Student Loan Negotiators Seek Further Clarification of Protection for Borrowers in Repayment
The final week of the three-week student loan negotiated rulemaking process commenced Monday with further discussion on proposed borrower documentation and notification issues for the income-related repayment plans.
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
The Department of Education proposed regulatory language to meet negotiators’ requests for stronger consumer protections for borrowers who leave the income-based repayment (IBR) plan, 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. ED has proposed regulatory changes that provide more information and notifications to borrowers on the annual review process, the consequences of noncompliance and other available options to provide borrowers “education and information up front.” ED is also proposing notification to borrowers no later than six months prior to the anticipated loan forgiveness date.
Still, consumer protection advocates argued for ED to consider more clarification regarding payments during transition periods, dates for documentation submission deadlines, flexibility in interest capitalization calibration and grace periods for late payments.
ED said many of negotiators concerns require more internal discussion within the Department before moving forward.
Changes to the Income Contingent Repayment (ICR) Plan in the Direct Loan Program
Because many of the proposed regulatory changes for IBR were also made in the Income-Contingent Repayment (ICR) plan to ensure consistency programs, ED said it will consider negotiators concerns across both programs where applicable.
Given the Obama administration’s mandate to provide greater benefits to a limited group of new borrowers through ICR, ED has proposed dividing the ICR plan into one classic (ICR-B) and one revised (ICR-A) program. ED is proposing that the revised ICR-A be open to all eligible borrowers, while the ICR-B be provided as an option to only those borrowers who do not qualify for ICR-A or IBR.
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.
The proposed language for ICR-A 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.
Consumer protection advocates argued that ICR-B be open to all borrowers, because it does not require determinations of partial financial hardship and is available to a broader base of borrowers. They also argued that the change unfairly gives one limited group of borrowers better repayment terms than another, particularly since classic ICR-B borrowers do not receive the benefit of a 10 percent limit on capitalization through the entirety of the payment plan. Though in last month’s negotiations, ED said it was too costly to expand the benefits of ICR-A to the entire ICR and IBR program, this time ED officials said they plan to eventually offer one simple plan (grown from ICR-A) and thereby reduce borrower confusion inherent with multiple complex plans. Consumer advocates requested "to leave the options open to provide access.
Forbearance for Post-270 day Defaulted Loan Borrowers Prior to Lender Claim Payment or Transfer to ED Default Collections
The Department of Education is proposing regulatory language to allow defaulted borrowers to make an oral affirmation of debt to receive forbearance or deferment to eliminate the default. At last month’s meeting, negotiators requested more clarification on what oral affirmation would mean. ED proposed that oral affirmation 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
The change would apply to a borrower who has passed into default after 270 days of delinquency, if the guaranty agency has not yet submitted a default claim to the guaranty agency.
Though some negotiators expressed concern at a propensity for fraud among institutions that may abuse oral affirmation for forbearance to reduce their cohort default rate, ED argued that there are too many requirements for subsequent contact with the borrower regarding the oral affirmation and agreement to repay or acknowledge the debt that would serve to mitigate that concern.