject the proposed regulations to a negotiated rulemaking process.
All proposed regulations that the Department publishes on which the
negotiators reached consensus must conform to final agreements
resulting from that process unless the Secretary reopens the process or
provides a written explanation to the participants stating why the
Secretary has decided to depart from the agreements. Further
information on the negotiated rulemaking process can be found at http:/
/www.ed.gov/policy/highered/reg/hearulemaking/2008/index2008.html.
On October 22, 2007,the Department published a notice in the
Federal Register (72 FR 59494) announcing our intent to establish up to
two negotiated rulemaking committees to prepare proposed regulations.
One committee would focus on issues related to the new TEACH Grant
Program (TEACH Grant Committee). A second committee would address
Federal student loans (Loans Committee). The notice requested
nominations of individuals for membership on the committees who could
represent the interests of key stakeholder constituencies on each
committee. The Loans Committee met to develop proposed regulations
during the months of January 2008, February 2008, March 2008, and April
2008. This NPRM resulted from the work of the Loans Committee and
proposes regulations relating to the administration of the Federal
student loan programs.
The Department developed a list of proposed regulatory provisions
from advice and recommendations submitted by individuals and
organizations as testimony to the Department in a series of three
public hearings held on:
[[Page 37695]]
November 2, 2007, at the Sheraton New Orleans, New
Orleans, Louisiana.
November 16, 2007, at the U.S. Department of Education in
Washington, DC.
November 29, 2007, at the Manchester Grand Hyatt San
Diego, San Diego, California.
In addition, the Department accepted written comments on possible
regulatory provisions submitted directly to the Department by
interested parties and organizations. A summary of all comments
received orally and in writing is posted as background material in the
docket. Transcripts of the regional meetings can be accessed at http://
www.ed.gov/policy/highered/reg/hearulemaking/2008/index2008.html.
Staff within the Department also identified issues for discussion
and negotiation.
At its first meeting, the Loans Committee reached agreement on its
protocols and proposed agenda. These protocols provided that the non-
Federal negotiators would participate in the negotiated rulemaking
process based on each Committee member's experience and expertise and
would not represent specific constituencies.
The Loans Committee included the following members:
Luke Swarthout, U.S. Public Interest Research Group, and
Rebecca Thompson (alternate), United States Student Association.
Carrie Steere-Salazar, Association of American Medical
Colleges, and Radhika Miller (alternate), National Lawyers Guild
Partnership for Civil Justice.
Deanne Loonin, National Consumer Law Center, and Lauren
Saunders (alternate), National Consumer Law Center.
Allison Jones, California State University, and Anna
Griswold (alternate), Pennsylvania State University.
Eileen O'Leary, National Direct Student Loan Coalition,
and Kathleen Koch (alternate), Seattle University School of Law.
George Chin, University Director of Student Financial
Assistance, The City University of New York, and John Curtice
(alternate), The State University of New York System Administration.
Mark Pelesh, Corinthian Colleges, and Tammy Halligan,
(alternate), Career College Association.
Tom Levandowski, Wachovia Corporation, and Walter Balmas
(alternate), MyRichUncle Student Loans.
Scott Giles, Vermont Student Assistance Corporation, and
Phil Van Horn (alternate), Wyoming Student Loan Corporation.
Gene Hutchins, New Jersey Higher Education Student
Assistance Authority, and Dick George (alternate), Great Lakes Higher
Education Guaranty Corporation.
Wanda Hall, Edfinancial Services, and Robert Sommer
(alternate), Sallie Mae.
Martin Damian, Windham Professionals, and Carl Perry
(alternate), Progressive Financial Services, Inc.
Anne Gross, National Association of College and University
Business Officers, and Larry Zaglaniczny (alternate), National
Association of Student Financial Aid Administrators.
Dan Madzelan, U.S. Department of Education.
These protocols also provided that, unless agreed to otherwise,
consensus on all of the amendments in the proposed regulations had to
be achieved for consensus to be reached on the entire NPRM. Consensus
means that there must be no dissent by any member.
During its meetings, the Loans Committee reviewed and discussed
drafts of proposed regulations. At the final meeting in April 2008, the
Loans Committee reached consensus on all of the proposed regulations in
this document. More information on the work of the Loans Committee can
be found at http://www.ed.gov/policy/highered/reg/hearulemaking/2008/
loans.html.
Following the Loans Committee's final meeting the proposed
regulations were reviewed by the Department of Defense (DOD) and the
Department of Health and Human Services (HHS). Based on the comments we
received from DOD and HHS, we made technical changes to the proposed
regulations.
HHS pointed out that the correct technical term for the specific
set of dollar figures published annually by HHS for use in determining
eligibility for certain programs is ``the poverty guidelines'' rather
than ``the poverty line guidelines.'' The poverty guidelines are used
to determine whether a title IV borrower is eligible for an economic
hardship deferment or has a partial financial hardship under the IBR
plan. HHS recommended that we replace all references to ``the poverty
line guidelines'' in the proposed regulations with the term ``poverty
guidelines.'' We agreed and made this change.
DOD questioned one provision in the proposed definition of ``active
duty'' for purposes of determining a borrower's eligibility for the
post-active duty student deferment in the Federal Perkins, FFEL, and
Direct Loan programs. DOD indicated that the reference to ``section
101(19) of title 32'' in proposed 34 CFR 674.34(i)(2)(iv),
682.210(u)(2)(iv), and 685.204(f)(2)(iv) was incorrect because State
active duty, which is not Federally funded, would not be covered under
section 101(19) of title 32, but under State law and regulations. To
correct the reference and to accomplish the goal of the proposed
provision, which was to exclude from deferment eligibility those
individuals who are employed in permanent full-time positions with the
National Guard unless they are subject to a further call-up to active
State duty, DOD recommended language that we have substantively
incorporated in the relevant sections of the proposed regulations.
These proposed regulations would implement a new loan repayment
plan and a new loan forgiveness program created by the CCRAA. In
addition, these proposed regulations would implement several other
provisions enacted by the CCRAA that relate to the title IV HEA loan
programs.
The CCRAA added a new income-based repayment (IBR) plan to the FFEL
and Direct Loan Programs. Under the IBR plan, effective July 1, 2009, a
borrower who has a partial financial hardship is eligible to make
reduced monthly payments on his or her loan for a period of up to 25
years, after which the Secretary cancels any remaining principal and
accrued interest on the loan, provided the borrower meets certain
requirements.
The CCRAA also added the new Public Service Loan Forgiveness
program to the Direct Loan Program. Under this loan forgiveness
program, the Secretary forgives any remaining principal and accrued
interest on a borrower's eligible Direct Loan if, after October 1,
2007, the borrower makes 120 monthly payments on the loan while the
borrower is employed full-time in a public service job. The CCRAA
provides that a FFEL borrower may obtain a Direct Consolidation Loan if
the borrower wants to participate in the Public Service Loan
Forgiveness Program, but this provision does not take effect until July
1, 2008.
This NPRM also addresses changes made by the CCRAA to military and
economic hardship deferments, special allowance payments, and not-for-
profit holders under the FFEL Program.
Significant Proposed Regulations
We group major issues according to subject, with appropriate
sections of the proposed regulations referenced in parentheses. We
discuss substantive issues under the sections of the
[[Page 37696]]
proposed regulations to which they pertain. Generally, we do not
address proposed regulatory provisions that are technical or otherwise
minor in effect.
Economic Hardship Deferment (Sec. Sec. 674.34 and 682.210)
Statute: Section 435(o) of the HEA defines economic hardship as
when a borrower is working full-time and is earning an amount that does
not exceed either an amount equal to 150 percent of the poverty
guideline applicable to the borrower's family size or the Federal
minimum wage rate. The poverty guidelines are issued annually by the
Department of Health and Human Services (HHS). The statute also
authorizes the Secretary to establish other criteria by regulation. Any
regulatory criteria added by the Secretary would have to consider a
borrower's income and debt-to-income ratio as primary factors.
Current Regulations: The regulations governing the economic
hardship deferment in the FFEL, Direct Loan, and Federal Perkins Loan
programs were amended on November 1, 2007 (72 FR 61960) to incorporate
the change in the eligibility standard enacted as part of the CCRAA.
The CCRAA changed the applicable standard used to determine eligibility
for the deferment from ``an amount equal to 100 percent of the poverty
line for a family of two, as determined in accordance with section
673(2) of the Community Service Block Grant Act'' to ``an amount equal
to 150 percent of the poverty line applicable to the borrower's family
size, as determined in accordance with section 673(2) of the Community
Service Block Grant Act.'' The current regulations also include
criteria under which a borrower could qualify for the deferment if the
borrower is: (1) Working full-time and has a Federal educational debt
burden that equals or exceeds 20 percent of the borrower's monthly
income, and that income, minus the borrower's Federal education debt
burden, is less than 220 percent of either the Federal minimum wage
rate or the poverty guideline, or (2) working less than full-time and
has a monthly income that does not exceed twice the Federal minimum
wage rate or poverty guideline and, after deducting the borrower's
Federal education debt burden, the remaining amount of that income does
not exceed the Federal minimum wage rate or the poverty guideline.
Proposed Regulations: The Secretary proposes to amend the
regulations governing eligibility for an economic hardship deferment to
include a definition of family size. The proposed definition of family
size would be the number that is determined by counting the borrower,
the borrower's spouse, and the borrower's children, if the children
receive more than half their support from the borrower. A borrower's
family size could include other individuals if, at the time the
borrower requests the economic hardship deferment, the other
individuals reside with the borrower and receive more than half of
their support from the borrower, and if they will continue to receive
that support from the borrower. The kinds of support provided by the
borrower to the individual could include money, gifts, loans, housing,
food, clothes, car, medical and dental care, and payment of college
costs.
The proposed regulations also would remove the reference to
``section 673(2) of the Community Service Block Grant Act'' and
substitute, in its place, a reference to ``the Department of Health and
Human Services guidelines pursuant to 42 U.S.C. 9902(2).'' The
regulations also would specify that if a borrower is not a resident of
a State identified in the poverty guidelines, the poverty guideline to
be used for the borrower is the poverty guideline for the relevant
family size used for the 48 contiguous States.
Finally, the proposed regulations would eliminate both the economic
hardship criterion for a borrower who is working full-time and has a
20/220 debt-to-income ratio, and the corresponding debt-to-income ratio
criterion for a borrower who is working part-time.
Reasons: A definition of family size is not currently part of the
poverty guidelines. A definition is now necessary because the
applicable poverty guideline used to determine whether a borrower has
an economic hardship is based on the borrower's family size at the time
the borrower requests, or applies for renewed eligibility for, the
deferment. A standard definition is needed to ensure that borrowers are
treated equitably in determining economic hardship. Because they share
the same statutory basis in section 435(o) of the HEA, the proposed
definition of family size for the purpose of determining eligibility
for an economic hardship deferment is also the definition proposed for
use to determine a borrower's partial economic hardship under the new
IBR plan.
The proposed regulations would clarify that HHS is the source of
the poverty guidelines and provide guidance on the treatment of a
borrower who is not residing in a ``State'' identified in the poverty
guidelines. In particular, the proposed regulations address situations
in which a borrower resides in a foreign country when the borrower
applies for the deferment. Some non-Federal negotiators indicated that
they believed that the Department's prior operational guidance on
economic hardship deferments directed them to use the poverty guideline
for the State in which the borrower last resided. However, the
borrower's last residence in that State might be many years in the past
and irrelevant to the borrower's current circumstances. Moreover, such
an approach could result in using a more favorable poverty guideline
for borrowers who formerly resided in either Alaska or Hawaii than
borrowers who formerly lived in one of the 48 contiguous States. In
light of these factors, the negotiators decided that using the
contiguous 48-State poverty guideline for borrowers living outside the
United States would be more equitable for similarly situated borrowers.
The CCRAA eliminated the provision in section 435(o) of the HEA
under which a borrower could be considered to have an economic hardship
if the borrower was working full-time and had a Federal educational
debt burden that equaled or exceeded 20 percent of the borrower's
adjusted gross income (AGI). Previously, borrowers were eligible for an
economic hardship deferment if they could demonstrate that they were
working full-time and had a Federal education debt burden that equaled
or exceeded 20 percent of the borrower's income, and that the
borrower's income minus the borrower's Federal education debt burden
would leave the borrower with an available income that was less than
220 percent of the Federal minimum wage rate or an amount equal to 150
percent of the poverty guideline based on the borrower's family size. A
comparable debt-to-income ratio provision applied to borrowers working
less than full-time. This has been referred to as ``the 20/220 rule.''
The Department retained the 20/220 rule in regulations published on
November 1, 2007, so that borrowers could continue to qualify for an
economic hardship deferment on this basis until the newly created IBR
plan became operational on July 1, 2009. Consequently, a borrower who
is in an economic hardship deferment under either one of the debt-to-
income provisions (applicable to borrowers working full-time or on a
less than full-time basis), with a deferment period that starts prior
to July 1, 2009, will continue in that status for one year after the
start date of that deferment period. However, no subsequent economic
hardship deferment will be available under that
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criterion for any deferment request made on or after July 1, 2009.
Some non-Federal negotiators asked the Department to retain the 20/
220 rule. They argued that the elimination of the rule would have an
adverse impact on borrowers (i.e., some borrowers who would not have to
make payments under the 20/220 rule would now be required to make
payments), particularly on medical and other health professionals who
have a large amount of student loan debt and will spend a number of
years in low paying medical internships and residencies as part of
their training. The Department believes, however, that Congress
intended to eliminate the 20/220 rule and replace it with the new IBR
plan that is meant to provide assistance to this kind of borrower
during periods of limited earnings. Both the definition of partial
financial hardship for purposes of the IBR plan and the criteria for
economic hardship deferment are based on the definition of economic
hardship in section 435(o) of the HEA. The Congress expanded the
potential applicability of a partial financial hardship, which supports
IBR eligibility, by changing the applicable poverty guideline for
eligibility in section 435(o)(1)(A)(ii), while at the same time
deleting section 435(o)(1)(B), which specifically supported the 20/220
criteria for the economic hardship deferment. The Department's action
to retain the 20/220 rule in the November 1, 2007, regulations was
designed to ease the transition for affected borrowers until the IBR
plan is implemented.
Although the IBR plan, unlike a deferment, does not permit a
borrower to postpone payments, it does provide for reduced payments
because borrowers who initially select the IBR plan must have a partial
financial hardship. A borrower has a partial financial hardship if the
annual amount due on all eligible loans, as calculated under a standard
repayment plan based on a 10-year repayment period, is more than 15
percent of the difference between the borrower's most recent,
documented AGI and 150 percent of the poverty guideline for the
borrower's family size. Some borrowers in the IBR plan will not be
required to make monthly loan payments. Other borrowers will have
monthly payment amounts that are much less than those normally
calculated under a standard repayment plan.
Military Service Deferment and Post-Active Duty Student Deferment
(Sec. Sec. 674.34, 682.210, 682.211, and 685.204)
Statute: The Higher Education Reconciliation Act of 2005 (HERA)
established a new military service deferment in the FFEL, Direct Loan,
and Federal Perkins Loan programs for military personnel and members of
the National Guard who are called to active duty military service
during a war or other military operation or national emergency. The
CCRAA expanded the military service deferment to allow all eligible
borrowers to receive the deferment on all their outstanding title IV
loans, rather than just on loans that were first disbursed on or after
July 1, 2001, and eliminated the maximum three-year limit on the
deferment. The CCRAA also extended the military service deferment for
an additional 180 days following the date the borrower is demobilized
from the qualifying active duty service. The expansion of the military
deferment is for all periods of active duty service that include
October 1, 2007, or begin on or after that date.
The CCRAA also created a new post-active duty student deferment in
the FFEL, Direct Loan, and Federal Perkins Loan programs for members of
the National Guard or Armed Forces Reserve, and members of the Armed
Forces who are in a retired status who are called or ordered to active
duty service. The deferment is available for up to 13 months following
the borrower's demobilization from active duty service. To be eligible,
the borrower must have been called to active duty service while the
borrower was enrolled in a program of instruction at an eligible
institution or within six months of having been enrolled. The deferment
expires if the borrower reenrolls in school. Active duty for the
purpose of this deferment is defined in the CCRAA as active duty as the
term is used in 10 U.S.C. section 101(d)(1); however, it does not
include active duty for attendance at a service school or for training
duty, and it does include active duty of members of the National Guard
(``active State duty''). Consistent with the date of enactment of the
CCRAA, the deferment is available to an eligible borrower who was
serving on active duty on October 1, 2007, or was called to active duty
service on or after that date.
Current Regulations: The FFEL, Direct Loan, and Federal Perkins
Loan program regulations governing the military service deferment were
amended on November 1, 2007, to reflect the expansion of deferment
benefits resulting from the CCRAA. The references in prior regulations
to a three-year time limit and its applicability only to loans first
disbursed on or after July 1, 2001 were removed from the regulations,
and the new 180-day post-active duty deferment was added. A provision
for the new 13-month post-active duty student deferment and the
statutory definition of the term ``active duty'' for purposes of this
deferment were also added to the regulations.
Proposed Regulations: The proposed regulations would clarify the
current regulations, incorporate guidance on the deferments that was
provided to program participants in Dear Colleague Letter GEN-08-01
(issued January 8, 2008), and would provide relief to borrowers who may
qualify for a post-active duty student deferment after demobilization,
but do not qualify for the military service deferment during their
active State duty service.
The proposed regulations would clarify that the expansion of the
military service deferment to include a 180-day post demobilization
period, and the post-active duty student deferment would be available
to borrowers who were serving on active duty on October 1, 2007, or who
are called to active duty on or after that date. The proposed
regulations in Sec. Sec. 674.34(i)(3), 682.210(u)(3), and
685.204(f)(1)(ii) would also clarify that a borrower's eligibility for
the post-active duty student deferment terminates only if the borrower
returns to enrolled student status on at least a half-time basis, and
that a borrower returning from active duty who is in the grace period
on a loan is not required to waive the grace period to use the 13-month
post-active duty student deferment. The proposed regulations in
Sec. Sec. 674.34(i)(2)(i) and (ii), 682.210(u)(2)(i) and (ii), and
685.204(f)(2)(i) and (ii) would also clarify that active State duty for
members of the National Guard includes, for purposes of the post-active
duty student deferment, both active duty under which a Governor
activates members of the National Guard under State statute or policy
and the activities are paid for with State funds, and active duty under
which a Governor is authorized, with the approval of the President or
U.S. Secretary of Defense to activate members of the National Guard and
the activities are paid for with Federal funds. The proposed
regulations in Sec. Sec. 674.34(i)(2)(iv), 682.210(u)(2)(iv), and
685.204(f)(2)(iv) would also specify that active duty for this purpose
does not include a borrower who is serving in a full-time, permanent
position of employment with the National Guard,
[[Page 37698]]
unless the borrower is reassigned as part of a call-up to active duty
service. At the recommendation of DOD, the incorrect reference to
section 101(19) of title 32, U.S.C. has been removed, as discussed
elsewhere in this preamble.
The proposed regulations also incorporate the Department's earlier
guidance (Dear Colleague Letter GEN-08-01) on implementation of the
CCRAA military-related deferment provisions. As provided in that
guidance, the proposed regulations in Sec. Sec. 674.34(h)(7),
682.210(t)(9), and 685.204(e)(7) would authorize loan holders to grant
a military service deferment to an otherwise eligible borrower for an
initial deferment period not to exceed 12 months from the date the
borrower's qualifying active duty service begins based on a request
from either the borrower or the borrower's representative. Consistent
with that earlier guidance, although supporting documentation is not
required for this initial 12-month deferment period, it is required for
any subsequent deferment period. Additionally, Sec. Sec. 674.34(i)(4),
682.210(u)(4), and 685.214(f)(4) of the proposed regulations would
specify that if a borrower is eligible for both the 180-day military
service deferment following the borrower's demobilization, and the 13-
month post-active duty student deferment, the borrower's eligibility
for those separate deferments runs concurrently.
Finally, a change has been proposed in the FFEL program regulations
in Sec. 682.211(h) governing mandatory forbearance that would require
the loan holder to grant forbearance to a borrower who is called to
active State duty for more than a 30-day period and who does not
qualify for a military service deferment during the active State duty
service period, but who qualifies for the post-active duty student
deferment.
Reasons: The negotiators agreed that the regulations governing the
two military service-related deferments required clarifying amendments,
and that the Department's earlier guidance should be included in the
proposed regulations to ease program administration. That guidance
addressed the October 1, 2007, effective date for the new benefits, and
clarified that a borrower who received a military service deferment
that began prior to October 1, 2007, would qualify for the extra 180
days of deferment if the borrower's period of military service included
the October 1, 2007, date.
Non-federal negotiators noted that the post-active duty student
deferment does not relieve a borrower of the obligation to make
payments on a student loan during the borrower's period of active duty
military service. A borrower in an in-school status would be required
to make payments after the initial grace period elapses. A borrower
receiving an in-school deferment would be required to make payments on
a student loan after the borrower drops below half-time status at the
school and reports for active duty service.
The non-federal negotiators recommended that the Department provide
for a mandatory forbearance to cover this gap, so that borrowers who
will qualify for a post-active duty student deferment, but are no
longer in an in-school status or qualify for an in-school deferment,
will not be obligated to make loan payments during the period of active
duty service.
The Department agreed with the non-federal negotiators. The
proposed revisions to Sec. 682.211(h) provide for the mandatory
forbearance to begin after the initial grace period elapses, for
borrowers in an in-school status, and to begin after the borrower
ceases enrollment, for borrowers who are in an in-school deferment at
the time of the call to active duty.
Some of the non-Federal negotiators expressed concern over the
confusion that may result for borrowers and those assisting them with
respect to the different eligibility requirements for the two different
military service-related deferments. The negotiators discussed
different approaches to providing information on the various forms of
relief available to title IV student loan borrowers called to active
duty military service, such as charts and brochures, but determined
that these efforts were operational in nature and would not affect the
regulations.
Income-Based Repayment Plan
Definitions (Sec. Sec. 682.215(a) and 685.221(a))
Partial Financial Hardship
Statute: Section 493C(a)(3) of the HEA provides that a borrower has
a partial financial hardship if the annual amount due on all of the
borrower's eligible FFEL and Direct Loans (as calculated under a
standard repayment plan based on a 10-year repayment period) exceeds 15
percent of the difference between the borrower's AGI and 150 percent of
the poverty guideline for the borrower's family size. If a married
borrower files a separate Federal income tax return, section 493C(d) of
the HEA provides that only the borrower's income and student debt are
used in determining the amount of the borrower's payment under the IBR
plan.
Proposed Regulations: Proposed Sec. Sec. 682.215(a)(4) and
685.221(a)(4) would incorporate the statutory definition of the term
partial financial hardship. The proposed regulations would also
incorporate the terms and definitions of ``AGI,'' ``family size,'' and
``poverty guideline'' from existing Sec. 682.210, which addresses how
to determine whether a borrower qualifies for an economic hardship
deferment.
Under the proposed regulations, AGI would mean the income reported
by the borrower to the Internal Revenue Service (IRS). For a married
borrower filing jointly, AGI would include both the borrower's and
spouse's income. If a married borrower files separately, AGI would
include only the borrower's income.
Under the proposed regulations, family size would include the
borrower, the borrower's spouse, and the borrower's children if the
children receive more than half their support from the borrower. Other
individuals could be included in family size if, at the time the
borrower certifies family size, those other individuals live with the
borrower and receive more than half their support from the borrower and
will continue to receive this support for the year the borrower
certifies family size. Support would include money, gifts and payment
of other expenses, including college costs.
Under the proposed regulations, poverty income would be the income
categorized by State and family size in the poverty guidelines.
Finally, under the proposed regulations, the term ``eligible loan''
would refer to any outstanding FFEL or Direct Loan made to a borrower,
except for a FFEL or Direct PLUS Loan made to a parent borrower or a
FFEL or Direct Consolidation Loan that repaid a FFEL or Direct PLUS
Loan made to a parent borrower.
Reasons: For consistency and ease of administering the title IV
loan programs, the definitions of AGI, family size, and poverty
guidelines would be the same in all sections of the regulations to
which they apply. While supporting this approach, some non-Federal
negotiators suggested that AGI or the total amount of eligible loans
should be adjusted in cases when a married borrower and his or her
spouse both have outstanding loans, file a joint Federal tax return,
and both qualify for IBR. In these cases, the combined monthly student
loan payments of the borrower and the spouse could exceed the 15
percent payment threshold under the IBR plan. The Department
acknowledged this possibility but noted that the negotiators' suggested
change would be
[[Page 37699]]
inconsistent with the HEA. First, section 493C(d) of the HEA, as
amended by Public Law 110-153, specifically provides for considering
the individual AGI of one married borrower only when the borrower and
the borrower's spouse file separate Federal tax returns. Second,
section 493C(a)(3)(A) of the HEA requires that only the borrower's
eligible loans, not the spouse's, are considered in determining whether
the borrower has a partial financial hardship.
Income-Based Payment Amount (Sec. Sec. 682.215(b) and 685.221(b))
Statute: Under section 493C(b)(1) of the HEA, the monthly payment
amount of a borrower who qualifies for a partial financial hardship is
determined by calculating 15 percent of the amount obtained by
subtracting 150 percent of the borrower's poverty guideline from the
borrower's AGI, and then dividing this amount by 12 (an example of this
calculation is provided in Appendix A of this preamble).
Proposed Regulations: If a borrower's eligible loans are held by
more than one loan holder, proposed Sec. Sec. 682.215(b)(1) and
685.221(b)(2) would require each loan holder to adjust the amount of a
borrower's calculated monthly payment. The borrower's adjusted monthly
payment would be determined by multiplying the calculated monthly
payment amount by the percentage of the total outstanding principal
amount of eligible loans held by that holder (see the example in
Appendix A of this preamble).
If the borrower's calculated monthly payment is less than $5.00,
the borrower would not be required to make a payment. If the borrower's
calculated monthly payment is between $5.00 and $10.00, the borrower
would be required to make a $10.00 payment.
Reasons: Without the proposed adjustment by each loan holder of the
borrower's eligible loans, a borrower who selects the IBR plan with two
or more loan holders would have to make total monthly payments in
excess of the statutory maximum.
With regard to minimum monthly payment amounts, the Department
initially proposed to adopt the $5.00 minimum monthly payment provision
used in the Direct Loan Program income contingent repayment (ICR) plan.
Under the ICR plan, a minimum payment of $5.00 is required whenever the
borrower's calculated monthly payment is greater than zero but equal to
or less than $5.00. The non-Federal negotiators argued that, because a
borrower's calculated monthly payment amount under the IBR plan could
be zero, a minimum $5.00 payment (or any payment amount over zero)
would violate the 15 percent payment threshold. As a result, the
Department agreed to allow zero payment amounts, which will require no
collection action on the part of the loan holder. However, as an
administrative matter, taking into consideration the cost of processing
payments, the non-Federal negotiators agreed to the Department's
proposal to establish a minimum payment of $10.00 whenever the
borrower's calculated monthly payment is between $5.00 and $10.00. This
represents a compromise approach for dealing with de minimis payment
amounts for borrowers with low income and high debt. On one hand, it
satisfies the concern of the non-Federal negotiators that a borrower
with a calculated payment at or near zero should not have to make any
payments. On the other hand, setting the minimum payment at $10 (an
amount agreed to by the Loans Committee as part of the negotiations)
mitigates the financial risk to FFEL loan holders, servicers, and the
Department that the marginal cost of processing the payment is not more
than the payment amount.
Borrower Payments (Sec. Sec. 682.215(b), 682.215(c), 685.221(b),
685.221(c), and 682.300(b))
Statute: Section 493C(b)(2) of the HEA specifies that monthly loan
payments made under the IBR plan are applied first toward interest due
on the loan, next toward any fees, and then to the principal balance of
the loan. In addition, section 493C(b)(3) provides that if the
borrower's monthly payment does not cover the accrued interest on a
subsidized loan, the Secretary will pay the interest for up to three
years after the date the borrower elects IBR. The three-year period
does not include any period during which a borrower receives an
economic hardship deferment.
Proposed Regulations: Proposed Sec. Sec. 682.215(c) and 685.221(c)
would incorporate the provisions from the HEA regarding the order in
which IBR payments are to be applied by a loan holder.
Proposed Sec. Sec. 682.215(b)(4) and 682.300(b)(1)(iv) and
(b)(2)(x) would provide that, if the borrower's payment is insufficient
to pay the accrued interest on a loan, the Secretary pays the accrued
interest on a subsidized Stafford Loan, or on the subsidized portion of
a Consolidation Loan, to the FFEL loan holder for up to three
consecutive years from the date that the borrower initially began
repayment on each loan under the IBR plan. In the Direct Loan Program,
proposed Sec. 685.221(b)(3) would provide that the Secretary will not
charge interest to borrowers during this three-year period. In the
proposed regulations for both the FFEL and Direct Loan Programs, the
three-year period would not include any period during which a borrower
receives an economic hardship deferment.
Reasons: Some of the non-Federal negotiators believed that the
statutory provisions regarding the three-year interest subsidy period
were ambiguous in three respects. First, these negotiators believed
that the date that a borrower elects the IBR plan could be interpreted
to mean the date the borrower notified the holder, or any other date up
to the date the borrower makes a payment under the IBR plan. Second,
they believed it was unclear whether the three-year period was
applicable to each of the borrower's loans or was the cumulative period
of the borrower's eligibility for the subsidy payments. The proposed
regulations would address both of these issues by providing that the
three-year period starts on the date the borrower initially begins
repayment on each loan under the IBR plan.
Third, some of the non-Federal negotiators did not agree with the
Department's determination that the three-year period is a consecutive
period. The Department notes that section 493C(b)(3)(A) of the HEA
specifically states that the subsidy period starts on the date the
borrower selects the IBR plan and provides for only one type of
interruption or break in the three-year period--economic hardship
deferments. Therefore, once the subsidy period begins, it runs
continuously for three years as long as the borrower's monthly payment
under the IBR plan is not sufficient to pay the accrued interest on the
borrower's loan.
Changes in Payment Amount (Sec. Sec. 682.215(d) and 685.221(d))
Statute: For a borrower who no longer has a partial financial
hardship, or who no longer wants to continue making income-based
payments under the IBR plan, section 493C(b)(6) of the HEA provides
that the maximum monthly payment the borrower may be required to make
must not exceed the monthly amount calculated for the borrower under a
10-year repayment period when the borrower first entered IBR. Under
either of these circumstances, the repayment period may exceed 10
years. Section 493C(b)(8) of the HEA also provides that a borrower who
is paying under the IBR plan may elect, at any time, to terminate
payment under the IBR plan and repay under the standard repayment plan.
[[Page 37700]]
Proposed Regulations: Proposed Sec. Sec. 682.215(d) and 685.221(d)
would provide for the recalculation of the borrower's monthly payment
if the borrower no longer has a partial financial hardship, chooses to
stop making income-based payments, or elects to leave the IBR plan
entirely.
The proposed regulations provide that if a borrower no longer has a
partial financial hardship or wishes to stop making income-based
payments, but remains within the IBR plan, the maximum monthly amount
that the borrower would be required to repay must be recalculated. The
recalculated amount the borrower would be required to repay is the
amount the borrower would have paid under the standard repayment plan
with a 10-year repayment period based on the eligible loans that were
outstanding at the time the borrower began repayment under the IBR
plan. The proposed regulations would also provide that the borrower's
total repayment period based on the recalculated payment amount may
exceed 10 years.
If a borrower no longer wishes to pay under the IBR plan, the
proposed regulations would require the borrower to pay under the
standard repayment plan for the remaining term available based on the
borrower's initial standard repayment disclosure. The loan holder would
recalculate the borrower's monthly payment based on the time remaining
under the maximum 10-year repayment period for the amount of the
borrower's loans that were outstanding at the time the borrower
discontinued paying under the IBR plan. For a Consolidation Loan
borrower who elects to leave the IBR plan, the applicable repayment
period would be the repayment period remaining based on the total
amount of that loan and the balance on other student loans that were
outstanding at the time the borrower discontinued paying under the IBR
plan.
Reasons: The proposed regulations would reflect the statutory
provisions in section 493C(b)(6) of the HEA, which require a loan
holder to recalculate the borrower's monthly payment if the borrower no
longer has a partial financial hardship, chooses to stop making income-
based payments, or leaves the IBR plan entirely. The proposed
regulations would also provide for a different calculation of monthly
payment amounts for Consolidation Loans when a borrower elects to leave
the IBR plan and must repay under a standard repayment plan. The
Department is proposing this distinction because a Consolidation Loan
can have a repayment period of up to 30 years. The negotiators agreed
with this approach.
Eligibility Documentation and Verification (Sec. Sec. 682.215(e) and
685.221(e))
Statute: Section 493C(c) of the HEA requires the Department to
establish procedures for annually determining whether a borrower
qualifies for IBR. These procedures include verifying the borrower's
annual income and the annual amount due on the borrower's loans, and
other procedures necessary to effectively implement the IBR plan.
Proposed Regulations: Under proposed Sec. Sec. 682.215(e) and
685.221(e), the loan holder would determine whether a borrower has a
partial financial hardship to qualify for the IBR plan for the year the
borrower initially selects the plan and for each subsequent year that
the borrower remains in the plan.
To make this determination, the loan holder would require the
borrower to (1) provide written consent to the disclosure of AGI and
other tax return information by the IRS to the loan holder, and (2)
annually certify family size. The borrower would provide consent by
signing a consent form and returning it to the loan holder. If the
borrower's AGI is not available, or the loan holder believes that the
borrower's reported AGI does not reasonably reflect the borrower's
current income, the proposed regulations would allow the loan holder to
use other documentation provided by the borrower (for example, a
current pay stub or unemployment benefits letter) to verify income. If
the borrower fails to respond to a loan holder's request to certify
family size for a particular year, the loan holder must assume a family
size of one for that year.
The proposed regulations would require the loan holder to place the
borrower in a standard repayment plan if the borrower selects the IBR
plan, but fails to provide the required written consent necessary for
the loan holder to determine whether the borrower initially qualifies
for the IBR plan. The proposed regulations also designate the
recalculated monthly payment option as discussed under the ``Changes in
Payment Amount'' for a borrower who no longer has a partial financial
hardship or a borrower who fails to renew the required written consent
for income verification (or withdraws that consent) but does not select
another repayment plan.
Reasons: If a borrower initially selects the IBR plan but fails to
provide the necessary consent for securing income information, the loan
holder would place the borrower into the standard repayment plan. This
approach is consistent with the current FFEL and Direct Loan
regulations that provide for a borrower to be placed on the standard
repayment plan if the borrower selects the income-sensitive repayment
plan in the FFEL Program or the ICR plan in the Direct Loan Program,
but then fails to provide the information or authorization that is
necessary for the borrower to enter that repayment plan.
The non-Federal negotiators proposed that borrowers should be
allowed to provide consent for the disclosure of income information for
multiple years, rather than annually. Although the Department does not
object to this proposal, the forms used to provide consent are IRS-
produced forms. The Department has no authority to specify the period
of time an IRS consent form may cover, so the proposed regulations do
not specify the duration of the consent form.
The Department initially proposed that a loan holder would
automatically change the borrower's repayment option if the borrower
fails to provide annual information on family size. The non-Federal
negotiators recommended that the Department instead allow the
borrower's family size to default to one in these cases to allow the
loan holder to recalculate the borrower's eligibility for a partial
financial hardship. If the borrower no longer qualifies for a partial
financial hardship based on a family size of one, the loan holder would
recalculate the borrower's monthly payment as discussed under ``Changes
in Payment Amount.'' The Department agreed with this proposal.
Loan Forgiveness (Sec. Sec. 682.215(f) and 685.221(f))
Statute: Section 493C(b)(7) of the HEA provides that the Department
will repay or cancel the outstanding balance and accrued interest on an
eligible loan for a borrower who participates in the IBR plan for a
period not to exceed 25 years and meets certain requirements or makes
qualifying payments during the maximum 25-year period.
Proposed Regulations: Sections 682.215(f) and 685.221(f) of the
proposed regulations would: (1) Establish the conditions that a
borrower must satisfy to qualify for loan forgiveness under the IBR
plan; (2) identify the beginning date of the 25-year period for
determining whether a borrower made qualifying payments or received
economic hardship deferments during that period; and (3) provide that
the Department will repay or cancel the outstanding balance and accrued
interest on an eligible loan at the end of the 25-year period.
[[Page 37701]]
Under the proposed regulations, a borrower would qualify for loan
forgiveness after 25 years as long as the borrower participated in the
IBR plan at any time during that period and satisfied at least one of
the following conditions:
Made reduced monthly payments on the loan under a partial
financial hardship, including a payment of zero dollars.
Made reduced monthly payments on the loan after the
borrower no longer had a partial financial hardship or stopped making
income-based payments.
Made monthly payments under any repayment plan that were
not less than the amount required under a FFEL or Direct Loan standard
repayment plan with a 10-year repayment period based on when the
borrower initially entered repayment.
Made monthly payments under the FFEL standard repayment
plan based on a 10-year repayment period for the amount of the
borrower's loans that were outstanding at the time the borrower first
selected the IBR plan.
Paid a Direct Loan under the income contingent repayment
(ICR) plan.
Received an economic hardship deferment on an eligible
loan.
Except for borrowers who repaid Direct Loans under the ICR plan,
under proposed Sec. 685.221(f)(3)(ii) the beginning date of the 25-
year period would be no earlier than July 1, 2009, which is the
effective date for the implementation of the IBR plan. In general,
after the borrower selects the IBR plan, the loan holder would
establish the beginning date by determining when the borrower made a
qualifying payment or received an economic hardship deferment on the
loan on or after July 1, 2009. However, under Sec. 685.221(f)(3)(i) of
the proposed regulations, for a borrower who made payments under the
Direct Loan Program ICR plan, the beginning date would be the date the
borrower made a payment on the loan under that plan any time after July
1, 1994. For borrowers who consolidate their eligible loans, the 25-
year period would restart from the date of the consolidation.
Under proposed Sec. Sec. 682.215(f)(4) and 685.221(f)(4), the
Secretary would pay (for a FFEL loan) or forgive (for a Direct Loan)
the outstanding balance and accrued interest on the eligible loan after
the guaranty agency or the Department determines that the borrower
satisfies the loan forgiveness requirements.
Reasons: With regard to establishing the beginning date of the 25-
year period, some of the non-Federal negotiators suggested that
qualifying payments made by an otherwise eligible borrower at any time
before July 1, 2009 (i.e., retroactive payments), should count toward
the 25-year forgiveness period. The Department considered, but did not
adopt this suggestion, for three reasons. First, the statute does not
support a general rule that payments made before the effective date of
the IBR plan (July 1, 2009) should count toward the forgiveness period.
Second, allowing retroactive payments would substantially increase
costs to the Federal government and the taxpayers (for more detail see
the discussion under the Regulatory Impact Analysis section of the
preamble). Third, it would be administratively difficult, if not
impossible in some cases, for a loan holder to determine the beginning
date of the 25-year period before July 1, 2009, because there was no
expectation of loan forgiveness, and therefore, no basis to require
loan holders to track and maintain data on individual loan payments in
the manner needed to readily identify qualifying payments under the IBR
plan.
The Department was able, however, to reach a compromise on this
issue with the non-Federal negotiators for a group of borrowers that
the negotiators acknowledged as the most vulnerable and needy. The
Department agreed to count retroactive payments made by borrowers in
the Direct Loan Program ICR plan for two reasons. First, there are no
material administrative costs because the Department has readily
available payment data for ICR borrowers. Second, we do not believe
there would be any additional program costs because borrowers repaying
their loans under the Direct Loan Program ICR plan are already on a
path to loan forgiveness.
The proposed conditions and qualifying payments that a borrower
must satisfy for loan forgiveness would parallel the statutory
requirements. Some non-Federal negotiators encouraged the Department to
consider establishing a loan forgiveness period of less than 25 years.
The negotiators suggested a 20-year period, stating that the 25-year
period is only a statutory maximum. The Department could not adopt this
suggestion for two reasons. First, reducing the forgiveness period to
20 years would increase Federal costs (for more detail see the
discussion under the Regulatory Impact Analysis section of the
preamble). Second, as a policy matter, the Department believes that the
loan forgiveness periods for IBR and ICR should be the same for these
borrowers because they are in similar circumstances.
Loan Forgiveness Processing and Payment (Sec. 682.215(g))
Statute: The HEA does not address procedures for IBR loan
forgiveness processing and payment with respect to FFEL loan holders
and guaranty agencies.
Proposed Regulations: Proposed Sec. 682.215(g) would establish
deadlines for FFEL loan holders and guaranty agencies for processing
loan forgiveness claims. A loan holder would be required to request
payment from a guaranty agency no later than 60 days from the date the
holder determines that a borrower qualifies for loan forgiveness.
Within 45 days of receiving the lender's request, the guaranty agency
would need to determine if the borrower satisfies the forgiveness
requirements and notify the lender of that determination. Finally, the
proposed regulations would require the loan holder to notify the
borrower of the guaranty agency's determination within 30 days.
In addition, the proposed regulations would address how the loan
holder and guaranty agency resolve any differences between the
outstanding balance of the borrower's eligible loans and the
forgiveness amount, and how a borrower is treated if it is determined
that the borrower is not eligible for loan forgiveness. Although the
Department has not included comparable processes in the Direct Loan
Program regulations, the Department intends to follow the same deadline
and notification provisions specified in these proposed FFEL
regulations.
Reasons: The non-Federal negotiators supported including these
processing requirements in the proposed regulations to provide for the
timely processing of IBR forgiveness claims. The deadlines for lenders
and guaranty agencies to process IBR loan forgiveness claims are
consistent with the deadlines used for other loan discharges.
Special Allowance Payments for Income-based Loans (Sec. 682.302(a))
Statute: For loans in repayment under the IBR plan, section
493C(b)(9) of the HEA requires that the special allowance payment to a
lender be calculated separately on the principal balance of the loan
and on any unpaid accrued interest. In addition, section 493C(b)(3)(B)
provides that accrued interest may be capitalized only when the
borrower: (1) Elects to leave the IBR plan; or (2) begins making
payments of not less than the amount the borrower would have made under
a standard 10-year repayment plan based on the outstanding amount of
the borrower's
[[Page 37702]]
loan at the time the borrower began repayment under the IBR plan.
Current Regulations: Current Sec. 682.302(a) provides for special
allowance payments by the Secretary to loan holders in the FFEL
Program. A special allowance payment is generally described as a
subsidy payment made to a FFEL lender under a formula provided in the
HEA that ensures that the lender will receive a market-based rate on a
FFEL loan regardless of what the student or parent borrower pays.
Proposed Regulations: Proposed Sec. 682.302(a) would add to the
current regulations a separate calculation of the special allowance
rate for the unpaid accrued interest on a loan in repayment under the
IBR plan. The current provisions for calculating the special allowance
payment rate on the unpaid principal balance of a loan (including
capitalized interest) would remain unchanged. However, the proposed
regulations would require that, when computing the special allowance
rate on the unpaid accrued interest for a borrower in IBR, the
applicable interest rate used in the calculation would be zero.
Reasons: The Department initially proposed calculating the special
allowance payment to be paid on the unpaid accrued interest for a
borrower in the IBR plan in the same way that the special allowance
payment would be calculated for other loans. Some of the non-Federal
negotiators argued, however, that since accrued unpaid interest on an
income-based loan can only be capitalized under limited circumstances,
or may never be capitalized, the yield on the principal balance of an
income-based loan would be less than the yield that would otherwise be
obtained on the same type of loan when accrued unpaid interest is
capitalized and becomes part of the loan principal. Moreover, the yield
on the income-based loan would have been further reduced under the
Department's initial approach (the special allowance rate for the
unpaid accrued interest would be reduced by the applicable interest
rate of the loan). The Department agreed.
Income Contingent Repayment Plan--Maximum Repayment Period (Sec.
685.209(c))
Statute: Section 455(e) of the HEA specifies the periods that count
toward the maximum 25-year repayment period under the ICR plan in the
Direct Loan Program.
Current Regulations: Current Sec. 685.209(c) establishes the
repayment period for Direct Loans under the ICR plan.
Proposed Regulations: Proposed Sec. 685.209(c)(4) would parallel
the provisions in the HEA by counting the following periods toward the
maximum 25-year repayment requirement:
Periods in which the borrower makes payments under the ICR
plan on loans that are not in default.
Periods in which the borrower makes reduced monthly
payments under the IBR plan or a recalculated reduced monthly payment
after the borrower no longer has a partial financial hardship or stops
making income-based payments.
Periods in which the borrower made monthly payments under
the standard repayment plan after leaving the IBR plan.
Periods in which the borrower makes payments under the
standard repayment plan.
Periods after October 1, 2007, in which the borrower makes
monthly payments under any other repayment plan that are not less than
the amount required under the standard repayment plan.
Periods of economic hardship deferment after October 1,
2007.
In addition to the provisions reflecting the statutory
requirements, the Department proposes to maintain the current provision
in Sec. 685.209(c)(4)(ii)(A)(2). This current provision applies to
borrowers who entered repayment before October 1, 2007, with repayment
periods of not more than 12 years and who made payments under either of
the extended repayment plans, or, for Direct Consolidation Loan
borrowers, made payments under the standard repayment plan. October 1,
2007, is the effective date of the maximum ICR repayment period
provisions in the CCRAA.
Reasons: The proposed changes are necessary to reflect the
statutory requirements. The Department proposes to maintain the current
provisions to allow the periods that now count toward the 25-year
repayment timeframe to continue to be counted for these borrowers.
Eligible Not-For-Profit Holder Definition (Sec. 682.302)
Statute: Section 435(p) of the HEA, added by the CCRAA, included
the new term ``eligible not-for-profit holder'' to describe a State or
non-profit entity that may receive a higher special allowance payment
(SAP) rate on loans it holds than other lenders. Regulations issued by
the Department on November 1, 2007 (72 FR 61960), incorporated the
statutory definition of ``eligible not-for-profit holder'' from the
CCRAA into the regulations. However, Congress made further changes to
that definition in Public Law 110-109, the Third Higher Education
Extension Act of 2007, enacted October 31, 2007. Public Law 110-109
made a significant change to the definition by removing the requirement
that only an entity that is an eligible lender in its own right under
section 435(d) of the HEA could qualify as an eligible not-for-profit
holder. Public Law 110-109 made conforming changes to other parts of
section 435(p) of the HEA that excluded from eligible not-for-profit
holder status any State or non-profit entity that was not the sole
owner of the beneficial interest in the loan or that was itself owned
or controlled by a for-profit entity.
Current Regulations: Current Sec. 682.302(f) does not reflect the
changes made by Public Law 110-109. In addition, the regulations do not
address how an entity that claims to qualify as an eligible not-for-
profit holder demonstrates eligibility to the Department or the
standards the Department will use to determine whether the entity
qualifies for that status.
Proposed Regulations: The proposed regulations would amend Sec.
682.302(f)(3) to incorporate the changes made by Public Law 110-109
that removed the requirement that an entity qualified for not-for-
profit holder status, either directly or through an eligible lender
trustee (ELT), only if the entity was an eligible lender under section
435(d) of the HEA.
The Secretary also proposes to describe, in Sec. 682.302(f)(3)(v),
the circumstances in which a State or non-profit entity is deemed to be
owned or controlled by a for-profit entity. These circumstances
generally are those described in the Department's Dear Colleague Letter
FP-07-12, issued December 28, 2007, and which were used by the
Department in its initial determination of whether entities qualified
for eligible not-for-profit holder status. These circumstances include
those in which a for-profit entity either has a sufficient ownership
interest, as a member or shareholder of an entity, to control the State
or non-profit entity, or employs or appoints a majority of the
individuals who serve as trustees of the State or non-profit entity, or
who serve on the audit, executive, or compensation committees of the
board of the entity. The proposed regulations would deem a trustee or
director to be employed or appointed by a for-profit entity if the for-
profit entity employs a family member of an individual, unless the
Secretary determines that the nature of a family member's employment by
the for-profit entity is not the kind that
[[Page 37703]]
would likely subject the trustee, director, or the board on which the
family member serves to pressures that would affect the integrity of
their decisions. The proposed regulations thus would distinguish
between family members employed as lower level employees from those
employed in more responsible positions.
To identify whether a for-profit entity has the power to control a
State or non-profit entity, the proposed regulations would provide for
review of whether the for-profit entity controls, by any of various
agreements, a sufficient voting percentage of the membership or equity
interests of the State or non-profit entity to direct or cause the
direction of the management and policies of the State or non-profit
entity.
Section 435(p)(2)(C) of the HEA provides that the State or non-
profit entity must be the exclusive owner of at least the beneficial
interest in a loan and its income. The proposed regulations would
define ``beneficial owner'' (including ``beneficial ownership'' and
``owner of a beneficial interest'') in the conventional sense, as the
right to receive, possess, use, and sell or otherwise exercise control
over a loan and income from the loan. The proposed regulations would
recognize and disregard those instances in which this power might be
significantly restricted by a security interest granted by the entity
in the course of issuing a debt obligation or where the entity has used
an ELT to retain ownership of its loans in order to qualify those loans
for FFEL Program benefits.
The HEA provides that a trustee that holds loans on behalf of a
State or non-profit entity may not be compensated for that function in
excess of reasonable and customary fees. The proposed regulations would
provide that fees are reasonable and customary if the rate paid by the
entity to the trustee does not exceed the rate paid for similar
services on similar portfolios of loans of that State or non-profit
entity that did not qualify for the higher SAP, or did not exceed an
amount determined by using another method requested by the State or
non-profit entity that the Secretary considers reliable.
The Secretary also proposes, in Sec. 682.302(f)(3)(x), the list of
documents that must be provided to the Secretary by a State or non-
profit entity that seeks to demonstrate that it qualifies as an
eligible not-for-profit holder. These documents generally are those
described in Dear Colleague Letter FP-07-12, and which were used by the
Department in its initial determination of whether entities qualified
for eligible not-for-profit holder status. The requirements would
include submission of a certification signed by the State or non-profit
entity's Chief Executive Officer (CEO), as well as a certification or
opinion signed by the State or non-profit entity's external legal
counsel or the attorney general of the State. Both submissions would be
required to include copies of documents that provide the basis for the
certification or opinion.
The certification or opinion of the external legal counsel or State
attorney general, with supporting documentation, would be required to
show that the State or non-profit entity meets one of the four
criteria: (1) Is a constituted entity by operation of State law; (2)
has been designated by the State or one or more political subdivisions
of the State to serve as a qualified scholarship funding corporation
under section 150(d)(2) of the Internal Revenue Code of 1986 (IRC), has
not made the election described under section 150(d)(3) of the IRC, and
is incorporated under State law as a not-for-profit organization; (3)
is incorporated under State law as a not-for-profit organization or
entity described in 150(d)(3) of the IRC; or (4) has in effect a
relationship with an eligible lender under which the lender is acting
as trustee on behalf of the State or non-profit entity. The
certification of the State or non-profit entity's CEO would be required
to state the basis upon which the entity believes it qualifies as an
eligible not-for-profit holder for purposes of SAP as a State entity, a
150(d) entity, a 501(c)(3) entity, or a trustee on behalf of a State
entity, and that the entity, on September 27, 2007, acted as an
eligible lender under section 435(d) of the HEA, other than as a school
lender, or was on that date the sole beneficial owner of a loan
eligible for SAP under the HEA; is not owned or controlled, in whole or
in part, by a for-profit entity; and is the sole beneficial owner of
the loan and income from the loan. The HEA expressly requires the
entity's status to be determined as of the effective date of the CCRAA,
which was September 27, 2007.
Proposed Sec. 682.302(f)(3)(xi) would provide that, to retain
continued eligibility as a not-for-profit holder, the State or the not-
for-profit entity must submit an annual certification signed by the
State or not-for-profit entity's CEO that states that the State or
entity has not altered its status since its prior certification or that
describes any alterations that have taken place since its prior
certification, and, if a non-profit entity, provide copies of its most
recent IRS Form 990.
Reasons: The proposed changes are required to conform current
regulations to changes in the HEA, and to establish procedures for
demonstrating whether an entity qualifies as an eligible not-for-profit
holder. In addition, changes were needed to clarify the standards that
would be used to determine whether a for-profit entity had ownership or
control of the entity or its loans or whether excessive fees were paid
to a trustee engaged by the entity.
The changes to the HEA indicated strong Congressional concern that
only those entities not controlled by for-profit entities could receive
the higher SAP. Control can be exercised directly or indirectly by a
for-profit entity. The Department initially proposed to identify
specific kinds of conduct by a State or non-profit entity that would
indicate that the entity was indirectly controlled by a for-profit
entity. One proposed provision would have required the not-for-profit
holder to use a survey to determine the market rate for fee-paid
services used by the not-for-profit holder to determine whether the
particular not-for-profit holder's fee payments were excessive. The
Department proposed to view excessive fee payments for services as a
possible indication that a for-profit entity receiving fee payments
from the not-for-profit entity effectively controlled the not-for-
profit holder and was diverting SAP-related benefits through the
excessive fee payments. Additionally, the Department proposed that a
not-for-profit holder be subject to an ongoing transaction-based
analysis of its student loan financing arrangements, again to determine
whether payments made by the not-for-profit holder to acquire loans or
received by that entity for the sale of its loans exceed the sale price
paid or received by other entities in the purchase or sale of similar
loans.
The Department determined, after extensive discussions with non-
Federal negotiators familiar with not-for-profit loan holders, that a
survey of fees would be impractical for a not-for-profit holder to
conduct on an ongoing basis, and that market fluctuations affected the
cost of services to such an extent that it would be an unreliable
indicator of any indirect control by another entity. The Department
instead agreed to measure whether fees are excessive by simply
comparing the fees a not-for-profit entity pays on its eligible loans
to what it pays on its ineligible loans.
Similarly, the same non-Federal negotiators argued that each
student loan financing transaction was subject to marketplace
volatility and that the nature of the student loan paper subject to
sale or acquisition (e.g., default risk,
[[Page 37704]]
loan amount, or loan maturity) dictated the associated costs and was
therefore an equally unreliable indicator of indirect control of a not-
for-profit holder. The Department also consulted with individuals who
had knowledge of capital financing and with Department of Treasury
staff responsible for oversight of tax-exempt organizations and IRS
Form 990, which is filed annually by tax-exempt organizations and
reflects the activities and supports the tax-exempt status of the
organization. As a result of these discussions, the Department
determined that a not-for-profit entity had little incentive to
undertake questionable activities related to the receipt of increased
special allowance payments that would threaten the tax-exempt status of
the organization.
The Department agreed to determine ``control'' of the not-for-
profit entity based on a measurement of any for-profit entity's control
over the voting rights of the members or shareholders sufficient to
dictate the policies and management of the not-for-profit holder, or
any for-profit entity's ability to place employees with the not-for-
profit holder or secure appointments to the majority of its boards or
committees. The Department also believes that the annual
recertification process adopted in the proposed regulations, the
receipt of the not-for-profit entity's Form 990, and the not-for-profit
entity's quarterly lender financial reports to the Department will
provide a sufficient baseline against which future activities of a not-
for-profit holder can be monitored.
Public Service Loan Forgiveness
Borrower Eligibility for Loan Forgiveness (Sec. 685.219(c))
Statute: Section 455(m) of the HEA, which governs the William D.
Ford Direct Loan Program, was amended to create a new loan forgiveness
program for public service employees. Under section 455(m)(1) of the
HEA, the Secretary will forgive the outstanding principal balance and
accrued interest on a borrower's eligible Direct Loan if the borrower
satisfies the following conditions:
The borrower is not in default on the loan.
The borrower makes 120 monthly payments on the loan after
October 1, 2007, under one or more specified repayment plans.
The borrower is employed in a public service job at the
time that loan forgiveness is requested and granted, and during the
period the borrower makes the required 120 monthly payments.
Proposed Regulations: Proposed Sec. 685.219(c)(1) would parallel
the statutory requirements and would require the borrower to make 120
separate, full, qualifying monthly payments within 15 days of the
scheduled payment due date while the borrower is employed full-time in
a public service job to be eligible for this program. The qualifying
120 payments would not have to be consecutive.
To be considered a qualifying payment for loan forgiveness, each
payment would have to be made under one or more of the following
repayment plans:
The IBR plan.
The ICR plan.
The Direct Loan standard repayment plan.
Any other repayment plan if the monthly payment amount is
not less than the amount the borrower would have paid under the Direct
Loan standard repayment plan.
For a payment to count towards the forgiveness period, the borrower
would have to have been employed full-time by a public service
organization when the payment was made. For borrowers with a
contractual or employment period of less than 12 months, qualifying
payments would have to have been made each month for all 12 months.
This requirement is primarily intended to address teachers who work on
an academic year basis. Although teachers on this type of schedule
typically work for only 9 months out of the year, they would still be
required to make payments on their loans during the summer vacation
period. This provision would also apply to other individuals who might
work on a similar type of schedule.
The proposed regulations would acknowledge full-time service in an
AmeriCorps position as equivalent to employment in a public service
job. The proposed regulations also would treat an AmeriCorps education
award used for loan repayment of a Direct Loan as qualifying payments
to meet the 120-payment requirement. The number of qualifying monthly
payments would be calculated for this purpose by dividing the lump sum
AmeriCorps education award used for Direct Loan repayment by the amount
of the borrower's scheduled monthly payment on the loan.
Reasons: The proposed regulations implement the basic statutory
framework for the public service loan forgiveness program.
After much discussion concerning the many types of public service
jobs that might qualify a borrower for public service loan forgiveness,
the negotiators decided not to define specific job types that might
qualify. Instead, they decided it would be clearer and more efficient
to define the types of organizations that would qualify as eligible
employers for purposes of public service loan forgiveness, and base
eligibility for the forgiveness on the type of organization that
employs the borrower. Accordingly, the proposed regulations define the
term ``public service organization.''
AmeriCorps members receive an award for service performed annually
(the Segal Education Award) that can be used to make a lump sum payment
on a Federal student loan. The negotiators determined that it would be
appropriate and consistent with considering AmeriCorps service as
qualifying service for this purpose to allow use of the education award
received for that service as a basis for deriving qualifying payments
on a Direct Loan that would count towards the 120 monthly payments
required for loan forgiveness.
Definitions (Sec. 685.219(b))
Statute: For purposes of the public service loan forgiveness
program, section 455(m)(3)(A) of the HEA defines ``eligible Federal
Direct Loan'' as a Direct Stafford Loan, a Direct PLUS Loan, a Direct
Unsubsidized Stafford Loan, or a Direct Consolidation Loan.
Section 455(m)(3)(B) of the HEA defines ``public service job'' as:
(1) A full-time job in a number of public service occupations and
fields; (2) a full-time job at a non-profit organization that satisfies
the requirements of section 501(c)(3) of the IRC; or (3) a full-time
faculty member at a Tribal college or university as provided in section
316(b) of the HEA, or other faculty teaching in high-needs areas as
determined by the Secretary. The statute does not define any other term
for the purposes of this program.
Proposed Regulations: Proposed Sec. 685.219(b) would define
several terms for purposes of implementing the public service loan
forgiveness program. The defined terms would include ``Employee or
employed,'' ``Full-time,'' ``Public Interest Law,'' and ``Public
Service organization''.
Under the proposed regulations:
``Employee or employed'' would mean an individual who is
hired and paid by a public service organization.
``Full-time'' would mean working in qualifying employment
in one or more jobs for the greater of--
(1)(i) An annual average of at least 30 hours per week; or
[[Page 37705]]
(ii) For a contractual or employment period of at least 8 months,
an average of 30 hours per week; or
(2) The number of hours the employer considers full-time.
Vacation or leave time provided by the employer would not be
considered in determining the average hours worked on an annual or
contract basis.
``Public interest law'' would refer to legal services
provided by a public service organization that are funded in whole or
in part by a local, State, Federal, or Tribal government.
``Public service organization'' would mean:
(1) A Federal, State, local, or Tribal government organization,
agency, or entity;
(2) A public child or family service agency;
(3) A non-profit organization that qualifies under section
501(c)(3) of the IRC that is exempt from taxation under section 501(a)
of the IRC;
(4) A Tribal college or university; or
(5) A private organization that--
(i) Provides the following public services: Emergency management,
military service, public safety, law enforcement, public interest law
services, public child care, public service for individuals with
disabilities and the elderly, public health, public education, public
library services, school library, or other school-based services; and
(ii) Is not a business organized for profit, a labor union, a
partisan political organization, or an organization engaged in
religious activities, unless the qualifying activities are unrelated to
religious instruction, worship services, or any form of proselytizing.
Reasons: The proposed definitions are needed to clarify program
eligibility and public service work requirements for borrowers who wish
to seek public service loan forgiveness.
Some of the non-Federal negotiators proposed definitions that would
extend eligibility to individuals in certain jobs (e.g., public
defenders) by specifically identifying them in the definition of public
interest law, regardless of the nature of their employer or the funding
source of their salaries. The negotiators determined that this would be
inconsistent with the statutory intent of the definition of the term
``public service job'' and the fact that the legislative history
surrounding this section of the CCRAA spoke to recognizing individuals
in ``public sector jobs.'' Some of the non-Federal negotiators also
argued that the definitions should not limit the eligibility of
individuals. In particular, negotiators were concerned that the
definition of the term ``full-time'' could make it difficult for
teachers to qualify for loan forgiveness.
The term ``Employee or employed'' includes only those individuals
who are hired and paid by a public service organization. The term would
not include individuals who are contracted to work for the organization
or individuals who are hired by a for-profit company that has a
contract with the public service organization.
The term ``full-time'' would be defined to recognize the varied
full-time work schedules that can exist and the fact that there are no
Federal or generally applicable State standards for what constitutes
full-time employment. Under the proposed regulations, a borrower would
be considered to be employed full-time if the borrower works an annual
average of 30 hours per week, an average of 30 hours per week during a
contractual or employment period of at least 8 months, or for the
number of hours the employer considers full-time. The 30-hour standard
is the same full-time standard used for purposes of title IV student
loan unemployment deferment eligibility, which requires a borrower to
be seeking but unable to find full-time employment of at least 30 hours
per week. The definition is broad enough to include individuals who
might not work 30 hours each week, but who meet that standard using an
annual average of their weekly hours. Consequently, teachers and others
with contractual or employment periods that include an acknowledged
break period during which they could still be considered employed would
meet the definition for full-time.
The term ``Public Interest Law'' limits such services to services
that are supported in whole or in part by a government.
The term ``public service organization'' would be derived largely
from the statutory definition of ``public service job,'' but is
clarified to include certain non-profit organizations that are not
qualified under 501(c)(3) of the IRC, but that meet the other statutory
requirements and qualify as public service employers under the HEA.
Loan Forgiveness (Sec. 685.219(d) and (e))
Statute: Section 455(m)(2) of the HEA provides that at the
conclusion of the borrower's employment period in a public service job
during which the borrower has made 120 qualifying payments under one or
more qualifying repayment plans, the Secretary will cancel the
outstanding loan principal and accrued interest on the borrower's loan.
Proposed Regulations: Proposed Sec. 685.219(d) and (e) would
provide that, after making the qualifying 120 monthly payments, a
borrower could request loan forgiveness on a form provided by the
Secretary. If the Secretary determines that the borrower qualifies for
loan forgiveness, the Secretary would cancel the outstanding principal
balance and accrued interest on the borrower's loan and notify the
borrower of those actions. If the Secretary determines that the
borrower is ineligible for the loan forgiveness, the Secretary would
notify the borrower of that determination.
Reasons: Although the proposed regulations implement the statutory
requirements, some of the non-Federal negotiators recommended that the
Department provide more assistance to a borrower seeking public service
loan forgiveness by providing for annual borrower submission and
Departmental review and retention of the form provided by the Secretary
that would be certified by the borrower's employer. The negotiators
believed that this approach would provide timely confirmation to the
borrower that all requirements for loan forgiveness (provided the
borrower made the qualified monthly payments) were satisfied for that
year. The Department considered the negotiators' suggestion, but
decided not to adopt this approach for several reasons. First, this
suggestion would be operational rather than a regulatory issue. Second,
tracking and reviewing documents on an annual basis for potentially
thousands of borrowers, many of whom might not remain in public service
employment or who may never meet the eligibility requirements for final
loan forgiveness, would be a complex and costly administrative process.
Finally, as a policy matter, the Department believes it is the
borrower's responsibility to gather and maintain the documents to
support his or her eligibility for this Federal benefit.
Loan Consolidation (Sec. Sec. 682.201 and 685.220(d))
Statute: Section 428C(a)(3)(B) and (b)(5) of the HEA provide that a
borrower who has a FFEL loan or a FFEL Consolidation Loan, but who
wishes to use the public service loan forgiveness program, can obtain a
Direct Consolidation Loan. These provisions are effective July 1, 2008.
Current Regulations: Sections 682.201(e) and 685.220(d)(1) provide
that a FFEL borrower can obtain a Direct Consolidation Loan only if:
(1) The borrower is unable to obtain a FFEL consolidation loan; (2) the
borrower is
[[Page 37706]]
unable to obtain a FFEL consolidation loan with income sensitive
repayment terms acceptable to the borrower; or (3) the borrower's FFEL
consolidation loan is submitted to the guaranty agency for default
aversion and the borrower wants to obtain a Direct Consolidation Loan
to make payments under the ICR plan.
Proposed Regulations: The proposed regulations would amend Sec.
685.220(d) to provide that a FFEL borrower can obtain a Direct
Consolidation loan for the purpose of using the public service loan
forgiveness program. The Department is proposing a conforming change to
Sec. 682.201(e)(5).
Reasons: The proposed regulations implement statutory requirements.
Conforming and Technical Amendments (34 CFR Parts 682, 685)
Statute: The CCRAA made conforming amendments to sections 428C and
455(d) of the HEA to include in these sections certain provisions of
the IBR plan, the public service loan forgiveness program, and the ICR
plan. The HEA does not specifically address conforming or technical
amendments to the Department's regulations that are needed to implement
statutory provisions.
Proposed Regulations: The proposed regulations in 34 CFR parts 682
and 685 contain statutory and regulatory conforming and technical
amendments.
Reasons: The proposed conforming and technical amendments are
needed to reflect and implement statutory provisions or are otherwise
needed to harmonize program regulations. These conforming and technical
amendments were discussed with the negotiating committee and consensus
was reached on the amendments.
Appendix
The following Appendix will not appear in the Code of Federal
Regulations:
Appendix A to the Preamble--Partial Financial Hardship
Example: Borrower's AGI = $50,000, Family Size = 5, Borrower's
Total Loans = $25,000, Borrower is a resident of Virginia.
Step 1: Determine the poverty guideline associated with the
borrower's family size and State of residence. Using the 2008 HHS
poverty guidelines, which are available at http://aspe.hhs.gov/
poverty/08poverty.shtml, the borrower's poverty guideline is
$24,800.
Step 2: Multiply the poverty guideline by 150%
$24,800 x 150% = $37,200
Step 3: Subtract the result in Step 2 from AGI.
$50,000 - $37,200 = $12,800
Step 4: Calculate 15% of the amount obtained in Step 3. This is
the annual amount of the borrower's income-based payment.
15% x $12,800 = $1,920
Step 5: Determine the annual payment on the total amount of the
borrower's loans based on a standard 10-year repayment schedule and
the applicable interest rate. In this example, the total amount of
the borrower's loans is $25,000, and the interest rate is 6.8%. The
annual payment is $3,452.40.
Step 6: Since the annual payment amount in Step 5 ($3,452.40) is
greater than the annual income-based payment amount in Step 4
($1,920), the borrower has a partial financial hardship.
Step 7: To calculate the borrower's monthly income-based
payment, divide the result in Step 4 by 12.
$1,920 / 12 = $160
Step 8: If a borrower's loans are held by more than one loan
holder, each loan holder needs to adjust the amount of the
borrower's monthly income-based payment by multiplying the payment
by the percentage of the total amount of loans owed to the holder.
In this case, assume the borrower owes $20,000 to Bank A and the
remaining $5,000 to Bank B. Bank A's percentage of the borrower's
total loan amount is 80% ($20,000 / $25,000). The borrower's monthly
income-based payment for Bank A would be 80% x $160, or $128.
Executive Order 12866
Regulatory Impact Analysis
Under Executive Order 12866, the Secretary must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the OMB.
Section 3(f) of Executive Order 12866 defines a ``significant
regulatory action'' as an action likely to result in a rule that may
(1) Have an annual effect on the economy of $100 million or more, or
adversely affect a sector of the economy, productivity, competition,
jobs, the environment, public health or safety, or State, local or
Tribal governments or communities in a material way (also referred to
as an ``economically significant'' rule); (2) create serious
inconsistency or otherwise interfere with an action taken or planned by
another agency; (3) materially alter the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raise novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive order.
Pursuant to the terms of the Executive order, it has been
determined this proposed regulatory action will have an annual effect
on the economy of more than $100 million. Therefore, this action is
``economically significant'' and subject to OMB review under section
3(f)(1) of Executive Order 12866. In accordance with the Executive
order, the Secretary has assessed the potential costs and benefits of
this regulatory action and has determined that the benefits justify the
costs.
Need for Federal Regulatory Action
These proposed regulations are needed to implement provisions of
the HEA, as amended by the CCRAA, that established a new IBR plan for
FFEL and Direct Loan borrowers, revised the conditions under which a
FFEL or Direct Loan borrower could qualify for a loan deferment due to
economic hardship, changed the terms of a number of military service
deferments, created a loan forgiveness program in the Direct Loan
Program for borrowers who perform public service, and established a
separate special allowance rate formula for not-for-profit loan
holders.
Proposed Regulation's Discretionary Provisions
The Secretary has limited discretion in implementing the provisions
of the CCRAA; in most cases these proposed regulations directly reflect
specific statutory requirements. Policy choices were made in a small
number of areas. Those areas are listed below, followed by a discussion
of the alternatives considered and final policy choices made.
Minimum payment under IBR: The CCRAA does not establish a minimum
payment that must be made by a borrower under the IBR plan.
Procedures for Establishing IBR Eligibility: The CCRAA requires the
Department to establish procedures for annually determining whether a
borrower qualifies for IBR; these procedures must include verifying the
borrower's annual income and the annual amount due on the borrower's
loans.
Loan Forgiveness Processing and Payment: The CCRAA does not address
procedures for IBR loan forgiveness processing and payment with respect
to FFEL loan holders and guaranty agencies.
Loan Forgiveness: The CCRAA provides that the Department repays or
cancels the outstanding balance and accrued interest on an eligible
loan for a borrower who has participated in IBR for a period not to
exceed 25 years and
[[Page 37707]]
met certain requirements. The statute does not set a minimum for the
period of years a borrower can be in IBR and have their loan forgiven.
SAP for Income-Based Loans: For loans being repaid under IBR, the
CCRAA requires the special allowance payment to be calculated
separately on the principal balance of the loan and on any unpaid
accrued interest. The statute does not specify the precise elements
that must be included in this calculation.
Economic Hardship Deferment: The CCRAA changed the eligibility
criteria under which a borrower may qualify for an economic hardship
deferment. In implementing this provision, the Secretary has the
discretion to implement additional criteria through regulations.
Definition of Full-Time Employment: The CCRAA requires borrowers to
have worked full-time in a qualifying occupation to be eligible for the
public service loan forgiveness program; however, the statute does not
include a definition of full-time employment.
The following section addresses the alternatives that the Secretary
considered in implementing these discretionary portions of the CCRAA
provisions. These alternatives are also discussed in the Reasons
sections of this preamble related to the specific regulatory
provisions.
Regulatory Alternatives Considered
Minimum payment under IBR: As noted above, the CCRAA does not set
minimum payment levels under the IBR plan. As discussed in the Reasons
section of the preamble related to this provision, the Department
initially proposed to the non-Federal negotiators a provision requiring
a $5.00 minimum monthly payment, which is the minimum monthly payment
used in the Direct Loan Program ICR plan. Under that plan, a minimum
payment of $5.00 is required whenever the borrower's calculated monthly
payment is greater than zero but equal to or less than $5.00. Non-
Federal negotiators argued that a $5.00 minimum monthly payment (or any
payment amount over zero) would violate the statute's 15 percent
payment cap. Department negotiators agreed that allowing zero payment
amounts would avoid this problem. (The Department determined that this
approach had no budgetary impact.) Recognizing that requiring a small
payment may be inefficient given the administrative costs, the
negotiators agreed, and the Department is therefore proposing to
establish a minimum monthly payment of $10.00 whenever the calculated
monthly payment is between $5.00 and $10.00.
Procedures for Establishing IBR Eligibility: As discussed in more
detail earlier in this preamble, the establishment of IBR eligibility
is largely dependent on a borrower providing consent for a loan holder
to obtain tax information from the IRS. Non-Federal negotiators
recommended that the Department allow borrowers to provide consent to
disclose income information for multiple years. The Department agreed
to this conceptually, but noted that the forms used for this purpose
are IRS forms and that the Department could not regulate the period of
time that these consent forms would cover. The Direct Loan ICR form
allows consent to be granted for 5 years. The burden associated with
completing this form was estimated at 12 minutes. Should IRS adopt a
similar form for IBR, loan holders' administrative costs would be
significantly reduced. The Department is interested in obtaining any
data that could be used to quantify this assessment.
Under the Department's initial proposal at the beginning of the
negotiating process, borrowers who failed to provide annual information
on family size when they provide their consent would automatically be
deemed ineligible to participate in IBR and would be placed in another
repayment plan. The non-Federal negotiators recommended, and the
Department agreed, that under these circumstances a borrower's family
size should be set at one, allowing loan holders to recalculate IBR
eligibility for the upcoming year. The approach adopted is consistent
with Department practice in administering the ICR plan. However, the
Department specifically seeks comment on whether family size should
instead default to the number previously certified by the borrower. The
Department's initial baseline budget estimates in this area were based
on ICR procedures, so the adopted alternative would result in no cost
beyond this baseline. The Department did not attempt to calculate the
budget impact of the initial proposal; however, we believe the overall
impact to the budget would not have been substantially different than
this proposed policy, since borrowers would have been assigned to
another repayment plan.
Loan Forgiveness Processing and Payment: While the CCRAA did not
establish procedures for FFEL loan holders and guaranty agencies to
follow in processing loan forgiveness claims and payments for IBR
borrowers, the non-Federal negotiators supported including such
requirements in the proposed regulations to provide clear guidelines
for FFEL loan holders and guaranty agencies administering the IBR plan.
Accordingly, the proposed regulations would establish deadlines related
to processing of loan forgiveness claims, notifying borrowers of their
eligibility for loan forgiveness, and the handling of loan forgiveness
payments. These proposed regulations are consistent with current FFEL
regulations for other claim payment transactions between loan holders
and guaranty agencies and, as such, should not represent a significant
additional administrative burden for lenders and guaranty agencies.
This new benefit represents a new collection under the Paperwork
Reduction Act. A separate 60-day Federal Register notice, including
burden estimates, will be published to solicit comment on this form
once it is developed.
Loan Forgiveness: In the CCRAA, Congress gave the Secretary
discretion to set a period not to exceed 25 years during which a
borrower must meet certain requirements to qualify for loan forgiveness
at the end of such period. The CCRAA did not provide that qualifying
payments made prior to July 1, 2009, the date this statutory amendment
becomes effective, would count when determining whether a borrower met
the relevant requirements during this time period. Some non-Federal
negotiators suggested that qualifying payments made by a borrower at
any time before July 1, 2009, should count, and that the forgiveness
period should be shortened to 20 years. In assessing these suggested
alternatives, the Department determined that both would result in
substantially increased Federal costs. Reducing the forgiveness period
to 20 years, for example, would increase Federal costs by nearly $600
million over 10 years when compared to the baseline established by
initial estimates of CCRAA costs, which assumed a forgiveness period of
25 years. Under OMB memorandum M-05-13, any regulatory action that
increases the costs to the Federal government must be offset by
corresponding cost savings; as no corresponding offsets to these
proposals were available, it was not possible to include them in the
proposed regulations. In addition, if retroactive payments counted for
purposes of meeting the loan forgiveness requirements, loans holders
would find it difficult, if not impossible, to determine a beginning
date before July 1, 2009, since there was no expectation of loan
forgiveness and, therefore, no need to track and maintain
[[Page 37708]]
data on individual loan payments in the manner required for IBR
purposes. A compromise was ultimately agreed to under which retroactive
payments made by borrowers in the ICR plan would be counted when
calculating the IBR forgiveness period. This approach avoids both
additional Federal costs (since ICR borrowers are already on a path to
loan forgiveness) and administrative hurdles, since ICR is available
only in the Direct Loan Program, for which the Department has readily
available payment data.
SAP for Income-Based Loans: Initially, the Department recommended
calculating SAP rates related to accrued interest on loans repaid under
the IBR plan in the same manner that is used to calculate rates for a
loan's principal balance. Some non-Federal negotiators noted that
accrued interest on an IBR loan is only capitalized under limited
circumstances. They stated that the lender's yield on the principal
balance of these loans would be less than that obtained on a similar
loan where accrued interest is capitalized. These negotiators also
noted that, under the Department's approach, the lender's yield on a
loan in repayment under IBR would be reduced further because the
special allowance rate for the unpaid accrued interest would be reduced
by the applicable interest rate of the loan. The Department agreed.
Economic Hardship Deferment: Under the CCRAA, economic hardship for
the purpose of qualifying for a student loan deferment is defined
through an income threshold of 150 percent of the poverty guideline
applicable to the borrower's family size. This approach replaced
previous criteria under which borrowers were eligible if they earned
100 percent of the poverty guideline for a family of two or if their
Federal educational debt burden exceeded 20 percent of their adjusted
gross income when adjusted gross income minus debt burden is less than
220 percent of the poverty guideline for a family of two.
Under the HEA, the Secretary has discretion to establish additional
eligibility criteria for economic hardship deferments through
regulation. The Department is proposing to exercise this discretion to
retain the ``20/220'' rule described above for a limited time. First
established in regulations published on November 1, 2007, retaining
this provision would allow borrowers to continue to qualify for an
economic hardship deferment until July 1, 2009, when the newly created
IBR plan becomes effective. Borrowers in an economic hardship deferment
under the 20/220 provision that began prior to July 1, 2009, would
continue in that status for one year from the start of the deferment
period. Some of the non-Federal negotiators were concerned that
eliminating the rule after July 1, 2009, would adversely affect medical
students with large student loans. Data from the National Postsecondary
Student Aid Survey indicate 91.2 percent of students beyond their third
year of medical school have Federal student loans, with an average
outstanding balance of $109,572. Nearly three-quarters of these
students have Federal student loan debt of at least $75,000. Under the
20/220 provision, a significant number of these borrowers qualify for
an economic hardship deferment during their internship and residency;
under this deferment they would make no payments for up to 3 years,
with interest paid by the government on Stafford Loans during that
period. In the absence of the 20/220 provision, many of these borrowers
would not qualify for a deferment and would therefore have to begin
repaying their loans while completing their training in relatively low-
paying positions. In light of these concerns, negotiators asked the
Department to extend the 20/220 provision indefinitely. Such an
extension would be prohibitively expensive, with estimated 10-year
costs of over $1.1 billion. This estimate, based on a review of
Department data on borrower incomes and debt burdens, reflects an
estimated 30 percent increase in loan volume qualifying for economic
hardship deferment over the amount assumed under baseline estimates. In
addition, the Department noted that many high-debt, low-income
borrowers under the IBR plan will not be required to make monthly loan
payments; others will have monthly payment amounts well below those
normally calculated under a standard repayment plan. All borrowers have
access to either the IBR or the ICR plan in the Direct Loan Program.
The Department does not have borrower-level income data by profession
and so cannot estimate aggregate payment amounts under these plans for
medical students affected by these regulations. After considering all
these factors, the Department declined to use its authority to extend
the 20/220 provision beyond July 1, 2009.
Definition of Full-Time Employment: The CCRAA did not include a
definition of the term ``full-time,'' when describing the type of
employment that would qualify a borrower for the public service loan
forgiveness program. Accordingly, we are proposing a definition in this
NPRM.
After consulting with the Department of Labor, the Department
determined that there is no Federal or generally applicable State
standard for what constitutes full-time employment. Subsequent
discussions considered the wide variety of full-time work schedules
available. Negotiators agreed to a definition under which an individual
who works an annual average of 30 hours per week, an average of 30
hours per week during a contractual or employment period of at least 8
months, or for the number of hours the employer considers full-time,
would be considered a full-time employee. This proposed definition is
consistent with the standard used to determine a borrower's eligibility
for a student loan unemployment deferment, which requires a borrower to
be seeking but unable to find full-time employment of at least 30 hours
per week. The proposed definition also could include employment that is
less than 30 hours each week, but which averages 30 hours a week over
the course of a year. Under the proposed definition, teachers and other
individuals engaged in public service employment who have a contractual
or employment period that includes an acknowledged break period during
which they remain employed could be considered to be employed full-
time.
Benefits
Benefits provided in these regulations include: The provision of
more flexible repayment options for student loan borrowers, expanded
eligibility for economic hardship deferments for borrowers with large
families, additional deferment benefits for military personnel, and the
provision of loan forgiveness for public service employees. The Federal
taxpayer also benefits from reduced costs related to the reduction of
SAP paid to not-for-profit loan holders in the FFEL Program. These
benefits all flow directly from statutory changes included in the
CCRAA; the Department does not believe these benefits are materially
affected by discretionary choices exercised by the Department in
developing these regulations. As discussed in greater detail under Net
Budget Impacts, these proposed provisions result in net costs to the
government of $3.3 billion over 2008-2012.
Costs
Because entities affected by these proposed regulations already
participate in the title IV, HEA programs, these lenders, guaranty
agencies, and schools must already have systems and procedures in place
to meet program eligibility requirements. These proposed regulations
generally would require
[[Page 37709]]
discrete changes in specific parameters associated with existing
guidance--such as the use of new criteria to calculate eligibility for
deferments or determine SAP--rather than wholly new requirements.
Accordingly, entities wishing to continue to participate in the student
aid programs have already incurred most of the administrative costs
related to implementing these proposed regulations. Marginal costs over
this baseline are primarily related to one-time system changes that,
while possibly significant in some cases, are an unavoidable cost of
continued program participation. In assessing the potential impact of
these proposed regulations, the Department recognizes that certain
provisions--primarily the provision of an IBR plan--are likely to
increase workload for some program participants. (This additional
workload is discussed in more detail under the Paperwork Reduction Act
of 1995 section of this preamble. These workload analyses indicate an
overall increase of 217,297 hours as a result of this NPRM.) Additional
workload would normally be expected to result in estimated costs
associated with either the hiring of additional employees or
opportunity costs related to the reassignment of existing staff from
other activities. In this case, however, these costs are not expected
to be significant because the Department estimates that participation
by FFEL borrowers in the IBR plan will be extremely limited.
The Department is particularly interested in comments on possible
administrative burdens related to the proposed regulations. In a number
of areas, such as the administrative activities required for FFEL
lenders in establishing an IBR option, non-Federal negotiators raised
concerns about possible administrative burden associated with
provisions included in these proposed regulations. Given the limited
data available, however, the Department is particularly interested in
comments and supporting information related to possible burden stemming
from the proposed regulations. Estimates included in this notice will
be reevaluated based on any information received during the public
comment period.
IBR and Economic Hardship Deferment Changes. The Department
estimates that the proposed regulatory changes related to IBR and
economic hardship deferments would result in $4.5 billion in additional
Federal costs over fiscal years 2008-2012. ($3.0 billion of these costs
are associated with loans made prior to 2008.) These costs are almost
entirely related to IBR, as the proposed changes in the economic
hardship deferment--liberalizing the family-size criteria while
eliminating the debt burden test--largely cancelled one another out.
With respect to the IBR plan, the Department reviewed Direct Loan
servicing system data on participation in the ICR plan and assumed
borrowers participating or estimated to participate in ICR who meet the
IBR eligibility criteria would stop participating in the ICR plan and
choose to participate in the more generous IBR plan. Assumptions were
derived by applying percentages based on historical participation in
the ICR plan to loan volume forecasts for future years. Using this
approach, we estimate that 126,000 borrowers in the FY 2009 loan cohort
would select the IBR plan, and that of these borrowers, 44,000 would
eventually have at least a portion of their loan forgiven after 25
years. By the 2012 cohort, projected growth in loan volume increase
these figures to 146,000 and 52,000, respectively.
Public Service Loan Forgiveness. The Department estimates the
public service loan forgiveness provisions in these proposed
regulations would increase Federal costs by $1.5 billion over FY 2008-
2012. (Of these costs, $1.2 billion is associated with loans made prior
to 2008.) This estimate was based on an analysis of public sector job
participation by student loan borrowers using information from
Department Direct Loan systems and data compiled by the Census Bureau
through its Current Population Surveys. These data indicated 32.6
percent of individuals between the ages of 21 and 28 were employed in
public service positions that meet the statutory eligibility percent
criteria. This age range was chosen to best capture the population of
borrowers most likely to take advantage of this benefit. The Department
was unable to obtain data on how long individuals remain employed in
qualifying positions. In the absence of data to the contrary, and to
estimate the maximum government exposure under this provision, the
Department assumed all individuals would work the full 10 years needed
to receive the benefit. Given the requirement that borrowers be making
payments throughout the qualifying employment period, it was assumed
that only borrowers choosing the IBR or ICR plan would have balances
eligible for forgiveness after 10 years. The Department assumed the
distribution of borrowers choosing these repayment plans was consistent
with the population as a whole as indicated by the Census data.
Accordingly, the Department's cost estimation model was run assuming
remaining balances would be forgiven after 10 years for 32.6 percent of
ICR and IBR borrowers.
SAP for Not-for-Profit Entities. The Department estimates the not-
for-profit holder SAP provisions will reduce Federal costs by $2.9
billion over FY 2008-2012. These estimates are based on forecasts of
commercial paper rates prepared by OMB and loan volume assumptions
developed by the Department using data from the FFEL lender payment
system and publicly available information on lender characteristics.
Initial estimates prepared following the passage of the CCRAA assumed
12.4 percent of new FFEL loan volume will be held by not-for-profit
loan holders; this percentage increased to 16.2 percent when adjusted
for Public Law 110-109, as implemented by this NPRM, which removed the
requirement that eligible not-for-profit holders be eligible lenders
under section 435(d) of the HEA. To determine the cost of this change,
the Department's loan cost model was run applying the not-for-profit
SAP rates to the revised percentage of loan volume.
Net Budget Impacts
The CCRAA provisions implemented by these proposed regulations are
estimated to have a net budget impact of $650 million in 2008 and $9.2
billion over FY 2008-2012. Consistent with the requirements of the
Credit Reform Act of 1990, budget cost estimates for the student loan
programs reflect the estimated net present value of all future non-
administrative Federal costs associated with a cohort of loans. (A
cohort reflects all loans originated in a given fiscal year.)
These estimates were developed using OMB's Credit Subsidy
Calculator. (This calculator will also be used for re-estimates of
prior-year costs, which will be performed each year beginning in FY
2009). The OMB calculator takes projected future cash flows from the
Department's student loan cost estimation model and produces discounted
subsidy rates reflecting the net present value of all future Federal
costs associated with awards made in a given fiscal year. Values are
calculated using a ``basket of zeros'' methodology under which each
cash flow is discounted using the interest rate of a zero-coupon
Treasury bond with the same maturity as that cash flow. To ensure
comparability across programs, this methodology is incorporated into
the calculator and used government-wide to develop estimates of the
Federal cost of credit programs. Accordingly, the Department believes
it is the appropriate methodology to use in developing estimates for
these
[[Page 37710]]
regulations. That said, however, in developing the Accounting Statement
included below, the Department consulted with OMB on how to integrate
our discounting methodology with the discounting methodology
traditionally used in developing regulatory impact analyses.
Absent evidence on the impact of these regulations on student
behavior, budget cost estimates were based on behavior as reflected in
various Department data sets and longitudinal surveys listed under
Assumptions, Limitations, and Data Sources. Program cost estimates were
generated by running projected cash flows related to each provision
through the Department's student loan cost estimation model. Student
loan cost estimates are developed across five risk categories:
Proprietary schools, two-year schools, freshmen/sophomores at four-year
schools, juniors/seniors at four-year schools, and graduate students.
Risk categories have separate assumptions based on the historical
pattern of behavior--for example, the likelihood of default or the
likelihood to use statutory deferment or discharge benefits--of
borrowers in each category.
Assumptions, Limitations, and Data Sources
Because these proposed regulations would largely restate statutory
requirements that would be self-implementing in the absence of
regulatory action, impact estimates provided in the preceding section
reflect a pre-statutory baseline in which the CCRAA changes implemented
in these proposed regulations do not exist. Costs have been quantified
for five years. In general, these estimates should be considered
preliminary; they will be reevaluated in light of any comments or
information received by the Department prior to the publication of the
final regulations. The final regulations will incorporate this
information in a more robust analysis.
In developing these estimates, a wide range of data sources were
used, including data from the National Student Loan Data System,
operational and financial data from Department of Education systems,
and data from a range of surveys conducted by the National Center for
Education Statistics such as the 2004 National Postsecondary Student
Aid Survey, the 1994 National Education Longitudinal Study, and the
1996 Beginning Postsecondary Student Survey. Data from other sources,
such as the Census Bureau, were also used. Data on administrative
burden at participating schools, lenders, guaranty agencies, and third-
party servicers are extremely limited; accordingly, as noted above, the
Department is particularly interested in comments in this area.
Elsewhere in this SUPPLEMENTARY INFORMATION section we identify and
explain burdens specifically associated with information collection
requirements. See the heading Paperwork Reduction Act of 1995.
Accounting Statement
As required by OMB Circular A-4 (available at http://
www.Whitehouse.gov/omb/Circulars/a004/a-4.pdf), in Table 2 below, we
have prepared an accounting statement showing the classification of the
expenditures associated with the provisions of these proposed
regulations. This table provides our best estimate of the changes in
Federal student aid payments as a result of these proposed regulations.
Expenditures are classified as transfers from the Federal government to
student loan borrowers (for the IBR, loan deferment, and loan
forgiveness provisions) and from student loan holders to the Fede |
