Student Loan Negotiators Push for More Relief for Borrowers in Rehabilitation

Negotiators at the student loan negotiated rulemaking meeting entered an impasse Tuesday over how a borrower’s monthly payment is calculated in Direct Loan or FFEL loan rehabilitation.

Borrowers who have defaulted on Direct Loan and FFEL program may be 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. 

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 argue that the IBR formula should be used for all borrowers in loan rehabilitation to calculate “reasonable and affordable” payment amounts, rather than only if a borrower objects to the payment amount determined by the guarantor.

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. The Department argued that it has an obligation to the taxpayer to collect on federal loans, and that borrower repayment success is better served if the guaranty agency calculates a reasonable and affordable monthly payment first and the IBR calculation is only used if the borrower objects to the monthly payment determined by the guarantor.

Some non-federal negotiators questioned this justification, and also expressed concern about borrowers’ need to formally object and their awareness of this right. 

ED also proposed that this regulation change would not include IBR’s $0.00 minimum monthly payment baseline. Rather, ED officials proposed a $5.00 minimum monthly rehabilitation payment when the IBR formula is used.

OTHER ISSUES

  • 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 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. Some guarantors stop the AWG earlier after a certain number of voluntary payments. The proposed regulation would standardize guarantor practice.
  • FFEL Program Administrative Wage Garnishment (AWG) Hearings for Defaulted Borrowers: ED is considering expanding a borrower’s ability to request a hearing to object to AWG. In addition to objections to the existence or the amount of the debt that are currently allowable, ED proposes to add objections to the enforceability of a debt, and objections that the withheld amount or rate would cause financial hardship.  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. Given the size of the document and the limited amount of time negotiators had to review it, ED agreed to accept comments and review the issue with negotiators at a later date via conference call. 
  • Modification of Direct Loan Program Regulations: The Department has also 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. Most of the technical changes would involve counseling, deferment, repayment plans and Direct Loan consolidation. ED would also bring sub-regulatory guidance from the FSA Handbook into the regulations to clarify that a school can send written material by e-mail to an e-mail address provided by the student borrower to satisfy the exit counseling completion requirement for students who withdraw from a school without the school’s prior knowledge or if the student fails to complete the exit counseling as required. Another modification would allow for a student’s completion of electronic interactive exit counseling offered by the Secretary to satisfy the exit counseling requirements.  Negotiators required more time to review the 122-page issue document, and are scheduled to pick up discussion of the proposed changes later this week.