Yesterday, the Federal Register posted proposed rules on the Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program. These proposed regulations would implement general and lender-based loan provisions of the HEA, as amended by the HEOA.

These rules were developed through the negotiated rulemaking process. One of the negotiators was serving as NASFAA’s representative and since negotiators did reach consensus on the proposed rules, NASFAA is prohibited from commenting negatively on the NPRM.

However, NASFAA members are free to raise issues as they see fit. Comments on the NPRM must be received by the Department by August 24 and may be submitted through the Federal eRulemaking Portal Web site or via postal mail, commercial delivery, or hand delivery. All comments must be submitted using the appropriate Docket ID: ED-2009-OPE-0004.

NASFAA has provided the following outline of proposed regulations on these issues for easier consumption and analysis by members. Questions or concerns about any specific aspect of these provisions may be sent to policy@nasfaa.org.

Total and Permanent Disability Loan Discharges (Sections 674.61, 682.402, and 685.213)

Currently regulations define ‘‘total and permanent disability’’ as the condition of an individual who is unable to work and earn money because of an injury or illness that is expected to continue indefinitely or result in death. Current regulations do not define ‘‘substantial gainful activity.’’

The Proposed Regulations would:

• Define total and permanent disability as the condition of an individual who:

  1. Is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, has lasted for a continuous period of not less than 60 months, or can be expected to last for a continuous period of not less than 60 months; or

  2. is a veteran and who has been determined by the Secretary of Veterans Affairs to be unemployable due to a service-connected disability.

• The proposed regulations would also add a definition of substantial gainful activity that would specify that substantial gainful activity means a level of work performed for pay or profit that involves doing significant physical or mental activities, or both.

• The proposed regulations would establish two separate loan discharge processes, one for veterans who have been determined by the Secretary of Veterans Affairs to be unemployable due to a service-connected disability, and a different process (the general discharge process) for borrowers who have been determined (as certified by a physician) to be unable to engage in substantial gainful activity due to a physical or mental impairment that can be expected to result in death or that has lasted for a continuous period of not less than 60 months, or that can be expected to last for a continuous period of not less than 60 months.

  General Discharge Process:

  • Instead of using the current conditional discharge process, the Secretary would discharge a borrower's obligation to repay a loan after determining that the borrower meets the discharge eligibility requirements.

  • The proposed regulations would also provide that, if a borrower received a title IV loan or TEACH Grant before the date the physician certified the loan discharge application and a disbursement of that loan or grant is made after the date of the physician's certification but before the date the Secretary grants the discharge, the processing of the borrower's loan discharge request will be suspended until the borrower ensures that the full amount of the disbursement has been returned to the loan holder or to the Secretary, as applicable.

  Veterans Discharge Process:

  • Veterans would submit to the loan holder a loan discharge application accompanied by documentation from the VA showing that the borrower has been determined to be unemployable due to a service-connected disability.

  • The borrower would not be required to have a physician certify the loan discharge application, and would not be required to provide any additional documentation related to the borrower's service-connected disability.

Borrower Eligibility for New Title IV Loans After a Prior Total and Permanent Disability Discharge (Sections 674.9(g), 682.201(a), and 685.200(a))

The proposed regulations would:

• Retain the current requirement that, to receive a new title IV loan after a disability discharge, a borrower would have to obtain a certification from a physician that the borrower is able to engage in substantial gainful activity, and acknowledge that the new loan may not be discharged in the future based on any present condition unless the condition substantially deteriorates.

• Require a borrower to resume repayment on any previously discharged loans if a borrower receives a new title IV loan within three years of the date that a prior loan was discharged due to disability.

Consolidation Loans (Sections 682.201(e), 682.206(f) and 685.220(d))

The proposed regulations would:

• Allow active duty military service borrowers with only FFEL loans to consolidate into the Direct Loan Program to use the no accrual of interest benefit for active duty military service personnel.

• Allow borrowers to consolidate a FFEL Consolidation loan into the Direct Loan Program without including another eligible loan in the consolidation if the FFEL Consolidation loan is in default, or if the borrower wishes to obtain an income-based repayment plan.

• Require lenders to inform borrowers that simply applying for the Consolidation loan does not obligate the borrower to take the loan.

In-School Deferments, Interest Capitalization, and Administrative Forbearance for PLUS Loans (Sections 682.202(b), 682.210(v),682.211(f), 685.202(b), 685.204(g), and 685.205(b))

The proposed regulations would:

• Allow parent PLUS borrowers to receive a deferment on PLUS loans first disbursed on or after July 1, 2008, during the period when the student on whose behalf the loan was obtained is enrolled on at least a half-time basis, and during the 6-month period that begins on the later of the day after the student ceases to be enrolled at least half-time or, if the parent borrower is also a student, the day after the parent ceases to be enrolled at least half-time.

• Allow graduate and professional borrowers to receive a deferment on a PLUS loan first disbursed on or after July 1, 2008 during the 6-month period that begins on the day after the student ceases to be enrolled on at least a half-time basis at an eligible institution.

• Revise the interest capitalization provisions in Section 682.202(b) to provide that a lender may capitalize interest on a PLUS loan that has accrued from the date of the first disbursement until the date the repayment period begins, and would make a corresponding change in the Direct Loan Program regulations by revising Sec. 685.202(b) to provide that the Secretary may capitalize unpaid interest on a PLUS loan when the loan enters repayment.

• Add a new administrative forbearance provision to Sec. 682.211(f) allowing a lender to grant a forbearance, upon notice to the borrower, on a borrower's PLUS loans first disbursed before July 1, 2008 to align repayment with a borrower's PLUS loans first disbursed on or after July 1, 2008, or with a borrower's Stafford Loans that are subject to a grace period.

• Require a lender to notify the borrower that he or she has the option to cancel the forbearance and to continue paying on the loan. A corresponding administrative forbearance provision would be added to Sec. 685.205(b) in the Direct Loan Program regulations.

Applicability of the Servicemembers Civil Relief Act (SCRA) to FFEL and Direct Loan Program Loans (Sections 682.202, 682.302, and 685.202)

The proposed regulations would revise Sec. 682.202 and 685.202 to provide that, effective August 14, 2008, upon a loan holder's receipt of a written request from a borrower and a copy of the borrower's military orders, the maximum interest rate that may be charged on FFEL or Direct Loan program loans made prior to the borrower entering active duty status is six percent while the borrower is on active duty status.

In-School Deferment (Sections 682.210(a), 682.210(c)(1), and 685.204(b)(1))

The proposed regulations would:

• Revise Sections 682.210(c)(1) and 685.204(b)(1)(iii)(A) to reflect the additional statutory method a lender or the Secretary may use to grant an in-school deferment, based on confirmation of the borrower's half- time enrollment status through the use of NSLDS if requested by the borrower's school.

• Revise Sec. 682.210(a)(3) of the FFEL regulations to provide that if a borrower is responsible for the interest on a loan during a deferment period, the lender, at or before the time the deferment is granted, must notify the borrower that he or she has the option to pay the accruing interest or cancel the deferment and continue paying on the loan.

The proposed regulations would:

• Specify that the annual amount due on a borrower's eligible loans for purposes of determining whether the borrower has a partial financial hardship is the greater of the amount due on the eligible loans as calculated under a standard repayment plan with a 10-year repayment period when the borrower initially entered repayment on those loans, or the annual amount due on those loans as calculated under a standard repayment plan with a 10-year repayment period when the borrower elects the IBR plan.

• If a married borrower and his or her spouse file a joint tax return with the IRS and both have eligible loans, use the joint AGI and the total amount of the borrower's and spouse's eligible loans to determine whether each borrower has a partial financial hardship.

Income-Based Payment Amount (Sections 682.215(b)(1) and 685.221(b)(2))

Under the proposed rules, married borrowers that both have eligible loans and file a joint Federal tax return, would each have their individual payment calculated by figuring out the applicable borrower's percentage of the total loan debt and by multiplying the calculated partial financial hardship payment amount by that percentage.

FFEL and Direct Loan Program Teacher Loan Forgiveness (Sections 682.216 and 685.217)

The proposed regulations would:

• Allow a borrower who otherwise meets the eligibility requirements for teacher loan forgiveness to receive forgiveness based on teaching service performed at one or more locations of an eligible educational service agency that serves low-income families.

• Allow borrowers to also qualify based on teaching service performed at a combination of eligible elementary or secondary schools and eligible educational service agencies.

  (Note - To be considered eligible service for teacher loan forgiveness purposes, an educational service agency would have to meet the same eligibility requirements that apply to elementary and secondary schools under current regulations. For a borrower employed at an eligible educational service agency, the borrower's qualifying teaching service would have to be certified by the chief administrative officer of the educational service agency.)

• Allow qualifying teaching service performed at an eligible educational service agency to be counted toward the required five consecutive complete years of full-time teaching only if the consecutive five-year period includes qualifying teaching service performed at an eligible educational service agency after the 2007-2008 academic year.

• Define the term ``educational service agency'' as a regional multiservice agency authorized by State law to develop, manage, and provide services or programs to local educational agencies, as defined in section 9101 of the Elementary and Secondary Education Act of 1965, as amended.

• Prohibit a borrower from receiving loan forgiveness under both the FFEL and Direct Loan teacher loan forgiveness programs for the same teaching service, or from receiving loan forgiveness for the same teaching service under either the FFEL or Direct Loan teacher loan forgiveness programs and:

  1. The Direct Loan public service loan forgiveness program in Sec. 685.219;

  2. subtitle D of title I of the National and Community Service Act of 1990; or

  3. the Loan Forgiveness for Service in Areas of National Need program authorized by section 428K of the HEA.

Eligibility for Rehabilitation of Defaulted FFEL and Direct Loans (Sections 682.405(a) and (b)(1)(iii) and 685.211(f))

The proposed regulations would amend Sections 682.405(a)(3) and 685.211(f)(3) to provide that for any loan that is rehabilitated on or after August 14, 2008, the borrower may not rehabilitate the loan again if the loan returns to a default status following the rehabilitation.

Guaranty Agency and Lender Prohibited Inducements (Sections 682.200(b) and 682.401(e))

The proposed regulations would incorporate all of the new prohibited and permitted activities for lenders and guaranty agencies as specified in the HEA.

Information to Borrowers Upon Transfer, Sale or Assignment of a FFEL Program Loan (Sec. 682.208(e))

The proposed regulations would incorporate the additional information specified in the HEA that must be provided to a borrower if the assignment or transfer of ownership interest on a FFEL Program loan results in a change in the identity of the party to whom subsequent payments must be sent. The date on which the current servicer will stop accepting payments is required only if that is applicable.

Forbearance (Sec. 682.211)

The proposed regulations would:

• Require the lender, at the time the borrower is granted a forbearance, to give the borrower information about the impact of capitalization of interest on the loan and the total amount to be repaid over the life of the loan.

• Require the lender to contact the borrower at least once every 180 days during any period of forbearance and to give the borrower or endorser more specific information as to the impact of interest on the loan.

Audit Requirement for a FFEL School Lender or an Eligible Lender Trustee (ELT) That Originates FFEL Loans for a School or School- Affiliated Organization (Sections 682.305(c) and 682.601(a)(7))

The proposed regulations would revise Sec.682.305(c) to require that a FFEL school lender, or a lender serving as a trustee on behalf of a school or school-affiliated organization for the purpose of originating loans, submit an annual compliance audit to the Department regardless of the dollar volume of loans originated.

Financial and Economic Literacy for Rehabilitated Borrowers (Sec. 682.405)

The proposed regulations would require guaranty agencies to make available financial and economic education materials, including debt management information, to any borrower who has rehabilitated a defaulted loan.

Consumer Credit Reporting Following Loan Rehabilitation (Sections 682.405(b)(1)(iii) and (b)(3))

The proposed regulations would:

• Require the prior holder of the loan, in addition to the guaranty agency, to request that a consumer reporting agency to which the default was reported remove the default from the borrower's credit history.

• Require more detailed reporting deadlines for the guaranty agency and the prior loan holder to request removal of the report of the default from the borrower's credit history, and would reduce the overall period for this activity from 90 to 75 days.

• Require the guaranty agency, within 45 days of the sale of the rehabilitated loan to an eligible lender, to request that the consumer reporting agency remove the record of default from the borrower's credit history and notify the prior holder of the loan rehabilitation.

• Require the prior holder of the loan, within 30 days of the guaranty agency's notification of the loan's rehabilitation, to request that the consumer reporting agency remove the loan holder's default claim record or its equivalent from the borrower's credit history.

Notifications to Borrowers in Default and Definition of Nationwide Consumer Reporting Agency (Sections 682.410(b) and 682.200(b))

The proposed regulations would expand the information that must be provided in the notice required under Sec. 682.410(b)(5)(ii) to include information on the options that are available to the borrower to remove the loan from default, including an explanation of the fees and conditions associated with each option.

Posted 07/24/09 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.