ED to Delay Portions of Student Loan Rulemaking Process
Portions of the current student loan negotiated rulemaking process 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 of Education does, however, plan 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.
The student loan committee is negotiating 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.
Financial aid administrations expressed some concern with some of the updates and technical changes to Direct Loan Program regulations. The Department has proposed a series of technical changes to Direct Loan regulations to replace prior cross-references to FFEL regulations with up-to-date and clear language and definitions.
FAAs requested that ED provide more guidance for Direct Loan servicers to resolve some of the inconsistencies that borrowers have encountered. ED responded that FAAs can take such issues to program specialists Pamela Moran and Gail McLarnon at the Office of Postsecondary Education.
FAAs also requested clarification from ED on some graduate and professional student issues, such as long-term residency forbearance for students who enroll in programs that last longer than 2-3 years. ED said it would review those considerations.
Reasonable and Affordable Payment Standard for Rehabilitation of Defaulted FFEL/DL Loans
The Department proposed regulatory language that allows borrowers who object to the “reasonable and affordable” monthly payment amount determined by their guaranty agency to have their payment amount recalculated using the income-based repayment (IBR) formula.
Some negotiators requested that ED also add language that guaranty agencies notify borrowers of their right to object and provide guidance on best practices for a holistic approach to financial counseling and review in the preamble. ED said it would resume internal talks on these issues before further discussion.
ED’s proposal would also stipulate that if the borrower fails to provide the necessary documentation to recalculate the payment amount using the IBR formula, then no rehabilitation agreement exists and the rehabilitation does not proceed.
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.
Rehabilitation of Defaulted Direct Loan and FFEL Program Loans: Treatment of Borrowers Subject to Administrative Wage Garnishment (AWG)
Payments made by an employer under administrative wage garnishment (AWG) do not qualify as payments under a rehabilitation agreement, because they are involuntary. These borrowers must make additional voluntary payments concurrent with the wage garnishment. The Department is proposing requiring guaranty agencies to stop AWG after the borrower makes five voluntary, monthly qualifying payments under the rehabilitation agreement. Currently, guaranty agencies are not required to stop AWG until after the borrower makes 9 voluntary payments during 10 consecutive months, although some guaranty agencies do stop AWG earlier.
Negotiators representing consumer advocates requested that borrowers also be made aware of the option to work with guaranty agencies to attain a reduced voluntary payment that takes into consideration the AWG, and again when garnishment is suspended of their options to seek a “partial financial hardship” determination for a lower voluntary payment. Meanwhile, guaranty agencies request that such language remain non-prescriptive to give GAs flexibility in working with borrowers who wish to enter loan rehabilitation.
FFEL Program Administrative Wage Garnishment (AWG) Hearings for Defaulted Borrowers
Though ED has proposed expanding a borrower’s ability to request a hearing to object to AWG, some negotiators would like to see more accountability in the hearing process. Consumer advocates cited a “real quality problem,” and expressed concern over the potential for bias given that the hearing official (judge) is often paid by the guaranty agency. ED argued that there are little to no incentives for the judge to exhibit bias and the threat of a lawsuit should be enough to mitigate that factor. ED officials noted that incompetency can be a more realistic concern, and though ED conducts reviews of GAs service, an incompetent hearing official can also adversely affect the GA and the GA has the determination to retain or remove those officials. Consumer advocates plan to propose new language for ED to consider.
ED also proposed to allow the borrower to pursue other objections in the AWG hearings, including the enforceability of a debt and objections that the withheld amount or rate would cause financial hardship. Negotiators representing guaranty agencies raised concerns about the implications that would have toward the validity of the debt, when the focus of the hearing is on AWG. ED responded that the hearings are to be treated as any lawsuit, whereby both parties are bound by the decision made in the hearing, including those that invalidate the legitimacy of the debt.
ED is also proposing more robust procedural requirements for Guaranty Agencies, requiring them to consider whether a borrower would undergo financial hardship as a result of AWG, specifying the manner by which agencies may use third-party contractors and the manner in which garnishment may end.
Repeal of Unnecessary FFEL Program Regulations
In a 319-page issue paper, ED outlined proposed changes for the 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. Negotiators highlighted a number of small concerns that ED has or is working to address.