William D. Ford Federal Direct Loan Program

SUMMARY: The Secretary of Education amends provisions of the

regulations governing the income contingent repayment plan under the

William D. Ford Federal Direct Loan (Direct Loan) Program regulations.

The Secretary is amending these provisions to provide benefits to

borrowers and protect the taxpayers' interests.

EFFECTIVE DATE: These regulations take effect July 1, 1996. However,

affected parties do not have to comply with the information collection

requirements in Sec. 685.209 until the Department of Education

publishes in the Federal Register the control number assigned by the

Office of Management and Budget (OMB) to these information collection

requirements. Publication of the control number notifies the public

that OMB has approved these information collection requirements under

the Paperwork Reduction Act of 1995.

FOR FURTHER INFORMATION CONTACT: Ms. Rachel Edelstein, Program

Specialist, Direct Loan Policy Group, Policy Development Division, U.S.

Department of Education, Room 3053, ROB-3, 600 Independence Avenue, SW,

Washington, D.C. 20202-5400. Telephone: (202) 708-9406. Individuals who

use a telecommunications device for the deaf (TDD) may call the Federal

Information Relay Service (FIRS) at 1-800-877-8339 between 8 a.m. and 8

p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION:

Background

On July 1, 1994, the Secretary published final regulations that

included provisions for the income contingent repayment plan during

Year One of the Direct Loan Program. The Higher Education Act of 1965,

as amended (HEA), directed the Secretary, to the extent practicable, to

develop proposed rules for the Direct Loan Program through a negotiated

rulemaking process for the second and subsequent years of the program

(1995-1996 and beyond). Therefore, following negotiated rulemaking, the

Secretary published a Notice of Proposed Rulemaking (NPRM) on August

18, 1994, and final regulations on December 1, 1994, both of which

included new provisions for the income contingent repayment plan of the

Direct Loan Program. On December 22, 1994, the Secretary published

regulations that revised the July 1, 1994, regulations to provide that

provisions for income contingent repayment would be identical for Year

One and Year Two of the Direct Loan Program.

On September 20, 1995, the Secretary published a notice of proposed

rulemaking (60 FR 48848), proposing to make improvements to the

existing income contingent repayment plan. These changes were proposed

for Year Three of the program and beyond. The following section

summarizes the major revisions to the proposed rule.

Substantive Revisions to the Proposed Rule

Section 685.209(a)(3)

The definition of ``discretionary income'' under the

proposed income contingent repayment plan has been revised. Under these

final regulations, discretionary income is now defined as the

borrower's adjusted gross income (AGI) minus the United States

Department of Health and Human Services (HHS) poverty level appropriate

to the borrower's family size. This is the same definition of

discretionary income as in existing regulations.

Appendix A

The income percentage factor chart has been revised so

that there are only two categories of borrowers: single and married/

head of household. Therefore, married and head-of-household borrowers

with the same family size, income, and debt make the same payments.

Under the proposed income contingent repayment plan, head-of-household

borrowers actually made higher payments than married borrowers with the

same income and debt levels; the Secretary has determined that head-of-

household borrowers should not be required to make higher payments than

married borrowers with the same debt and income.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM, 19 parties

submitted comments on the proposed regulations. An analysis of the

comments and the changes follows. Major issues are grouped according to

subject, with references to the appropriate sections of the

regulations. Technical and other minor changes, and suggested changes

the Secretary is not legally authorized to make under the applicable

statutory authority, generally are not addressed.

Revising Income Contingent Repayment

Comments: A number of commenters recommended that any revisions to

the plan be brought about through negotiated rulemaking. These

commenters noted that the existing repayment plan was developed through

extensive negotiated rulemaking.

Discussion: Section 457 of The HEA requires the Secretary to

conduct negotiated rulemaking for the Direct Loan Program only to the

extent practicable. This section does not require negotiated rulemaking

for amendments to existing regulations. Further, the Secretary does not

believe that it is practicable to conduct negotiated rulemaking for

amendments to these regulations. Negotiated rulemaking is a lengthy

process that would have prevented implementation of the revised income

contingent repayment plan for the 1996-1997 academic year. For these

amendments, the Secretary has decided not to use the negotiated

rulemaking process to solicit input from the higher education

community. In the Secretary's opinion, the revised income contingent

repayment plan is an improvement over the existing plan, and borrowers

should be able to benefit from these regulatory revisions as soon as

possible. Further, a number of commenters supported the Secretary's

proposal to revise the existing plan.

Changes: None.

Required Minimum Payment

Comments: In response to the Secretary's request for comments

regarding a required minimum payment for all borrowers, one commenter

recommended establishing a minimum payment of $15.00 for all borrowers,

including those with a calculated repayment amount of $0. Another

commenter advocated establishing a minimum payment of $2.00, if the

Secretary were to require a minimum payment from all borrowers. A third

commenter suggested that borrowers simply send in a coupon on a monthly

basis in place of a payment amount.

Most commenters argued against requiring a payment from a borrower

whose calculated repayment amount is $0. In addition, many commenters

questioned whether collecting $2.00 payments would be cost-effective.

One commenter stated that borrowers with a calculated payment of less

than $2.00 would not likely have a checking account and that the

requirement to make these minimal payments would,

[[Page 61821]]

therefore, be burdensome. To reduce burden and improve the cost-

effectiveness of collection efforts, several commenters suggested that

the Secretary bill borrowers with minimal monthly payments on a

quarterly or annual basis.

One commenter questioned whether the Secretary would send

delinquency notices to borrowers with $2.00 monthly payments who are

$4.00 behind in payments (that is, two months behind in payments).

Discussion: The Secretary agrees with those commenters who argued

that borrowers with a calculated monthly payment amount of $0 should

not be required to make monthly payments. In addition, the Secretary

agrees with commenters that collecting $2.00 monthly payments may not

be cost-effective. The Secretary has determined that requiring a $5.00

minimum monthly payment of borrowers whose calculated monthly payment

amount is greater than $0 but less than or equal to $5.00 would be more

cost-effective and would better promote responsible repayment practices

than establishing a minimum $2.00 payment amount. In addition, the

Secretary believes that this change in policy will not impose a

significant burden on borrowers. Therefore, the Secretary has decided

to require a $5.00 minimum monthly payment of borrowers whose

calculated monthly payment amount is greater than $0 but less than or

equal to $5.00.

In response to concerns that monthly billing will be burdensome for

borrowers with minimal monthly repayment amounts, the Secretary will

consider carefully the option of billing these borrowers on a quarterly

or other less frequent basis. The Secretary has not prescribed billing

cycles or billing frequency in these regulations and thus has the

flexibility to change billing frequency if this action is warranted.

The Secretary considers a borrower to be delinquent after the

borrower has missed a monthly payment. Therefore, a borrower with

required $5.00 monthly payments who is $10.00 behind in payments is

considered to be delinquent, and the Secretary would send a delinquency

notice to the borrower.

Changes: None.

Comment Period

Comments: Several commenters were concerned that the comment period

was too short, especially considering that the Department published six

NPRMs, all with comment periods ending at approximately the same time.

Discussion: In the six NPRMs referred to above, the Secretary

proposed numerous improvements and necessary changes to the Student

Financial Assistance Program. The ``Master Calendar'' provisions

contained in section 482 of the HEA require that regulations be

published in final form by December 1 prior to the start of the award

year for which they will become effective. Because of the importance of

implementing these changes and improvements for the award year

beginning July 1, 1996, the Secretary established a comment period that

would allow publication of these final regulations by December 1, 1995,

consistent with the ``Master Calendar'' timeframe. The Secretary always

endeavors to provide as long a comment period as possible.

Changes: None.

Section 685.209(a) Repayment Amount Calculation

Comments: Several commenters expressed support for the new

repayment amount calculation provisions. Many commenters approved of

the Secretary's simplifying the existing income contingent repayment

plan, which requires borrowers to choose between two formulas, so that

there is only one formula. However, several commenters expressed

objections to the new formula. For example, in response to the

Secretary's statement in the preamble to the NPRM that the revised

income contingent repayment plan will discourage over-borrowing,

several commenters argued that the Secretary should not attempt to

discourage over-borrowing through the income contingent repayment plan.

One commenter suggested that the Secretary's efforts to discourage

over-borrowing will result in a repayment plan that will prevent

borrowers from entering public service and will discourage borrowers

from choosing high-tuition institutions, even if they wish to attend

such institutions.

With regard to specific problems commenters identified in the new

income contingent repayment plan, numerous commenters noted that the

new formula makes no adjustment for family size. To address this

problem, several commenters recommended that the Secretary incorporate

into the new plan the current income contingent repayment plan's

definition of discretionary income, which takes family size into

account. Another commenter suggested offering forbearance to borrowers

with larger households. Similarly, several commenters were concerned

that the levels of discretionary income the plan established are well

below the poverty level for borrowers with dependents. In addition,

commenters argued that the level of discretionary income for single

borrowers and head-of-household borrowers should not be identical.

Other commenters noted that head-of-household borrowers would make

higher payments than married borrowers with the same level of income

and debt, due to the income percentage factors applicable to the two

categories of borrowers. These commenters questioned whether this

outcome of the proposed formula is appropriate. Another commenter who

commented on the income percentage factors asked when the Secretary

would apply the annually updated income percentage factors--each

January 1st or when the Secretary obtains updated income data.

One commenter stated that the proposed revision to the income

contingent repayment plan violates section 455(e)(4) of the HEA because

the proposed calculation amount is relative to income and debt, and the

statute states only that payments should be relative to income.

Finally, one commenter questioned whether the effect of the revised

income contingent repayment plan would result in middle-class borrowers

supporting lower-income borrowers.

Discussion: The Secretary agrees with the commenters that using

only one formula to calculate repayment under the income contingent

repayment plan will simplify the income contingent repayment option.

While several commenters objected to the Secretary's attempt to

discourage over-borrowing, the Secretary believes that it is fiscally

irresponsible to structure an income contingent repayment plan that

encourages over-borrowing. As stated in the preamble to the September

20, 1995, NPRM, the Secretary believes that the existing income

contingent repayment plan may encourage over-borrowing because

borrowers' payments increase only negligibly as debt increases. To

remove this incentive to over-borrow, the Secretary believes it is

appropriate to revise the plan so that payments increase significantly

with amounts borrowed.

The Secretary disagrees with the commenter who stated that the

proposed revision to the income contingent repayment plan is in

violation of the HEA because it bases payments on income and debt. The

existing plan also bases payments on income and debt. The new plan

simply takes the amount borrowed into greater consideration than the

existing plan. Contrary to this commenter's suggestion, section

455(e)(4) of the HEA does not prohibit the Secretary from taking into

account a borrower's debt

[[Page 61822]]

level when determining repayment schedules. The statute requires that

income be included but does not address the factors which the Secretary

may, in his discretion, include.

The Secretary agrees with the commenters that payments should be

adjusted for family size, that discretionary income levels for single

and head-of-household borrowers should not be identical, and that

payments for head-of-household borrowers should not be higher than

those for married borrowers with the same income and debt levels. In

order to revise the regulations accordingly, the Secretary has amended

the definition of discretionary income. Under the revised regulations,

discretionary income is now defined as AGI minus poverty levels

established by HHS; these poverty levels take family size into account.

In response to the commenter's question as to when the Secretary

would apply the adjusted income percentage factor, the Secretary will

apply new income percentage factors and new HHS Poverty Guidelines at

the same time that new interest rates are applied: each July 1st.

Finally, the Secretary assures the commenter who suggested that

middle-income borrowers may be supporting lower-income borrowers that

there is no cross-subsidization under either the existing or the

revised income contingent repayment plan.

Changes: The income percentage chart has been revised to reflect

only two categories of borrowers: single and married/head of household.

Because the income percentage factors applicable to married and head-

of-household borrowers will be identical, married and head-of-household

borrowers with the same family size, income, and debt make the same

monthly payments.

Section 685.209(a)(3) has been revised so that discretionary income

is now defined as AGI minus the amount of the ``HHS Poverty Guidelines

for all States (except Alaska and Hawaii) and the District of

Columbia'' as published by the United States Department of Health and

Human Services on an annual basis. For residents of Alaska and Hawaii,

discretionary income is defined as a borrower's AGI minus the amounts

in the ``HHS Poverty Guidelines for Alaska'' and the ``HHS Poverty

Guidelines for Hawaii'' respectively. These guidelines adjust for

family size.

Comments: One commenter stated that the Secretary should make the

new income contingent repayment plan formula available on software, so

that borrowers can calculate their payments. This commenter suggested

extending the comment period until 30 days after this software becomes

available. In addition, this commenter suggested that the final

regulation should include charts showing typical repayments over 25

years. In these charts, the commenter suggested that the Secretary show

both the accrual and capitalization of interest during periods of

negative amortization and during periods of positive amortization.

Discussion: The Secretary is considering making available to the

public software for income contingent repayment calculations. However,

the Secretary cannot extend the comment period until this software is

available without seriously delaying the effective date of the

regulations. In addition, the Secretary is not including charts showing

typical repayments over 25 years. The Secretary will make such charts

available in informational repayment materials provided to borrowers.

Changes: None.

Section 685.209(b) Treatment of Married Borrowers

Comments: Several commenters approved of the Secretary's treatment

of married borrowers under the new income contingent repayment plan.

However, one commenter argued against the Secretary's requiring

borrowers who file their income tax separately from their spouse to

obtain consent to disclosure of tax return information from their

spouse. This commenter stated that the proposed policy would prohibit

borrowers whose spouses are unwilling to provide this consent to

disclosure from repaying under the income contingent repayment plan.

Also, this commenter asked how the Secretary would determine whether

the borrower is married.

One commenter suggested an alternative to the wording in the NPRM

that provides that married borrowers who are legally separated are not

required to obtain their spouse's consent to tax return disclosure.

This commenter stated that the regulations should provide that the

borrower is not required to obtain this consent to disclosure if the

borrower provides proof that he or she is living apart from the spouse

and has filed for divorce. According to this commenter, some states do

not recognize the status of being legally separated.

One commenter questioned whether there were any provisions for

married couples who choose to repay their loans jointly under the

income contingent repayment plan and subsequently divorce and wish to

separate their payments.

Discussion: The Secretary feels strongly that repayment amounts for

married borrowers must be based on the income of the borrower and the

borrower's spouse. This policy will ensure that payments from married

borrowers are calculated based on an accurate assessment of the

borrower's ability to repay. The Direct Loan Program offers borrowers a

variety of repayment plans; therefore, a married borrower who is unable

to repay under the income contingent repayment plan because the spouse

is unwilling to provide consent to disclosure of tax return information

would be eligible to repay under any of the other Direct Loan repayment

plans. Further, the Secretary intends to update income information

concerning borrowers' spouses annually.

To respond to the commenter's concern regarding how the Secretary

would determine whether or not the borrower is married, the Secretary

obtains a borrower's filing status (married, single, or head of

household) from the Internal Revenue Service (IRS) when AGI information

is reported. The Secretary acknowledges that some states do not

recognize the status of ``legally separated'' and has made a change

accordingly. Finally, with regard to the commenter's concern that

married borrowers who have been repaying jointly should be able to

begin repaying separately should they divorce, the Secretary assures

the commenter that borrowers in joint repayment can always begin

repaying separately at any time by changing their repayment plan

option.

Changes: Section 685.209(b)(1) has been revised so that a married

borrower who has filed taxes separately from his or her spouse and is

``separated'', rather than ``legally separated'', is not required to

provide his or her spouse's written consent to disclosure of tax return

information.

Section 685.209(c)(2) Alternative Documentation of Income

Comments: One commenter advocated allowing all borrowers to submit

alternative documentation of income to establish monthly payments under

the income contingent repayment plan while the Direct Loan Servicer is

waiting for adjusted gross income (AGI) information from the IRS.

Another commenter asked the Secretary to clarify whether the Secretary

would require alternative documentation of income from borrowers who

have been in repayment for a number of years but are in their first

year of repayment under a Direct Consolidation Loan. In addition, this

commenter noted that a

[[Page 61823]]

borrower may be in the first two years of repayment on some loans but

may have been in repayment for a longer period of time on other loans.

Finally, this commenter asked whether the Secretary would collect

alternative documentation of income from a borrower and the borrower's

spouse, if the borrower is in his or her first or second year of

repayment and is married.

Discussion: With regard to the comment that all borrowers be

allowed to submit alternative documentation of income while the

Servicer is waiting for AGI, the Secretary may use other documentation

of income provided by the borrower if AGI is not available or if, in

the Secretary's opinion, the borrower's reported AGI does not

reasonably reflect current income. Therefore, if a borrower's AGI will

not reflect current income, the borrower can submit alternative

documentation of income to the Servicer before IRS-reported AGI becomes

available.

The Secretary intends to collect alternative documentation of

income from borrowers in their first and second years of repayment,

when IRS-reported AGI does not reasonably reflect the borrower's

current income. The Secretary will likely collect alternative

documentation of income from borrowers who are in their first and

second years of repayment on any of their loans, even if they have been

in repayment for a longer period of time on other loans. These

borrowers have recently completed school and, therefore, the prior

year's AGI is unlikely to reflect current income.

On the other hand, the Secretary does not intend to collect

alternative documentation of income from borrowers who have been in

repayment for more than two years but have recently changed into the

income contingent repayment plan or from borrowers who have recently

consolidated and chosen to repay under this plan. These borrowers have

not recently left school and have likely been working. For these

borrowers, the prior year's AGI will probably reflect the current

year's income.

Finally, the Secretary intends to collect alternative documentation

of income from the borrower and the borrower's spouse if the borrower

is in his or her first or second year of repayment and AGI does not, in

the Secretary's opinion, accurately reflect the borrower's current

income. The Secretary will collect this alternative documentation of

income from the spouse of these borrowers in order to assess accurately

the borrower's ability to repay.

Changes: None.

Section 685.209(c)(5) Limitation on Capitalization of Interest

Comments: One commenter mistakenly believed that the Secretary has

removed the existing limit on capitalization.

Discussion: The Secretary has not removed the existing limit on

capitalization, which provides that unpaid interest is capitalized only

until the outstanding principal amount is ten percent greater than the

original principal amount. While the Secretary has revised certain

provisions under the income contingent repayment plan, the Secretary

has not altered the provision that limits interest capitalization under

the income contingent repayment plan.

Changes: None.

Section 685.209(c)(4)(iv) Forgiveness after 25 Years of Repayment

Comments: Several commenters asked whether the Secretary is

pursuing a legislative solution to the current tax problem under the

income contingent repayment plan (that is, the problem that any amount

forgiven at the end of 25 years is treated as income).

Discussion: The Secretary is working with the Department of the

Treasury to pursue a legislative solution to the tax liability problem

under the income contingent repayment plan. The Department included its

proposal to remove the tax liability under the income contingent

repayment plan in the Administration's Sallie Mae privatization bill

that was submitted to Congress.

Changes: None.

Executive Order 12866

These final regulations have been reviewed in accordance with

Executive Order 12866. Under the terms of the order the Secretary has

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the final regulations are those

resulting from statutory requirements and those determined by the

Secretary as necessary for administering this program effectively and

efficiently.

In assessing the potential costs and benefits--both quantitative

and qualitative--of these final regulations, the Secretary has

determined that the benefits of the regulations justify the costs.

The Secretary has also determined that this regulatory action does

not unduly interfere with State, local, and tribal governments in the

exercise of their governmental functions.

Summary of Potential Costs and Benefits

The potential costs and benefits of these final regulations are

discussed elsewhere in this preamble under the following heading:

Analysis of Comments and Changes.

Assessment of Educational Impact

In the NPRM, the Secretary requested comments on whether the

proposed regulations would require transmission of information that is

being gathered by or is available from any other agency or authority of

the United States. Based on the response to the proposed rules and on

its own review, the Department has determined that the regulations in

this document do not require transmission of information that is being

gathered by, or is available from, any other agency or authority of the

United States.

List of Subjects in 34 CFR Part 685

Administrative practice and procedure, Colleges and universities,

Education, Loan programs-education, Reporting and recordkeeping

requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Number 84.268, William D.

Ford Federal Direct Loan Program)

Dated: November 27, 1995.

Richard W. Riley,

Secretary of Education.

The Secretary amends Part 685 of Title 34 of the Code of Federal

Regulations as follows:

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

1. The authority citation continues to read as follows:

Authority: 20 U.S.C. 1087a et seq.

2. Section 685.209 is amended by revising paragraphs (a) and (b);

removing paragraph (c) and redesignating paragraph (d) as paragraph

(c); redesignating newly redesignated paragraphs (c)(2) through (5) as

(c)(4) through (7), respectively; and adding new paragraphs (c)(2) and

(c)(3) to read as follows:

Sec. 685.209 Income contingent repayment plan.

(a) Repayment amount calculation. (1) The amount the borrower would

repay is based upon the borrower's Direct Loan debt when the borrower's

first loan enters repayment, and this basis for calculation does not

change unless the borrower obtains another Direct Loan or the borrower

and the borrower's spouse obtain approval to repay their loans jointly

under paragraph (b)(2) of this

[[Page 61824]]

section. If the borrower obtains another Direct Loan, the amount the

borrower would repay is based on the combined amounts of the loans when

the last loan enters repayment. If the borrower and the borrower's

spouse repay the loans jointly, the amount the borrowers would repay is

based on both borrowers' Direct Loan debts at the time they enter joint

repayment.

(2) The annual amount payable under the income contingent repayment

plan by a borrower is the lesser of--

(i) The amount the borrower would repay annually over 12 years

using standard amortization multiplied by an income percentage factor

that corresponds to the borrower's adjusted gross income (AGI) as shown

in the income percentage factor table in Appendix A to this part; or

(ii) 20 percent of discretionary income.

(3) For purposes of this section, discretionary income is defined

as a borrower's AGI minus the amount of the ``HHS Poverty Guidelines

for all States (except Alaska and Hawaii) and the District of

Columbia'' as published by the United States Department of Health and

Human Services on an annual basis.1 For residents of Alaska and

Hawaii, discretionary income is defined as a borrower's AGI minus the

amounts in the ``HHS Poverty Guidelines for Alaska'' and the ``HHS

Poverty Guidelines for Hawaii'' respectively. If a borrower provides

documentation acceptable to the Secretary that the borrower has more

than one person in the borrower's family, the Secretary applies the HHS

Poverty Guidelines for the borrower's family size.

\1\ The HHS Poverty Guidelines are available from the Office of

the Assistant Secretary for Planning and Evaluation, Department of

Health and Human Services (HHS), Room 438F, Humphrey Building, 200

Independence Avenue, S.W., Washington, D.C. 20201

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(4) For exact incomes not shown in the income percentage factor

table in Appendix A, an income percentage factor is calculated, based

upon the intervals between the incomes and income percentage factors

shown on the table.

(5) Each year, the Secretary recalculates the borrower's annual

payment amount based on changes in the borrower's AGI, the variable

interest rate, the income percentage factors in the table in Appendix

A, and updated HHS Poverty Guidelines (if applicable).

(6) For purposes of the annual recalculation described in paragraph

(a)(5) of this section, after periods in which a borrower makes

payments that are less than interest accrued on the loan, the payment

amount is recalculated based upon unpaid accrued interest and the

highest outstanding principal loan amount (including amount

capitalized) calculated for that borrower while paying under the income

contingent repayment plan.

(7) For each calendar year after calendar year 1996, the Secretary

publishes in the Federal Register a revised income percentage factor

table reflecting changes based on inflation. This revised table is

developed by changing each of the dollar amounts contained in the table

by a percentage equal to the estimated percentage changes in the

Consumer Price Index (as determined by the Secretary) between December

1995 and the December next preceding the beginning of such calendar

year.

(8) Examples of the calculation of monthly repayment amounts and

tables that show monthly repayment amounts for borrowers at various

income and debt levels are included in Appendix A to this part.

(b) Treatment of married borrowers. (1) A married borrower who

wishes to repay under the income contingent repayment plan and who has

filed an income tax return separately from his or her spouse must

provide his or her spouse's written consent to the disclosure of

certain tax return information under paragraph (c)(5) of this section

(unless the borrower is separated from his or her spouse). The AGI for

both spouses is used to calculate the monthly repayment amount.

(2) Married borrowers may repay their loans jointly. The

outstanding balances on the loans of each borrower are added together

to determine the borrowers' payback rate under (a)(1) of this section.

(3) The amount of the payment applied to each borrower's debt is

the proportion of the payments that equals the same proportion as that

borrower's debt to the total outstanding balance, except that the

payment is credited toward outstanding interest on any loan before any

payment is credited toward principal.

(c) * * *

(2) First and second year borrowers. The Secretary requires

alternative documentation of income from borrowers in their first and

second years of repayment, when in the Secretary's opinion, the

borrower's reported AGI does not reasonably reflect the borrower's

current income.

(3) Adjustments to repayment obligations. The Secretary may

determine that special circumstances, such as a loss of employment by

the borrower or the borrower's spouse, warrant an adjustment to the

borrower's repayment obligations.

* * * * *

3. Appendix A to part 685 is revised to read as follows:

Appendix A to Part 685--Income Contingent Repayment

Examples of the Calculation of Monthly Repayment Amounts

Example 1. A single borrower with $12,500 of Direct Loans, 8.25

percent interest, and an AGI of $25,000.

Step 1: Determine annual payments based on what the borrower

would pay over 12 years using standard amortization. To do this,

multiply the principal balance by the constant multiplier for 8.25%

interest (0.1315452). The constant multiplier is a factor used to

calculate amortized payments at a given interest rate over a fixed

period of time. (See the constant multiplier chart below to

determine the constant multiplier you should use for the interest

rate on the loan. If the exact interest rate is not listed, choose

the next highest rate for estimation purposes.)

0.1315452 x 12,500=1,644.315

Step 2: Multiply the result by the income percentage factor

shown in the income percentage factor table that corresponds to the

borrower's income (if the income is not listed, you can calculate

the applicable income percentage factor by following the

instructions under the interpolation heading below):

85.55% (0.8555) x 1,644.315=1,406.7115

Step 3: Determine 20 percent of discretionary income. To do

this, subtract the lowest income for single borrowers shown in the

income percentage factor table (HHS poverty level for a family of

one) from the borrower's income and multiply the result by 20%:

$25,000-$7,470=$17,530

$17,530 x 0.20=$3,506

Step 4: Compare the amount from step 2 with the amount from step

3. The lower of the two will be the borrower's annual payment

amount. This borrower will be paying the amount calculated under

step 2. To determine the monthly repayment amount, divide the annual

amount by 12.

1,406.711512=$117.23

Example 2. Married borrowers both repaying under the income

contingent repayment plan with a combined Adjusted Gross income

(AGI) of $30,000. The husband has a Direct Loan balance of $5,000,

and the wife has a Direct Loan balance of $15,000. This couple has

no children.

Step 1: Add the Direct Loan balances of the husband and wife

together to determine the aggregate loan balance.

$5,000+$15,000=$20,000

Step 2: Determine the annual payments based on what the couple

would pay over 12 years using standard amortization. To do this,

multiply the aggregate principal balance by the constant multiplier

for 8.25% interest (0.1315452). (See the constant multiplier chart

to determine the constant multiplier you should use for the interest

rate on the

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loan. If the exact interest rate is not listed, choose the next highest

rate for estimation purposes.)

0.1315452 x 20,000=2630.904

Step 3: Multiply the result by the income percentage factor

shown in the income percentage factor table that corresponds to the

couple's income (if the income is not listed, you can calculate the

applicable income percentage factor by following the instructions

under the interpolation heading below):

82.74% (0.8274) x 2,630.904=2,176.80997

Step 4: Determine 20 percent of the couple's discretionary

income. To do this, subtract the lowest income for married borrowers

shown in the income percentage factor table (HHS poverty level for a

family of 2) from the couple's income and multiply the result by

20%:

$30,000-$10,030=$19,970

$19,970 x 0.20=$3,994

Step 5: Compare the amount from step 3 with the amount from step

4. The lower of the two will be the annual payment amount. The

married borrowers will be paying the amount calculated under step 3.

To determine the monthly repayment amount, divide the annual amount

by 12.

$2,176.8099712=$181.40

Interpolation: If your income does not appear on the income

percentage factor table, you will have to calculate the income

percentage factor through interpolation. For example, let's say you

are single and your income is $26,000. To interpolate, you must

first find the interval between the closest income listed that is

less than $26,000 and the closest income listed that is greater than

$26,000 (for this discussion, we'll call the result ``the income

interval''):

$27,112-$25,000=$2,112

Next, find the interval between the two income percentage factors

that are given for these incomes (for this discussion, we'll call

the result, the ``income percentage factor interval''):

88.77-85.55=3.22

Subtract the income shown on the chart that is immediately less than

$26,000 from $26,000:

$26,000-$25,000=1,000

Divide the result by the number representing the income interval:

1,0002,112=0.4735

Multiply the result by the income percentage factor interval:

0.4735 x 3.22=1.52

Add the result to the lower income percentage factor used to

calculate the income percentage factor interval for $26,000 in

income:

1.52+85.55=87.07%

BILLING CODE 4000-01-P

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[FR Doc. 95-29207 Filed 11-30-95; 8:45 am]

BILLING CODE 4000-01-C