Student Loan Negotiators Reach Consensus on 25 Proposed Rulemaking Issues

Negotiators reached consensus on proposed regulatory language Friday on 25 student loan regulatory issues that will now result in two packages of proposed rules to be published in the Federal Register for public comment before promulgation of final rules.

Consensus means that there is no dissent by any member of the negotiating committee on any of the issues addressed. Disagreement on any one issue would give the Department authority to propose regulatory language as it sees fit on all the issues, though historically the Department honors tentative agreements that were reached on individual issues. ED said in the history of the student loan rulemaking committee negotiators have only once failed to reach consensus.

Portions of the proposed rulemaking package will be delayed by a technical issue, creating two rulemaking packages, one with a likely effective date of July 2013 and the other with an effective date of July 2014.  The Department plans to make available the proposed rules for public comment and the final rules regarding Income-Based Repayment, Income-Contingent Repayment and Total and Permanent Disability by Nov. 1, 2012, to be effective in July 2013. Proposed rules related to those issues will be published first and separately from the others given their importance to the Obama administration’s mandated student loan initiatives.

ED said because it takes extra time to prepare large documents for the Federal Register and the rulemaking package is currently 400-plus pages, ED plans to make the other proposed rules available as soon as possible, but at the very latest by Jan. 2013. This delay on the second portion of the rulemaking issues would postpone the effective date to July 2014 at the earliest.

In Friday’s discussion, negotiators found compromise regarding the annual review process in the income-based repayment program and tied up some loose ends in the rehabilitation of defaulted loans.

Reasonable and Affordable Payment Standard for Rehabilitation of Defaulted FFEL/DL Loans

Federal and non-federal negotiators reached agreement on regulatory language that provides for a form that guaranty agencies would use to determine a "reasonable and affordable" payment for borrowers rehabilitation their defaulted FFEL or Direct Loans. ED initially found the negotiators’ proposed form too prescriptive, but both parties were able to reach a compromise.

Loan rehabilitation provides borrowers who have defaulted on a Direct Loan or FFEL program loan the opportunity to reaffirm their intention to repay the defaulted loan and to establish a successful voluntary repayment history sufficient to support returning the borrower to normal repayment, with its associated benefits, and to remove the record of the default from the borrower’s credit report.

Under this rehabilitation program, guaranty agencies must determine a "reasonable and affordable" payment amount based on the borrower's financial situation. Consumer advocates expressed concern that there is a lot of inconsistency in the treatment of the practice of this determination and that in many cases the agencies neglected important expenses and other considerations. Current regulation provides guidance that consumer advocates say doesn’t always result in compliance by the servicers and agencies.

Negotiators proposed that regulatory language provide for a new form that lists criteria that guaranty agencies could use in determining what is "reasonable and affordable," including disposable income, household costs and "relevant and necessary expenses." 

As proposed by the Department, this issue paper would fall into the second rulemaking package, which would likely take effect July 2014. Consumer advocates said they remained concerned about the inconsistency and misrepresentation in this process in the interim. To address those immediate concerns, ED plans to issues Dear Colleague Letter to servicers to remind them of the existing regulations. ED said it will also work to get the proposed form ready as soon as possible, so that it is ready for release once the regulations take effect.

Changes to the Income-Based Repayment (IBR) Plan

Though consumer advocates and servicers struggled to reach a compromise Thursday over the processes in place to help borrowers avoid the consequences of interest capitalization for failing to meet an Income-Based Repayment (IBR) deadline, both parties found common ground Friday.

IBR limits the borrower’s monthly loan payments to 15 percent of the difference between the borrower’s adjusted gross income (AGI) and 150 percent of the annual poverty guideline for the borrower’s family size, and forgives any loan amount remaining after 25 years of repayment made under the plan, including periods of economic hardship deferment. A borrower who would be required to repay monthly amounts higher than that difference under the standard 10-year repayment plan is considered to have a partial financial hardship and thereby qualifies for IBR. The Health Care and Education Reconciliation Act (HCERA) of 2010 amended the IBR plan for new borrowers on or after July 1, 2014 by reducing the 15 percent to 10 percent, and by reducing the 25-year repayment term to 20 years. 

Borrowers must undergo an annual evaluation to demonstrate that they continue to qualify for IBR, by documenting AGI and family size. A borrower who no longer shows a partial financial hardship may remain under the umbrella of IBR, but must revert back to a 10-year standard repayment plan (fixed monthly payment plan for a loan term of up to 10 years) and interest capitalization (the addition of unpaid interest to the loan balance). Interest is not capitalized for borrowers under IBR, unless they leave the program or no longer show partial financial hardship.

Consumer advocates argue that the interest capitalization can have dire consequences, in some cases increasing the borrower’s debt load by as much as $20,000. 

ED and negotiators representing servicers proposed requiring servicers to send a notification letter, for each subsequent year that a borrower who currently has a partial financial hardship remains on the IBR plan, to specify the financial consequences of failure to meet the specified deadline and noncompliance in the annual review process (e.g. interest capitalization). The proposed language would require the letter go out no later than 60 days and no earlier than 90 days prior to the annual deadline for the submission of documentation. 

Servicers had also originally proposed a 5-calendar day grace period for late submissions, but consumer advocates argued that because the consequences of failing to meet this deadline can be so severe, borrowers should be protected as much as regulatory authority can allow. Consumer advocates requested 10-calendar day grace period, which guaranty agencies agreed to on a condition that provides five more days for the agencies to process the documentation.