ED Clarifies ICR and IBR changes at Student Loan Negotiating Rulemaking Committee

The student loan negotiated rulemaking committee added two new items to the agenda Tuesday and began discussions on eight of the 24 issues now scheduled for negotiation. This first week of meetings in the process is designed to brainstorm the issues so that the Department of Education (ED) can begin to draft proposed rule language that will be the basis of negotiation during the second week-long session to be held next month.

ED evaluated more than 20 issues proposed by negotiators for addition to the week-long agenda. ED eliminated most of proposals because they were either beyond the scope of this negotiation team or would, in ED’s opinion, require statutory amendments by Congress rather than regulatory action. A few of the proposed issues would be included in other topics that had already been suggested for negotiation by ED. The addition of several other proposed issues remains unresolved while ED gathers additional information. The committee accepted for negotiation, the 22 issues initially proposed by ED as well as two issues raised yesterday that would conform Perkins Loan regulations to Direct Loan provisions. The added Perkins topics concern the definition of on-time payments during rehabilitation of defaulted loans and breaks in service leading to cancelation due to conditions covered under the Family and Medical Leave Act. 

Changes to the Income Contingent Repayment (ICR) Plan in the Direct Loan Program

Much discussion surrounded the modifications to the Income Contingent Repayment (ICR) Plan in the Direct Loan Program, as outlined in President Obama’s “Pay As You Earn” student loan repayment initiative. The plan would cap the annual payments for “new borrowers” on or after 2008 who receive a new loan in 2012 and after, and who repay under the ICR plan, at 10 percent of discretionary income, down from the current 15 percent, and reduce the maximum repayment period from 25 years to 20 years. Any loan amount remaining at the end of the 20-year repayment period would be canceled.

Negotiators asked for clarification of the regulatory language, particularly to make it easier to explain to students. ED said it welcomes further recommendations from negotiators before the next round of discussions, but did shed some light on a few of the details.

ED explained that eligibility for the new IBR plan is a two part test: is the borrower a new borrower during or after 2008, and did the borrower take a loan during or after 2012. ED defined “new borrower” as an individual with no outstanding FFEL or Direct Loan debt on the day they took a new loan, and clarified that a consolidation loan can be considered a “new loan.” The determination of whether a new loan was attributable to 2012 is an issue that will require definition in the proposed regulations, as is the time period covered by “2008” (a year can be a calendar, fiscal, or award year). Several nonfederal negotiators asked ED to use parameters that would encompass as many borrowers as possible.

ED did not reject this request, but did point out that the plan, which would assist an estimated 1.6 million borrowers, would be a very costly one.  ED said it has to find offsetting savings in order to support the proposed changes, but has some flexibility in developing the regulations and hopes to receive more recommendations from the non-federal negotiators in the coming weeks. 

Changes to the Income-Based Repayment (IBR) Plan

Income-based repayment (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.

Having heard concerns from the community about inconsistencies in timely notification to borrowers about the annual hardship review, the Department weighed options for requiring FFEL servicers to provide early notification, such as that provided to Direct Loan borrowers. During discussion the issue of a database match with IRS was raised, as was consideration of extending forbearance to borrowers who fail to provide the necessary documentation and cannot make payments under the standard repayment plan.

The Department also proposed to bring into regulation its subregulatory guidance for borrowers wishing to leave the IBR plan to change repayment plans after making one full payment under the standard repayment plan. 

Forbearance for Post-270 day Defaulted Loan Borrowers Prior to Lender Claim Payment or Transfer to ED Default Collections

 A borrower who has passed into default after 270 days of delinquency can be granted a forbearance or deferment to eliminate the default or reduce the delinquency before a default claim is submitted (under FFELP) or before the loan is transferred to ED’s Debt Collection Division (under Direct Loans). As part of the forbearance agreement between a FFEL lender and a defaulted borrower, the borrower must sign a new agreement to repay the debt, which constitutes the borrower’s reaffirmation of his or her obligation to repay the loan and reinstates borrower protections. Defaulted borrowers in the Direct Loan program are not required to sign a new repayment agreement or otherwise reaffirm the debt when forbearance is granted under the same circumstances. 

Though the Department received requests to eliminate the signed repayment agreement requirement from the FFEL regulations, it is considering adding that requirement to Direct Loan regulations instead. 

Several school negotiators agreed with this proposal, stating that reaffirmation is an important part of the borrower understanding that the loan must be repaid, as it reestablishes the terms of the agreement between the lender and the borrower and is important in establishing the borrower’s obligation going forward.

Negotiators representing servicers recommend requiring the reaffirmation at the point the default claim is issued, but before it is paid by the guarantor, rather than at the 270-day mark, saying many borrowers wait until the 270th day they are past due to seek help and need more time to sign the agreement. 

Minimum Loan Period for Transfer Students in Non-Term and Certain Non-Standard Term Programs

For a school that measures academic progress in clock hours, or measures academic progress in credit hours but does not use a semester, trimester, or quarter system and does not have terms that are substantially equal in length with no term less than 9 weeks in length, current regulations provide that, in general, the minimum period for which the school may originate a Direct Loan is the lesser of (1) the length of the student’s program at the school (or the remaining portion of the program), or (2) the academic year as defined by the school. 

The regulations provide an exception to this requirement only in the case of a student who transfers into a school with credit or clock hours from another school, and the loan period at the prior school overlaps the loan period at the new school. In this circumstance, the new school may originate a loan for the remaining balance of the program or academic year that started at the prior school, in an amount up to the balance of the borrower’s annual loan limit remaining after subtracting the amount borrowed for attendance at the prior school. After this initial loan period, the student becomes eligible for a new annual loan limit, with a new loan period corresponding to the lesser of the program (or remaining portion of the program) or academic year at the new school. 

ED said that the limited scope of the exception provides no benefit to most transfer students and may in some cases discourage students from transferring to different schools. Discussion of this issue centered on eliminating the restriction that requires hours to have been accepted from the former school, and allowing the new school to originate any remaining loan limit for the balance of the applicable period to which the limit applies in all cases where loan periods overlap between the former school and the new school.

Other Issues Discussed on Day 2

  • Deadline for FFEL lender 60-day delinquent borrower repayment disclosure - FFEL lenders and lender servicers have noted that because disclosure notices are often system-generated and sent automatically on a fixed schedule, in some cases the 60-day delinquency disclosure may not be sent until more than five calendar days after the 60th day of delinquency, in violation of the regulations. For example, if a borrower’s 60th day of delinquency falls on a weekend, but a lender’s system generates disclosures only on business days, the 60-day delinquency disclosure may not be sent within the regulatory timeframe.
  • Forbearance Provisions for Borrowers Receiving Department of Defense (DOD) Student Loan Repayment Benefits - Current law specifies that forbearance must be granted to FFEL borrowers who are eligible for and will receive partial repayment on their FFEL loans under the DOD repayment benefit program. This mandatory forbearance is reflected in FFEL regulations. The same provision also applies to Direct Loan borrowers, but is not included in the Direct Loan forbearance regulations. In addition, the Department received requests for this same forbearance provision to be applied to borrowers receiving student loan repayment benefits under other DOD student loan repayment programs.
  • Borrowers who are Delinquent when Authorized Forbearance is Granted - FFEL lenders are authorized to grant administrative forbearance, a form of forbearance that does not require documentation from borrowers, at the end of a deferment period if the borrower was delinquent on repayment of the loan at the beginning of the deferment period. They are not authorized to grant administrative forbearance if the same conditions of delinquency apply to a period of non-mandatory forbearance, even though ED grants such forbearance to Direct Loan borrowers.  Commenters have asked ED to extend the same authority to FFEL lenders.
  • Repeal of unnecessary FFEL Program regulations - HCERA prohibited new federal student loans under the FFEL Program after June 30, 2010. As a result of this change, certain sections of the FFEL Program regulations (or portions of certain sections) containing provisions related to the making and disbursement of new loans may no longer be needed. Certain other provisions may also be obsolete. Removal of these unnecessary provisions would simplify the FFEL Program regulations.