Negotiated rulemaking (negreg) on student loan issues concluded its first of three separate sessions yesterday after only two days of negotiations. The quick conclusion was due in part to a fluid negotiation process where negotiators found themselves in agreement on several agenda items. The quick conclusion also stems from the fact that the first round of negotiations consists of fact finding and information gathering so the Department can draft proposed regulations to be discussed at the next round of negreg in February.

The Department divided the agenda items into two separate packages for consideration. The first package of regulatory issues focuses solely on provisions related to the College Cost Reduction and Access Act (CCRAA). The second package focuses on the issue of the preemption of state law by a Federal law, i.e. when is it appropriate that a federal statute takes precedence over and, in effect, nullifies a state statute. A third package was introduced by Mark Pelesh from Corinthian Colleges that focused on trying to find ways to address what he sees as a credit crisis amongst lenders.

Package 1: CCRAA Regulations

Income Based Repayment

The CCRAA created an income-based repayment (IBR) program. The statute authorizes the Secretary to create a new IBR program available to both FFEL and Direct Loan borrowers on all Stafford and graduate PLUS loans. Parent PLUS loans and consolidations loans that contain parent PLUS loans are ineligible for IBR. The IBR program is similar to the current income contingent repayment (ICR) program available to Direct Loan borrowers but has several notable differences that make it more generous. These differences are highlighted in a previous NASFAA article. Negotiators discussed the following issues that they believe need regulatory attention:

Eligibility Requirements

A nonfederal negotiator asked that current requirements for loan forgiveness be extended to borrowers even if they met those requirements prior to the law's enactment. For example, one of the ways borrowers can qualify for loan forgiveness through the IBR is to pay a reduced monthly payment under a partial financial hardship. The negotiator asked that the Department consider borrowers to have met that requirement if they made that reduced payment before the IBR implementation date of July 1, 2009.

Income Verification Process

One nonfederal negotiator wanted provisions drafted to allow borrowers to be able to document their income if for any reason their previous year's federal income tax return did not accurately reflect their income situation.

Harmonizing "Reasonable and Affordable" With Other Programs

For "fairness and efficiency" a nonfederal negotiator asked that certain IBR and ICR definitions be made the same between the two repayment programs. The new IBR program defines discretionary income differently than the ICR program by expanding the percentage of non-discretionary income. IBR limits loan payments to 15 percent of the borrower's (and spouse's, if applicable) adjusted gross income that exceeds 150 percent of the poverty line applicable to the borrower's family size. ICR defines non-discretionary income as anything above 100 percent of the poverty line and then limits loan payments to 20 percent of discretionary income. The IBR program allows borrowers to make more money and pay a smaller portion of their discretionary income than ICR.

Taxability of Loan Forgiveness

After 25 years borrowers may receive loan forgiveness if they've been in the IBR program. The IRS would view that forgiveness as taxable income. Some nonfederal negotiators expressed concern about those programs triggering a "taxable event," which is tantamount to a penalty imposed on borrowers for loan forgiveness. The Department stated that it was unsure whether it had authority to regulate in that area, but pointed out that it had successfully worked the IRS to make other loan forgiveness provisions nontaxable in the past.

Interest and Capitalization

Under IBR, a borrower's payments are first applied to interest due, then to any loan fees due, and finally toward the principal. The Secretary will pay any remaining interest on subsidized loans for up to 3 years. Interest is capitalized when the borrower stops participating in IBR or no longer has a partial financial hardship (when their loan payments no longer exceed 15 percent of their adjusted gross income beyond 150 percent of the poverty rate).

Some nonfederal negotiators asked the Department to consider making interest accrual in the IBR equal to the interest accrual in the ICR where interest accrues without capitalization after the outstanding principle amount is 10 percent greater than the original amount. Under ICR, if the amount of the borrower's monthly payment is less than the accrued interest, the unpaid interest is capitalized until the outstanding principal amount is 10 percent greater than the original principal amount (i.e., the amount owed by the borrower when entering repayment). After the outstanding principal amount is 10 percent greater than the original amount, interest continues to accrue without capitalization.

Debt-To-Income Ratio Economic Hardship Deferment

The Department has already confirmed its intent to retain the current debt-to-income ratio pathway for borrowers to qualify for an economic hardship deferment in both the FFEL and Direct Loan programs. Many in higher education - mostly from the medical field - had expressed concern before negreg that students would no longer qualify for an economic hardship deferment during the period between when the debt-to-income ratio provisions were eliminated by the CCRAA and the implementation of the new income-based repayment plan in July 2009.

"Prior to the CCRAA, a medical resident could qualify for the economic hardship deferment if he/she was employed full-time and his/her federal education debt burden was equal to or greater than 20 percent of his/her monthly income, and his/her income minus the education debt burden was less than 220 percent of the greater of the minimum wage rate or the federal poverty line for a family of two ('20/220 pathway')," explained an American Medical Association letter to the Department.

Public Service Loan Forgiveness

The CCRAA creates a new loan forgiveness option for Direct Loan borrowers who hold full-time public service jobs. FFEL borrowers may take advantage of public service loan forgiveness by consolidating or reconsolidating their FFEL loans into the Direct Loan program. To qualify for public service loan forgiveness, a borrower must:

• Make 120 monthly payments on the eligible Federal Direct Loan on or after Oct. 1, 2007;
• Be employed full-time in a public service job as defined in the CCRAA during the time he or she makes the qualifying monthly payments;
• Be employed in a public service job as defined in the CCRAA at the time the Secretary forgives the loan; and
• Make qualifying payments under one of (or some combination of) the following:
  • Income contingent repayment plan;
  • Income-based repayment plan (not available until July 2009);
  • Standard repayment plan with a 10 year repayment period; or
  • One of the other Direct Loan repayment plans under which the borrower paid a monthly amount that is not less than what the borrower would pay under a 10 year repayment plan.

Some nonfederal negotiators asked that when drafting proposed regulations the Department maintain a broad definition of qualifying jobs to include as many borrowers in low-paying jobs as possible. But other nonfederal negotiators also asked for more specificity on defining "government" jobs. Are employees of private libraries that serve a public purpose, staff to city council members, and/or employees of Native American tribal governments eligible?

Nonfederal negotiators also asked that the Department not to limit "full-time" to 40 hours per week because some jobs are still fulltime even though they may not work that many hours per week, every week (e.g. teachers who only work 9 months as opposed to 12 months). One negotiator asked that the full-time work definition conform to a definition already used by the Department of Labor. Another negotiator pointed out that the Teacher Loan Forgiveness program already contains a definition of full-time employee. One negotiator pointed out that in some public health jobs individuals work in several part-time positions that more than equal a full-time position and should not be penalized for not being able to work in a "traditional" full-time position.

The Department asked for assistance in developing language to help define "public interest law" jobs. Some lawyers may work for private firms but only perform public service work. Defining those types of jobs will be difficult, according to the Department. Nonfederal negotiators said they would be willing to help in any way possible.

Definition of Not-for-Profit Holder in the FFEL Program

The CCRAA includes a provision that allows not-for-profit lenders to earn a higher special allowance payment (SAP) from the Department than for-profit lenders. The Department is soliciting help in identifying situations where for-profit lenders might exert "control" over a not-for-profit entity so that it can be expressly forbidden in regulation.

This topic set off a firestorm of ideas and discussion items by nonfederal negotiators. Defining "not-for-profit lender" also led to a few tense moments as several negotiators hammered lender, servicer, and guarantor negotiators on ethical behavior. One proposal was to setup an oversight board to keep tabs on lender behavior. Another proposal shifted the burden of oversight to the Department, then to the IRS.

Harmonizing Heroes Waivers and Other Benefits Provided to Returning and Active Duty Military

The federal student loan program regulations do not reflect the HEROES waivers and there are currently no rules that apply these benefits to borrowers who qualify for multiple military benefits. For example, eligible military service under HEROES waivers and the HERA military deferment is limited to active duty military service or qualifying National Guard Service in connection with a war, military operation (defined as a "contingency" operation) or national emergency, while the eligible military service required for the new post-active duty student deferment is all active duty service except training or attendance at a service school, including active state duty by the National Guard.

The object of negreg is to draft regulations that coordinate all of these separate benefits so that borrowers have the best options available to them. The Department envisions a decision tree that would lead a borrower - based on their circumstance - to the optimal military benefit. These provisions waive current requirements and do not providing additional benefits because under internal government rules that ED must comply with these changes must be cost neutral.

Some questioned the need for any regulations since most loan servicers have already resolved these issues internally when the CCRAA passed last fall. Allison Jones, from California State University, wants regulations that specify who should be disseminating this information to military personnel or to military organizations.

"There is a huge disconnect between these benefits and the military personnel," said Jones who has witnessed this information disconnect in his state where 12 percent of all U.S. military reside.

Package 2: Federal Preemption Laws

In the preamble to the final regulations published November 1, 2007, the Secretary stated that any state law that conflicts with or stands as an obstacle to the execution of those regulations would be preempted by federal law. The Department is considering whether additional federal preemption is needed to supersede many varieties of state laws regarding the relationships between schools and lenders.

The Department's legal counsel explained that according to the U.S.Constitution, federal law always supersedes state law when they are in direct conflict. But, in some instances federal and state laws simply don't match. In those cases, the easiest way for courts to determine when preemption is appropriate is when Congress specifically preempts a state law. Even if Congress hasn't explicitly stated that a federal law will preempt state law, there are cases when the federal law is so comprehensive that it preempts state law. (This is known as "field preemption" where federal laws and regulations oversee an entire field.)

In some cases federal agencies can decide not to preempt state laws. Executive Order 13132 says that if a federal agency is considering preemption it must follow specific steps, including consultation with the states concerning preemption.

Negotiators discussed several issues concerning federal preemption and were deeply divided on whether the Department should preempt state laws meant to govern appropriate behavior between lenders and schools. One side argued that federal preemption was needed for lenders and schools to be able to operate under one set of regulations. Other negotiators argued that federal preemption supersedes states rights and would ultimately harm borrowers.

Next Steps

Next the Department will draft proposed regulations that will be discussed through subsequent rounds of negreg to be held Feb. 4-6 and Mar. 3-5. NASFAA will provide coverage of later rounds of negreg and issues.

Once ED provides proposed draft regulations to the negotiators, NASFAA will ask you for your comments, opinions, and suggested changes. If you have comments on any of these issues described in this article, please send them to negreg@nasfaa.org. NASFAA shares all member opinions with the negreg committee.

By Justin Draeger
NASFAA Assistant Director for Communications

Posted 01/16/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.