Negotiators Reach Impasse as Deadline to Reach Consensus Nears

As negotiators neared the end of the three-week long student loan negotiated rulemaking process Thursday, negotiators found themselves at an impasse regarding the annual review process in the income-based repayment program.

Today marks the last day for federal and non-federal negotiators to come to a consensus on the entire rulemaking package. 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.

Changes to the Income-Based Repayment (IBR) Plan

A frequent point of contention at all three student loan negotiated rulemaking sessions has involved an impasse between consumer advocates and servicers about how best to avoid the consequences of interest capitalization for borrowers who fail to meet their documentation deadlines to remain in the income-based repayment (IBR) program.

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. Having heard concerns from the community about inconsistencies in timely notification to borrowers about the annual hardship review, ED proposed the additional regulatory language to indicate the following:

  • For each subsequent year that a borrower who currently has a partial financial hardship remains on the income-based repayment plan, the loan holder must notify the borrower in writing of the annual review requirements no later than 60 days prior to the date by which the loan holder must receive all of the information to determine whether he or she continues to have a partial financial hardship.

ED and negotiators representing servicers have also proposed requiring this notification letter to specify the financial consequences of failure to meet the specified deadline and noncompliance in the annual review process (e.g. interest capitalization). Servicers also proposed a 5-calendar day grace period for late submissions. 

Still consumer advocates argued that regulatory language should provide more protections for borrowers who miss their deadlines or the grace period for exceptional circumstances. They argued that because the consequences can be so severe, borrowers should be protected as much as regulatory authority can allow.

ED said the severity of the consequences and the lack of an appeal process for the failure comply with requirements or to meet the deadline are statutory issues, and cannot be addressed in regulation. Consumer advocates plan to submit another proposal, but if all federal and non-federal negotiators cannot reach a consensus on the entire rulemaking package, ED will develop its own proposed language in the Notices of Proposed Rulemaking (NPRMs). 

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

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 raised concern that this process of determination neglected important expenses and other considerations.

Negotiators proposed that regulatory language provide for a new form that guaranty agencies would use to determine the "reasonable and affordable" payment amount. The proposed form lists criteria that guaranty agencies could use in determining what is "reasonable and affordable," including disposable income, household costs and "relevant and necessary expenses." ED found the proposed form too prescriptive, but negotiators said they could work to simplify the form to allow for broader criteria. For example, ED said the criteria could list "utilities" rather than "electric or gas." Federal and non-federal negotiators came close to tentative agreement on the issue Thursday.

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

ED and negotiators reached a compromise on proposed language to address concerns about the potential for fraud in the use of oral affirmation to grant administrative forbearance to borrowers that have passed into default after 270 days of delinquency, if the guaranty agency has not yet submitted a default claim to the guaranty agency.

State attorney general negotiators expressed concern that ED’s proposed language to allow borrowers to receive forbearance through an oral affirmation of the debt and their agreement to pay would incentivize institutions to use the process to manipulate their cohort default rates. They requested that ED find a solution to ensure that oral affirmation is not used in this manner. ED proposed language in the preamble that would caution schools against the abuse of oral affirmation and note that ED will review forbearance trends for signs of misuse.

Servicers cautioned ED from inserting new language that would be overly prescriptive, arguing that making the process more cumbersome might deter servicers from providing the option to borrowers. The decision to offer and grant forbearance at this point in the process is left to the discretion of the servicer.

The proposed regulatory language would allow defaulted borrowers to make an oral affirmation of debt to receive forbearance or deferment to eliminate the default. The oral affirmation would include, but not be limited to the borrower’s or endorser’s:

  • Acknowledgement of the loan in a legally binding manner
  • New signed repayment agreement, schedule or other agreement to pay the debt
  • Oral acknowledgement and agreement to repay the debt
  • Payment made on the loan

ED also proposed that the forbearance period in this instance be limited to 120 days rather than 12 months and that during the oral affirmation the servicer review the terms of the forbearance, the potential for interest capitalization and the end date of the forbearance. The servicer would also provide the borrower with written confirmation including those same terms and conditions. 

Modification of Direct Loan Program Regulations 

The Department proposed language to clarify and bring consistency to Direct Loan regulations. 

ED proposed more clarity in the Direct Loan Consolidation judgment language to require the borrower to consolidate at least one DL or FFEL program loan and that at the time the borrower applies for Direct Loan Consolidation, the borrower is  --

  • In a grace period
  • In a repayment period, but not default
  • In default, but has made satisfactory repayment arrangements
  • Not subject to a judgment secured through litigation, unless the judgment has been vacated
  • Not subject to loan order for wage garnishment, unless the order has been lifted