Student Loan Negotiated Rulemaking Committee Tackles Rehabilitation and Discharge Issues

The student loan negotiated rulemaking committee added three new items to the agenda Wednesday, for a total of 27 issues now scheduled for negotiation, although some may be combined during the course of negotiation. Federal and non-federal negotiators have so far addressed 17 issues in the weeklong regulatory brainstorming session.

The week’s detailed discussions on various student loan issues between representatives from the higher education community and the U.S. Department of Education (ED) form the basis of negotiations for the second week-long session to be held next month, when the Department will provide draft proposed rule language.

The committee accepted for negotiation, the 22 issues initially proposed by ED, two issues raised Tuesday that would conform Perkins Loan regulations to Direct Loan provisions, and added three more Wednesday regarding FFEL lender additional repayment disclosures for borrowers having difficulty making payments, administrative wage garnishment (AWG) provisions regarding hardship and IBR and ICR forgiveness processing regulations for the 20- or 25-year forgiveness mark.

 Satisfactory Repayment Arrangements on Defaulted Title IV Loans for Borrowers who also Rehabilitate the Loan

Borrowers who wish to rehabilitate a defaulted loan must make nine consecutive on-time voluntary payments; this option may be used only once for any given defaulted loan. Students in default who wish to re-establish Title IV eligibility may do so by making six consecutive monthly payments under a satisfactory repayment arrangement; this option may be used only once by any given borrower. ED has found inconsistent interpretation within the financial aid community about the simultaneous nature of these two options. In the course of making loan rehabilitation payments, a borrower could also satisfy the six consecutive on-time monthly payments necessary to regain eligibility for Title IV aid, but the borrower might not understand that he or she is using both one-time options simultaneously.

Under the Department’s current policy, if a borrower re-defaults on a loan that was previously rehabilitated, the borrower is not considered to have already used up the one-time opportunity to make satisfactory repayment arrangements unless the student entered into both a rehabilitation agreement and a satisfactory repayment arrangement up front. However, some have interpreted the law to provide that a borrower automatically makes satisfactory repayment arrangements at the time the borrower rehabilitates a defaulted loan even if borrowers have no intent to receive additional Title IV aid at that time. Most often, students would be unaware that they are using the one opportunity to make satisfactory repayment arrangements afforded under the law by virtue of the rehabilitation. Under this interpretation (which ED regards as a misunderstanding of its policy), if a borrower re-defaults on a previously rehabilitated loan, the borrower has no other opportunity to make satisfactory repayment arrangements to regain Title IV eligibility. 

Several negotiators expressed agreement with current ED policy, and suggested that counseling should require explanation of exercising one, the other, or both options, as well as the advantages and disadvantages of exercising the two options separately or together. Several negotiators also said borrowers should be allowed to apply monthly rehabilitation payments subsequently to a satisfactory repayment arrangement, should the student decide during the rehabilitation period to return to school.

The Department is examining whether the six consecutive, on-time, monthly payments made as part of a rehabilitation agreement should count as satisfactory repayment arrangement payments only if the borrower and the loan holder agree that the payments are also intended to be satisfactory repayment arrangements to regain Title IV aid eligibility and the borrower applied for and received such aid within a reasonable time after making the six payments.

 “Reasonable and Affordable” Payment Standard for Rehabilitation of Defaulted Direct Loan and FFEL Program Loans

The Department is considering using the income-based repayment (IBR) formula to determine what is a reasonable and affordable payment for loan rehabilitation purposes to simplify and standardize the process for borrowers. However, there is no minimum payment amount under IBR, and, in some cases, a borrower’s calculated monthly payment under IBR may be $0.00. ED has not allowed a zero payment amount to be considered a “reasonable and affordable” payment amount.

Several negotiators expressed some concern that if the IBR standard is used and a $0 monthly payment is calculated, then the opportunity to make repayment habitual for borrowers is lost. Other negotiators related experiences where a servicer working to make rehabilitation arrangements will not work with the borrower to reduce payments from a required minimum to a lower “reasonable and affordable” level, and thus wanted to see a more standardized process for determination of that amount.

Loan rehabilitation programs authorized for borrowers who have defaulted on Direct Loan and FFEL program loans provide that a borrower is eligible for rehabilitation if the borrower makes 9 voluntary, reasonable and affordable payments within 20 days of the scheduled due date during 10 consecutive months. Unlike the case for a Direct Loan borrower, a FFEL borrower’s defaulted loan is not rehabilitated until the guaranty agency holding the defaulted loan sells the loan to an eligible lender. Only then is the default removed from the borrower’s credit reports and the benefits of the promissory note restored. 

Many negotiators expressed concern over the possibility that a borrower can seek rehabilitation and make their 9 voluntary payments, but be denied rehabilitation if the guaranty agency cannot sell their loan. Some suggested the Department draft regulation either to change the requirement that the loan be sold as a qualification for rehabilitation, or to allow the borrower to still enter rehabilitation if the loan is not sold through other means. However, the sale of the loan is a statutory requirement that ED is unable to alter, and ED does not have authority to purchase rehabilitated FFELP loans itself.

Guaranty agencies are only required to sell loans to rehabilitate them if such a sale “is practicable.” If a guaranty agency is unable to sell the loan, the loan remains in default status and the borrower continues repaying the guaranty agency that holds the loan.

Total and Permanent Disability Discharge: Post-Discharge Monitoring of Employment Earnings

ED solicited feedback from non-federal negotiators on monitoring of employment earnings of borrowers whose loans have been discharged due to total and permanent disability. ED has raised this issue in an effort to reduce the number of disabled borrowers whose loans are reinstated due to a monitoring error or failure to provide proper documentation.

After a total and permanent disability discharge has been granted, the borrower enters a 3-year post discharge monitoring period that begins on the date the loan was discharged. A discharged loan is reinstated if the borrower’s annual employment earnings exceed the poverty guideline amount for a family of two, or if the borrower fails to provide required documentation of the 3-year post-discharge employment earnings. Because the 3-year post-discharge monitoring period begins on the discharge date, in most cases ED has to obtain employment earnings information for two partial calendar years at the beginning and end of the 3-year period, which is hard to obtain. Borrowers have not filed income tax returns for a calendar year that isn’t over; social security earnings statements only provide income information on a calendar-year basis; and other documentation of employment earnings that a borrower could provide for a partial calendar year may be inconclusive. 

To help avoid errors to due to inconclusive data and reduce the number of borrowers whose loans are reinstated due to the borrower’s failure to provide such documentation, ED is considering monitoring a borrower’s post-discharge employment earnings for three complete calendar years beginning on Jan. 1 of the year after the discharge was granted. ED said this would make it easier for borrowers to provide employment earnings documentation to the Department. Although negotiators understood that ED was trying to make documentation requirements more feasible for borrowers to meet, some negotiators expressed concern about room for error, and about extending out the time during which earnings are monitored. ED said it will consider letting the borrower determine whether the monitoring period would include two partial years and two complete calendar years or three complete calendar years. 

Total and Permanent Disability Discharge: Single Application Process 

ED responded to criticism it received last year that its total and permanent disability (TPD) discharge application process is unduly burdensome for borrowers by proposing a streamlined TPD discharge process, by which a borrower would submit one TPD discharge application directly to the Department.

Currently, a borrower applying for a total and permanent disability (TPD) discharge must submit a discharge application to each of the borrower’s loan holders. The loan holder then makes an initial determination of the borrower’s eligibility for a TPD discharge, and assigns the loan to ED if the loan holder determines the borrower qualifies. For non-defaulted FFEL Program loans, both the loan holder and the guaranty agency must agree that the borrower appears to qualify for a TPD discharge before the loan is assigned to ED. After accepting the assignment, ED makes the final determination of whether the borrower qualifies for a discharge. 

Under a streamlined TPD discharge process, a borrower would submit one TPD discharge application directly to ED, even if they have multiple Title IV loans. ED would use NSLDS data to determine what loans the borrower has. Negotiators also proposed making the single application available for electronic submission to further help expedite the process, and establishing a single point of contact in the Department. ED expressed concern about added workload, but said it will consider the proposals.

A single application process would also improve timeliness of decisions to discharge and consistency in determining whether a discharge is allowable.

Other Issues Addressed Wednesday

  • Total and Permanent Disability Discharge: Borrower Notification of Denial: The Department received public comments recommending that the regulations governing total and permanent disability (TPD) denials reflect the information currently included in the Department’s TPD discharge denial letters and include additional information (beyond what is currently included in the letters) that might be helpful to borrowers. Negotiators asked that the regulations require more detail in the denial letters, including the reasoning for the denial, how to correct any deficiency in payments, and inform the borrower of forbearance options. 
  • Rehabilitation of Defaulted Direct Loan and FFEL Program Loans: Treatment of Borrowers Subject to Administrative Wage Garnishment (AWG): 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. 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 examining whether concurrent voluntary borrower payments and involuntary AWG payments should continue for the entire period it takes the borrower to qualify for loan rehabilitation, or whether the garnishment could be dropped after a certain number of voluntary payments have also been made. Given the greater risk of re-default associated with these borrowers, discussion included whether any relaxation of the current double payment requirement should be limited.
  • Title IV Closed School Loan Discharge: A borrower’s loan may be discharged if the borrower’s school completely closes, or if the borrower withdrew within 90 days of the school’s closure. Public comment suggested that the 90-day window for student withdrawal prior to a school’s closure date may be insufficient because there may be indications of a school’s pending closure that may prompt a student to withdraw more than 90 days prior to the school’s identified closure date. Negotiators said expanding the exceptional circumstances window beyond 90-days to 120 days, or even to a year, would allow students more flexibility, and not punish student who withdrew due to signs of the school’s financial insolvency.  Cautions were raised to avoid discouraging students from seeking teach out options, whereby students could finish uncompleted courses at a different location or other institution and receive their credit.
  • Participation Rate Index Appeal for Single Cohort Default Rate Loss of Eligibility to Participate in the Direct Loan Program: When the statutory definition of cohort default rate (CDR) was amended in 2008 to expand the period during which borrowers are tracked for default, regulations allowing an appeal for low numbers of borrowers (i.e., a participation rate index, or PRI) were accordingly revised. Normally an institution’s eligibility is affected by three consecutive years of high CDRs. However, regulations also impose sanction against an institution that has a very high CDR for just one year. The participation rate index (PRI) appeal also applies to this single year sanction, but the regulatory threshold was not similarly revised. Discussion of this issue centered on how that revision for the PRI should be accomplished.