William D. Ford Federal Direct Loan Program

Part VII

Department of Education

_______________________________________________________________________

34 CFR Part 685

William D. Ford Federal Direct Loan Program; Proposed Rule

Proposed Rules

DEPARTMENT OF EDUCATION

34 CFR Part 685

RIN 1840-AC19

William D. Ford Federal Direct Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary of Education proposes to amend provisions of 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.

DATES: Comments on the proposed regulations must be received on or

before October 31, 1995.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to Ms. Rachel Edelstein, U.S. Department of Education, P.O.

Box 23272, Washington, D.C. 20026-3272. Comments may also be sent via

the internet to: [email protected].

To ensure that public comments have maximum effect in developing

the final regulations, the Department urges that each comment clearly

identify the specific section or sections of the regulations that the

comment addresses and that comments be in the same order as the

regulations.

Comments that concern information collection requirements must be

sent to the Office of Management and Budget at the address listed in

the Paperwork Reduction Act section of this preamble. A copy of those

comments may also be sent to the Department representative named in the

preceding paragraph.

FOR FURTHER INFORMATION CONTACT:

Ms. Rachel Edelstein, telephone: (202) 708-9406. (Internet address:

direct [email protected]). 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.

the Department representative named in the

preceding paragraph.

FOR FURTHER INFORMATION CONTACT:

Ms. Rachel Edelstein, telephone: (202) 708-9406. (Internet address:

direct [email protected]). 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 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. After a year of administering the

Direct Loan Program, the Secretary proposes to make improvements to the

existing income contingent repayment plan.

Provisions Proposed

mber 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. After a year of administering the

Direct Loan Program, the Secretary proposes to make improvements to the

existing income contingent repayment plan.

Provisions Proposed

These proposed regulations include policies and procedures that

would apply to borrowers who initially select the income contingent

repayment plan under the Director Loan Program when they enter

repayment on or after July 1, 1996 and borrowers who switch into the

income contingent repayment on or after July 1, 1996. To improve the

existing income contingent repayment plan, the Secretary proposes the

following: To revise the income contingent repayment formula so that

payments will increase more significantly as debt increases than under

the current formula; to eliminate the minimum payment amount currently

allowed under regulations so that more borrowers will be in the habit

of repaying regularly; to alter the treatment of married borrowers when

calculating the repayment amount by always including the income of the

borrower and the borrower's spouse so that the Secretary may more

accurately assess the married borrower's ability to repay; and to

require alternative documentation of income for most borrowers in their

first and second years of repayment, because, for most of these

borrowers, the previous year's adjusted gross income (AGI) will not

accurately reflect current income.

Summary of Contents

Revised Repayment Formula

er's spouse so that the Secretary may more

accurately assess the married borrower's ability to repay; and to

require alternative documentation of income for most borrowers in their

first and second years of repayment, because, for most of these

borrowers, the previous year's adjusted gross income (AGI) will not

accurately reflect current income.

Summary of Contents

Revised Repayment Formula

After administering the current income contingent loan repayment

plan, the Secretary is proposing several ways to improve the repayment

formula. The Statement of Managers language included in the Conference

Report on the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-

66) stated that payments should generally be directly proportional to

the amount borrowed in order to discourage over-borrowing. The current

income contingent repayment plan increases borrowers' payments by only

0.2 percent of income per $1,000 borrowed; therefore, increased

borrowing affects monthly repayment amounts only negligibly. For

example, a student who has borrowed $5,000 could continue to borrow

until his or her loan balance reaches almost six times that amount

($29,000) before the repayment amount doubles, and almost 11 times that

amount ($53,000) before the repayment amount triples. Because payments

do not increase significantly with the amount borrowed, the Secretary

believes the current income contingent repayment plan may encourage

over-borrowing.

Under the proposed formula, borrowers' payments would equal the 12-

year amortization repayment amount for their outstanding loans

multiplied by an income percentage factor that varies with annual

income; however, borrowers would never pay more than 20 percent of

their discretionary income. Discretionary income for single borrowers

and single head of household borrowers is defined as adjusted gross

income (AGI) minus $7,087; discretionary income for married borrowers

is AGI minus $8,517

mount for their outstanding loans

multiplied by an income percentage factor that varies with annual

income; however, borrowers would never pay more than 20 percent of

their discretionary income. Discretionary income for single borrowers

and single head of household borrowers is defined as adjusted gross

income (AGI) minus $7,087; discretionary income for married borrowers

is AGI minus $8,517. Therefore, under the revised formula, no payment

will be required of single borrowers or single head of household

borrowers with incomes of $7,087 or less, and no payments will be

required of married borrowers with income of $8,517 or less. The

Secretary believes that the threshold income levels discussed above are

reasonable measures for determining discretionary income.

Except for the protection that borrowers never pay more than 20

percent of their discretionary income under the proposed formula, the

formula increases payment amounts directly in proportion to the amount

borrowed. Therefore, payments required under the proposed formula

increase more significantly in relation to amounts borrowed than under

the current formula, and this proposed plan is more likely to

discourage over-borrowing than the current plan.

Under the current formula, payments are a flat percentage of income

for any given debt. Thus, as annual income rises from $10,000 to

$100,000, the expected repayment amount increases by a factor of 10.

This variance is too wide and results in a plan that is not useful for

many borrowers because the monthly repayment amount is too large for

higher income borrowers. The Secretary believes that it would be more

formula, payments are a flat percentage of income

for any given debt. Thus, as annual income rises from $10,000 to

$100,000, the expected repayment amount increases by a factor of 10.

This variance is too wide and results in a plan that is not useful for

many borrowers because the monthly repayment amount is too large for

higher income borrowers. The Secretary believes that it would be more

appropriate to structure a plan so that, for any given debt level, the

highest repayment amounts should be no more than four times the lowest

payments for most borrowers.

Because the new formula uses a factor relative to income and takes

debt into greater consideration, payments are no longer a flat

percentage of income. Under the proposed plan, while payments increase

significantly in relation to amounts borrowed, the highest repayment

amount at any debt level is no more than four times the lowest payment

for that debt level. Limiting the variance in repayment amounts results

in some borrowers at higher income levels repaying a smaller percentage

of total income than borrowers at lower income levels with the same

level of debt; however, the borrowers with higher income levels will

make larger monthly payments than the borrowers with lower income

levels. The income percentage factors ensure that payments increase

with income, that borrowers pay what they can afford to pay, and that

borrowers repay their loans within a reasonable period of time.

Under the existing income contingent repayment plan, borrowers

choose between two repayment formulas. The choice of two repayment

calculation options may have confused borrowers. In addition, under one

of these options, the ``capped amount,'' borrowers repay under an

income contingent repayment plan that does not take income into

account. Under the proposed plan, there is only one repayment formula.

This change would reduce borrower confusion and simplify administration

of the income contingent repayment plan

repayment

calculation options may have confused borrowers. In addition, under one

of these options, the ``capped amount,'' borrowers repay under an

income contingent repayment plan that does not take income into

account. Under the proposed plan, there is only one repayment formula.

This change would reduce borrower confusion and simplify administration

of the income contingent repayment plan.

In addition to the improvements listed above, for many low- to

middle-income borrowers the proposed formula plan offers lower monthly

payment amounts. For borrowers with annual incomes between $15,000 and

$35,000 and average levels of debt, the revised repayment formula

offers lower monthly repayment amounts than the current plan. However,

the proposed formula does not significantly increase the number of

borrowers who have not paid in full after 25 years. In fact, for

medium- and high-income borrowers, who represent 75 percent of total

borrowers, the percentage who repay within 25 years increases.

Finally, the current plan has been criticized for allowing

borrowers to make monthly payments that are less than interest accrued

(that is, borrowers may go into negative amortization). Recognizing

that borrowers cannot always afford to make payments to cover interest,

the Secretary also understands the importance of avoiding negative

amortization whenever possible. Under the proposed plan, the overall

percentage of borrowers who experience a period of negative

amortization is expected to decrease slightly.

Examples of the calculation of monthly repayment amounts, together

with tables showing the repayment amounts for borrowers at various

income and debt levels, are included in Appendix A to the regulations.

Minimum Payments

rtization whenever possible. Under the proposed plan, the overall

percentage of borrowers who experience a period of negative

amortization is expected to decrease slightly.

Examples of the calculation of monthly repayment amounts, together

with tables showing the repayment amounts for borrowers at various

income and debt levels, are included in Appendix A to the regulations.

Minimum Payments

Under the current plan, borrowers with a calculated monthly payment

below $15 are not required to make any payment. The Secretary proposes

to change this provision. Instead, all borrowers with a calculated

repayment amount greater than zero would be required to make payments.

Further, the Secretary proposes requiring borrowers with a calculated

repayment amount that is at least 1 cent but less than $2.00 to make a

two dollar payment. The Secretary believes that removing the minimum

payment threshold promotes responsible repayment practices. Even if

borrowers are required to repay only a small amount each month, this

requirement will ensure that borrowers are in the habit of repaying and

remain in contact with the Direct Loan Servicing Center. Under this

approach, borrowers with very low incomes may still have a calculated

monthly payment of zero.

The Secretary also requests comments on establishing a policy

whereby borrowers who are repaying under the income contingent

repayment plan (and who are not in deferment or forbearance) would

always make a monthly payment, even if their calculated monthly

repayment amount is $0. The Secretary solicits comments and supporting

arguments on whether requiring monthly payments of all borrowers would

promote responsible repayment practices and help to prevent defaults.

The Secretary also solicits comments and supporting evidence about what

an appropriate minimum repayment level would be, if one were to be

required.

Treatment of Married Borrowers

y

repayment amount is $0. The Secretary solicits comments and supporting

arguments on whether requiring monthly payments of all borrowers would

promote responsible repayment practices and help to prevent defaults.

The Secretary also solicits comments and supporting evidence about what

an appropriate minimum repayment level would be, if one were to be

required.

Treatment of Married Borrowers

Under the current regulations, a married borrower who files a

Federal income tax return separately from his or her spouse is not

required to provide any income information concerning his or her spouse

(unless the spouses are repaying their loans jointly). The Secretary

has determined that this policy may prevent an accurate assessment of

the borrower's ability to repay the loan and may allow for uneven

treatment of married borrowers, depending upon whether they file their

income tax separately or jointly. Section 455(e)(3) of the HEA provides

the Secretary with the authority to obtain additional information

concerning a borrower's income when AGI does not reasonably reflect the

borrower's income. Therefore, in order to assess accurately the

borrower's ability to repay, the Secretary proposes requiring married

borrowers who do not file joint tax returns with their spouses and who

choose to repay under the income contingent repayment plan to obtain a

consent to disclosure of tax information from their spouses. This

policy will ensure that the Secretary obtains the AGI of both the

borrower and the borrower's spouse; the couple's joint AGI will be used

to calculate the borrower's repayment amount. However, the Secretary

would not require a spouse's tax return information if the spouses are

legally separated

ngent repayment plan to obtain a

consent to disclosure of tax information from their spouses. This

policy will ensure that the Secretary obtains the AGI of both the

borrower and the borrower's spouse; the couple's joint AGI will be used

to calculate the borrower's repayment amount. However, the Secretary

would not require a spouse's tax return information if the spouses are

legally separated.

In addition, under the current regulations, for married borrowers

who each have loans and who choose to repay their loans jointly under

the income contingent repayment plan, the Secretary assumes that the

AGI for each married borrower is proportionate to the relative size of

the borrower's individual debt. The Secretary proposes to eliminate the

assumption that the AGI for each married borrower is proportionate to

debt in order to assess more accurately borrowers' ability to repay.

Under the proposed repayment formula, the repayment amounts for married

borrowers who repay jointly are based on their combined AGIs and their

combined debts. A step-by-step calculation of a combined amount is

included as Example 2 in Appendix A.

Married borrowers who each have outstanding balances on Direct

Loans are not required to repay their loans jointly. However, even if

only one borrower chooses to repay under the income contingent

repayment plan, the Secretary will use the AGI of both spouses to

determine the payback rate of the borrower who is repaying under the

income contingent repayment plan.

Cohort of Borrowers Affected by New Plan

When these regulations become effective, this new formula will

apply to borrowers who select the income contingent repayment plan when

they enter repayment and to borrowers who are in other repayment plans

and switch into the income contingent repayment plan on or after July

1, 1996. Borrowers

is repaying under the

income contingent repayment plan.

Cohort of Borrowers Affected by New Plan

When these regulations become effective, this new formula will

apply to borrowers who select the income contingent repayment plan when

they enter repayment and to borrowers who are in other repayment plans

and switch into the income contingent repayment plan on or after July

1, 1996. Borrowers

who are already in repayment under the income contingent repayment plan

will continue under the current formula, although they will be given

the option of converting to the new formula.

Borrowers in Their First and Second Years of Repayment

The Secretary proposes requiring borrowers who are in their first

and second years of repayment and who are repaying under the income

contingent repayment plan to submit alternative documentation of their

income (that is, other than IRS-reported AGI) to the Secretary, when,

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

reasonably reflect the borrower's current income. Under current

regulations, the previous year's IRS-reported AGI is used to calculate

the monthly payment amount for all borrowers. However, borrowers in

their first year of repayment have recently left school, and their

incomes while in school were likely lower than their incomes after

leaving school. Therefore, if these borrowers filed taxes while they

were in school, the AGI representing the year prior to the year they

entered repayment would not, in most cases, reflect their current

income and their current ability to repay their loans. In addition,

borrowers may need some time to find their first job after graduation.

Therefore, the AGI the secretary would obtain for the borrower's second

year of repayment still might not reflect current income

school, the AGI representing the year prior to the year they

entered repayment would not, in most cases, reflect their current

income and their current ability to repay their loans. In addition,

borrowers may need some time to find their first job after graduation.

Therefore, the AGI the secretary would obtain for the borrower's second

year of repayment still might not reflect current income. As discussed

above, the HEA provides the Secretary with the authority to obtain

additional information concerning a borrower's income when the AGI does

not reasonably reflect the borrower's income (see section 455(e)(3) of

the HEA). The Secretary believes that, for the majority of borrowers,

the AGI will not accurately reflect a borrower's income or ability to

repay during the first and second years of repayment. Therefore, the

Secretary proposes to request alternative documentation of income from

these borrowers under the statutory authority provided in the HEA,

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

reasonably reflect the borrower's current income.

Executive Order 12866

1. Assessment of Costs and Benefits

These proposed 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 proposed regulatory

action.

The plan does not impose unacceptable new costs; it would increase

costs of the Federal Government by an estimated $145 million over 5

years. This increase in costs represents only a 2 percent increase in

overall program costs. Costs increase under this proposed plan because

low-income borrowers make lower payments than under the current formula

and some do not fully repay; in addition, high-income high-debt

borrowers repay their loans more quickly than under the current formula

and, therefore, pay less in interest

n over 5

years. This increase in costs represents only a 2 percent increase in

overall program costs. Costs increase under this proposed plan because

low-income borrowers make lower payments than under the current formula

and some do not fully repay; in addition, high-income high-debt

borrowers repay their loans more quickly than under the current formula

and, therefore, pay less in interest. Although not reflected in the

cost estimate, this proposal may actually reduce long-term costs

because under the income contingent repayment plan, defaults may

decrease. Defaults may decrease because payments will be more

affordable under the income contingent repayment plan than under other

available repayment plans. The Secretary has determined that the

potential costs associated with the proposed regulations are necessary

for administering the income contingent repayment plan effectively and

efficiently. Burdens specifically associated with information

collection requirements, if any, are explained elsewhere in the

preamble under the heading of Paperwork Reduction Act of 1995.

In assessing the potential costs and benefits--both quantitative

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

determined that the benefits of the proposed regulations justify the

costs. A further discussion of the benefits and costs of the proposed

regulations is contained in the summary of the provisions proposed.

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.

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comment on

whether there may be further opportunities to reduce any potential

costs or increase potential benefits resulting from these proposed

regulations without impeding the effective and efficient administration

of the title IV, HEA programs.

2. Clarity of the Regulations

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comment on

whether there may be further opportunities to reduce any potential

costs or increase potential benefits resulting from these proposed

regulations without impeding the effective and efficient administration

of the title IV, HEA programs.

2. Clarity of the Regulations

Executive Order 12866 requires each agency to write regulations

that are easy to understand.

The Secretary invites comments on how to make these regulations

easier to understand, including answers to questions such as the

following: (1) Are the requirements in the regulations clearly stated?

(2) Do the regulations contain technical terms or other wording that

interferes with their clarity? (3) Does the format of the regulations

(grouping and order of sections, use of headings, paragraphing, etc.)

aid or reduce their clarity? Would the regulations be easier to

understand if they were divided into more (but shorter sections? (A

``section'' is preceded by the symbol ``Sec. '' and a numbered heading;

for example, Sec. 685.209 Income Contingent Repayment Plan.) (4) Is the

description of the proposed regulations in the ``Supplementary

Information'' section of this preamble helpful in the understanding of

the proposed regulations? How could this description be more helpful in

making the proposed regulations easier to understand? (5) What else

could the Department do to make the regulations easier to understand?

A copy of any comments that concern whether these proposed

regulations are easy to understand should also be sent to Stanley

Cohen, Regulations Quality Officer, U.S. Department of Education, 600

Independence Avenue, SW., (Room 5442 FOB-10), Washington, DC. 20202-

2110.

Regulatory Flexibility Act Certification

(5) What else

could the Department do to make the regulations easier to understand?

A copy of any comments that concern whether these proposed

regulations are easy to understand should also be sent to Stanley

Cohen, Regulations Quality Officer, U.S. Department of Education, 600

Independence Avenue, SW., (Room 5442 FOB-10), Washington, DC. 20202-

2110.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not

have a significant economic impact on a substantial number of small

entities. The regulations will affect borrowers who are in repayment.

They will not have a significant economic impact on any small entities

under the Regulatory Flexibility Act.

Paperwork Reduction Act of 1995

Section 685.209 contains an information collection requirement. As

required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)),

the Department of Education has submitted a copy of this section to the

Office of Management and Budget (OMB) for its review.

Collection of Information

Income Contingent Repayment Plan Consent to Disclosure of Tax

Information form from spouses of married borrowers who file separately

and select the income contingent repayment plan and collection of

alternative documentation of income from borrowers in their first and

second years of repayment, when in the opinion of the Secretary, AGI

does not reasonably reflect a borrower's current income.

Married Borrowers

Repayment Plan Consent to Disclosure of Tax

Information form from spouses of married borrowers who file separately

and select the income contingent repayment plan and collection of

alternative documentation of income from borrowers in their first and

second years of repayment, when in the opinion of the Secretary, AGI

does not reasonably reflect a borrower's current income.

Married Borrowers

Under the current regulations, a married borrower who is not

repaying jointly with his or her spouse is not required to provide any

income information concerning his or her spouse unless the couple files

their taxes jointly. The Secretary proposes requiring all spouses of

married borrowers who choose to repay under income contingent repayment

to complete the Income Contingent Repayment Plan Consent to Disclosure

of Tax Information form. This policy will ensure that the Secretary

obtains the AGI of both the borrower and the borrower's spouse and will

enable to the Secretary to assess more accurately a borrower's ability

to repay.

First and Second Year Borrowers

The Secretary proposes requiring borrowers who are in their first

and second years of repayment and who are repaying under the Income

Contingent Repayment Plan to complete the Income Contingent Repayment

Plan Request of Alternative Documentation of Income Form when, in the

Secretary's opinion, AGI does not reasonably reflect the borrower's

current income.

Spouses of married borrowers would be required to provide consent

to tax disclosure only once every five years. The Secretary estimates

that all first and most second year borrowers would be required to

provide alternative documentation of income annually, while in the

first two years of repayment.

Annual public reporting burden for this collection of information

is estimated to average .32 hours for each of the estimated 230,288

individuals providing information regarding Income Contingent Repayment

Information (total annual reporting burden equals 73,692 hours)

rowers would be required to

provide alternative documentation of income annually, while in the

first two years of repayment.

Annual public reporting burden for this collection of information

is estimated to average .32 hours for each of the estimated 230,288

individuals providing information regarding Income Contingent Repayment

Information (total annual reporting burden equals 73,692 hours).

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

Information and Regulatory Affairs, OMB, room 10235, New Executive

Office Building, Washington, D.C. 20503; Attention: Desk Officer for

U.S. Department of Education.

The Department considers comments by the public on this proposed

collection of information in--

Evaluating whether the proposed collection of information

is necessary for the proper performance of the functions of the

Department, including whether the information will have practical use;

Evaluating the accuracy of the Department's estimate of

the burden of the proposed collection of information, including the

validity of the methodology and assumptions used;

Enhancing the quality, usefulness, and clarity of the

information to be collected; and

Minimizing the burden of the collection of information on

those who are to respond, including through the use of appropriate

automated, electronic, mechanical, or other technological collection

techniques or other forms of information technology; e.g., permitting

electronic submission of responses.

OMB is required to make a decision concerning the collection of

information contained in these proposed regulations between 30 and 60

days after publication of this document in the Federal Register.

Therefore, a comment to OMB is best assured of having its full effect

if OMB receives it within 30 days of publication. This does not affect

the deadline for the public to comment to the Department on the

proposed regulations.

Invitation To Comment

ection of

information contained in these proposed regulations between 30 and 60

days after publication of this document in the Federal Register.

Therefore, a comment to OMB is best assured of having its full effect

if OMB receives it within 30 days of publication. This does not affect

the deadline for the public to comment to the Department on the

proposed regulations.

Invitation To Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations. All comments

submitted in response to these proposed regulations will be available

for public inspection, during and after the comment period, in room

4624, Regional Office Building 3, 7th and D Streets SW., Washington,

DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of

each week except federal holidays.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would 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.

Dated: September 13, 1995.

Richard W. Riley,

Secretary of Education.

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

Ford Federal Direct Loan Program)

The Secretary proposes to amend 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

Program)

The Secretary proposes to amend 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); in newly designated paragraph (c), redesignating 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 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 debt 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; or

(ii) 20 percent of discretionary income.

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

minus--

er 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; or

(ii) 20 percent of discretionary income.

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

minus--

(i) For a single borrower, the lowest amount shown in the income

percentage factor table in Appendix A for single borrowers;

(ii) For a single head of household borrower, the lowest amount

shown in the income percentage factor table in Appendix A for head of

household borrowers; or

(iii) For a married borrower, the lowest amount shown in the income

percentage factor table in Appendix A for married borrowers.

(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, and the income percentage factors in Table A.

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

(a)(4), 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.

s of the annual recalculation described in paragraph

(a)(4), 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 legally 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 balance on the loans of each borrower are added together to

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

turn information under paragraph (c)(5) of this section

(unless the borrower is legally 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 balance 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 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

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

``interpolate'' 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 from the borrower's income and

multiply the result by 20%:

$25,000-$7,087=$17,913

$17,913 x 0.20=$3,582.60

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.

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

.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.

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 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

``interpolate'' 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 from the couple's income

and multiply the result by 20%:

$30,000-$8,517=$21,483

$21,483 x 0.20=$4,296.60

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

uple's income

and multiply the result by 20%:

$30,000-$8,517=$21,483

$21,483 x 0.20=$4,296.60

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''):

$27,122-$25,000=$2,122

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:

1,0002,122=0.4713

Multiply the result by the income percentage factor interval:

0.4713 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%

hat 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:

1,0002,122=0.4713

Multiply the result by the income percentage factor interval:

0.4713 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%

Income Percentage Factors

[Based on annual income]

----------------------------------------------------------------------------------------------------------------

Single Married Head of Household

----------------------------------------------------------------------------------------------------------------

Income Percent factor Income Percent factor Income Percent factor

----------------------------------------------------------------------------------------------------------------

7,087............ 55.00 8,517 50.52 7,087 50.52

9,752............ 57.79 10,000 52.72 10,000 54.90

10,000........... 58.03 12,678 56.68 11,183 56.68

12,548........... 60.57 15,000 59.29 13,328 59.56

15,000........... 65.42 18,139 62.83 15,000 62.92

15,409........... 66.23 20,000 64.98 17,424 67.79

18,139........... 71.89 23,536 69.07 20,000 72.39

20,000........... 76.44 25,000 72.31 21,585 75.22

21,585........... 80.33 29,127 81.46 25,000 82.87

25,000........... 85.55 30,000 82.74 27,112 87.61

27,112........... 88.77 35,000 90.09 30,000 92.80

30,000........... 93.48 35,434 90.73 34,003 100.00

34,003........... 100.00 40,000 96.87 35,000 100.00

35,000........... 100.00 42,325 100.00 40,000 100.00

40,000........... 100.00 50,000 100.00 40,895 100.00

40,895........... 100.00 52.663 100.00 50,000 108.28

49,152........... 111.80 60,000 106.92 51,233 109.40

50,000........... 112.52 68,787 115.20 60,000 117.34

60,000........... 121.01 70,000 115.76 68,462 125.00

62,935........... 123.50 80,000 120.40 70,000 125.99

70,000........... 128.27 90,000 125.04 80,000 132.46

80,000..........