On October 23, the Department published final rules in the Federal Register on the Federal Perkins, FFEL, and Direct Loan programs. These regulations implement statutory changes made to the Higher Education Act by the College Cost Reduction and Access Act (CCRAA) passed last year. These final regulations become effective on July 1, 2009. However, the new and revised provisions governing the military service and post-active duty student deferments, including related forbearance provisions, may be implemented earlier - on or after November 1, 2008 - by an institution, lender, guaranty agency, or servicer, as appropriate.

These final rules result from a Notice of Proposed Rulemaking (NPRM) released by the Department on July 1, 2008, on which public comment was invited. The proposed rules came out of the negotiated rulemaking process, a process federal agencies use to formulate rules and regulations that seeks input from an advisory counsel of relevant stakeholders. The advisory committee attempts to draft proposed rules by consensus, usually meaning unanimous agreement (not majority) by all participants. The loans committee, which consisted of both Federal and nonfederal negotiators, reached consensus on the proposed regulations during their fourth round of negotiations in April.

While the regulations are reflective of the successful Negotiated Rulemaking outcome, NASFAA, along with other concerned organizations, will seek future legislative changes from the Congress to improve several aspects of these regulations, including but not limited to, changes in the loan forgiveness and IBR programs.

The Department estimates that implementing these regulations will cost $650 million in fiscal year 2008 and $9.2 billion over fiscal years 2008 to 2012.

Public Service Loan Forgiveness

• 682.201, 685.201, 685.212, 685.219, 685.220(d)

The majority of the comments received by the Department from the NPRM focused on public service loan forgiveness provisions. The CCRAA created a loan forgiveness program for borrowers in the Direct Loan Program who make 120 monthly payments after October 1, 2007, in a qualified repayment plan while employed full time in an eligible public service job. The final rules clarify that a qualified repayment plan would include payments made in the IBR, ICR, and Direct Loan standard repayment plans. The final rules also allow FFELP borrowers to consolidate into the Direct Loan Program solely for the purpose of qualifying for public service loan forgiveness.

Borrowers working under a contractual agreement or employment period of less than 12 months would still need to make payments each of the 12 months of that year, under the final rules. (This requirement is specifically geared towards teachers.)

Full time service in an AmeriCorps job or Peace Corps position will count as qualified public service jobs under the final rules. Education benefits paid through the AmeriCorps or Peace Corps programs can be used as qualified payments for loan forgiveness. The number of qualifying monthly payments would be calculated by dividing the total AmeriCorps award used for loan repayment by the amount of the borrower's scheduled monthly payment on the loan.

Borrowers working as financial aid administrators at public or nonprofit institutions would also be counted as qualified public service jobs, according to a Department of Education official.

The final rules also define several terms used as eligibility requirements for forgiveness. Those definitions include:

• Employee: an individual who is hired and paid by a public service organization
• Full Time: working in one or more qualified jobs for: an annual average of at least 30 hours per week, for a contractual or employment period for at least eight months for an average of 30 hours per week, or the number of hours an employer considers full time. Leave taken under the Family and Medical Leave Act (FMLA) does not constitute a break or reduce the borrower's annual average.
• Public Interest Law: legal services provided by a public service organization that are funded in whole or in part by a local, state, federal, or tribal government.
• Public Service Organization: A federal, state, local, or tribal government agency, a public child or family service agency, a nonprofit organization, or a tribal college or university. Private organizations that provide the following public services would also qualify as a public service organization under the final rules: emergency management, military service, public safety, law enforcement, public interest law services, early childhood education, public service for individuals with disabilities and the elderly, public health, public education, public library services, school library, or other school-based services - as long as that organization is not for-profit, a labor union, or a partisan political organization, or an organization involved in religious activities unless the qualifying activities are unrelated to religious instruction, worship services, or any form of proselytizing. The regulation further expands on some of these services.

If the Department determines that a borrower is ineligible for loan forgiveness, it must notify the borrower of that decision along with documentation outlining the reason for the denial. Forbearance will be granted to borrowers while the Department considers a borrower's request for loan forgiveness.

Income Based Repayment

• 682.205(h), 682.215, 682.209(a), 682.211(f), 682.300, 682.302, 682.304, 682.405, 682.411, 682.604, 685.208, 685.209, 685.210, 685.211, 685.221, 685.304

The CCRAA created the income-based repayment (IBR) program for the FFEL and Direct Loan programs. The IBR program is similar to the current income contingent repayment (ICR) repayment plan for Direct Loans but has several notable differences that make it more generous. The IBR program recognizes a partial financial hardship when the annual amount due under a standard 10-year repayment plan on a borrower's outstanding eligible student FFEL and Direct Loans exceeds 15 percent of the difference between the borrower's AGI and 150 percent of the poverty line applicable to the borrower's family size. (Defaulted loans, parent loans, and consolidation loans that repaid a parent loan may not be included in this determination.) The same calculation is used to determine the maximum repayment amount: 15 percent of the difference between the borrower's AGI and 150 percent of the poverty line applicable to the borrower's family size, with the result divided by 12 to determine the maximum monthly repayment.

Under IBR, the Secretary forgives any outstanding loan balance after 25 years of repayment. Except for borrowers in the Direct Loan program who made payments in the ICR payment plan, the beginning date of the 25-year period would be July 1, 2009, which is the statutory implementation date of the IBR repayment plan.

Final rules stipulate that borrowers' AGI should come from borrowers' tax forms. Married couples filing jointly would need to include both the borrower's and spouse's income, a point that has received a lot of criticism since it penalizes married couples who file taxes jointly. If married couples file separately, only the AGI of the borrower would be used. Family size will be defined by the same criteria used in the economic hardship deferment regulations, although the time frame to which the definition applies might differ.

The final rules require a lender to adjust its monthly payment amounts in the IBR plan if it is not the sole holder of the borrower's eligible loans. So if one lender only holds 25 percent of the borrower's eligible loan volume, that lender could only collect 25 percent of the total calculated IBR monthly payment amount.

Borrowers with calculated monthly payment amounts of $5 or less would not be required to make any payment. Nonpayment in this instance will still count as a qualified payment for purposes of loan forgiveness. Payments between $5 and $10 would be required to make a $10 payment under the final rules.

The CCRAA specifies that monthly loan payments made under IBR be applied first to interest due on the loan, next toward fees, and then applied to the principal balance of the loan. If the total monthly payment amount does not cover accruing interest, the Department will pay any remaining interest on subsidized portions of any Stafford loans for up to three consecutive years - excluding any period of economic hardship - from the date the borrower initially began making payments under IBR.

Borrowers' monthly payments would be recalculated when the borrower ceases to have a partial economic hardship, stops making income-based payments, or chooses to stop participating in the IBR plan entirely. If a borrower stops making income-based payments or ceases to have a partial economic hardship, but remains in the IBR repayment plan, final rules require that the monthly payment amount be recalculated under a standard 10-year repayment period based on the outstanding amount at the time the borrower began repayment under the IBR program. The minimum monthly payment of $50 applies when the borrower no longer has a partial financial hardship. When the borrower elects to leave the IBR plan entirely, the new payment amount depends on whether the loan is a Stafford or a Consolidation loan. For a Stafford Loan, the payment is calculated on the time remaining on a 10-year repayment period using the borrower's outstanding balance on the loan when the borrower discontinued paying under the IBR plan. For a Consolidation Loan, the payment amount is based on the remaining repayment period using the borrower's outstanding balance on the loan and on other student loans that were outstanding when the borrower discontinued paying under the IBR plan.

Lenders will be required to verify borrowers' income annually. Lenders will be required to collect written consent from borrowers to obtain their AGI and other tax return information from the IRS. Lenders must also collect an annual family size certification form from borrowers. Lenders could use other documentation if borrowers' AGI is unavailable. Borrowers who fail to renew their consent for income verification, will be treated as if they no longer have a partial economic hardship. Borrowers who do not respond to a lender's request for documentation of family size will have an assumed family size of "1" for that year.

Loan forgiveness after 25 years will be granted as long as a borrower participated in IBR at any time during that period and did one of the following:

• Made reduced monthly payments on the loan under a partial financial hardship, including a payment of zero dollars
• Made reduced monthly payments on the loan after the borrower no longer had a partial financial hardship or stopped making income-based payments
• Made monthly payments under any repayment plan that were not less than the amount required under a FFEL or Direct Loan standard repayment plan with a 10-year repayment period based on when the borrower initially entered repayment
• Made monthly payments under the FFEL or Direct Loan standard repayment plan based on a 10-year repayment period for the amount of the borrower's loans that were outstanding at the time the borrower first selected the IBR plan
• Paid a Direct Loan under the income contingent repayment (ICR) plan
• Received an economic hardship deferment on an eligible loan

Lenders may offer a 60-day forbearance to borrowers who request loan forgiveness to give lenders time to collect and process documentation supporting the request.

The final rules also include a technical change made in the Higher Education Opportunity Act (HEOA) that prohibits payments made on defaulted loans from counting toward the 25-year forgiveness period. Payments made to a lender on a loan that has already been sold to a guaranty agency must promptly return the payment to the sender. The Department may require a borrower of a defaulted FFEL loan to repay the loan under the IBR plan after it is assigned to the Department by a guaranty agency, and to require borrowers of other defaulted FFEL and Direct Loans held by the Department to pay under the IBR plan.

Finally, the CCRAA created a separate special allowance payment for lenders when borrowers utilize IBR. The final rules ensure that lenders could receive at least the same amount of yield as loans made in other repayment plans. Since accrued unpaid interest on a loan in income-based repayment can only be capitalized under limited circumstances, or may never be capitalized, the yield on the principal balance of a loan in IBR would be less than the yield that would otherwise be obtained on the same type of loan when accrued unpaid interest is capitalized and becomes part of the loan principal.

Note that although the IBR is not available under the Perkins Loan Program, a Perkins borrower may obtain access to the plan by consolidating his or her Perkins loans into FFEL or Direct Consolidation Loan. However, consolidation results in a loss of employment-related Perkins Loan cancellation opportunities and other benefits.

Economic Hardship Deferment

• 674.34, 682.210

The HEA allows borrowers to defer loan payments when they are working full-time and not earning a minimum amount related to the poverty line. The CCRAA changed that standard from "an amount equal to 100 percent of the poverty line for a family of two" to "an amount equal to 150 percent of the poverty line applicable to the borrower's family size."

The regulations also stipulate that poverty lines be determined by using the Department of Health and Human Services (HHS) poverty guidelines, which are adjusted and published annually on a state by state basis. If a borrower is not a resident of a state, the loan holder will use the poverty guideline used for the 48 contiguous states as published by the HHS.

The final rules define family size to include the borrower, the borrower's spouse, and the borrower's children (including unborn children who will be born in the year the borrower certifies family size), if the children receive more than half their support from the borrower. Family size could also include other individuals who, when the deferment is requested, live with the borrower as long as the borrower is providing for at least 50 percent of their support and will continue to do so during the year of certification. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs.

Under the final rules, economic hardship deferments will be eliminated for borrowers who had previously qualified with a 20/220 debt to income ratio after July 1, 2009. The Department believes that most borrowers who previously qualified for the 20/220 will now qualify for IBR, which will begin on that date. However, a loan holder may grant an economic hardship deferment under the 20/220 criterion to an eligible borrower who requests a deferment after July 1, 2009, for a deferment period that began prior to July 1, 2009, and is for a period not to exceed 12 months from that pre-July 1, 2009, start date. No additional economic hardship deferment periods may be granted based on that criterion to the borrower at the conclusion of that deferment period, or for any deferment request on or after July 1, 2009, for a deferment period that begins on or after that date.

Military Service Deferment & Post-Active Duty Student Deferment

• 674.34, 682.205(a), 682.210, 682.211, 685.204, 685.205

The CCRAA expanded military service deferments on all outstanding Title IV loans. Previously the Higher Education Reconciliation Act of 2005 (HERA) had only allowed military deferments on loans first disbursed on or after July 1, 2001. The CCRAA also eliminated the three-year deferment maximum and extended military service deferment for six months after a borrower's demobilization date. The CCRAA also created a new post-active duty student deferment for members of the National Guard or Armed Forces Reserve for up to 13 months following a borrower's demobilization from active duty.

Regulations have already been updated to reflect the statutory changes of the CCRAA. The final rules seek to clarify those updated regulations by adding that the six month post demobilization period is available to borrowers who have served on active duty on or after October 1, 2007. The final rules also stipulate that a post-active duty deferment would end if a borrower returns to school on at least a half-time basis. Members of the National Guard who are activated by a governor - whether they are paid with state or federal funds - would also qualify for the six month post-active duty deferment

In accordance with Dear Colleague Letter GEN-08-01, military service deferments may be granted to an otherwise eligible borrower for a period not to exceed 12 months from the date the qualifying eligible borrower for a period not to exceed 112 months from the date of the qualifying eligible service based on a request from either the borrower or the borrower's representative.

Borrowers who are eligible for both the six month post active-duty service deferment and the 13 month deferment will be required to have those deferments run concurrently.

The final rules require loan holders to grant a mandatory forbearance to borrowers who are called to active state duty for more than a 30-day period and who do not already qualify for military service deferments during that period. The forbearance begins on the day after a borrower ceases to be enrolled at least half-time

Eligible Not-For-Profit Holder Definition

• 682.302

The CCRAA cut the subsidies that student loan providers receive on federal student loans. Under the law, not-for-profit loan providers will receive a higher subsidy that for-profit loan providers. To receive the increased subsidy, a nonprofit lender must not be owned or controlled by a for-profit entity.

The final rules attempt to describe how a nonprofit lender could be deemed owned or controlled by a for-profit entity. These circumstances generally are those described in Dear Colleague Letter FP-07-12 and include instances where a for-profit entity either has a sufficient ownership interest, as a member or shareholder of an entity, to control the State or non-profit entity, or employs or appoints a majority of the individuals who serve as trustees of the State or non-profit entity, or who serve on the audit, executive, or compensation committees of the board of the entity. The final rules introduce several technical definitions (e.g., "beneficial owner," "beneficial interest") and technical changes to ensure the independence of nonprofit lenders, which must turn over official documents signed by the entity's CEO and its external legal counsel to the Department of Education as part of the certification process. The CEO must recertify the lender's nonprofit status on an annual basis.

By Justin Draeger
NASFAA Vice President of Development

Joan Berkes, Director of Legislative and Regulatory Analysis, also contributed to this article.

Posted 10/29/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.