Negotiators Seek Better Protection for Struggling Borrowers in Federal Repayment Programs
In week two of the student loan negotiated rulemaking process, the Department of Education proposed a number of regulatory changes to make loan repayment a little easier for struggling borrowers. Still, some negotiators representing consumer advocates would like to see more help for borrowers.
In the second of three week-long meetings, the student loan committee is negotiating 25 student loan regulatory issues that will ultimately result in a package of proposed rules to be published for public comment before promulgation of final rules.
Of particular concern to some negotiators on the committee was the Department’s proposed plan to divide the Income-Contingent Repayment (ICR) plan into one classic and one revised program.
The revised ICR plan (or ICR-A, as ED officials temporarily dubbed it) reflects the changes outlined by President Obama’s “Pay as You Earn” Initiative, which affects a small group of borrowers. The plan would cap the annual payments for a specific group of borrowers 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.
Under the Department of Education’s proposed regulatory language, an eligible ICR-A borrower:
- Has no outstanding balance on a Direct Loan Program Loan or FFEL Program loan as of Oct. 1, 2007, or has no outstanding balance on such a loan on the date he or she receives a new loan after Oct. 1, 2007.
- Has received a disbursement of a loan under the Direct Loan Program on or after Oct. 1, 2011. The disbursement in this instance does not have to be a first disbursement. An eligible borrower may also have received a Direct Consolidation Loan based on an application received on or after Oct. 1, 2011.
Though the President’s initiative did not indicate whether the requirements should be based on academic or fiscal years, ED said award years do not typically apply to loan programs and it would be too costly to use the academic year, which would produce a larger eligibility pool than using the fiscal year determination.
The proposed language would also limit capitalization of interest on the loans to 10 percent of the original balance at the time the borrower entered repayment, unless the borrower leaves the ICR-A program or no longer shows financial hardship, at which point the interest on the loan would capitalize.
Because the President’s Initiative makes changes that affect a specific group of ICR borrowers, the Department proposed splitting the repayment program into two programs, establishing the classic ICR program (ICR-B) as limited to borrowers who were in repayment under ICR prior to July 1, 2013, and borrowers who do not meet the eligibility requirements for the revised ICR plan (ICR-A). ED officials said they would look into how to operationalize that determination.
Negotiators representing consumer advocacy groups argued that this change unfairly gives one limited group of borrowers better repayment terms than another, particularly since classic ICR borrowers do not receive the benefit of a 10 percent limit on capitalization through the entirety of the payment plan. ED said it was too costly to expand the benefits of ICR-A to the entire ICR and IBR program.
Some negotiators also argued that under all three plans, borrowers who leave the program or no longer qualify are disadvantaged once they enter standard repayment and the capitalization of the interest that has accrued becomes outstanding.
Negotiators also argued for stronger consumer protections for borrowers who leave IBR, no longer qualify for IBR or are removed from IBR due to compliance issues. To comply with IBR, borrowers must submit an annual review, providing documentation that determines whether the borrower continues to show partial financial hardship to qualify for IBR.
At last month’s rulemaking meeting, negotiators stated that many borrowers were not given sufficient notification prior to the review process, or sufficient time to submit all required documents, verify completion or make necessary corrections before the borrower was converted to a standard repayment plan for failure to comply. To address those concerns, ED is proposing the following additional regulatory language:
- For each subsequent year that a borrower 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 the borrower will be re-evaluated to determine whether he or she continues to have a partial financial hardship.
- The loan holder designates the repayment option for any borrower who selects the income-based repayment plan, but does not provide the written consent or other documentation required within 60 days of the date provided to the borrower.
ED said it will consider requiring the notification letter to specify the consequences of noncompliance in the annual review process.
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.
With regard to loan forgiveness, ED is proposing to require the lender or servicer to determine when a borrower has reached forgiveness, rather than the borrower being required to submit a request for loan forgiveness.
- Deadline for FFEL lender 60-day delinquent borrower repayment disclosure - FFEL lenders and 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. ED has proposed language that would require the notice be sent within five business days of the date the borrower becomes 60-days delinquent. ED also proposed specifying that a repayment disclosure is not required if the borrower’s difficulty has been resolved through contact with the borrower.
- 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. ED is proposing language to resolve both of these issues.
- 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. ED has proposed language to extend the same authority to FFEL lenders, however negotiators had additional concerns that ED said it will attempt to address.