Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

DEPARTMENT OF EDUCATION

34 CFR Parts 674, 682, and 685

RIN 1840-AD05

[Docket ID ED-2012-OPE-0010]

Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Secretary proposes to amend the Federal Perkins Loan (Perkins Loan) program, Federal Family Education Loan (FFEL) program, and William D. Ford Federal Direct Loan (Direct Loan) program regulations. The proposed regulations would implement a new Income Contingent Repayment (ICR) plan in the Direct Loan program based on the President's “Pay As You Earn” repayment initiative, incorporate recent statutory changes to the Income Based Repayment (IBR) plan in the Direct Loan and FFEL programs, and streamline and add clarity to the total and permanent disability discharge process for borrowers in the title IV, HEA loan programs. The proposed regulations implementing a new ICR Plan and the statutory changes to the IBR plan would assist borrowers in repaying their loans while the proposed changes to the total and permanent disability discharge process would reduce burden for borrowers who are disabled and seeking a discharge of their title IV debt.

DATES:

We must receive your comments on or before August 16, 2012.

ADDRESSES:

Submit your comments through the Federal eRulemaking Portal or via postal mail, commercial delivery, or hand delivery. We will not accept comments by fax or by email. To ensure that we do not receive duplicate copies, please submit your comments only once. In addition, please include the Docket ID at the top of your comments.

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Federal eRulemaking Portal:

Go to

www.regulations.gov

to submit your comments electronically. Information on using Regulations.gov, including instructions for accessing agency documents, submitting comments, and viewing the docket, is available on the site under “How To Use This Site.”

•

Postal Mail, Commercial Delivery, or Hand Delivery:

If you mail or deliver your comments about these proposed regulations, address them to Jessica Finkel, U.S. Department of Education, 1990 K Street NW., Room 8031, Washington, DC 20006-8502.

Privacy Note:

The Department's policy is to make all comments received from members of the public available for public viewing in their entirety on the Federal eRulemaking Portal at

www.regulations.gov

. Therefore, commenters should be careful to include in their comments only information that they wish to make publicly available.

FOR FURTHER INFORMATION CONTACT:

Jessica Finkel, U.S. Department of Education, 1990 K Street NW., Room 8031, Washington, DC 20006-8502. Telephone: (202) 502-7647 or by email at:

Jessica.Finkel@ed.gov

. If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339.

Individuals with disabilities can obtain this document in an accessible format (e.g., Braille, large print, audiotape, or compact disc) on request to the contact person listed under

FOR FURTHER INFORMATION CONTACT

.

SUPPLEMENTARY INFORMATION:

Executive Summary

Purpose of This Regulatory Action:

The combination of increased enrollment and rising tuition has contributed to a significant increase in student loan debt among Americans. The ability of recent college graduates to find immediate employment with wages adequate enough to repay this debt has been challenged.

For Federal student loan borrowers who suffer from a total and permanent disability (TPD), the Department's current disability discharge process has led to inconsistencies in determining their eligibility for discharge and created undue hardship.

Based on the results of the negotiated rulemaking process and the advice and recommendations submitted by individuals and organizations in public hearing testimony and in written comments submitted to the Department, the proposed regulations would create a new Income Contingent Repayment (ICR) plan in the Direct Loan program based on the President's “Pay As You Earn” repayment initiative, incorporate recent statutory changes to the Income Based Repayment (IBR) plan in the Direct Loan and FFEL programs, and streamline and add clarity to the total and permanent disability discharge process for borrowers in the title IV, HEA loan programs.

Summary of the Major Provisions of This Regulation: Action: The NPRM proposes regulations that would—

• Create a new ICR plan (proposed ICR-A) in the Direct Loan program based on the President's Pay As You Earn repayment initiative. The proposed regulations support the administration's goal of making the statutory improvements made by the SAFRA Act included in the Health Care and Reconciliation Act of 2010 (Pub. L. 111-152) to the IBR plan available to some borrowers earlier than July 1, 2014, and make technical corrections and minor changes to the current ICR plan regulations, including the addition of provisions related to notification of income documentation requirements and the ICR loan forgiveness process.

• Incorporate statutory changes to the IBR plan that were made by the SAFRA Act and add new provisions related to notification of income documentation requirements, repayment options after leaving the IBR plan, and the IBR loan forgiveness process.

• Revise Perkins Loan and FFEL program regulations to permit borrowers to apply directly to the Department for a total and permanent disability discharge. In the Direct Loan program, borrowers would continue to apply directly to the Department for total and permanent disability discharges, as they do under the current Direct Loan regulations.

• Modify regulations in the Perkins Loan, FFEL, and Direct Loan programs to provide more detailed information to borrowers in letters explaining why a disability discharge has been denied.

• Define the term “borrower's representative” for purposes of the disability discharge application process and state that references to a borrower or a veteran in the total and permanent disability discharge regulations include a borrower's representative or a veteran's representative.

• Specify that the Department denies a disability discharge request and collection resumes on the borrower's loans if the borrower receives a disbursement of a new title IV loan or receives a new TEACH Grant made on or after the date the physician certified the borrower's disability discharge application and before the date the Department makes a decision on the borrower's application for a total and permanent disability discharge.

• Specify that, if a borrower's Perkins Loan, FFEL, or Direct Loan program loan is reinstated, it returns to the status that would have existed if the total and permanent disability discharge application had not been received.

• Make corresponding changes to the total and permanent disability application process based on a certification from the Department of Veterans Affairs.

Please refer to the

Significant Proposed Regulations

section of this preamble for a fuller discussion of the major provisions contained in this NPRM.

Chart 1 summarizes the proposed regulations and related benefits, costs, and transfers that are discussed in more detail in the

Regulatory Impact Analysis

of this preamble. The Department estimates that approximately 1.6 million borrowers could take advantage of the proposed ICR-A repayment plan with another million borrowers being affected by the statutory changes to the IBR plan reflected in the proposed regulations. Significant benefits of these proposed regulations include a streamlined process for total and permanent disability discharges, enhanced notifications related to TPD, IBR, and ICR application and servicing processes, and reduced monthly payments for borrowers in partial financial hardship (PFH) status as a result of using a lower PFH threshold of 10 percent. The net budget impact of the proposed regulations is $2.1 billion over the 2012 to 2021 loan cohorts.

Chart 1—Summary of the Proposed Regulations

Issue and key features

Benefits

Cost/transfers

Income Contingent Repayment (34 CFR part 685)

Establishes ICR-A repayment plan with features of IBR as revised by SAFRA for new borrowers on or after 10/1/2007 with a loan disbursement made on or after 10/1/2011. ICR-A retains a cap on interest capitalization from current ICR

Enhanced cash management option for borrowers

Estimated net budget impact of $2.1 billion over the 2012-2021 loan cohorts.

Establishes threshold for PFH at 10% for ICR-A borrowers

Reduced payments and shorter forgiveness period may encourage acknowledgement and payment of debt

Loan forgiveness after 20 years of qualifying payments compared to 25 years under current regulations

Reduced monthly payments may allow greater participation in the economy

Retains current ICR program as ICR-B

ICR-B leaves an income driven repayment option available to all borrowers

Establishes process for borrower notification and processing of loan forgiveness by loan holders

Income Based Repayment (34 CFR part 685)

Incorporates statutory changes from SAFRA

Benefits mirror those associated with proposed ICR changes

Threshold for PFH reduced from 15% to 10% for new borrowers after 7/1/2014

Loan forgiveness after 20 years of qualifying payments compared to 25 years under current regulations

Income Based Repayment (34 CFR part 685, 34 CFR part 682)

A smaller payment amount made under a forbearance can qualify as the single payment made in standard repayment plan for borrower leaving IBR to select another repayment plan

Improved notifications around annual recertification of income may reduce number of borrowers removed from PFH for paperwork reasons

No net budget impact from proposed regulations.

Modified notification and income documentation requirements for borrowers in IBR

Estimated paperwork compliance costs of approximately $570,000 annually.

Establishes process for borrower notification and processing of loan forgiveness by loan holders

Total and Permanent Disability (34 CFR 674.61; 34 CFR 682.402; 34 CFR 685.213)

Creates single discharge application process through the Department for all of a borrower's FFEL, Direct Loans, and Perkins loans

Simplifies process for borrowers

Estimated paperwork compliance burden of approximately $725,000.

Specifies that borrower's representative will receive all notifications and can be involved in all aspects of the process

Departmental processing should increase consistency of TPD determinations

Enhanced notifications, including more detailed reasons for denials and information about options for reapplying

Process changes could reduce reinstatements for paperwork reasons

Revised treatment of payments made following a TPD discharge

Creation of standard form for reporting income during 3-year post-discharge monitoring period

Invitation To Comment:

As outlined in the Negotiated Rulemaking section of this notice, significant public participation, through three public hearings and three negotiated rulemaking sessions, has occurred in

developing this notice of proposed rulemaking (NPRM). We invite you to submit comments regarding these proposed regulations. To ensure that your comments have maximum effect in developing the final regulations, we urge you to identify clearly the specific section or sections of the proposed regulations that each of your comments addresses and to arrange your comments in the same order as the proposed regulations.

We invite you to assist us in complying with the specific requirements of Executive Order 12866 and 13563 and their overall requirement of reducing regulatory burden that might result from these proposed regulations. Please let us know of any further ways we could reduce potential costs or increase potential benefits while preserving the effective and efficient administration of the Department's programs and activities.

During and after the comment period, you may inspect all public comments about these proposed regulations by accessing Regulations.gov. You may also inspect the comments in person, in Room 8031, 1990 K Street NW., Washington, DC, between 8:30 a.m. and 4:00 p.m., Washington DC time, Monday through Friday of each week except Federal holidays. Please contact the person listed under

FOR FURTHER INFORMATION CONTACT

.

Assistance to Individuals with Disabilities in Reviewing the Rulemaking Record:

On request we will provide an appropriate accommodation or auxiliary aid to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for these proposed regulations. If you want to schedule an appointment for this type of accommodation or auxiliary aid, please contact the person listed under

FOR FURTHER INFORMATION CONTACT.

Negotiated Rulemaking

Section 492 of the Higher Education Act of 1965, as amended, requires the Secretary, before publishing any proposed regulations for programs authorized by title IV of the HEA, to obtain public involvement in the development of the proposed regulations. After obtaining advice and recommendations from the public, including individuals and representatives of groups involved in the Federal student financial assistance programs, the Secretary must establish a negotiated rulemaking committee and subject the proposed regulations to a negotiated rulemaking process. All proposed regulations that the Department publishes on which the negotiators reached consensus must conform to final agreements resulting from that process unless the Secretary reopens the process or provides a written explanation to the participants stating why the Secretary has decided to depart from the agreements. Further information on the negotiated rulemaking process can be found at:

www2.ed.gov/policy/highered/reg/hearulemaking/2011/loans.html.

On May 5, 2011, the Department published a notice in the

Federal Register

(76 FR 25650) announcing our intent to establish up to two negotiated rulemaking committees to prepare proposed regulations. One committee would focus on issues related to streamlining institutional reporting requirements and proposed regulations regarding better State identification of low-performing teacher preparation programs pursuant to sections 205 and 207 of the HEA through focusing reporting on improved measures of program quality. A second committee (the “Loans Committee”) would address Federal student loan issues. The regulations considered by the second committee would: Implement changes made by the SAFRA Act (Pub. L. 111-152), which ended the making of new loans in the Federal Family Educational Loan (FFEL) program as of July 1, 2010; make improvements to the income-contingent and income-based repayment plans; and improve the process for consideration of applications for total and permanent disability discharges. The notice requested nominations of individuals for membership on the committees who could represent the interests of key stakeholder constituencies on each committee.

The Department developed a list of proposed regulatory provisions from advice and recommendations submitted by individuals and organizations in testimony submitted to the Department in a series of three public hearings and a roundtable discussion held on:

• May 12, 2011, at Tennessee State University, Nashville, Tennessee.

• May 16, 2011, at Pacific Lutheran University, Tacoma, Washington.

• May 19, 2011, at Loyola University-Lakeshore Campus, Chicago, Illinois.

• May 26, 2011, at College of Charleston, Charleston, South Carolina.

In addition, the Department accepted written comments on possible regulatory provisions submitted directly to the Department by interested parties and organizations. Transcripts of the regional meetings can be accessed at

www2.ed.gov/policy/highered/reg/hearulemaking/2011/loans.html

and is also accessible in the rulemaking docket on

www.regulations.gov.

Staff within the Department also identified issues for discussion and negotiation.

The Loans Committee included the following members:

• Mr. Getachew Kassa, Legislative Director, United States Student Association and Mr. Abou Amara, Jr. (alternate), President, Graduate and Professional Student Association, University of Minnesota, Twin Cities.

• Ms. Deanne Loonin, National Consumer Law Center, and Ms. Radhika Miller (alternate), Program Manager, Educational Debt Relief and Outreach, Equal Justice Works.

• Ms. Jennifer Mishory, Deputy Director, Young Invincibles, and Ms. Maureen Thompson (alternate), The Hastings Group, LLC.

• Ms. Margaret Rodriguez, Senior Associate Director of Financial Aid, University of Michigan and Chair, National Direct Student Loan Coalition, and Ms. Elizabeth Hicks (alternate), Executive Director Student Financial Services, Massachusetts Institute of Technology.

• Mr. David Glezerman, Assistant Vice President and University Bursar, Temple University, and Ms. Maria Livolsi (alternate), Student Loan Service Center, State University of New York.

• Mr. Robert Perrin, President, Williams & Fudge, Inc.

• Mr. Todd Leatherman, Executive Director, Office of Consumer Protection, Office of the Kentucky Attorney General, and Ms. Michele Casey (alternate), Assistant Attorney General, Consumer Fraud Bureau Office of the Illinois Attorney General.

• Ms. Cristi Millard, Director of Financial Aid, Salt Lake Community College, and Mr. Chris Christensen, (alternate) Director of Financial Aid, Johnson County Community College, Kansas.

• Ms. Kris Wright, Director, Office of Student Finance, University of Minnesota and Executive Council Member and Secretary, National Direct Student Loan Coalition, and Ms. Elaine Papas-Varas (alternate), University Director of Student Financial Aid and Director of the Primary Care Practitioner Loan Redemption Program of New Jersey University of Medicine and Dentistry of New Jersey.

• Ms. Yvonne Gutierrez-Sandoval, Senior Associate Director of Financial Aid, Pitzer College, and Mr. Jeffrey A. Gall (alternate), Associate Dean, Office of Student Financial Services, Georgetown University.

• Mr. Tom Sakos, Director of Student Lending and Regulatory Quality

Assurance, DeVry Inc., and Mr. Anthony Fragomeni (alternate), Director of Governmental Affairs, Empire Education Group and Chairman, American Association of Cosmetology Schools' Government Relations Team.

• Ms. Betsy Mayotte, Director, Regulatory Compliance and Privacy, American Student Assistance, and Mr. Scott Giles (alternate), Vice President for Operations, Social Marketing and Strategy, Vermont Student Assistance Corporation.

• Mr. Robert Sandlin, Director of Policy and Compliance, Higher Education Servicing Corporation, and Ms. Vicki Shipley (alternate), Senior Advisor, National Council of Higher Education Loan Programs.

• Mr. Albert Gray, Executive Director and CEO, Accrediting Council for Independent Colleges and Schools, and Ms. Sharon Tanner (alternate), CEO, National League for Nursing Accreditation.

• Ms. Pamela Moran and Ms. Gail McLarnon, U.S. Department of Education.

The Loans Committee met to develop proposed regulations during the months of January, February, and March of 2012. These proposed regulations reflect the work of this second committee and proposes regulations relating to the administration of the Federal student loan programs, specifically changes governing the ICR and IBR plans, and the process for making TPD discharge determinations. These proposed regulations also include certain technical changes to the regulations that are needed to reflect recent amendments to the HEA and to correct certain technical errors. These types of changes are not normally subject to the statutory requirements for negotiated rulemaking and public notice and comment. However, since those changes affected the regulations that would be considered by the negotiated rulemaking committee, the Secretary chose to include those changes in the proposed regulations to be considered by the committee to ensure that the committee could evaluate the full scope of changes to those regulations.

At its first meeting, the Loans Committee reached agreement on its protocols and proposed agenda. The Committee's protocols provided that, unless agreed to otherwise, for the committee to be considered to have reached consensus on the regulations, consensus must be reached on all of the proposed regulations. Consensus means that there must be no dissent by any member in order for the Committee to be considered to have reached agreement.

During its first meeting, the Loans Committee agreed to negotiate an agenda of 25 student loan related issues. The most significant issues: Developing regulations necessary to implement the President's “Pay As You Earn” repayment initiative; developing regulations to incorporate statutory changes in the Income-Based Repayment Plan (IBR) and to address certain problems in the administration of the IBR and Income-Contingent Repayment plans; to overhaul the total and permanent disability discharge process; to update the FFEL program regulations to eliminate obsolete and unnecessary provisions governing loan origination and disbursement; to revise the Direct Loan program regulations to eliminate cross reference to the FFEL program regulations; to revise regulations governing the determination of a defaulted borrower's reasonable and affordable payment amount for purposes of rehabilitation of the borrower's defaulted loan; to revise the regulations governing administrative wage garnishment (AWG) for defaulted borrowers in the FFEL program; and to provide for consistent treatment of borrowers requesting forbearance on or after the 270th day of delinquency. The Department stated its commitment to publishing the regulations to implement the Pay As You Earn repayment initiative and to overhaul and improve the total and permanent disability discharge process for borrowers as soon as possible.

During the development of proposed regulatory language and prior to the second meeting of the Committee, the Department concluded that the scope and volume of the likely resulting proposed regulations resulting from the agenda approved by the Committee would require extensive and significant changes to regulations. In particular, updating the FFEL program regulations and major changes to the Direct Loan regulations involved making changes to the entirety of those program regulations. The Department determined that it was unlikely that one NPRM reflecting all of the issues could be published by the deadline established by section 482(c) of the HEA. To ensure the earliest possible implementation of the Pay As You Earn repayment initiative and the revised total and permanent disability discharge regulations, which will provide significant benefits to student loan borrowers, the Department determined that two NPRMs would result from the Committee's work.

During the second meeting of the Committee, the Department explained to the Committee members that one NPRM would contain proposed regulations to implement the Pay As You Earn repayment initiative, to incorporate statutory changes in the IBR plan, to make other changes to improve the administration of the IBR and ICR plans, and to overhaul the total and permanent disability discharge process. The second NPRM would contain all the remaining proposed regulations that were on the Committee's agenda, including proposed regulations involving rehabilitation of defaulted loans and AWG in the FFEL program. The Department also explained that any final regulations published as a result of the second NPRM would not be published by November 1, 2012, and therefore would not become effective until July 1, 2014, under the master calendar provisions of section 482(c)(1) the HEA. The Department committed, however, to authorize, to the extent possible, early implementation of the final regulations published as a result of the second NPRM under the Secretary's authority to designate regulatory provisions for early implementation by program participants under section 482(c)(2) of the HEA.

At the final meeting in March 2012, the Loans Committee reached consensus on the full agenda of loans issues. This document represents the first of two NPRMs resulting from the Committee's negotiations. It contains proposed regulations to: Implement the Pay As You Earn repayment initiative; incorporate statutory changes in the IBR plan; make certain improvements in the administration of the IBR and ICR plans; and overhauling the total and permanent disability discharge process.

More information on the work of the Loans Committee can be found at:

www.ed.gov/policy/highered/reg/hearulemaking/2008/loans.html.

Summary of Proposed Changes

Income Contingent Repayment

The proposed regulations create a new ICR plan (proposed ICR-A) based on the President's Pay As You Earn repayment initiative and proposes to make technical corrections and other minor changes to the current ICR plan (proposed ICR-B). The proposed changes to ICR-B include the addition of provisions related to notification of income documentation requirements and the ICR loan forgiveness process.

Under the proposed regulations, ICR-A would be available to a new borrower who: (1) Did not have an outstanding student loan as of October 1, 2007, or as of the date he or she received a new loan after October 1, 2007; and (2) received a disbursement of a Direct

Subsidized Loan, a Direct Unsubsidized Loan or a student Direct PLUS Loan on or after October 1, 2011, or receives a Direct Consolidation Loan based on an application received on or after October 1, 2011, except if the Direct Consolidation Loan repays a Direct or FFEL loan made before October 1, 2007. The proposed regulations for the ICR-A program would incorporate the following provisions from the statutory amendments to IBR that become effective on July 1, 2014:

• A borrower's maximum annual payment amount under the ICR-A plan would be capped at 10 percent of the difference between the borrower's AGI and 150 percent of the annual poverty guideline amount for the borrower's State and family size.

• Borrowers who repay under the ICR-A plan would qualify for forgiveness of any remaining loan balance after 20 years of qualifying payments and periods of economic hardship deferment.

• To qualify for the ICR-A plan and to continue to make income-contingent payments under that plan, a borrower would be required to have a partial financial hardship. A borrower would be considered to have a partial financial hardship if the annual amount due on all of the borrower's eligible Direct Loan and FFEL Program loans, as calculated based on a standard repayment plan with a 10-year repayment period, exceeds 10 percent of the difference between the borrower's AGI and 150 percent of the annual poverty guideline amount for the borrower's State and family size.

• For married borrowers who file a joint Federal tax return, the determination of a borrower's partial financial hardship status would be based on the combined income of both spouses and, if the spouse also has eligible loans, the combined eligible loan debt of both individuals. For a married borrower who files an individual Federal tax return, only the borrower's income and loan debt would be considered.

• The ICR-A plan will be available to any borrower who is repaying a non-defaulted Direct Loan, except for a parent Direct PLUS loan or a Direct Consolidation loan that repaid a parent Direct or FFEL PLUS loan. As with IBR, parent Direct PLUS Loans and Direct Consolidation Loans that repaid parent Direct PLUS Loans or parent Federal PLUS Loans would not be eligible for repayment under the ICR-A plan.

• Unpaid accrued interest would be capitalized only if a borrower repaying under the ICR-A plan is determined to no longer have a partial financial hardship, or if the borrower chooses to leave the ICR-A plan.

• For a borrower whose scheduled payment under the ICR-A plan is less than the amount of interest that accrues each month, the Secretary would pay the remaining interest for a period of three consecutive years from the date the borrower begins repayment under the ICR-A plan, excluding periods of economic hardship deferment.

A Direct Loan borrower who is not a parent Direct PLUS borrower will continue to be able to select the ICR-B plan as one of the available repayment plans. These proposed regulations also incorporate the proposed IBR regulations regarding the treatment of married borrowers and borrowers who fail to provide required documentation of income into the current ICR/ICR-B regulations.

Income Based Repayment

The proposed regulations incorporate statutory changes to the IBR plan that were included in the SAFRA Act and add new provisions related to notification of income documentation requirements, repayment options after leaving the IBR plan, and the IBR loan forgiveness process.

SAFRA changes:

Proposed § 685.221(a)(4) would reflect the statutory definition of “new borrower” for purposes of the changes to the IBR program as an individual who has no outstanding balance on a Direct Loan or a FFEL program loan on July 1, 2014, or who has no outstanding balance on such a loan on the date he or she obtains a loan after July 1, 2014.

The proposed regulations would revise the definition of “partial financial hardship” in § 685.221(a)(5) to reflect the statutory provision and state that for new borrowers after July 1, 2014, a borrower is considered to have a partial financial hardship if the annual amount due on all of the borrower's eligible Direct Loan and FFEL Program loans, as calculated based on a standard repayment plan with a 10-year repayment period, exceeds 10 percent of the difference between the borrower's AGI and 150 percent of the annual poverty guideline amount for the borrower's family size. The proposed regulations would revise § 685.221(b)(1) to provide that for a new borrower after July 1, 2014, the maximum IBR monthly payment amount during periods of partial financial hardship may not exceed 10 percent of the amount by which the borrower's AGI exceeds 150 percent of the poverty guideline amount for the borrower's family size, divided by 12.

Finally, the proposed regulations would revise § 685.221(f) to provide that a new borrower who has participated in the IBR plan qualifies for loan forgiveness after 20 years of qualifying payments and periods of economic hardship deferment.

Provisions that affect all IBR participants:

The proposed IBR regulations would also:

• Revise the partial financial hardship (PFH) determination process and modify notification, income documentation requirements, rights and responsibilities of borrowers who have been found qualified for IBR.

• Improve notifications requirements for borrowers who are eligible or approaching eligibility for loan forgiveness.

• Revise payment requirements for borrowers who leave IBR. A borrower who leaves the IBR plan and is placed on the standard repayment plan may change to a different repayment plan after making one monthly payment under the standard repayment plan. Under the proposed regulations, the single payment made under the standard repayment plan could include a smaller payment amount paid under a reduced payment forbearance agreement with the loan holder or the Secretary.

Total and Permanent Disability Discharge

The proposed regulations will revise Perkins and FFEL regulations to provide for direct application to the Department for total and permanent disability discharges. They will modify regulations in the Perkins, FFEL, and Direct Loan program to provide more detailed information to borrowers in the letters explaining decisions to deny discharge applications and the proposed regulations would modify the Perkins, FFEL, and Direct Loan regulations to specify that the Department will collect income documentation from borrowers during the post-discharge monitoring period on an OMB-approved form.

The proposed total and permanent disability regulations would:

• Revise certain provisions to specify that a borrower's representative may be involved in any part of the total and permanent disability total and permanent disability process and must receive all notifications sent to the borrower.

• Extend the loan suspension window to 120 days from 60 days after a borrower has notified the loan holder(s) of his or her intent to apply for a discharge.

• Extend the deadline to submit an application for total and permanent

disability to 90 days after the date of the physician's certification that a borrower has a total and permanent disability.

• Revise the total and permanent disability discharge application process so that a borrower applies for total and permanent disability directly to the Department and that the Department directly notifies the borrower's Perkins and FFEL lenders upon approval of the application for total and permanent disability discharge.

• Revise provisions related to a borrower's responsibilities to report income annually after a discharge has been granted and specify that the Department will create an OMB approved form for reporting earnings during the monitoring period.

• Revise provisions to require that payments made by the borrower after a disability discharge has been granted are returned to the borrower.

• Revise the application process by streamlining the approval process where the borrower's documentation is for applications from the Department of Veterans Affairs to ensure consistency.

• Update the regulations governing the actions of FFEL lender and guaranty agencies in the disability discharge process to reflect the new single application process.

• Propose regulations to specify that if the borrower receives a disbursement of a new title IV loan or receives a new TEACH Grant made on or after the date the physician certified the borrower's discharge application and before the date the Secretary grants a total and permanent disability discharge, the Secretary will deny the borrower disability discharge application and resume collection on the borrower's loans.

• Revise provisions to require that the loans of a borrower who is denied a total and permanent disability discharge are reinstated as if the total and permanent disability application was never submitted.

Significant Proposed Regulations

We group major issues according to subject, with appropriate sections of the proposed regulations referenced in parentheses. We discuss other substantive issues under the sections of the proposed regulations to which they pertain. Generally, we do not address proposed regulatory provisions that are technical or otherwise minor in effect.

Total and Permanent Disability Discharge (34 CFR 674.61, 682.402, and 685.213)

Background:

After receiving significant public criticism in February 2011 that the Department's total and permanent disability discharge process lacked transparency and was unduly burdensome and costly for borrowers, the Department undertook a comprehensive review of the process. Before initiating this review, the Department had already begun making improvements such as: Streamlining the review process to ensure that the physician's certification received primary consideration in discharge decisions, performing outreach to borrowers to ensure that supplemental information from physicians is received timely, and improving information flow to help borrowers understand the process. We made other improvements when the Department designated a single contractor to manage the total and permanent disability discharge process in 2012, including the creation of a new Web site through which borrowers can track the status of their applications, clearer correspondence with borrowers, and borrower notifications at regular milestones as the application process progresses.

As a result of the comprehensive review and ongoing efforts to identify procedural deficiencies, the Department also committed to considering changes to the regulations governing the total and permanent disability discharge process. In the

Federal Register

notice published on October 28, 2011 (76 FR 66880), announcing our intent to establish a negotiated rulemaking committee on the Federal student loan programs, we included three topics for discussion related to loan discharges based on total and permanent disability:

• Establishing a single total and permanent disability application process;

• Improvements to borrower notification of denial; and

• Improvements in post-discharge monitoring of employment earnings.

These proposed regulations would revise §§ 674.61, 682.402(c), and 685.213 to require Perkins Loan and FFEL borrowers to apply directly to the Department for a total and permanent disability discharge and to provide increased transparency in the notifications a Perkins Loan, FFEL, and Direct Loan borrower receives when an application for discharge is denied. Finally, after discussions with the non-Federal negotiators, the Department committed to the development of a new Federal form that would assist borrowers in providing the Department with documentation of the borrower's annual earnings from employment during the three-year post-discharge monitoring period. The sections that follow describe in more detail these changes and other clarifying changes made by the Loans Committee to improve the total and permanent disability process.

Use of Terms (34 CFR 674.61(b)(1), 682.402(c)(1), and 685.213(a)(4))

Statute:

Section 437(a)(1) of the HEA, which is applicable to the Direct Loan Program under section 455(a)(1) of the HEA, and section 464(c)(1)(F) of the HEA provide for a discharge of a borrower's FFEL, Perkins Loan, or Direct Loan program loan if the borrower becomes totally and permanently disabled as determined in accordance with the Secretary's regulations, or if the borrower 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 or has lasted, or can be expected to last, for a continuous period of not less than 60 months.

Current Regulations:

Section 682.402(c)(2) of the FFEL program regulations authorize a borrower's representative to submit a total and permanent disability discharge application on behalf of a borrower. Sections 674.61(b)(6), 682.402(c)(6), and 685.213(b)(5) of the Perkins Loan, FFEL, and Direct Loan program regulations, respectively, provide that the borrower's representative may assume the borrower's responsibilities to provide notifications to the Secretary about address changes and annual earnings after the borrower has received a discharge based on total and permanent disability. However, current regulations do not define the term “borrower's representative.”

Section 682.402(c) of the FFEL program regulations use the terms “lender” and “guaranty agency,” as those terms are defined in 682.200(b).

Proposed Regulations:

The proposed regulations would add new §§ 674.61(b)(1)(ii), 682.402(c)(1)(iv)(A), and 685.213(a)(4) to the Perkins Loan, FFEL, and Direct Loan program regulations and specify that a “borrower's representative” or a “veteran's representative” is any individual, including a member of the borrower's or veteran's family or an attorney, authorized to act on behalf of the borrower or the veteran with respect to the borrower's or veteran's application for a total and permanent disability discharge. Under the proposed regulations, references to a “borrower” or a “veteran” in the total and permanent disability discharge regulations would include a borrower's representative or a veteran's representative. The proposed regulations would clarify that a

representative may act on behalf of the borrower to apply for a discharge, provide notifications or information to the Secretary in connection with a discharge application, and to receive notifications from the Secretary.

The proposed regulations would add a new § 682.402(c)(1)(iv)(B) to the FFEL regulations to clarify that for purposes of the FFEL total and permanent disability discharge regulations, the term “lender” would include a guaranty agency that holds a borrower's FFEL loan at the time the borrower applies for a total and permanent disability discharge. This proposed change would reflect current practice. Currently, if the guaranty agency is the loan holder at the time the borrower requests a total and permanent disability discharge, the guaranty agency carries out the responsibilities of a FFEL lender with regard to the borrower's discharge request (except for claim filing requirements).

The proposed regulations would add a new § 682.402(c)(1)(iv)(C) to the FFEL regulations to clarify that references in the total and permanent disability discharge regulations to “the applicable guaranty agency” refer to the guaranty agency that guaranteed the loan.

Reasons:

The current regulations specifically allow a borrower's representative to submit a total and permanent disability discharge application on behalf of the borrower only in the FFEL program. While discussing the role of the borrower's representative in helping a borrower apply for discharge of a FFEL loan based on a total and permanent disability, a non-Federal negotiator requested that the regulations be amended to clarify that a borrower's representative may represent the borrower throughout the process, not just during the initial application stage. Currently, as a matter of practice, the Department allows representatives to represent borrowers throughout the total and permanent disability discharge process in all of the title IV loan programs. However, a non-Federal negotiator argued that the practice is not consistently followed by loan servicers and others participating in the title IV loan programs and should be formalized by including it in the regulations. The non-Federal negotiator was particularly concerned that borrowers' representatives do not always receive the notifications that the borrower receives. The non-Federal negotiator requested that the regulations be amended to specify that both the borrower and the borrower's representative (if any) receive notices.

The Department agreed and, for consistency, added a paragraph to the proposed regulations for all of the title IV student loan programs stating that the term “borrower” includes a borrower's representative, if applicable. Under the proposed regulations any notice sent to a borrower must also be sent to the borrower's representative if the borrower has one. In addition, both the borrower and the borrower's representative may provide notifications and information in connection with the borrower's total and permanent disability discharge.

The Department also agreed to develop a new release form that the borrower can use to designate a representative to act on behalf of the borrower with respect to the borrower's request for a disability discharge.

The non-Federal negotiator also requested that the Department add language to the proposed regulations specifying that a borrower's representative could be an attorney. The Department agreed and added language to the Perkins Loan, FFEL, and Direct Loan program proposed regulations providing that an attorney could be a borrower's representative.

Other non-Federal negotiators requested that the proposed regulations clarify the role of a guaranty agency that holds a borrower's FFEL loan at the time the borrower applies for a total and permanent disability discharge. Under current practice, the guaranty agency carries out the functions of a FFEL lender with regard to the borrower's discharge request. The Department proposes to reflect this practice by adding a provision to the regulations specifying that the term “lender,” as used in the FFEL program disability discharge regulations, means a guaranty agency if the guaranty agency holds the loan at the time the borrower applies for a total and permanent disability discharge.

The current total and permanent disability discharge regulations do not specifically address borrowers with FFEL program loans held by more than one lender and possibly guaranteed by more than one guaranty agency. The proposed regulations, as discussed in the next section, would specifically address how discharge applications from these borrowers will be handled. Therefore, the proposed regulations use the term “the applicable guaranty agency.” Some non-Federal negotiators recommended that the proposed regulations specify that the term “applicable guaranty agency” means the guaranty agency that guaranteed the FFEL loan for which the borrower has requested a discharge. The Department agreed that this change would improve the clarity of the proposed regulations.

Total and Permanent Disability Discharge Application Process (34 CFR 674.61(b)(2), 682.402(c)(2), and 685.213(b))

Statute:

The HEA does not specify the application process for a borrower applying for a total and permanent disability discharge.

Current Regulations:

Currently, a borrower who has title IV loans held by two or more lenders must apply separately to each lender for a total and permanent disability discharge. The borrower must provide a total and permanent disability discharge application certified by a physician to each lender that holds title IV loans owed by the borrower. After the application is received, the title IV lender suspends collection activity on the borrower's Perkins Loan, FFEL, or Direct Loan program loans, in accordance with §§ 674.61(b)(2)(iv), 682.402(c)(7)(i), or 685.213(b)(1). Each loan holder processes the disability discharge application separately.

Under § 674.61(b)(2)(iv)(A) of the Perkins Loan program regulations, the institution that awarded the Perkins Loan reviews the borrower's disability discharge application. If the institution determines that the application supports the conclusion that the borrower is totally and permanently disabled, the institution assigns the loan to the Secretary.

Under § 682.402(c)(7)(ii) of the FFEL regulations, the FFEL program lender reviews the borrower's disability discharge application. If the lender determines that the application supports the conclusion that the borrower is totally and permanently disabled, the lender files a disability discharge claim with the guaranty agency. The guaranty agency reviews the application and, if it concurs with the lender's determination, approves the discharge claim in accordance with § 682.402(c)(7)(iv). After approving the claim, the guaranty agency assigns the loan to the Secretary in accordance with § 682.402(c)(7)(vi)(A).

Under § 685.213(b)(1) of the Direct Loan regulations, the borrower applies directly to the Secretary for a total and permanent disability discharge.

Under §§ 674.61(b)(3), 682.402(c)(3), and 685.213(b)(2), the Secretary makes the final determination of eligibility for a total and permanent disability discharge in the Perkins Loan, FFEL, and Direct Loan Programs.

Proposed Regulations:

The proposed regulations would revise §§ 674.61(b)(2) and 682.402(c)(2) of the Perkins Loan and FFEL program regulations to have borrowers submit applications for total

and permanent disability discharges directly to the Secretary. In the Direct Loan Program, borrowers would continue to submit applications directly to the Secretary.

Under the proposed single application process for total and permanent disability discharges, if a borrower notifies a Perkins loan school or a FFEL program lender that holds his or her loan and claims to be totally and permanently disabled, the school or lender would direct the borrower to notify the Secretary of the borrower's intent to apply for a discharge and would provide the borrower with the information necessary to do so.

Under proposed §§ 674.61(b)(2)(ii) and 682.402(c)(2)(ii), after a Perkins Loan or FFEL borrower notifies the Secretary of his or her intent to apply for a total and permanent disability discharge, the Secretary would—

• Provide the borrower with information needed to apply for the discharge;

• Identify all title IV loans owed by the borrower and notify the lenders of those loans of the borrower's intent to apply for the discharge;

• Direct the lenders to suspend collection efforts on those loans for up to 120 days; and

• Inform the borrower that collection will resume on the borrower's title IV loans if the borrower does not submit a total and permanent disability discharge application within 120 days.

The Secretary would carry out the same actions for Direct Loan borrowers who notify the Secretary that the borrower claims to be totally and permanently disabled under proposed § 685.213(b)(1).

Under proposed §§ 674.61(b)(2)(iii) and 682.402(c)(2)(iii) of the Perkins Loan program and FFEL program regulations, Perkins schools and FFEL lenders will resume collection on the borrower's loans if the borrower does not submit the total and permanent disability discharge application within 120 days. The Perkins loan school or FFEL lender would be deemed to have exercised forbearance during the suspension period. In the FFEL program, the lender could capitalize interest that accrued during the suspension period. Under proposed § 682.402(c)(2)(iii), a guaranty agency, even if it is acting as a lender for purposes of a total and permanent disability discharge request, would not be permitted to capitalize accrued interest.

Under proposed §§ 674.61(b)(2)(v) through (b)(2)(viii), 682.402(c)(2)(iv) through (c)(2)(viii), and 685.213(b)(3), a Perkins Loan, FFEL, or Direct Loan borrower must submit the total and permanent disability discharge application to the Secretary. The application must include a certification by a physician who is a doctor of medicine or osteopathy legally authorized to practice in a State, affirming that the borrower is totally and permanently disabled as described in the regulations. The borrower must submit the disability discharge application to the Secretary within 90 days of the date the physician certified the application.

Generally, the 90-day period for submitting the total and permanent disability discharge application would overlap with the 120-day suspension period referenced earlier in this section. The 120-day suspension period would begin on the date the Secretary notifies the borrower's title IV lenders of the borrower's intent to apply for a total and permanent disability discharge. The 90-day period would begin on the date the physician certifies the total and permanent disability application.

After receiving the total and permanent disability discharge application, the Secretary notifies the borrower's title IV loan holders that the Secretary has received the application. This notification would direct the borrower's loan holders either to suspend collection activity or to maintain the suspension of collection activity on the borrower's title IV loans.

If the application is incomplete, the Secretary requests the missing information from the borrower or the physician who certified the application. An application is incomplete if information requested on the application—such as a borrower's signature, a physician's signature, or a physician's license number—is not provided.

Under proposed §§ 674.61(b)(2)(ix) and 682.402(c)(2)(ix) after receiving the discharge application, the Secretary would send a notification to the borrower that would—

• State that the application will be reviewed by the Secretary;

• Inform the borrower of the suspension of collection activity on the borrower's title IV loans while the Secretary reviews the application; and

• Explain the process for the Secretary's review.

The Secretary would send the same notification to Direct Loan borrowers after receipt of the discharge application.

Reasons:

Under the Department's proposed regulations, a borrower would submit one total and permanent disability discharge application directly to the Secretary and this would eliminate the need for borrowers to submit separate discharge applications to each of their loan holders.

The Department's proposal eliminates the requirement that each of a borrower's loan holders (and guaranty agencies, in the FFEL program) review the borrower's total and permanent disability discharge application. The proposal eliminates redundant reviews of total and permanent disability discharge applications and reduces administrative burden on lenders and guaranty agencies in the title IV programs.

The Department believes that the streamlined total and permanent disability discharge process would provide many benefits to borrowers. The proposed regulations would—

• Simplify the process for the borrower;

• Establish a single point of contact provided to the borrower in the instructions for submitting his or her application;

• Reduce the length of time needed to process applications;

• Provide more consistency in determinations;

• Provide more uniformity in the communications sent to borrowers throughout the discharge process; and

• Ensure that all of a borrower's title IV loans that are eligible for a total and permanent disability discharge are discharged at the same time, reducing instances of “straggler” loans that the borrower may forget to include when applying for a discharge.

The non-Federal negotiators supported the Department's goal to simplify the application process for a total and permanent disability discharge. However, the non-Federal negotiators raised some concerns about the proposed single application process. The negotiated language in these proposed regulations addresses the majority of these concerns.

Under the Department's initial proposal, the first title IV lender that the borrower contacted would suspend collection activity on the borrower's loans for up to 90 days. The Secretary would notify the borrower's other title IV loan holders to suspend collection after the borrower notified the Secretary of his or her intent to apply for a total and permanent disability discharge. Non-Federal negotiators were concerned that beginning the suspension of collection activity on different dates would be confusing for borrowers. They were also concerned that the 90-day suspension period would not be sufficient time for a borrower to obtain the physician certification needed to apply for the discharge. The negotiators

stated that it would be preferable for the suspension of collection activity to last for up to 120 days and for it to begin on the same date for all of the borrower's title IV loans. The non-Federal negotiators recommended that the suspension of collection activity not begin on any of the borrower's title IV loans until after the borrower contacted the Secretary. The Department agreed and modified the proposed regulations accordingly.

Some non-Federal negotiators recommended that the suspension of collection activity also include a suspension of payments collected from borrowers through administrative wage garnishment (AWG) and the Treasury Offset Program (TOP). The Department did not agree. Borrowers applying for total and permanent disability discharges are, by definition, unable to engage in substantial gainful activity. Therefore, AWG should not be an issue for these borrowers. With regard to TOP, the Department reiterated its current policy on stopping TOP offsets. The submission of a total and permanent disability discharge application does not, in and of itself, demonstrate that a borrower is eligible for the discharge. Given the administrative effort and timing issues associated with stopping TOP, it may not be in the best interests of the taxpayers or the borrower to suspend TOP based solely on the filing of the discharge application. If a borrower's loan account has been certified for TOP, the Secretary or a guaranty agency is not required to stop TOP offsets while the borrower is preparing to submit the total and permanent disability discharge application or during its review. The Secretary or guaranty agency may, however, stop or reduce TOP offsets during this period if it believes such action is warranted in the borrower's particular circumstances.

If a determination is made that the borrower is eligible for a total and permanent disability discharge, the Secretary or guaranty agency must promptly inactivate TOP offsets on the account. After the borrower's loan is discharged, all payments on the loan received after the date of the physician's certification, including payments obtained through a TOP offset, are refunded to the borrower.

The proposed single application process would be consistent with the Department's current TOP practices. If the borrower's account is not certified in TOP at the time the borrower contacts the Secretary to request a total and permanent disability discharge, the Secretary or guaranty agency would not take steps to initiate TOP during the suspension of collection activity under proposed §§ 674.61(b)(2)(ii)(C), 682.402(c)(2)(ii)(C), and 685.213(b)(1). However, if the account is already certified in TOP at the time the borrower contacts the Department, neither the Department nor the guaranty agency would be required to stop TOP until the Department determines that the borrower is eligible for a total and permanent disability discharge.

Non-Federal negotiators representing guaranty agencies expressed concerns that the proposed changes would limit the role of guaranty agencies in the total and permanent disability discharge process. Under the new process, the guaranty agencies would be notified of a borrower's eligibility for a total and permanent disability discharge but would not receive copies of the borrower's applications or of any accompanying medical documentation. These non-Federal negotiators stated that this lack of information would hinder the agencies' ability to assist borrowers through the discharge process.

The Department declined to modify the proposed regulations to require that guaranty agencies receive copies of the total and permanent disability discharge applications. Under the proposed regulations, guaranty agencies and lenders would not conduct medical reviews of disability discharge applications. Therefore, there is no need for lenders or agencies to receive the applications. The Department believes that a requirement that disability discharge applications be provided to guaranty agencies would be contrary to the goal of streamlining the disability discharge application process. In addition, the Department notes that nothing prevents a borrower from voluntarily providing this documentation to a guaranty agency.

Secretary's Review of Total and Permanent Disability Discharge Applications (34 CFR 674.61(b)(3), 682.402(c)(3), and 685.213(b)(2))

Statute:

The HEA does not specify the procedures for the Secretary's review of total and permanent disability discharge applications.

Current Regulations:

If the Secretary determines that a title IV borrower qualifies for a total and permanent disability discharge, the Secretary discharges the loan and, in accordance with §§ 674.61(b)(3)(i), 682.402(c)(3)(ii), and 685.213(b)(2)(ii), the Secretary notifies the borrower that the Secretary has approved the total and permanent disability discharge request. The notification explains to the borrower the terms and conditions under which the Secretary will reinstate the discharged loan.

If the Secretary does not approve the total and permanent disability discharge request, the Secretary notifies the borrower that it has denied the disability discharge application and that collection will resume on the borrower's loan, in accordance with §§ 674.61(b)(3)(ii), 682.402(c)(3)(iii), and 685.213(b)(2)(iii).

Proposed Regulations:

Under proposed §§ 674.61(b)(3)(iii) and 682.402(c)(3)(iii), if the Secretary determines that the borrower qualifies for a total and permanent disability discharge, the Secretary would notify the borrower's Perkins and FFEL lenders that the Secretary approved the application and would provide the date that the physician certified the total and permanent disability discharge application.

For Perkins Loan borrowers, the Secretary would direct the institution to assign the borrower's Perkins Loans to the Department. Proposed § 674.61(b)(3)(iv) would require the institution to assign the Perkins Loan to the Secretary within 45 days of receiving the notification.

For FFEL borrowers, the Secretary would direct the FFEL lender to submit a disability claim to the applicable guaranty agency.

If the Secretary determines that the borrower does not qualify for a total and permanent disability discharge, the Secretary notifies the borrower and the lender that the Secretary denied the total and permanent disability discharge application under proposed §§ 674.61(b)(3)(vi), 682.402(c)(3)(v), and 685.213(b)(4)(iv). The notification would include—

• The reason or reasons for the denial;

• A statement that the loan is due and payable to the lender under the terms of the promissory note and that the loan will return to the status that would have existed had the total and permanent disability discharge application not been received;

• A statement that the lender will notify the borrower of the date the borrower must resume making payments on the loan or, in the case of a Direct Loan, the date that the borrower must resume making payments on the Direct Loan;

• An explanation that the borrower is not required to submit a new total and permanent disability discharge application if the borrower requests that the Secretary re-evaluate the application for discharge by providing, within 12 months of the date of the notification,

additional information that supports the borrower's eligibility for discharge; and

• An explanation that if the borrower does not request re-evaluation of the borrower's prior discharge application within 12 months of the date of the notification, the borrower must submit a new total and permanent disability discharge application to the Secretary if the borrower wishes the Secretary to re-evaluate the borrower's eligibility.

Under proposed §§ 674.61(b)(3)(vii), 682.402(c)(3)(vi), and 685.213(b)(4)(v), if the borrower requests re-evaluation of his or her application or submits a new disability discharge application, the request must include new information regarding the borrower's disabling condition that was not available at the time the Secretary reviewed the borrower's initial application for a total and permanent disability discharge.

Reasons:

The Department is proposing to change the regulations to reflect its current practice of providing detailed information in the notifications that are sent to borrowers about their disability discharge applications. The proposed regulations are based on letters that are currently available for use for total and permanent disability discharges but that are not used consistently. The Department believes that describing the content of these letters would ensure that the information provided in the notifications is consistent, and would provide more transparency to borrowers regarding the reasons for the denial of their application, as well as information on the options the borrower has to request that the disability discharge request be re-evaluated.

Treatment of Disbursements of Title IV Loans and Receipt of Title IV Loans After the Physician Certification Date (34 CFR 674.61(b)(4), 674.61(b)(5), 682.402(c)(4), 682.402(c)(5), 685.213(b)(3), and 685.213(b)(4))

Statute:

Sections 437(a)(1), which is applicable to the Direct Loan program under section 455(a)(1) of the HEA, and section 464(k) of the HEA authorize the Secretary to develop safeguards to prevent fraud and abuse in the discharge of title IV loans due to total and permanent disability.

Current Regulations:

Under § 674.61(b)(4), 682.402(c)(4), or 685.213(b)(3) of the Perkins Loan, FEEL, and Direct Loan program regulations, respectively, if a borrower received a title IV loan or a TEACH Grant prior to the date of the physician's certification of the borrower's total and permanent disability discharge application and a disbursement of that loan or grant occurs while the borrower's discharge request is being processed, the processing of the discharge request is suspended, until the borrower returns the full amount of the disbursement.

Proposed Regulations:

The proposed regulations do not change the current requirements for disbursements of loans made prior to the date of the physician's certification. The proposed regulations would add new §§ 674.61(b)(5), 682.402(c)(5), and 685.213(b)(6) to specify that if the borrower receives a disbursement of a new title IV loan or receives a new TEACH Grant made on or after the date the physician certified the borrower's discharge application and before the date the Secretary grants a total and permanent disability discharge, the Secretary will deny the borrower's disability discharge application and collection will resume on the borrower's loans.

Reasons:

The current total and permanent disability discharge regulations address late disbursements of loans received prior to a physician's certification of the borrower's disability discharge application and after a discharge has been granted. However, the current regulations do not address a situation in which a borrower receives a disbursement of a new title IV loan or a new TEACH Grant made on or after the date the physician certified the application, but before the date the Secretary discharges the loan. The Department is proposing to provide in the regulations that a borrower is not eligible for a discharge if the borrower receives a new title IV loan or TEACH Grant while the Department is reviewing his or her total and permanent disability discharge application. When a borrower takes out a title IV loan or receives a TEACH Grant, the borrower makes a commitment either to repay the loan or to teach for four years. If a borrower actively seeks a new title IV loan or TEACH Grant shortly after the borrower is certified as totally and permanently disabled by a physician, it raises the question of whether the borrower actually intends to repay the loan or to teach. The proposed regulations would preclude a borrower from receiving a title IV loan or TEACH Grant, only to have the loan or teaching obligation discharged a short time later.

The non-Federal negotiators agreed with this proposed change. However, there was some discussion on how to track receipt of a new title IV loan or TEACH Grant by a borrower. The Department proposed using the disbursement date of a new title IV loan or TEACH Grant to determine receipt and the non-Federal negotiators agreed.

Reinstatement of Loans and Borrower Responsibilities After Discharge (34 CFR 674.61(b)(6), 674.61(b)(7), 682.402(c)(6), 682.402(c)(7), 685.213(b)(7), and 685.213(b)(8))

Statute:

Sections 437(a)(1) of the HEA, which is applicable to the Direct Loan program under section 455(a)(1) of the HEA, and section 464(k) of the HEA authorize the Secretary to promulgate regulations to reinstate a borrower's obligation to repay a FFEL, Perkins Loan, or Direct Loan program loan that was discharged due to a disability if, after the discharge, the borrower receives another title IV loan or has earned income in excess of the poverty line, or under other circumstances that the Secretary determines to be necessary.

Current Regulations:

Sections 674.61(b)(5), 682.402(c)(5), and 685.213(b)(4) of the current regulations specify that a Perkins Loan, FFEL, or Direct Loan program loan that has been discharged due to a total and permanent disability will be reinstated if, within three years of the date of the discharge, the borrower—

• Has annual earnings from employment that exceed 100 percent of the poverty guideline for a family of two;

• Receives a new TEACH Grant or a new title IV loan, except for a Consolidation Loan; or

• Fails to return any disbursement the borrower receives after the discharge date of a title IV loan or TEACH Grant received prior to the discharge date.

Under §§ 674.61(b)(6), 682.402(c)(6), and 685.213(b)(5), during the three-year period after the discharge date, a Perkins Loan, FFEL, or Direct Loan borrower must—

• Notify the Secretary of any changes to the borrower's address or phone number;

• Notify the Secretary if the borrower's annual earnings exceed 100 percent of the poverty line for a family of two; and

• Provide the Secretary, upon request, with documentation of the borrower's annual earnings from employment.

Current regulations do not specify a format or process for providing documentation of annual earnings to the Secretary.

Proposed Regulations:

The proposed regulations would not change the conditions for reinstating a loan that has been discharged due to a total and permanent disability. However, we are proposing to modify §§ 674.61(b)(6)(ii)(B), 682.402(c)(6)(ii)(B), and 685.213(b)(7)(ii)(B) to provide that, if a

borrower's Perkins Loan, FFEL, or Direct Loan program loan is reinstated, it returns to the status it would have had if the total and permanent disability discharge application had not been received. Current regulations do not address the status of a loan that has been reinstated.

The proposed regulations would make one change to the regulations describing the borrower's responsibilities after the borrower has received a total and permanent disability discharge. Under proposed §§ 674.61(b)(7)(iii), 682.402(c)(7)(iii), and 685.213(b)(8)(iii), a Perkins Loan, FFEL, or Direct Loan borrower would be required to provide the Secretary, on request, with documentation of annual earnings from employment on a form provided by the Secretary.

Reasons:

Borrowers whose loans have been discharged based on a disability must provide documentation of their income to the Secretary for three years after the date of the discharge. It is the Department's experience that borrowers who are totally and permanently disabled and who have little or no income are often unsure how to document their income.

During the negotiations, the Department initially proposed shifting the three-year period during which the borrower would have to provide income information to three calendar years (January 1 to December 31) after the discharge was granted. The Department proposed this approach because it would allow borrowers to meet the income documentation requirement by submitting tax returns for each calendar year after the discharge.

Non-Federal negotiators objected to this proposal. They noted that it would stretch out the post-discharge review period for borrowers—in some cases to almost four years instead of three. The non-Federal negotiators also pointed out that low-income individuals may not be required to file tax returns, so the proposed solution would not resolve the problem for the many borrowers who qualify for a discharge but are not required to file tax returns.

The Department responded by proposing to revise the regulations to require that a borrower submit income information on a form provided by the Secretary. The Department intends to develop a form that will be available by the time these regulations become effective. Borrowers will be required to submit the form to the Secretary to document their annual earnings. The form will require the borrower to certify the borrower's annual earnings from employment and will require the borrower to submit documentation to support the earnings information, if the borrower has such documentation. The documentation may include income tax returns, documentation of eligibility for Social Security disability benefits, or other documentation that supports the amount certified by the borrower.

The proposed regulations do not specify the content of the form, but the form will be made available for public comment before it is approved for use.

Return of Payments After a Total and Permanent Disability Assignment (34 CFR 674.61(b)(8), 682.402(c)(8), 682.402(r)(2), 682.402(r)(3), and 685.213(b)(4)(iii))

Statute:

The HEA does not specify the treatment of payments received on a title IV loan after the borrower has received a total and permanent disability discharge on the loan.

Current Regulations:

Sections 674.61(b)(7)(i) and 674.61(b)(7)(iii) of the Perkins Loan program regulations require an institution that receives a payment on a Perkins loan after it has assigned the loan to the Secretary during the disability discharge process to forward the payment to the Secretary. If the Secretary discharges the loan, the Secretary returns to the sender any payments made after the date of the physician's certification of the borrower's discharge application.

Section 682.402(c)(7)(vii) of the FFEL regulations requires a lender to forward to the guaranty agency any payment received on a FFEL loan after the lender receives a claim payment from the guaranty agency.

Section 682.402(r)(2) of the FFEL regulations requires a guaranty agency that receives a payment on a loan after it has assigned the loan to the Secretary during the disability discharge process to forward the payment to the Secretary. At the time the guaranty agency forwards the payment to the Secretary, it must notify the borrower that there is no need to continue to make payments on the loan. Under current § 682.402(r)(3), the Secretary returns the payments to the borrower after the Secretary makes a final determination to discharge the loan due to a total and permanent disability.

Section 685.213(b)(2)(ii) of the Direct Loan program regulations requires the Secretary, after discharging a Direct Loan, to return to the sender any payments received after the date of the physician's certification of the borrower's discharge application.

Proposed Regulations:

Under proposed § 674.61(b)(8), if an institution receives a payment on a Perkins loan that has been assigned to the Secretary based on the Secretary's determination of the borrower's eligibility for a total and permanent disability discharge, the institution returns the payment to the sender.

Under proposed § 682.402(c)(8)(i)(C), after receiving a disability discharge claim payment from the guaranty agency, the FFEL lender must return to the sender any payments it receives after the date the physician certified the borrower's loan discharge application and any payments received after claim payment.

Under proposed § 682.402(r)(2), a guaranty agency must return to the sender any payments it receives on a FFEL loan that has been assigned to the Secretary based on the Secretary's determination of the borrower's eligibility for a total and permanent disability discharge.

Under proposed § 682.402(r)(3), after the Secretary discharges a FFEL loan, the Secretary returns to the sender any payments it receives on the loan after the date the borrower became totally and permanently disabled.

Under proposed § 685.213(b)(4)(iii) of the Direct Loan program regulations, after the Secretary discharges a Direct Loan, the Secretary returns to the sender any payments received after the date of the physician's certification of the borrower's discharge application.

Reasons:

Under the proposed regulations, the assignment of a Perkins loan or the filing of a disability claim on a FFEL loan would not occur until after the Secretary has determined that the borrower qualifies for a total and permanent disability discharge. Therefore, there is no reason for payments received after those dates to be forwarded to the guaranty agency or to the Secretary. The Department is proposing to have the payments returned to the sender.

Total and Permanent Disability Discharge Application Process for Applications Based on Documentation From the Department of Veterans Affairs (34 CFR 674.61(c), 682.402(c)(9), and 685.213(c))

Statute:

Sections 437(a)(2), which is applicable to the Direct Loan program under section 455(a)(1) of the HEA, and section 464(c)(1)(F)(iv) of the HEA provide that a FFEL, Perkins Loan, or Direct Loan borrower who has been determined by the Department of Veterans Affairs (VA) to be unemployable due to a service-connected disability and who provides documentation of that determination to the Secretary is considered totally and permanently disabled for the purpose of discharging the borrower's title IV loans. Section 437(a)(2) further specifies that a

borrower who provides such documentation shall not be required to present additional documentation for the purpose of determining eligibility for a total and permanent disability discharge.

Current Regulations:

Sections 674.61(c), 682.402(c)(8), and 685.213(c) of the Perkins Loan, FFEL, and Direct Loan program regulations describe the process for a veteran who is applying for a total and permanent disability discharge based on a determination by the VA that the veteran is unemployable due to a service-connected disability. The total and permanent disability discharge process based on VA documentation is similar to the total and permanent disability discharge process for non-veterans in the three loan programs, with a few major exceptions.

Sections 674.61(c)(2)(ii), 682.402(c)(8)(i), and 685.213(c)(1) of the current regulations require the veteran to submit to the Secretary documentation from the VA demonstrating that the veteran is unemployable due to a service-connected disability. This documentation takes the place of the physician's certification of total and permanent disability required of other borrowers.

The Perkins Loan and FFEL program regulations do not currently require the institution or guaranty agency to assign the loan to the Secretary if the institution or guaranty agency determines that the VA documentation supports the veteran's eligibility for a discharge. Sections 674.61(c)(2)(iii)(A) and 682.402(c)(8)(ii)(D) specify that the institution or guaranty agency is only required to submit the total and permanent disability discharge application and the VA documentation to the Secretary.

The three-year post-discharge monitoring period that generally applies to borrowers after the Secretary grants a total and permanent disability discharge does not apply to loans discharged based on documentation from the VA. The Secretary does not reinstate a loan that has been discharged based on documentation from the VA.

Proposed Regulations:

The total and permanent disability discharge application process for veterans who rely on documentation from the VA in proposed §§ 674.61(c), 682.402(c)(9), and 685.213(c) matches the proposed regulations for total and permanent disability discharge applications for non-veterans. The exceptions in the current regulations discussed above are retained in the proposed regulations. Title IV loans discharged based on documentation from the VA are not assigned to the Secretary, are not subject to the three-year post discharge monitoring period, and are not reinstated.

In addition, under proposed §§ 674.61(c)(3)(iv)(E), 682.402(c)(9)(xi)(E), and 685.213(c)(2)(ii)(E), the notification to a veteran whose disability discharge request based on documentation from the VA has been denied would include information on how the veteran may apply for a total and permanent disability discharge under the regular process for non-veterans, if the documentation from the VA indicates that the veteran might qualify for a total and permanent disability discharge under that standard.

Reasons:

The Department believes that the disability application process for veterans relying on a certification from the VA should be similar to the regular disability discharge process. Maintaining similar processes for both types of disability discharges will create less administrative burden for participants in the title IV loan programs and less confusion for borrowers. In addition, the Department believes that veterans will benefit by applying the changes proposed for the disability discharge process for non-veterans to the process for disability discharges based on VA documentation. Therefore, the Department is proposing to streamline the disability discharge process for veterans in the same manner that we are proposing to streamline the regular process.

FFEL Lender and Guaranty Agency Roles (34 CFR 682.402(c)(8), 682.402(g)(1), 682.402(g)(2), 682.402(h)(1), and 682.402(h)(3))

Statute:

The HEA does not specify any particular roles for lenders or guaranty agencies in the processing of total and permanent disability discharges.

Current Regulations:

Under § 682.402(c)(7)(i) of the FFEL regulations, if a borrower contacts a FFEL lender requesting a total and permanent disability discharge of a loan, the lender continues collection activity on the loan until it receives a disability discharge application certified by a physician or a letter from a physician asking for additional time to determine if the borrower is totally and permanently disabled. In the former situation, the lender suspends collection activity once it receives the application. In the latter, if the lender does not receive the total and permanent disability discharge application within 60 days of the physician's letter, the lender resumes collection activity. The lender also resumes collection activity on the loan if it receives the total and permanent disability discharge application and determines that the borrower does not qualify for a disability discharge. The lender may capitalize interest that accrued during the suspension of collection activity in accordance with § 682.402(c)(7)(iii).

If the lender receives the disability discharge application and determines that the application supports the conclusion that the borrower is totally and permanently disabled, the lender submits a disability claim to the guaranty agency, as specified in § 682.402(c)(7)(ii). Sections 682.402(g)(2)(i) and 682.402(g)(1)(iv) require the lender to submit the disability claim within 60 days of the date the lender determines that the borrower is totally and permanently disabled and to include a copy of the physician's certification of total and permanent disability with the claim.

Section 682.402(h)(1)(i)(B) requires a guaranty agency to pay the lender's claim within 90 days of the date it was filed, if the guaranty agency agrees with the determination of the lender. Under § 682.402(h)(3)(ii)(B), the amount payable on an approved disability discharge claim includes unpaid interest that accrued on the loan during the period the guaranty agency needed to review and approve the claim, not to exceed 90 days.

Under § 682.402(c)(7)(viii), the Secretary reimburses the guaranty agency for the disability claim after the agency pays the claim to the lender. Section 682.402(c)(7)(ix) requires the guaranty agency to assign the loan to the Secretary after the guaranty agency pays the disability claim.

Section 682.402(c)(7)(v) requires a guaranty agency to return the disability claim to the lender if the guaranty agency does not agree with the lender's determination that the borrower is totally and permanently disabled. If the disability claim is returned by the guaranty agency, the lender notifies the borrower that the application has been denied.

Proposed Regulations:

Proposed § 682.402(c)(2)(ii)(C) eliminates the option for a physician to submit a letter requesting additional time to submit the total and permanent disability discharge application. Under the proposed regulations, the Secretary would direct all of the borrower's title IV lenders to suspend collection efforts for up to 120 days after the borrower informs the Secretary that he or she intends to apply for a total and permanent disability discharge.

Under proposed § 682.402(g)(1)(iv), a FFEL lender would not submit a copy of the total and permanent disability discharge application with the disability discharge claim it files with the guaranty agency. Instead, the FFEL lender would provide the guaranty agency with the notification the lender received from the Secretary directing the lender to submit the disability claim.

Under proposed § 682.402(g)(2), a FFEL lender must file a disability claim within 60 days of receiving the notice from the Secretary directing the lender to file the claim. Under proposed § 682.402(h)(3)(iii)(A), the amount of the claim payment by the guaranty agency includes interest that accrued on the loan for up to 45 days during which the guaranty agency processed the disability claim. Under proposed § 682.402(c)(8)(i)(D), the Secretary reimburses the guaranty agency for the disability claim after the guaranty agency pays the claim to the lender. Under proposed § 682.402(c)(8)(i)(E), the guaranty agency assigns the loan to the Secretary within 45 days of the date the guaranty agency paid the disability claim and receives the reimbursement payment from the Secretary.

Reasons:

The Department is eliminating the option for a physician to submit a letter requesting more time for the borrower to submit a total and permanent disability discharge application because we believe that requiring such a letter would be cumbersome under the new process. The proposed regulations would provide a uniform period of suspension of collection activity for all borrowers.

The regulations specify that a FFEL lender may capitalize interest that accrues during the suspension period if the borrower does not submit a total and permanent disability discharge request, or if the request is denied. This provision is the same in the current regulations.

The proposed reductions in FFEL claim filing periods are intended to improve the timeliness with which a disability claim is processed in the FFEL program. Since neither the FFEL lender nor the guaranty agency would conduct medical reviews of the total and permanent disability discharge applications under the proposed new process, the Department believes that the timeframes for processing total and permanent disability discharge requests can be shortened.

The proposed regulations would specify a timeframe for a guaranty agency or Perkins school to assign a loan to the Secretary. The Department believes that specifying a timeframe for assignments will help to ensure that loans that qualify for a disability discharge are assigned to the Secretary promptly so the Secretary may complete the discharge.

Initially the Department proposed that guaranty agencies would be required to assign a FFEL loan to the Secretary within 30 days of a claim payment. Non-Federal negotiators representing guaranty agencies indicated that their current practice is to assign loans after receipt of the Federal reimbursement payment, not within a set number of days after a claim payment. In response to their concerns, the Department revised the proposed regulations to provide that a loan must be assigned within 45 days after receipt of the Federal reimbursement payment.

Income-Contingent Repayment Plans

Pay As You Earn Initiative (ICR-A Plan)

Statute:

Section 455(d)(1)(D) of the HEA authorizes the Secretary to offer an income-contingent repayment (ICR) plan with varying annual repayment amounts based on the income of the borrower, paid over an extended period of time prescribed by the Secretary, not to exceed 25 years. Section 455(e) of the HEA authorizes the Secretary to establish ICR plan repayment schedules through regulations.

Current Regulations:

Under current 34 CFR 685.209, the annual amount payable by a borrower under the ICR plan may not exceed 20 percent of the borrower's discretionary income, and the maximum ICR repayment period is 25 years. If a loan has not been repaid at the end of the 25-year period, the unpaid portion of the loan is forgiven.

Proposed Regulations:

In October 2011, President Obama announced the Pay As You Earn repayment initiative to help student loan borrowers reduce their monthly payments. The Pay As You Earn initiative reflected in these proposed regulations would be available to borrowers who: (1) did not have an outstanding loan under the Direct Loan or FFEL programs as of October 1, 2007, or as of the date they received a new loan after October 1, 2007; and (2) receive a disbursement of a Direct Subsidized Loan, a Direct Unsubsidized Loan or a student Direct PLUS Loan on or after October 1, 2011, or receive a Direct Consolidation Loan based on an application received on or after October 1, 2011, unless the Direct Consolidation Loan repays a Direct or FFEL loan that was outstanding as of October 1, 2007. The Pay As You Earn initiative reflected in these proposed regulations will cap a borrower's annual payment amount at 10 percent of the borrower's discretionary income and provide for forgiveness of any remaining loan balance after 20 years of repayment. These terms reflect changes to the separate income-based repayment (IBR) plan that will go into effect for new borrowers on or after July 1, 2014. To offer this repayment relief to borrowers earlier, the Secretary is using his authority to establish an ICR plan by regulation. The proposed regulations also make other changes to the ICR repayment plan to implement the Pay As You Earn initiative. The Secretary is proposing to implement the Pay As You Earn initiative as a new “ICR-A” plan in § 685.209(a). However, the Secretary realizes that for a small number of borrowers who would otherwise qualify for the IBR plan or the proposed ICR-A plan, the current ICR repayment plan may be more beneficial. Accordingly, the Secretary is proposing to retain the current ICR repayment plan as the “ICR-B plan,” with certain changes as discussed below, in new § 685.209(b).

The proposed ICR-A plan would generally have the same terms and conditions as the IBR plan that will be available to new borrowers on or after July 1, 2014. The terms and conditions of the proposed ICR-A plan include the following:

• A borrower's maximum annual payment amount would be capped at 10 percent of the difference between the borrower's AGI and 150 percent of the annual poverty guideline amount for the borrower's State and family size.

• Borrowers who repay under the ICR-A plan would qualify for forgiveness of any remaining loan balance after 20 years of qualifying payments and periods of economic hardship deferment.

• To initially qualify and to continue to make income-contingent payments under the plan, a borrower would be required to have a partial financial hardship. A borrower would be considered to have a partial financial hardship if the annual amount due on all of the borrower's eligible Direct Loan and FFEL program loans, as calculated based on a standard repayment plan with a 10-year repayment period, exceeds 10 percent of the difference between the borrower's AGI and 150 percent of the annual poverty guideline amount for the borrower's State and family size.

• For married borrowers who file a joint Federal tax return, the determination of a borrower's partial financial hardship status would be based on the combined income of both spouses and, if the spouse also has eligible loans, the combined eligible loan debt of both individuals. For a

married borrower who files an individual Federal tax return, only the borrower's income and loan debt would be considered.

• The ICR-A plan will be available to any borrower who is repaying a non-defaulted Direct Loan, except for a parent Direct PLUS loan or a Direct Consolidation loan that repaid a parent Direct or FFEL PLUS loan. As with IBR, parent Direct PLUS Loans and Direct Consolidation Loans that repaid parent Direct PLUS Loans or parent Federal PLUS Loans would not be eligible for repayment under the ICR-A plan.

• The term “eligible loan” would be defined as including any outstanding non-defaulted Direct Loan or FFEL program loan, except for a parent Direct PLUS loan, a parent Federal PLUS Loan, or a Direct Consolidation Loan or Federal Consolidation Loan that repaid a parent Direct PLUS Loan or parent Federal PLUS loan. The term “eligible loan” is used in connection with determining whether a borrower has, or continues to have, a partial financial hardship and, for a borrower who has eligible loans with more than one loan holder, to determine the borrower's prorated monthly payment amount under the ICR-A plan.

• Unpaid accrued interest would be capitalized only if a borrower repaying under the ICR-A plan is determined to no longer have a partial financial hardship, or if the borrower chooses to leave the ICR-A plan.

• For a borrower whose scheduled payment is less than the amount of interest that accrues each month on a subsidized loan or on the subsidized portion of a consolidation loan, the Secretary would not charge the borrower the remaining interest for a period of three consecutive years from the date the borrower begins repayment under the ICR-A plan, excluding periods of economic hardship deferment.

The ICR-A plan would also include certain changes that we are proposing to make to the IBR plan as discussed below under “Income-Based Repayment Plan.” Other terms and conditions of the proposed ICR-A plan are explained below.

Reasons:

To support the Administration's goal of making it easier for borrowers to repay their Federal student loans, the Secretary is using his authority under section 455(d)(1)(D) of the HEA to implement the Pay As You Earn initiative as a second type of ICR plan in the Direct Loan Program.

Access to the ICR-A Plan

Statute:

Under section 455(d)(1)(D) of the HEA, the ICR plan is available to repay any Direct Loans except for Direct PLUS Loans made to parent borrowers.

Current Regulations:

Current regulations in § 685.208(a) provide that all Direct Loan borrowers except parent Direct PLUS Loan borrowers may repay their loans under the ICR plan.

Proposed Regulations:

The proposed regulations would amend the provisions in § 685.208(a) related to borrower eligibility for the various Direct Loan repayment plans by adding a reference to the ICR-A plan and by providing that any type of Direct Loan could be repaid under the ICR-A plan except for a parent Direct PLUS Loan or a Direct Consolidation Loan that repaid a parent Direct PLUS Loan or a parent Federal PLUS Loan. In the regulations governing the ICR plan, proposed § 685.209(a) would provide that the ICR-A plan is available to borrowers who meet both of the following criteria:

(1) Did not have an outstanding loan under the Direct Loan or FFEL programs as of October 1, 2007, or as of the date they received a new loan after October 1, 2007; and

(2) Receive a disbursement of a Direct Subsidized Loan, a Direct Unsubsidized Loan or a student Direct PLUS Loan on or after October 1, 2011, or receive a Direct Consolidation Loan based on an application received on or after October 1, 2011, unless that Direct Consolidation Loan repays a Direct or FFEL loan that was outstanding as of October 1, 2007.

Reasons:

The Department is proposing to make the ICR-A plan available to new borrowers in fiscal year 2008 who receive a new loan in fiscal year 2012 or later. Fiscal years 2008 and 2012 began on October 1, 2007, and October 1, 2011, respectively. The proposed definition of “eligible new borrower” in § 685.209(a)(1)(iii) as an individual who had no outstanding balance on a Direct Loan or FFEL program loan as of October 1, 2007, or who had no outstanding balance on such a loan on the date the borrower obtained a loan after October 1, 2007, is consistent with the manner in which eligibility for the Direct Loan and FFEL teacher loan forgiveness programs is specified under §§ 685.217(a)(1) and 682.216(a)(1), respectively. To ensure that new borrowers in fiscal year 2008 who are enrolled during the 2011-2012 academic year can qualify for the ICR-A plan, the proposed regulations would specify that receipt of a new loan in fiscal year 2012 or later means receipt of any disbursement of a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a student Direct PLUS Loan on or after October 1, 2011. This means, for example, that a new borrower in 2008 who received the first disbursement of a 2011-2012 academic year loan in August or September 2011 (i.e., in fiscal year 2011) and who will graduate in the spring of 2012 would nonetheless be eligible for the ICR-A plan if a subsequent disbursement of that loan is made on or after October 1, 2011, in fiscal year 2012. The Department believes that offering the ICR-A plan to this population will provide a significant benefit to a group of student loan borrowers who are among those most likely to face difficulty repaying their loans under other repayment plans, while at the same time limiting additional costs to taxpayers.

The proposed regulations would also allow a borrower to choose the ICR-A plan if the borrower takes out a Direct Consolidation Loan on or after October 1, 2011. The Department originally proposed that a borrower could meet the requirement to receive a new loan in fiscal year 2012 or later by receiving a Direct Consolidation Loan based on an application received on or after October 1, 2011. In response to a request for clarification from a non-federal negotiator, the Department expanded the original proposal to clarify that an individual who receives a Direct Consolidation Loan based on an application received on or after October 1, 2011, is not eligible for the ICR-A plan if the Direct Consolidation Loan repays a loan that would otherwise make the borrower ineligible based on the requirement to be a new borrower as of October 1, 2007. For example, a borrower could not qualify for the ICR-A plan by obtaining a Direct Consolidation Loan (based on an application received on or after October 1, 2011) that repays earlier loans made to the borrower that were owed as of October 1, 2007. However, a borrower who had no outstanding balance on a Direct Loan or a FFEL program loan at the time the borrower obtained new loans after October 1, 2007, could qualify for ICR-A if he or she receives a Direct Consolidation Loan based on an application received on or after October 1, 2011, that repays the earlier loans made after October 1, 2007.

Interest Capitalization Under the ICR-A Plan

Statute:

Section 455(e)(5) of the HEA authorizes the Secretary to promulgate regulations limiting the amount of interest that may be capitalized on loans repaid under the ICR plan and specifying the timing of capitalization under the plan.

Current Regulations:

Under § 685.202(b)(4), generally the Secretary capitalizes unpaid interest annually for borrowers repaying under the ICR plan.

Current § 685.209(c)(5) further provides that if a borrower's monthly payment under the ICR plan 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. After the outstanding principal amount is 10 percent greater than the original amount, interest continues to accrue but is not capitalized.

Proposed Regulations:

Under proposed § 685.209(a)(2)(iv)(A), for borrowers repaying a Direct Loan under the ICR-A plan, unpaid accrued interest would be capitalized, as under the IBR plan, when a borrower is determined to no longer have a partial financial hardship or when a borrower chooses to leave the ICR-A plan. However, proposed § 685.209(a)(2)(iv)(B) would limit the amount of interest that is capitalized while a borrower is repaying under the ICR-A plan to 10 percent of the loan principal balance at the time the borrower entered the ICR-A plan. For borrowers who remain on the ICR-A plan after the 10 percent limit has been reached, interest would continue to accrue but would not be capitalized.

Reasons:

Some of the non-Federal negotiators asked the Department to consider a proposal to cap the amount of interest and fees that may be charged to borrowers under both the ICR plan (including the proposed ICR-A plan) and the IBR plan at 150 percent of the loan principal amount. The negotiators suggested that this approach could be implemented at no additional cost to the taxpayer because it would not reduce the total amount paid by a borrower under the ICR or IBR plan but would lower the total loan amount forgiven at the end of the ICR or IBR repayment period. This would benefit borrowers by reducing the loan amount that could potentially be treated as taxable income if a borrower ultimately receives ICR or IBR loan forgiveness.

The Department considered this proposal but determined that the Secretary does not have the authority under the HEA to stop charging interest to borrowers under the ICR or IBR plans after the amount of accrued interest has reached a certain percentage of the loan principal.

Under the FFEL Program, lenders would have a contractual right to payment of the interest that would otherwise accrue on a loan but which would be capped prior to loan forgiveness under the proposal from the non-Federal negotiators. This would involve making significant Federal outlays to FFEL lenders that the Secretary does not have the legal authority to make.

As an alternative, the Department proposed to include in the ICR-A regulations a provision comparable to the current ICR provision that limits the amount of interest that may be capitalized to 10 percent of the original principal amount. Under the proposed regulations for the ICR-A plan, unpaid accrued interest would be capitalized (as under the IBR plan) when a borrower is determined to no longer have a partial financial hardship or chooses to leave the ICR-A plan. However, the amount of accrued interest that may be capitalized when a borrower is determined to no longer have a partial financial hardship would be limited to 10 percent of the original loan principal balance when the borrower entered repayment under ICR-A. For borrowers who remain on the ICR-A plan, interest would continue to accrue after the 10 percent limit on capitalization has been reached, but there would be no further capitalization. If a borrower chooses to leave the ICR-A plan, the 10 percent limit on capitalization of interest would not apply.

Borrower Options After Leaving the ICR-A Plan

Statute:

Section 455(d)(3) of the HEA provides that a Direct Loan borrower may change repayment plans under such terms and conditions as may be established by the Secretary.

Current Regulations:

Direct Loan borrowers, including borrowers repaying their loans under the ICR plan, are subject to the requirements of § 685.210(b) that govern changing repayment plans in the Direct Loan program. The regulations provide that a borrower may change his or her repayment plan at any time after the loan enters repayment by notifying the Secretary but may not change to a repayment plan that has a maximum repayment period of less than the number of years the loan has already been in repayment. For example, a borrower who has paid for 13 years under the extended repayment plan or the ICR plan cannot then change to the 10-year standard repayment plan.

Borrowers may, however, change to the ICR or IBR plans at any time. A borrower who is repaying a defaulted loan under the ICR plan may not change to another repayment plan unless the borrower was required to and made an ICR payment on the loan in each of the three prior months, or the borrower was not required to make an ICR payment but made three reasonable and affordable payments on the loan in each of the three prior months, and the Secretary approves the borrower's request to change repayment plans. Current regulations provide that if a borrower changes to a different repayment plan, the repayment period under the new plan is calculated from the date the loan initially entered repayment, except that if a borrower changes to the ICR plan or the IBR plan, the repayment period is determined in accordance with the regulations for those repayment plans.

Proposed Regulations:

The proposed regulations for the ICR-A plan in § 685.209(a)(4)(ii), consistent with current ICR regulations, would provide that a borrower who wishes to leave the ICR-A repayment plan may change to a different repayment plan in accordance with the provisions in § 685.210(b) that are described earlier under “Current Regulations.”

Reasons:

As previously explained, the proposed ICR-A plan shares many of the features of the IBR plan. As a result, the Department initially proposed requiring borrowers who choose to leave the ICR-A plan to repay under the standard repayment plan, as IBR borrowers are required to do under section 493C(b)(8) of the HEA. However, several non-Federal negotiators pointed out that the ICR plan is not governed by a statutory requirement comparable to the statutory requirement for borrowers repaying under the IBR plan. Those negotiators argued that imposing such a regulatory requirement on ICR-A borrowers would pose a hardship on borrowers and be an unnecessary impediment to a borrower being able to leave the ICR-A plan and begin immediate repayment under another plan that may be better suited to the borrower's individual circumstances. After further consideration, the Department modified the proposed ICR-A regulations to reflect the same regulatory approach to changing repayment plans that applies to borrowers repaying under the existing ICR plan (the proposed ICR-B plan).

Current ICR Plan (ICR-B Plan)

Borrower Access to the ICR-B Plan

Statute:

Section 455(d)(1) of the HEA requires the Secretary to offer Direct Loan borrowers a variety of repayment plans. The repayment plans offered include a standard repayment plan, a graduated repayment plan, an extended repayment plan for certain borrowers, an ICR plan (except for parent Direct PLUS loan borrowers), and beginning July 1, 2009, an IBR plan (except for parent Direct PLUS Loan borrowers and borrowers of Direct Consolidation Loans that repaid parent Direct PLUS Loans or parent Federal PLUS Loans). The ICR plan must provide for the payment of

varying annual repayment amounts based on the income of the borrower paid over an extended period of time prescribed by the Secretary, not to exceed 25 years. Section 455(d)(2) of the HEA authorizes the Secretary to designate the standard, graduated, or extended repayment plan for a borrower who fails to choose a repayment plan, and section 455(d)(4) of the HEA authorizes the Secretary to provide, on a case-by-case basis, an alternative repayment plan if none of the available repayment plans are adequate to address a borrower's exceptional circumstances.

Current Regulations:

Under § 685.208(a), the existing ICR plan (referred to in these proposed regulations as the ICR-B plan) is available to all Direct Loan borrowers except for parent borrowers of Direct PLUS loans. The Department's regulations do not include any other limitations on borrower access to the ICR plan. Section 685.209(c)(7)(iv) provides that if a borrower fails to provide consent for the Secretary to obtain tax return information necessary for the Secretary to determine the borrower's ICR monthly payment amount, the Secretary designates the standard repayment plan for the borrower.

Proposed Regulations:

Proposed § 685.208(a) would allow a Direct Loan borrower (other than a parent Direct PLUS borrower) to continue to be able to select the ICR-B plan as one of the available repayment plans.

Reasons:

The Department initially proposed to limit borrower access to the ICR-B plan, after implementation of the ICR-A plan, to those borrowers who would not otherwise have access to any other “income-driven” repayment plan (i.e., the current IBR plan, the IBR plan for new borrowers on or after July 1, 2014, or the proposed ICR-A plan). The Department believed that having too many income-driven repayment plans would be confusing to borrowers and would make it more difficult for them to determine which plan would best meet their needs. The Department also believed that offering multiple income-driven plans with similar terms and conditions would make it more difficult for the Department to promote these plans and to inform borrowers of the benefits available under each plan. However, several non-Federal negotiators stated that maintaining the fullest possible menu of repayment plan options would be in the best interests of borrowers. These negotiators felt that some borrowers, even those who qualify for the IBR or ICR-A plans, may view the ICR-B repayment plan as simpler and a better fit for them, and therefore full access to the current ICR plan should be retained. After further consideration of this issue, the Department decided to retain full borrower access to the ICR-B repayment plan.

Table 1 summarizes the borrower eligibility requirements for the current IBR plan, the proposed IBR plan revisions for new borrowers on or after July 1, 2014, the proposed ICR-A plan, and the current ICR plan (proposed ICR-B plan):

Table 1—Eligibility for Income-Driven Repayment Plans

Current IBR

Proposed revised IBR (with 07/01/2014 statutory changes)

Proposed ICR-A

Current ICR (proposed ICR-B)

Loan Program and Eligible Borrowers

• Direct Loan Program

• FFEL Program

• Direct Loan Program only

• Only new borrowers as of July 1, 2014:

○ Must have no outstanding Direct Loan or FFEL balance as of July 1, 2014 or on the date a new Direct Loan is received after July 1, 2014

• Direct Loan Program only

• Only new borrowers in 2008 who receive a Direct Loan disbursement in 2012 or later:

○ Must have no outstanding Direct Loan or FFEL balance as of October 1, 2007 or on the date a new Direct Loan or FFEL Program loan is received after October 1, 2007;

and

○ Must receive a disbursement of a Direct Loan on/after October 1, 2011, or receive a Direct Consolidation Loan based on an application received on/after October 1, 2011

• FFEL new borrowers in 2008 may qualify through consolidation into the Direct Loan Program

• Direct Loan Program only.

• FFEL borrowers may qualify through consolidation into the Direct Loan Program.

The Department will make information available to borrowers to assist them in understanding their repayment plan options and determining their eligibility for the various income-driven plans.

Treatment of Married Borrowers Under the ICR-B Plan

Statute:

Section 455(e)(2) of the HEA provides for an income-contingent repayment plan with a repayment amount based on the borrower's AGI or, if the borrower is married and files a joint Federal income tax return, based on the adjusted gross income (AGI) of the borrower and the spouse. In accordance with section 455(e)(3) of the HEA, if the AGI of a borrower repaying under the income-contingent repayment plan is unavailable or does not reasonably reflect the borrower's current income, the borrower is required to provide other documentation of income acceptable to the Secretary, and the Secretary uses that documentation to determine the repayment amount.

For the IBR plan, section 493C(d) of the HEA provides that if a married borrower repaying under the IBR plan files a separate Federal income tax return from his or her spouse, only the borrower's AGI is used to determine the borrower's IBR payment amount.

Current Regulations:

Under current § 685.209(b)(1), if a married borrower chooses to repay under the income-contingent repayment plan, the AGI for both spouses is used to calculate the borrower's monthly payment amount, regardless of whether the borrower and spouse file a joint Federal income tax return or separate Federal tax returns. If a married borrower files a separate Federal income tax return from his or her spouse, the borrower's spouse must provide consent for the disclosure of the spouse's income.

Proposed Regulations:

Proposed § 685.209(b)(2)(i) would provide that if a married borrower repaying under the ICR-B plan files a Federal income tax return separately from his or her spouse, only the borrower's AGI would be used to determine the borrower's monthly ICR-B payment amount. The joint income of both spouses would be used only if the borrower files a joint Federal income tax return.

Reasons:

The treatment of married borrowers under the current ICR plan regulations is based on section 455(e)(3) of the HEA, which allows the Secretary to use other documentation of income provided by the borrower to determine the ICR payment amount if the borrower's AGI does not reasonably reflect the borrower's current income. At the time the current ICR regulations were developed, the Department believed that if a married borrower filed a separate tax return from his or her spouse, using only the borrower's AGI would not provide for an accurate determination of the monthly amount the borrower could afford to repay.

Accordingly, the current ICR regulations provide for consideration of the combined incomes of both spouses, even when married borrowers file separate Federal income tax returns. In contrast, the HEA provides that for a married borrower who chooses to repay under the IBR plan, the combined income of the borrower and the borrower's spouse is used to determine the monthly IBR payment amount only if the borrower and spouse file a joint Federal income tax return. To provide for consistent treatment of married borrowers in all of the repayment plans under which the monthly payment amount is based on the borrower's income, the Department believes it is appropriate to amend the regulations for the current ICR plan so that if a married borrower repaying under the ICR-B plan files a Federal income tax return separately from his or her spouse, only the borrower's AGI would be used to determine the borrower's monthly ICR-B payment amount. The joint income of both spouses would be used only if the borrower files a joint Federal income tax return.

Borrowers Repaying Under the ICR-B Plan Who Fail To Provide Required Documentation of Income

Statute:

The HEA does not address the treatment of borrowers repaying under the ICR plan who fail to provide the annual income information required by the Secretary to determine the monthly ICR payment amount.

Current Regulations:

Current § 685.209(c)(7)(iv) provides that if a borrower selects the ICR plan but fails to provide the required consent to the disclosure of income information, fails to renew a previously provided written consent after it has expired, or withdraws consent and does not select another repayment plan, the Secretary designates the standard repayment plan for the borrower. For the IBR plan, current § 685.221(e)(2) provides that, under these same circumstances, the Secretary recalculates the borrower's monthly payment and the maximum recalculated amount the borrower is required to repay is the amount that would be required under a standard repayment plan with a 10-year repayment period, based on the amount of the borrower's loans that were outstanding at the time the borrower selected the IBR plan. In such cases, the repayment period based on the recalculated payment amount may exceed 10 years.

Proposed Regulations:

Under proposed § 685.209(b)(3)(vi)(D), a borrower currently repaying under the ICR-B plan who fails to provide the annual income information needed to determine the borrower's monthly payment amount would be treated the same as a borrower repaying under the IBR plan who does not provide the required information needed to determine the IBR payment amount, as described in the prior discussion of the current regulations and explained in the following discussion of changes to the IBR plan.

Reasons:

Under the current regulations, a borrower repaying under ICR who does not provide the require consent to disclosure of income information is required to repay under the standard repayment plan. However, in some cases, a borrower may have been in repayment under the ICR plan longer than the maximum repayment period under the standard repayment plan. Placing the borrower on the standard repayment plan would thus conflict with the provision in § 685.210(b) that prohibits a borrower from changing to a repayment plan with a maximum repayment period of less than the number of years the borrower's loan has already been in repayment. The proposed regulations address this issue by conforming the ICR-B regulations with the current IBR regulations governing the treatment of borrowers who fail to provide required income documentation and provide greater consistency in the treatment of borrowers under the various income-driven repayment plans.

Other Changes to the Current ICR Plan (ICR-B Plan)

Statute:

The HEA does not address the changes discussed in this section.

Current Regulations:

Final regulations published on October 23, 2008 (73 FR 63232), inadvertently deleted § 685.209(c)(4)(iii), (iv), and (v) from the ICR plan regulations. Paragraph (c)(4)(iii) provided that if a borrower repays more than one loan under the ICR plan, a separate repayment period for each loan begins when that loan enters repayment. Paragraph (c)(4)(iv) stated that if a borrower has not repaid a loan in full at the end of the 25-year repayment period, the Secretary cancels the unpaid portion of the loan. Paragraph (c)(4)(v) provided that at the beginning of the repayment period under the ICR plan, a borrower is required to make monthly payments of the amount of interest that accrues until

the Secretary calculates the monthly payment amount based on the borrower's income.

Current § 685.209(c)(2) specifies that the Secretary requires alternative documentation of income from borrowers in their first and second years of repayment, when the Secretary believes that the borrower's reported AGI does not reasonably reflect the borrower's current income.

Current § 685.209(c)(7) requires a borrower who repays under the ICR plan to provide written consent to the disclosure of certain tax return information by the Internal Revenue Service (IRS) to the Secretary for purposes of determining the borrower's ICR payment amount. A borrower is required to provide consent for a period of five years.

Proposed Regulations:

The proposed regulations restore the provisions inadvertently deleted from § 685.209(c)(4)(iii) through (v) in 2008 and place them in new §§ 685.209(b)(1)(x), (b)(3)(iii)(C), and (b)(3)(iii)(D). The proposed regulation would remove the current provision in § 685.209(c)(2) related to alternative documentation of income for borrowers in their first and second year of repayment. In addition, the proposed regulations would replace the IRS consent requirement in current § 685.209(c)(7) with a more general requirement in new § 685.209(b)(3)(vi) for the borrower to provide acceptable documentation, as determined by the Secretary, of the borrower's AGI.

Reasons:

Restoring the three deleted provisions corrects a technical error resulting from the October 23, 2008 final regulations. The Department believes that the current provision in § 685.209(c)(2) is unnecessary, since current § 685.209(c)(1) (to be retained as proposed § 685.209(b)(3)) already permits the Secretary to require alternative documentation of income if a borrower's AGI does not reasonably reflect current income.

The Department is proposing to replace the current IRS consent requirement with a requirement for the borrower to provide acceptable documentation of AGI because the existing consent regulations no longer reflect current operational procedures in the Direct Loan Program. The consent process described in current § 685.209(c)(7) was developed in consultation with the IRS at the beginning of the Direct Loan Program. However, there have been increasing delays in obtaining information from the IRS. The Secretary now obtains the necessary income information for most borrowers repaying under ICR through other means, such as by having borrowers submit copies of their most recently filed Federal income tax returns. The proposed rules are consistent with that practice. Further, the proposed regulation is consistent with efforts the Department is currently undertaking to streamline the application and income verification process, by working with the IRS, so that borrowers can more easily enroll and participate in the ICR and IBR repayment plans.

Income-Based Repayment Plan

Partial Financial Hardship (34 CFR 685.221(a)(5)), Income-Based Payment Amount (§ 685.221(b)(1)), and Loan Forgiveness Period (§ 685.221(f))

Statute:

Section 493C of the HEA authorized the IBR plan for Direct Loan and FFEL program borrowers. To initially qualify for the IBR plan and to continue to make income-based payments under that plan, a borrower must have a partial financial hardship. Section 493C(a)(3) of the HEA provides that a borrower has a partial financial hardship if the annual amount due on all of the borrower's eligible Direct Loan and FFEL program loans, as calculated based on a standard repayment plan with a 10-year repayment period, exceeds 15 percent of the difference between the borrower's adjusted gross income (AGI) and 150 percent of the annual poverty guideline amount for the borrower's family size and State. During any period when a borrower who is repaying under the IBR plan has a partial financial hardship, the borrower's monthly loan payment may not exceed 15 percent of the difference between the borrower's AGI and 150 percent of the applicable annual poverty guideline amount, divided by 12.

Section 493C(b)(7) of the HEA provides that a borrower who has participated in the IBR plan qualifies for forgiveness of any remaining loan balance after making qualifying payments (including periods of economic hardship deferment) over a period of time prescribed by the Secretary, not to exceed 25 years.

The SAFRA Act included in the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152) made two changes to the terms and conditions of the IBR plan. First, section 2213 of the SAFRA Act amended section 493C(a)(3) of the HEA by changing the percentage used in the formula for determining whether a borrower has a partial financial hardship and for calculating the maximum IBR payment amount during periods of partial financial hardship from 15 percent to 10 percent. Second, the maximum repayment period after which a borrower repaying under the IBR plan qualifies for forgiveness of any remaining loan balance was changed from 25 years to 20 years. These amendments apply only to new Direct Loan borrowers on or after July 1, 2014. For all other borrowers repaying under IBR, the current 15 percent and 25-year provisions would continue to apply.

Current Regulations:

The current IBR plan regulations in § 685.221 reflect the 15 percent standard for determining whether a borrower has a partial financial hardship and for calculating the maximum IBR payment amount during periods of financial hardship. In this preamble, this income-based monthly payment amount that applies during a period of partial financial hardship is referred to as the “monthly PFH payment amount.” The current regulations also provide that a borrower qualifies for loan forgiveness after making the equivalent of 25 years of payments through a combination of qualifying payments and periods of economic hardship deferment.

Proposed regulations:

Proposed § 685.221(a)(4) would define “new borrower” for purposes of the changes to the IBR plan as an individual who has no outstanding balance on a Direct Loan or FFEL program loan on July 1, 2014, or who has no outstanding balance on such a loan on the date he or she obtains a loan after July 1, 2014. This is consistent with the definition of “new borrower” as used for purposes of teacher loan forgiveness under § 685.217(a)(1).

The proposed regulations would revise the definition of “partial financial hardship” in § 685.221(a)(5) to reflect the statutory provision and state that for new borrowers after July 1, 2014, a borrower is considered to have a partial financial hardship if the annual amount due on all of the borrower's eligible Direct Loan and FFEL Program loans, as calculated based on a standard repayment plan with a 10-year repayment period, exceeds 10 percent of the difference between the borrower's AGI and 150 percent of the annual poverty guideline amount for the borrower's family size. The proposed regulations would revise § 685.221(b)(1) to provide that for a new borrower after July 1, 2014, the maximum IBR monthly payment amount during periods of partial financial hardship may not exceed 10 percent of the amount by which the borrower's AGI exceeds 150 percent of the poverty guideline amount for the borrower's family size, divided by 12.

Finally, the proposed regulations would revise § 685.221(f) to reflect the statutory changes made by the SAFRA Act and provide that a new borrower who has participated in the IBR plan qualifies for loan forgiveness after 20 years of qualifying payments and periods of economic hardship deferment.

Reasons:

The proposed regulations implement statutory provisions that were added to the HEA by the SAFRA Act. Because the changes to the IBR plan made by the SAFRA Act apply only to new borrowers on or after July 1, 2014, and because the SAFRA Act ended the authority of lenders to make new loans under the FFEL Program effective July 1, 2010, the proposed changes apply only in the Direct Loan Program regulations.

In response to a request for clarification from one of the non-Federal negotiators, the Department clarified that qualifying payments made during the 25-year or 20-year (as applicable) IBR repayment period do not have to be consecutive payments. Unless the regulations specifically state that payments must be consecutive to meet the requirements of a particular provision, it is intended that the payments need not be consecutive.

Repayment of Loans Under the IBR Plan

Statute:

The HEA does not address the changes discussed in this section.

Current Regulations:

For the Direct Loan Program, current § 685.208(a)(4) requires that all of a borrower's Direct Loans be repaid under the same repayment plan unless a loan is not eligible for repayment under that plan. For the FFEL Program, current § 682.215(b)(3) provides that if a borrower selects the IBR plan, the loan holder must require that all of the borrower's eligible loans owed to that holder be repaid under the IBR plan, unless the borrower requests otherwise.

Proposed Regulations:

Proposed § 682.215(b)(3) would require a borrower who chooses the IBR plan to repay all of his or her loans under the IBR plan, unless some of the borrower's loans are not eligible for repayment under IBR. As a result of this change, a borrower who chooses the IBR plan would no longer be able to request that one or more IBR-eligible loans be excluded from that plan.

Reasons:

The Department is proposing this change to provide consistency with the Direct Loan Program regulations.

Annual IBR Partial Financial Hardship Assessment

Statute:

Section 493C(c) of the HEA provides for the Secretary to establish procedures for annually determining a borrower's eligibility to make income-based payments (i.e., to determine each year whether a borrower who initially qualified for the IBR plan continues to have a partial financial hardship). These procedures include verifying the borrower's annual income, verifying the annual amount due on the borrower's eligible loans, and any other procedures necessary to implement the IBR plan.

Under section 493C(b)(6) of the HEA, if a borrower repaying under the IBR plan is determined to no longer have a partial financial hardship or chooses to no longer make income-based payments, the borrower's monthly payment amount is recalculated and is no longer based on the borrower's income. In this situation, proposed § 682.215(e)(8)(ii) provides the maximum recalculated monthly payment amount the borrower would pay on the borrower's eligible loans under a standard repayment plan with a 10-year payment period, based on the loan amount owed at the time the borrower selected the IBR plan. The repayment period based on the recalculated payment amount may exceed 10 years. In accordance with section 493C(b)(3)(B) of the HEA, unpaid interest is capitalized if a borrower is determined to no longer have a partial financial hardship or chooses to stop making income-based payments.

Current Regulations:

Under current § 685.221(e)(1) and § 682.215(e)(1), the Secretary or the FFEL loan holder determines whether a borrower has a partial financial hardship for the year the borrower selects the plan and for each subsequent year that the borrower remains on the plan. To make this determination, the Secretary or the loan holder requires the borrower to provide documentation of his or her income and to annually certify the borrower's family size.

Under current § 685.221(e)(1)(i) and § 682.215(e)(1)(i), the Secretary or the FFEL loan holder determines whether a borrower has a partial financial hardship by requiring the borrower to provide written consent to the disclosure of AGI by the IRS. If the borrower's AGI is unavailable or the Secretary or loan holder believes that the borrower's reported AGI does not reasonably reflect current income, the Secretary or the loan holder may use other documentation provided by the borrower to verify income (“alternative documentation of income”). In subregulatory guidance issued in a June 12, 2009, electronic announcement posted on the Department's Information for Financial Aid Professionals Web site, the Department authorized FFEL loan holders to accept a signed copy of the borrower's most recently filed Federal income tax return as an alternative to requiring the borrower to provide written consent to the disclosure of AGI by the IRS. The Department adopted this same practice in the Direct Loan Program.

In accordance with current § 685.221(e)(2) and § 682.215(e)(2), if a borrower who is repaying under the IBR plan fails to renew the required consent to disclosure of AGI by the IRS, or withdraws consent and does not select another payment plan, the borrower's monthly payment amount is recalculated in accordance with § 685.221(d)(1) or § 682.215(d)(1). In addition, unpaid interest is capitalized in accordance with § 685.221(b)(4) and § 682.215(b)(5). The same treatment applies if a borrower fails to provide a copy of his or her most recently filed Federal tax return (if used as an alternative to written consent to disclosure of AGI) or fails to provide alternative documentation of income if required to do so by the Secretary or the loan holder.

Sections 685.221(d)(1) and 682.215(d)(1) reflect the statutory requirement in section 493C(b)(6) of the HEA for the recalculation of a borrower's monthly payment amount if a borrower repaying under the IBR plan is determined to no longer have a partial financial hardship or chooses to stop making income-based payments. If a borrower fails to provide the required income documentation needed by the Secretary or the loan holder to determine whether the borrower continues to have a partial financial hardship, the borrower is considered to no longer have a partial financial hardship. The maximum recalculated monthly payment amount for a borrower who is determined to no longer have a partial financial hardship is the amount the borrower would be required to pay under a standard repayment plan with a 10-year payment period, based on the amount owed on the borrower's loans at the time the borrower selected the IBR plan. In this preamble, this recalculated payment amount is referred to as the “permanent standard amount.”

Proposed Regulations:

The proposed regulations would add several new written notifications to borrowers and other provisions related to the initial and annual determination of partial financial hardship status and the

consequences if a borrower fails to provide documentation of income or other information required for the annual partial financial hardship assessment. The proposed regulations would also modify the income documentation requirements and, for the FFEL Program, add a requirement for some married borrowers to provide the loan holder with information related to the eligible loan debt of the borrower's spouse. Finally, the proposed regulations would clarify the treatment of borrowers who request a change from another repayment plan to the IBR plan but who do not provide the information required to determine eligibility for the IBR plan.

Under proposed § 685.221(e)(2) and § 682.215(e)(2), the Secretary or the FFEL loan holder, after making a determination that a borrower has a partial financial hardship to qualify for the IBR plan for the year the borrower initially selects the plan and for any subsequent year that the borrower has a partial financial hardship, would send the borrower a written notification that would include the following information:

• The borrower's scheduled monthly PFH payment amount and the time period during which that monthly PFH payment amount will would apply (“annual payment period”);

• Information about the requirement for the borrower to annually provide income information; in some cases for married FFEL Program borrowers, to provide information about the eligible loans of the borrower's spouse; and to certify family size, if the borrower chooses to remain on the IBR plan after the borrower's first year on the plan;

• An explanation that the borrower would be notified in advance of the date by which the Secretary or loan holder must receive this information;

• An explanation of the consequences if the borrower does not provide the required information each year;

• An explanation of the consequences if the borrower no longer wishes to repay under IBR; and

• Information about the borrower's option to request, at any time during the borrower's current annual payment period, that the Secretary or the loan holder recalculate the borrower's monthly PFH payment amount if the borrower's financial circumstances have changed and the income amount that was used to calculate the borrower's current monthly PFH payment amount no longer reflects the borrower's current income. If the monthly PFH payment amount is recalculated based on the borrower's request, the Secretary or the loan holder would send the borrower a written notification that includes the borrower's new calculated monthly PFH payment amount, new annual payment period, and the other information just described.

Under proposed new § 685.221(e)(3) and § 682.215(e)(3), for each subsequent year that a borrower repaying under the IBR plan has a partial financial hardship, the Secretary or the loan holder would establish the date by which the income information and other documentation required for the annual partial financial hardship assessment must be received (“annual deadline”), and would send the borrower a written notification in advance of the annual deadline informing the borrower of the annual documentation requirement. The proposed regulations would provide for the Secretary or the loan holder to send advance notification of the annual documentation requirement to the borrower no later than 60 days and no earlier than 90 days before the annual deadline. The annual deadline established by the Secretary or the loan holder for receipt of the required documentation could not be earlier than 35 days before the end of the borrower's current annual payment period. The notification of the annual documentation requirement would have to include the following information:

• The annual deadline by which the Secretary or the loan holder must receive the required information; and

• The consequences if the Secretary or the loan holder does not receive the required information within 10 days following the annual deadline, including the borrower's recalculated permanent standard monthly payment amount, the effective date for the recalculated monthly payment, and an explanation that unpaid accrued interest will be capitalized at the end of the borrower's current annual payment period.

Proposed § 685.221(e)(4) and § 682.215(e)(4) would provide that each time the Secretary or the loan holder makes a determination that a borrower no longer has a partial financial hardship for a subsequent year that the borrower remains on the IBR plan, the Secretary or the loan holder would send the borrower a written notification that includes the following information:

• The borrower's recalculated permanent standard payment amount;

• An explanation that unpaid interest will be capitalized; and

• Information about the borrower's option to request, at any time, that the Secretary or the loan holder make a new determination of whether the borrower has a partial financial hardship, if the borrower's financial circumstances have changed and the income amount used to determine that the borrower no longer has a partial financial hardship does not reflect the borrower's current income, and an explanation that the borrower will be notified annually of this option.

If the Secretary or the loan holder determines that the borrower again has a partial financial hardship based on a borrower's request for redetermination, the Secretary or the loan holder would determine the borrower's new monthly PFH payment amount and send the borrower a written notification including the same information that is provided to a borrower when he or she is determined to have a partial financial hardship to initially qualify for the IBR plan and again for any subsequent year that a borrower who has a partial financial hardship remains on the plan.

Under proposed § 685.221(e)(5) and § 682.215(e)(5), for each subsequent year that a borrower who does not have a partial financial hardship remains on the IBR plan, the Secretary or the loan holder would send a written notification to the borrower that includes information on the borrower's option to request, at any time, that the Secretary or the loan holder make a new determination of whether the borrower has a partial financial hardship, as described in the discussion of § 685.221(e)(4) and § 682.215(e)(4).

Proposed § 685.221(e)(6) and § 682.215(e)(6) would clarify that if a borrower who is currently repaying under another repayment plan selects the IBR plan but does not provide the information required by the Secretary or the loan holder to determine the borrower's eligibility for the IBR plan, the borrower would remain on his or her current repayment plan.

Under proposed § 685.221(e)(7) and § 682.215(e)(7), the Secretary or the loan holder would require a borrower to pay the permanent standard amount if a borrower currently repaying a monthly PFH payment amount remains on the plan for a subsequent year, but the Secretary or the loan holder does not receive the information required for the annual partial financial hardship assessment within 10 days of the annual deadline previously provided to the borrower, unless the Secretary or the loan holder is able to determine the borrower's new monthly PFH payment amount before the end of the annual payment period.

Proposed § 682.215(e)(8)(i) would require a loan holder to promptly determine a borrower's new monthly payment amount if the loan holder receives the information required for the annual partial financial hardship assessment within 10 days of the annual

deadline provided to the borrower. If the information is received within 10 days of the annual deadline, but the loan holder does not determine the borrower's new monthly payment amount by the end of the borrower's current annual payment period, the proposed regulations would prohibit the loan holder from converting the borrower's monthly payment to the permanent standard amount and would require the loan holder to maintain the borrower's current scheduled monthly PFH payment amount until the new monthly payment amount is calculated.

Under proposed § 682.215(e)(8)(ii), if the loan holder calculates a new monthly PFH payment that is less than the borrower's previously calculated monthly PFH payment amount, the loan holder would be required to make the appropriate adjustment to the borrower's account to reflect the additional amounts resulting from any payments at the previously calculated monthly PFH payment amount that the borrower made after the end of the most recent annual payment period. Unless the borrower requests otherwise, the loan holder would not apply the additional amounts to future monthly payments.

The proposed regulations would require the loan holder to apply any excess payment amounts made after the end of the most recent annual payment period in accordance with the IBR payment application rules in § 682.215(c)(1). The excess payment amounts would be applied in the following order: Accrued interest; collection costs; late charges; loan principal. Appropriate adjustments would also include, but are not limited to, adjustments to the lender's interest subsidy and special allowance billings based upon the new monthly PFH payment amount, and establishing a new annual payment period beginning on the day after the prior annual payment period ended to ensure that the annual date for determining whether a borrower continues to have a partial financial hardship remains the same.

Under proposed § 682.215(e)(8)(iii), if the new monthly payment amount is equal to or greater than the borrower's previously calculated monthly PFH payment amount, the loan holder would not make any adjustments to the borrower's account to make up the difference between a prior lower monthly PFH payment amount that the borrower continued to make after the end of the previous annual payment period and the borrower's new higher monthly payment. Proposed § 685.221(e)(8) would establish requirements in the Direct Loan Program comparable to the FFEL Program requirements in proposed § 682.215(e)(8)(i) through (iii).

Proposed § 682.215(e)(9) would provide that if a loan holder receives the information required for the annual partial financial hardship assessment more than 10 days after the specified annual deadline provided to the borrower and the borrower's monthly payment amount is converted to the permanent standard amount, the loan holder may grant forbearance with respect to any payments that are overdue or that would be due at the time the new calculated monthly PFH payment amount is determined, but only if the new calculated monthly PFH payment amount is zero or is less than the borrower's previously calculated monthly PFH payment amount.

If forbearance is granted, capitalization of interest at the end of the forbearance period would be limited to the interest accrued during the portion of the forbearance covering past-due payments before the end of the prior annual payment period that was capitalized at the time of conversion of the borrower's payment to the permanent standard amount. Interest that accrues during the portion of the forbearance period that covers payments that are overdue after the end of the prior annual repayment period would not be capitalized.

Proposed § 685.221(e)(9)(i) would establish the same requirements in the Direct Loan Program. In addition, proposed § 685.221(e)(9)(ii) would specify that any payments a borrower continued to make at the previously calculated monthly PFH payment amount after the end of the prior annual payment period and before the new monthly PFH payment amount is calculated are considered to be qualifying payments for purposes of the public service loan forgiveness program under § 685.219, provided that the payments otherwise meet the eligibility requirements of that program. These payments would also count for purposes of IBR loan forgiveness.

With regard to documentation of income, proposed § 685.221(e)(1)(i) and § 682.215(e)(1)(i) would amend current regulations by replacing the requirement that a borrower provide consent to the disclosure of AGI by the IRS with a general requirement for the borrower to provide documentation, acceptable to the Secretary or to the loan holder, of the borrower's AGI. Proposed § 685.221(e)(1)(ii) and § 682.215(e)(1)(ii) would retain the current provision requiring a borrower to provide other documentation of income if the borrower's AGI is not available or if the borrower's AGI does not reasonably reflect the borrower's current income.

Proposed § 682.215(e)(1)(iii) would specify that if the spouse of a married borrower who files a joint Federal income tax return has eligible loans and the loan holder does not hold at least one of the spouse's eligible loans, either the borrower's spouse must provide consent for the loan holder to access information about the spouse's eligible loans in the National Student Loan Data System (NSLDS), or the borrower must provide other documentation, acceptable to the loan holder, of the spouse's eligible loan information.

The proposed changes described in this section would also be incorporated, where applicable, in the proposed regulations for the ICR-A plan and the ICR-B plan.

Reasons:

The Department's current regulations do not require that borrowers be notified each year in advance of the annual requirement to provide income information and certify family size, nor do current regulations specify a deadline by which the borrower must provide this information before the borrower's current monthly PFH payment amount is converted to the permanent standard amount. During the public comment period prior to the beginning of the formal negotiated rulemaking sessions, the Department received numerous comments suggesting that not all loan holders currently notify borrowers in advance of the annual documentation requirement, and that there are inconsistencies among loan holders in the amount of time that borrowers are given to provide the required income information. As a result, some borrowers who continue to have a partial financial hardship have their payments converted to the permanent standard amount because they were not aware that it was time for their annual partial financial hardship assessment, or because they were not given sufficient time to provide the required income information.

During the negotiated rulemaking sessions, some non-Federal negotiators recommended that the proposed regulations include an explicit requirement for loan holders to promptly determine whether a borrower continues to have a partial financial hardship upon receipt of the required income documentation from the borrower. The borrower notification requirements included in these proposed regulations are intended to address these concerns. They ensure that a borrower would be notified of the annual documentation requirement, and of the consequences if the borrower does not comply, at the time he or she

is initially determined eligible for the IBR plan. A borrower who remains on the IBR plan and currently has a partial financial hardship would be notified of the annual documentation requirement in advance of the annual deadline for providing the required information needed to determine whether he or she continues to have a partial financial hardship. The proposed regulations for the FFEL Program would also require loan holders to promptly determine a borrower's new monthly payment amount after receiving the required income information from the borrower. The Secretary would apply the same requirement in the Direct Loan program.

The proposed regulations would also provide for more consistent treatment of borrowers by specifying the earliest date that may be established as the annual deadline for a borrower to provide the annual documentation and by specifying the latest and earliest dates prior to the annual deadline that a borrower may be notified of the requirement to provide the documentation.

The Department initially proposed that the annual notification reminding borrowers of the upcoming deadline for submitting income documentation could be sent no later than 60 days before the annual deadline established by the Secretary or the loan holder. Some of the non-Federal negotiators, while supportive of this notification requirement, expressed concerns that this would allow for the notification to be sent too far in advance of the annual deadline for it to be effective. The Department agreed that it would be appropriate to place a limit on how early the notification may be sent and modified the proposed regulatory language to specify that the notification may be sent no later than 60 days and no earlier than 90 days before the annual deadline.

During the first negotiated rulemaking session, some of the non-Federal negotiators recommended that the proposed regulations provide a borrower with a three-month “grace period” following the end of the borrower's current annual repayment period during which the borrower could provide the required income documentation without being subject to conversion to the permanent standard payment amount and capitalization of unpaid interest. A borrower who submitted the required documentation during the grace period would continue making his or her existing monthly PFH payment amount until the loan holder calculated the new payment amount. Once the loan holder calculated the new payment amount, the borrower's account would be adjusted if the borrower was determined to continue to have a partial financial hardship. Specifically, the recommendation from the non-Federal negotiators provided for reimbursement to the borrower if, during the grace period, the borrower had continued to make payments at the previously scheduled amount that were greater than the new payment amount. The recommendation also provided that any underpayment during the grace period (if the borrower continued to make payments at the previously scheduled monthly PFH payment amount that were less than the new monthly PFH payment amount) would be distributed evenly across the borrower's payments for the current annual payment period.

At the second negotiated rulemaking session, the Department presented proposed regulatory language that provided borrowers with a 60-day grace period following the end of the borrower's current annual payment period to submit the required income documentation to the Secretary or the loan holder. Under this proposal, a borrower's previously scheduled monthly PFH payment amount would have been continued during the grace period, with no conversion to the permanent standard amount unless the borrower did not provide the required documentation until after the end of the 60-day grace period. The Department's proposal did not provide for any adjustments to the borrower's account once the borrower's new monthly payment had been calculated.

Some non-Federal negotiators representing loan holders and servicers indicated that the proposed regulations providing for a grace period could be difficult to implement, since most loan holders' systems are set up to automatically convert a borrower's scheduled monthly PFH payment amount to the permanent standard payment amount at the end of the borrower's current 12-month annual payment period, if the borrower's new scheduled monthly PFH payment amount has not been calculated prior to that date. In addition, the same non-Federal negotiators noted that the proposed grace period approach would cause the ending date of the borrower's current annual payment period to shift every year if the previously scheduled monthly PFH payment amount had to be maintained for up to an additional 60 days after the end of original annual payment period, potentially causing confusion for borrowers and requiring loan holders to make significant systems changes.

These non-Federal negotiators presented an alternative proposal that provided for loan holders to notify borrowers of the deadline by which the loan holder must receive the required information for the annual partial financial hardship assessment. If the loan holder received the required information by the deadline and the borrower was determined to continue to have a partial financial hardship, the loan holder would be required either to prevent the conversion of the borrower's monthly payment to the permanent standard amount or remediate the consequences of such a conversion for the borrower. The proposal did not specify what would constitute remediation of a conversion to the permanent standard payment amount.

This proposal from the loan holders and servicers further provided that a loan holder could grant forbearance with respect to any payments that were overdue or would be due upon the loan holder's determination that a borrower continued to have a partial financial hardship, if the determination resulted in a new monthly PFH payment amount of zero. In addition, the proposal allowed for loan holders to grant forbearance to borrowers who were not more than 120 days delinquent, if the loan holder received the required income documentation after a borrower's monthly payment had been converted to the permanent standard amount and the loan holder determined that the borrower qualified for a new period of partial financial hardship with a monthly PFH payment amount greater than zero.

The Department agreed with the proposal from the negotiators representing loan holders and servicers to require that borrowers be notified of the deadline by which the loan holder must receive the documentation required for the annual partial financial hardship assessment to avoid conversion to the permanent standard payment amount. We included a provision for such a deadline in revised regulatory language presented at the third negotiated rulemaking session. The language proposed by the Department at the beginning of the third session allowed for the annual deadline to be established by the Secretary or the loan holder, without any limitation on how far in advance of the end of the borrower's current annual repayment period the deadline could be set. However, some non-Federal negotiators representing borrowers expressed concerns that having the deadline date determined at the discretion of the loan holder would continue to allow for inconsistent treatment of borrowers,

since the date might differ significantly among loan holders.

The same negotiators were also concerned that leaving the determination of the deadline date to the discretion of individual loan holders would allow for the date to be different each year and result in confusion for borrowers. In response to these concerns, the Department modified the proposed regulatory language to specify that the annual deadline may be no earlier than 35 days before the end of the borrower's current annual payment period. The 35-day period was discussed and agreed to by all of the non-Federal negotiators.

Some non-Federal negotiators representing borrowers, noting the potentially serious consequences for borrowers who do not provide the required information by the deadline, urged the Department to provide some flexibility in the regulations so that borrowers would not be subject to conversion to permanent standard and interest capitalization for being as little as one day late. These negotiators also objected to the proposed requirement for the loan holder to receive the documentation by the specified deadline and stated that the regulations should simply require the borrower to submit the documentation by the deadline. They noted that the proposed regulations did not require loan holders to notify borrowers that their documentation had been received, with the result that borrowers would have no way of proving that the information they sent was received by the deadline.

These negotiators also argued that requiring borrowers to submit the information by the deadline would allow for proof that the borrower was in compliance with the submission deadline by means of the postmark on documentation submitted by mail. Other non-Federal negotiators, however, noted that the United States Postal Service no longer routinely adds postmarks to mail and said that the only way for a borrower to prove that a document had been mailed and received would be for the borrower to request confirmation of receipt. The negotiators further noted that requiring loan holders to track postmark dates would be unduly burdensome. The negotiators for loan holders and servicers suggested that the Department retain the requirement for the income information to be “received” by the annual deadline provided to the borrower, but add a five-day “grace period” to the deadline. After further discussion, the Department and the non-Federal negotiators agreed that information submitted by a borrower should be considered to have been received by the deadline if it is received by the loan holder or the Secretary within 10 days after the deadline date.

Some non-Federal negotiators for borrowers asked the Department to consider limiting the amount of interest that is capitalized if a borrower repaying under the IBR plan fails to provide required income information within 10 days after the annual deadline. The Department declined to consider this recommendation, noting that it may result in significant costs to the Federal government. However, the Department is continuing to examine these likely costs and invites further comments on this proposal.

Some non-Federal negotiators representing borrowers also noted that under the statute and current regulations, if a borrower who is repaying under the IBR plan is determined to no longer have a partial financial hardship or chooses to stop making income-based payments, the “maximum” monthly amount the borrower is required to pay is the monthly amount that would be required under a standard repayment plan with a 10-year payment period, calculated based on the amount of the borrower's eligible loans that were outstanding at the time the borrower selected the IBR plan (“permanent standard amount”). Because the law and regulations provide that the permanent standard amount is the maximum amount a borrower is required to pay, the non-Federal negotiators asked the Department to consider amending the regulations to allow for a smaller permanent standard payment amount, as the conversion to a 10-year standard plan monthly payment amount may present a hardship for some borrowers.

The Department declined to consider this proposal, noting that the Department interprets the statutory reference to the “maximum” required payment amount, which is also reflected in current regulations, as a protection to ensure that a borrower's monthly payment amount under the IBR plan never exceeds the amount that would be required under a standard repayment plan with a 10-year repayment period. Accordingly, the permanent standard payment amount is the monthly payment amount that would be required under a 10-year standard repayment plan, calculated based on the amount of the borrower's eligible loan debt at the time the borrower selected the IBR plan. Without this provision, the formula used to calculate the required monthly payment during periods of partial financial hardship could result in a monthly payment that exceeds the amount that would be required under a 10-year standard r

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