ED Floats Proposal For Another Student Loan Repayment Plan

By Katy Hopkins, Communications Staff, and Karen McCarthy, Policy & Federal Relations Staff 

On the first day of negotiated rulemaking, committee members began to discuss two proposed agenda items from the Department of Education (ED) and suggested more than a dozen additional topics for inclusion on the agenda.  

As set forth by ED, over the next three months, negotiators will debate: 

  1. How to structure a new Pay As You Earn (PAYE) plan: ED has proposed creating a new plan, PAYE2, for Direct Loan borrowers ineligible for the current PAYE program.
  2. Whether to require loan holders to use an existing database to identify U.S. military servicemembers who may be eligible for lower interest rates: Negotiators will consider whether Federal Family Education Loan (FFEL) Program loan holders should be required to use the Department of Defense’s Manpower Data Center (DMDC) database to find servicemembers with FFEL loans that are eligible for lower interest rates under the Servicemembers Civil Relief Act (SCRA).

PAYE2 

ED has proposed creating a new income-driven repayment plan, PAYE2, to meet President Obama’s memorandum request to extend the repayment option to an additional 5 million borrowers by December 2015. ED would continue to offer existing repayment plans, including the original Income-Contingent Repayment (ICR) plan, the current PAYE plan, and the Income-Based Repayment (IBR) plan.

PAYE2 is intended to patch up an eligibility gap for a cohort of borrowers who currently do not qualify for PAYE based on when they took out their loans. Though ED supports an eventual move to a single income-based repayment plan, that would require Congressional action, ED representative Gail McLarnon said. Adding PAYE2 would allow ED to open the flexible repayment option to more borrowers in the interim, she added.

Many negotiators expressed concern at adding another repayment plan to federal student loan borrowers’ current menu of options, stressing the need for simplicity. Since PAYE is regulatory in nature, NASFAA member Rachelle Feldman urged ED to consider whether they should instead simply alter the regulatory structure of  the current PAYE plan, rather than retaining the current PAYE and then adding a new PAYE2 plan. NASFAA member Scott Cline suggested finding another name for PAYE2, if enacted, to avoid additional confusion for borrowers.

Depending on the negotiations, PAYE2, if enacted, could differ in structure from PAYE, as negotiators debate how to particularly target it to “the neediest borrowers,” as directed in the presidential memorandum, among other topics.

Changes negotiators are considering include whether PAYE’s partial financial hardship (PFH) eligibility criterion should be modified or eliminated, whether capitalized unpaid interest should be limited or nonexistent, and whether total payments should be capped at what a borrower would pay under a 10-year standard plan, as exists for PAYE borrowers.

DMDC USE: 

Under SCRA, servicemembers who borrowed a Direct or FFEL loan before entering active duty status are entitled to interest rates no higher than six percent while those borrowers remain in active duty. Originally, servicemembers had to submit written requests and copies of their military orders to obtain those lower rates.

ED has since simplified the process for Direct and FFEL loans held by ED by using the DMDC, through which loan holders can verify servicemembers’ information and are able to apply SCRA benefits for eligible borrowers without written requests from them. ED also authorized and encouraged FFEL program lenders and servicers to utilize the DMDC.

“We’re using what we believe to be good data and streamlining a process for both the Department and the borrower,” McLarnon said. “It seems like a win-win to us.”

ED is unsure, however, of what regulatory path to take to further use of the database by FFEL lenders and servicers, McLarnon said. Negotiators will debate whether lenders and servicers should be required to periodically check the DMDC for eligible borrowers or if borrowers should be able to request their servicers verify their information in the database, rather than submitted their written requests and military orders. 

Negotiators proposed 14 additional agenda items for negotiation. ED is considering the suggested topics for inclusion in the final negotiated rulemaking agenda, which it will release as early as Wednesday morning. Check back in with Today’s News tomorrow for an updated list of topics negotiators will tackle in the coming months. For more on this negotiated rulemaking, be sure to check out prior coverage.

 

Publication Date: 2/25/2015


Melissa C | 2/25/2015 4:22:50 PM

Students are confused by which repayment plan they can qualify for for loan forgiveness and which plan would give them the most benefit. Repayment plans should be looked at to simplify/modify the current repayment process for all: Direct Loans, Stafford, Grad or Parent Plus, and Consolidation Loans to 4 choices without the need for the borrower to be differentiated between their federally granted loan types; old FFEL vs new Direct Loan etc. or whether they will lose the ability to benefit on some plans to participate in a Loan Forgiveness plan. Loan Forgiveness should be allowed to weigh in if it will give the borrower a benefit to their repayment process. The repayment plans offered should be in the better interest of the borrower and simplified/modified to: 1. Standard, 2. Graduated, 3. Extended, and 4. NEW Payment Based on Income Plan (PBIP), that combines the better benefits to the borrower of the existing 4 income Based/Sensitive/Contingent/Pay based repayment plans. Those borrowers who choose the 4th option should be able to allow for payments already made to be incorporated into their new repayment calculation/length of time, as it seems those who may have needed this option the most may have struggled over a longer length of time before learning of this option, if they have a payment history that includes putting their loans in deferment, forbearance, or falling behind and becoming delinquent in general. Borrowers who choose the 4th plan should have their payments withheld through payroll deduction similar to federal/social security taxes, along with an option to allow a new calculation to occur in length of time payments are owed if the borrower chooses to pay-down some of their loans by using any federal tax refund they would be eligible to receive from year to year. Payment plan options 1-3 should allow borrowers the option to have their payments withheld through payroll deduction and apply tax refunds towards paying down their loans.

David S | 2/25/2015 2:5:02 PM

Paul - while no other country is even close to the US in terms of student loan volume, we're by no means the only country where they exist...Canada, the UK, France, Australia, New Zealand, Japan, Sweden...student loans are very much an international phenomenon.

Paul W | 2/25/2015 1:23:01 PM

How about eliminating student loans altogether? No other civilized nation uses them.
For repayment of existing loans, use the advantages already in the tax code to create an incentive for students, once employed, to share the repayment with their employers. That has all sorts of bottom line benefits for both the former student and the new employer. But, hey, that might require some imagination.

David S | 2/25/2015 12:47:12 PM

As my wife and I were planning our wedding many years ago, she told me one day, "we have to go pick out invitations." Little did I know that I would be faced with the choice of 70,000 different types and colors of paper, about 850,000 different fonts and approximately 7.2 million different colors for the type. I did what any husband-in-training would do and said "you decide." Too much for my brain.

Loan repayment plans are approaching that. Borrowers neither know nor care if they borrowed FFELP or DL; they have to stop and think about when they first borrowed. There is universal agreement that everything about financial aid is too complicated and difficult to explain...are our colleagues at the Department unaware of this? And knowing that sometime in perhaps the next 18 months we'll have a Reauthorization that could change all this - no secret that simplification is one of the early goals - well, to be blunt, what are they thinking?

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