Final Rules Establish REPAYE Repayment Plan

By Karen McCarthy, Policy & Federal Relations Staff

Final rules posted to the Federal Register on October 30 introduce a new income-driven repayment plan and make several other regulatory changes, including a new Participation Rate Index challenge and appeals process for cohort default rates. The rules finalize a Notice of Proposed Rulemaking (NPRM) published on July 9, 2015, which was the result of negotiated rulemaking sessions held from February to May 2015.

The general effective date of these final rules is July 1, 2016, with two significant exceptions: First, the Department of Education (ED) will exercise its early implementation authority to launch the new Revised Pay As You Earn (REPAYE) repayment plan in December 2015. And second, the new Participation Rate Index challenge and appeals process will not be implemented until ED’s new Data Challenge and Appeals Solution (DCAS) system is available in February 2017.

Establishment of REPAYE Repayment Plan

The final rules create a new income-driven repayment plan, REPAYE, to meet President Obama’s June 2014 memorandum to extend the current PAYE repayment option to an additional 5 million borrowers by December 2015. Other income-driven repayment plans, including the original Income-Contingent Repayment (ICR) plan, the current PAYE plan, and the Income-Based Repayment (IBR) plan, will co-exist with the REPAYE plan.

The most significant change from the NPRM is the removal of interest capitalization when a borrower in REPAYE no longer has a partial financial hardship (PFH). Because the proposed rules had already removed PFH as an eligibility criterion for enrollment in REPAYE, this interest capitalization change in the final rules means that PFH is not a factor in any way in the REPAYE plan.

You may review the terms of the REPAYE repayment plan  in NASFAA’s Summary of Income-Driven Repayment Plans.

In response  to the many NPRM commenters (including NASFAA) who objected to the creation of yet another income-driven repayment plan, ED stated in the preamble discussion that the REPAYE plan is intended to introduce a model for Congress to consider when developing a single, streamlined income-driven repayment, which may be tackled in the upcoming reauthorization of the Higher Education Act.

In the preamble, ED describes its two goals with the REPAYE plan:

  • To create an income-driven repayment plan that requires a reasonable monthly payment amount from those borrowers who can afford it; and
  • To provide relief to struggling borrowers who may still have large outstanding balances after years of making payments on their student loans.

Because REPAYE is available to all Direct Loan borrowers regardless of when they borrowed, the primary benefit of REPAYE is a broader pool of borrowers eligible to make payments based on 10 percent of their discretionary income. ED estimates that of the 6 million borrowers who are eligible for REPAYE from cohorts from 1994-2025, 2 million will enroll in REPAYE. ED expects that most new enrollees in REPAYE will be borrowers who are not eligible for “new” IBR (with payments at 10 percent of discretionary income) or PAYE. Because of provisions in the REPAYE plan that are not as financially advantageous to certain borrowers as those in the “new” IBR or PAYE, most borrowers who are currently enrolled in “new” IBR or PAYE are expected to stay with those plans.

The REPAYE plan is estimated to cost $15.4 billion over 10 years for borrower cohorts from 1994-2025.

Participation Rate Index Challenges and Appeals

The final rules expand the circumstances under which an institution may challenge or appeal the potential consequences of a draft or official cohort default rate (CDR) based on the institution’s Participation Rate Index (PRI).  The rules propose permitting an institution to bring a timely PRI challenge or appeal in any year that the institution’s CDR is less than or equal to 40 percent, but greater than or equal to 30 percent, for any of the three most recently calculated fiscal years.

Application of Department of Defense Lump Sum Payments for Public Service Loan Forgiveness

ED will count lump sum payments made on a borrower’s behalf through the student loan repayment programs administered by the Department of Defense (DOD) as multiple qualifying payments, rather than only one payment, for purposes of the Public Service Loan Forgiveness (PSLF) Program. This treatment is the same as existing regulations for lump sum payments made through the AmeriCorps and Peace Corps programs.

In response to public comment, including from NASFAA, ED stated that in the future it will explore counting lump sum payments from other agencies as multiple payments for purposes of the PSLF program.

Use of Department of Defense Database by FFEL Program Loan Holders

The rules reduce the burden on active duty servicemembers who may be entitled to an interest rate reduction under the Servicemembers Civil Relief Act (SCRA), by:

  • Requiring FFEL Program loan holders to proactively use the Defense Manpower Data Center (DMDC) database maintained by the DOD to begin, extend, or end, as applicable, the SCRA interest rate limit of six percent
  • Permitting a borrower to use a form developed by ED to provide the loan holder with alternative evidence of active duty service to demonstrate eligibility when the borrower believes that the information contained in the DOD database may be inaccurate or incomplete

Direct Loan servicers already use the DMDC database to document active duty service.

Transition of Borrowers from Rehabilitation to Servicing

To assist with the transition to loan repayment for a borrower who rehabilitates a defaulted loan, guaranty agencies must:

  • Provide each borrower with whom it has entered into a loan rehabilitation agreement with information on repayment plans available to the borrower after rehabilitating the defaulted loan
  • Explain to the borrower how to select a repayment plan
  • Provide financial and economic education materials to borrowers who successfully complete loan rehabilitation

Technical Corrections to the FFEL Program Loan Rehabilitation Regulations

To conform with changes made to the Higher Education Act of 1965, as amended (HEA) by the Bipartisan Budget Act of 2013, the final rules amend §682.405 to:

  • Cap collection costs following loan rehabilitation at 16 percent
  • Direct loan holders to assign to ED rehabilitated loans that they have been unable to sell to an eligible lender at the end of the 9- or 10-month rehabilitation payment period


Publication Date: 11/4/2015

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