Student loan negotiated rulemaking (NegReg) continued this week as stakeholders in the student loan programs discussed proposed draft regulations issued by the Department. Negotiators spent a day and a half examining draft regulations on the income based repayment (IBR) option created by the College Cost Reduction and Access Act (CCRRAA). NASFAA's summary of IBR - as outlined in statute - is available online. This article discusses the main points and discussions that took place on the IBR program at negreg.
Monthly Payment Provisions
Loan payments are limited to no more than 15 percent of the amount by which the borrower's AGI exceeds 150 percent of the poverty line income applicable to borrowers' family size. Negotiators expressed concern that married individuals filing jointly have both of their incomes taken into account whereas married individuals filing separately have incomes separated out. Negotiators said that married borrowers filing jointly should have a way to break out their individual incomes so that borrowers with low incomes aren't discounted because a spouse that makes more. The Department was not inclined to allow a breakout in this regard because it would include additional administrative effort to break-out income. Additionally, the Department feels that third-party verification is necessary and believes the best way to do that is through the IRS.
Loan providers would be required to limit the monthly payment amount to the proportion of the borrower's total aggregate loan amount. Under the draft proposed regulations borrowers would be required to request IBRs from each lender if they have loans with multiple loan providers. Nonfederal negotiators asked that provisions require lenders to share documentation with other lenders with which a borrower has loans. But sharing documentation raised several concerns about borrower privacy since that would entail lenders sending other lenders borrower tax information.
Nonfederal negotiators asked for language that would require all loans with a single loan holder be placed into IBR. The Department stated that it would be wary of taking away any choice from a borrower, even though it admits that it is difficult to conceive of a scenario where it wouldn't be appropriate to place all loans into IBR.
The monthly payment amount would also be adjusted up to $5 if the monthly payment amount is between $0 and $5. Student negotiators objected to this provision saying that no exception to the IBR calculation that would require a borrower to pay more than the calculated amount because they believe it would be a violation of statute that specifies that payments be limited to 15 percent. "If anything, the amount should be lowered to $0," said the negotiator. The Department agreed and said that it would allow a zero calculated payment, but that those payments would not qualify for loan forgiveness after 25 years.
This drew strong opposition from some nonfederal negotiators who felt that if a repayment calculation is zero, those payments should be counted as qualifying payments for forgiveness. The Department contends that a zero calculation is not a payment, rather a suspension of payments.
"The statute and the policy are on the other side of your position," said a nonfederal negotiator. "A lot of people who are the most destitute are there for a long term. Allowing zero dollar payments to count towards the 25-year forgiveness is vital to a lot of borrowers and goes contrary to the intent of the statute."
Nonfederal negotiators also pointed out that zero payment is accepted in the ICR program. The Department contends that ICR is completely different regulation because it allows for loan forgiveness after 25 years without respect to the number of payments a borrower makes. In IBR statute it stipulates 25-years worth of actual payments, which the Department interprets to mean payments greater than zero.
"We appreciate your opinion, but we disagree on that point," said the Department's legal counsel.
The proposed draft regulations stipulate that in instances where the borrower's monthly payment amount isn't enough to cover accrued interest on a subsidized Stafford loan, the Secretary will pay the remaining interest on the loan for up to three consecutive years on each loan. Borrowers that consolidate will be eligible to have an interest rate subsidy on the underlying portion of their consolidation loan that was subsidized because the regulations specifically stipulate the loan must be a subsidized Stafford loan.
When a borrower's monthly payment isn't large enough to cover the principal amount due, the payment of that principal is postponed until the borrower leaves IBR.
Loan Forgiveness
Borrowers may only elect IBR if they qualify for a partial economic hardship. The repayment period for a borrower under IBR may be greater than 10 years, but not more than 25 years, not including periods of deferment or forbearance. Payments made on or after July 1, 2009, in the income sensitive, graduated, or extended repayment plans also count towards the 25-year maximum. Payments made in a standard repayment schedule are currently excluded, but at the request of nonfederal negotiators, the Department will consider whether those payments can also count.
Several nonfederal negotiators took strong issue with the fact that payments made in other programs would not be counted for loan forgiveness until July 2009. "We think this is bad public policy and not supported by statute," said one negotiator. The Department held firm to their policy interpretation and no payments will be counted towards the 25 years needed for loan forgiveness. The Department basis its position in part upon the fact that IBR is not effective until July 1, 2009.
Under the proposed draft regulations, borrowers will receive a cancellation on any remaining principal and accrued interest on their eligible loans after 25 years if the borrower has participated in the IBR program at any time during that period. Loan holders must notify borrowers that no additional payments are required within 60 days after the lender determines that the borrower qualifies for forgiveness.
Some nonfederal negotiators asked that the 25 year maximum be shortened to 20 or 10 years. The Department explained that shortening that period would affect budget scoring, but promised to look into the matter more fully by the next round of negreg.
Payment Application and Prepayment
When a borrower makes a payment, the funds will be applied in the following order:
- Accrued interest
- Collection costs
- Late charges
- Loan principal
Proposed draft regulation stipulate no penalty for early repayment and does allow borrowers to make prepayment that she applied in accordance with 682.209(b)(2)(ii).
Post IBR
Borrowers who no longer have a partial economic hardship may continue to make payments under the income-based repayment plan. The loan holder would recalculate the borrower's payments, which would be no more then their standard 10-year repayment amount before the borrower entered IBR. At the request of the borrower, the loan holder must change a borrower's repayment plan from an IBR repayment plan to a FFEL standard repayment plan.
Some nonfederal negotiators also questioned a section of the proposed draft regulations that would allow a borrower to remain in the IBR program even if they no longer meet the partial economic hardship status.
Eligibility Documentation
The proposed draft regulations allow loan holders to require written consent from the borrower to access their tax return information from the IRS for a period of five years to determine adjusted gross income (AGI). If the AGI is not available - because the borrower did not file or any other reason - or if the AGI does not accurately reflect the borrower's current income, the lender may use other forms of documentation. Lenders were unsure whether the IRS would accept a consent form that would grant access to tax forms into the future. Some nonfederal negotiators also questioned how the Department came to the five-year time frame. The Department said the time matched provisions in other loan repayment plans that require verification.
Borrowers will also need to certify their family size on an annual basis. A nonfederal negotiator asked the Department to consider using a default family size of "1," unless the borrower specifically specifies otherwise.
Disclosures and Consumer Information
Mirroring disclosure requirements in ICR, the proposed draft regulations would require student loan providers to inform borrowers about the income based repayment (IBR) option in their disclosure statements. Lender negotiators objected to the idea that they would have to inform the borrower of the IBR program at the time the loan is offered because in most cases it would be preferable to give borrowers an economic hardship deferment first. At the very least, lender negotiators want to see regulatory language that encourages borrowers to take an economic hardship before using IBR.
The proposed draft regulations would also require IBR to be included during exit counseling. A nonfederal negotiator also asked that regulatory language be added that requires borrowers to be notified of other partial or full loan forgiveness programs, and a notice that tells them which forgiveness programs are only available in the Direct Loan program. Lender negotiators also asked that borrowers be informed of particular benefits available to the borrowers in the FFEL program.
Loan Rehabilitation
The IBR is an eligible repayment plan for borrowers to make their nine required monthly payments to rehabilitate a defaulted loan. Payments made while in a rehabilitation program do count toward the 25-years worth of payments needed for loan forgiveness, according to the Department. A nonfederal negotiator asked the Department to consider regulatory language that would define "reasonable and affordable payments" to match the IBR payment requirements. The Department said it would consider the request. A nonfederal negotiator also asked the Department to consider regulation that would stipulate that rehabilitated loans that cannot find a loan provider to purchase the loan be moved into the Direct Loan Program.
Additional Resources
- Regulatory citations: §§682.205, 682.209, 682.215, 682.405, 682.410, 682.411, and §§682.604, 685.208, 685.209, 685.210, 685.211, 685.220, 685.221, and 685.304
- Proposed draft regulations of IBR
- Student Loans Negotiated Rulemaking Concludes, Issues Summary Included
- New Income-Based Repayment Provisions
By Justin Draeger
NASFAA Assistant Director for Communications
Jennifer Martin, NASFAA Assistant Director for Professional Assessment, Training, and Regulatory Assistance, also contributed to this article.
Posted 02/06/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
