Analysis of the Final Regulatory Changes (Negotiated Rulemaking Winter/Spring 2012)

Transcription

1 Analysis of the Final ulatory Changes (Negotiated Rulemaking Winter/Spring ) NPRM Package #1 Published in the Federal ister dated July 17, Final Rule Package #1 published in the Federal ister November 1, : The U.S. Department of Education (ED) held negotiated rulemaking sessions with members of the community to address 25 student loan program issues. The Student Loan Program Negotiating Committee held meetings from January March and was able to reach consensus. ED divided the 25 issues into two separate regulatory packages Package #1 includes issues relating to ICR, IBR and TPD; Package #2 includes the remaining issues. (Note: Package #2 will be published in 2013 and a separate analysis document will be developed.) Purpose: This document provides a summary of the changes to 674, 682, and 685. Date: The regulations included in the NPRM Package #1 are effective, unless otherwise noted. (Note: ED designated the following regulations for early implementation beginning on November 1, at the discretion of each loan holder, as appropriate: (1) Section (a)(6)(v)(C); (2) Section (f)(16); (3) Section (d); and (4) Section (e). ED intends to implement the regulations governing the Pay As You Earn repayment plan as soon as possible. We will publish a separate Federal ister notice to announce when the plan becomes available to borrowers.) Prepared by the NCHER Program ulations Committee This document provides a summary of the regulatory changes outlined in the Final Rule. Readers should refer to the Final Rule to resolve any questions about what the regulations require. Last updated February 15, 2013

2 Table of Contents Income-Based Repayment (IBR) Pay As You Earn Income-Contingent Repayment (ICR) Total and Permanent Disability (TPD) Page 2 of 56

3 Final Rule Package 1 Income-Based Repayment (IBR) Multipleholder proration of the PFH payment amount (b) (1)(i) and (ii)(c) (b)(2)(i) and Technical correction to clarify that the total outstanding principal amount of the borrower s eligible loans held by the loan holder is used in the proration of the partial financial hardship (PFH) payment when the borrower has multiple holders. Loans excluded from the IBR plan (ii)(c) (b) (3) A borrower who elects IBR on or after July 1, 2013 may no longer choose to exclude IBReligible loans from the IBR plan based simply on the borrower s choice. Only loans that are ineligible for IBR (Parent PLUS or Consolidation that repaid a Parent PLUS) are excluded from the IBR plan Should we suggest a trigger of application received on or after July 1, 2013?? Conforming change with Direct Loan requirement in (a)(4) that only allows a borrower to be in one repayment plan unless the borrower has loans that are not eligible for a particular repayment plan. ED clarified in the Final Rule preamble (p ) that a borrower who has already established a repayment plan based on the exclusion of IBReligible loans may continue to exclude those loans as long as the borrower remains under IBR. Per the Final Rule Preamble discussion, it is clear that ED intends this to preserve the borrower s election for any previously excluded IBR-eligible loans and does not preserve the borrower s option to Page 3 of 56

4 Permanentstandard payment calculation Expeditedstandard payment amount calculation Expeditedstandard payment amount calculation (d) (1)(i) (d) (1)(i) (d) (2)(i) (d) (2)(i)(A) (d) (2)(ii) (d) (2)(i)(B) Technical corrections clarify that the loan holder requires (as opposed to may require ) the borrower to repay the Permanent-standard payment amount when the borrower no longer has a partial financial hardship or the borrower chooses to no longer make the PFH payment. Also includes technical corrections to clarify that the Permanent-standard payment amount is calculated using the amount of the borrower s eligible loans that was outstanding at the time the borrower first entered IBR. Technical corrections were made to the Direct Loan regulations so that both FFEL and Direct Loan regulations are consistent. Technical corrections clarify that for all loan types, except Consolidation, the Expeditedstandard payment amount is calculated based on the remainder of the 10-year repayment period and the outstanding balance at the time the borrower chooses to completely leave the IBR umbrella. Technical corrections to clarify that for Consolidation loans, the Expedited-standard payment amount is calculated based on the remainder of the applicable repayment period that was initially determined when the loan elect to exclude any IBR-eligible loan at a later time. If the borrower chooses to leave IBR completely, then later elects IBR again after, the borrower may not exclude any IBR-eligible loans at that time, even if the borrower had excluded an IBReligible loan previously under the earlier IBR plan. The first change clarifies that the Permanent-standard amount is the only amount that is paid under the IBR umbrella after the borrower no longer has a partial financial hardship. There is no opportunity for a lesser payment amount (other than a PFH payment amount). This change conforms to sub-regulatory guidance ED has provided in the past and is a technical correction requested by the FFEL industry. Page 4 of 56

5 Consolidation loans Borrower selection of a new repayment plan after choosing the Expeditedstandard plan (d) (3) (d) (2)(ii) was made and only the outstanding balance of the Consolidation loan (not the Consolidation loan and balances of other student loans) at the time the borrower chooses to completely leave the IBR umbrella. A new requirement was added to the regulations for a borrower wanting to move to another repayment plan after moving to the Expedited-standard plan that requires the making of a single payment under the Expedited-standard plan. The one payment under the Expedited-standard plan may be a payment made under a reduced-payment forbearance. This codifies sub-regulatory private guidance provided by ED, except that the previous guidance did not allow for the single payment to be made under a reduced-payment forbearance (ED was requiring one full Expedited-standard payment to be made under the private guidance). The reduced payment under the forbearance must be greater than $0, but may be less than the interest accruing each month. Eligibility documentation - income (e) (1)(i) and (ii) (e) (1)(i) and (ii) Revises language to no longer require the borrower s consent for the IRS to send a tax transcript to the loan holder. The loan holder may now use any documentation of the borrower s AGI that is acceptable to the loan holder. In the Final Rule preamble (p ), ED stated that, although they cannot mandate that a FFELP loan holder grant this forbearance, they strongly recommend and expect a FFELP loan holder to do so. ED will grant this forbearance for the loans it holds (Direct and PUT). ED also clarified that, because this forbearance is done under the standard repayment plan, there is no restriction on capitalizing any unpaid interest during this forbearance period. ED agreed that the use of the 4506-T to obtain the borrower s AGI was contributing to delays in processing. ED also acknowledged that the Interim Guidance issued on 6/12/2009 requiring a signed copy of the federal tax return was contributing to delays in processing. ED issued guidance on 4/13/ stating that the borrower s signature is no longer required on the copy of the tax return. Under Page 5 of 56

6 this Final Rule, the loan holder (FFEL lender or ED) is now permitted to determine what constitutes acceptable documentation of AGI. Alt Docs may still be requested if the borrower s AGI is not available or does not reflect the borrower s current income. Eligibility documentation Spouse loan information PFH approval notification (e) (1)(iii) (e) (2) (e) Adds new language requiring the borrower to ensure that their spouse provides NSLDS access authorization or other documentation of the spouse s loans when the borrower: Files a joint tax return, and The spouse has eligible loans that will be considered in the eligibility determination, and The loan holder does not have a relationship with the spouse. Adds a new written notification requirement from the loan holder to a borrower who initially, and each subsequent year, is determined to have a partial financial hardship. In the Final Rule preamble (p ), ED discussed the fact that married borrowers who live in a community property state and file their tax returns separately, may be affected by the IRS requirement that joint income be split evenly between the two spouses. ED stated that if the borrower indicates that the AGI reported on the federal tax return does not reflect the borrower s actual income due to this situation, the loan holder may accept alternative documentation of income. In the Final Rule preamble (p ), ED acknowledges the need for the loan holder to obtain the spouse s consent to view loan information on NSLDS, as is done through the current authorization process. Spouse can choose to provide documentation, acceptable to the loan holder, of his or her loans. This authorization or documentation is one of the items that must be provided by the established deadline. ED does not need this requirement in the Direct Loan regulations as ED servicers have authorization to view NSLDS information. Per the discussions in the preamble to the 7/17/ NPRM, if the borrower s PFH payment amount is reevaluated before the end of the current annual payment period, the annual payment period may Page 6 of 56

7 (2) This notification must include: change. Annual renewal notification to borrowers in (e) (3) (e) The PFH payment amount and annual payment period applicable to the PFH payment amount. Information about the requirement to annually provide documentation to be reevaluated for PFH and that the borrower will be notified in advance of the deadline by which the documentation must be received by the lender. An explanation of the consequences (conversion to Permanent-standard and assumption of a family size of one) if the borrower does not provide documentation by the deadline. An explanation of the consequences if the borrower no longer wishes to repay under the IBR plan. Information regarding the borrower s ability to request a re-evaluation of the PFH payment amount at any time during the current annual payment period based on a change in the borrower s financial circumstances and the income used to determine the borrower s PFH payment no longer reflects the borrower s current income. Adds a new written, annual renewal notification that must be sent by the loan holder to each borrower who is currently in PFH status. This annual renewal notice must be The specific cite references for the consequences are only for the Permanent-standard amount and the fact that if the borrower does not provide family size, the loan holder will assume a family size of one. However, it would be best practice to include the fact that any unpaid interest will be capitalized. In the Final Rule preamble (p ), ED clarified that this notice DOES NOT need to contain a statement telling the borrower that if the loan holder does do an early re-evaluation, the loan holder will be sending another notice just like this one. That last sentence in (e)(2)(v) and (e)(2)(v) is just instructions for the loan holder. ED declined to require the actual renewal deadline date in this notice as doing so would be inconsistent with the agreements made during the rulemaking sessions and because that date could change if the borrower requests early re-evaluation and therefore could be confusing to the borrower. The borrower is allowed 10 days beyond the annual deadline date to allow for mail time in order for the loan holder to receive the renewal information. The intent of the language around the setting of the Page 7 of 56

8 PFH (3) sent no earlier than 90 days, and no later than 60 days, before the established annual deadline date by which the loan holder must receive renewal documentation from the borrower. The annual deadline date established by the loan holder must be no earlier than 35 days before the end of the current annual payment period. The written notification must contain the following: The types of information required to evaluate the borrower s continued eligibility for partial financial hardship. The annual deadline date by which the loan holder must receive all of the information required for evaluation of the borrower s continued partial financial hardship. The fact that the borrower has 10 days beyond the deadline date for the loan holder to receive the required information, The consequences (including the actual Permanent-standard payment amount, the effective date of the Permanent-standard payment and capitalization of unpaid interest at the end of the annual payment period) if the loan holder does not receive the information within 10 days following the annual deadline date given in the notice. annual deadline is to allow loan holders/servicers flexibility in allowing for their processing times. The timing of the notice is designed to allow the borrower at least 60 days to gather the required documentation and submit it to the loan holder, and to limit how early a loan holder/servicer can send the annual renewal notice. In addition, this process will allow a borrower to keep the same annual payment period each year unless the borrower requests a mid-year reevaluation. In the Final Rule preamble (p ), ED clarified that the loan holder must inform the borrower of the 10-day mail time beyond the deadline date for the loan holder to receive the required information. Page 8 of 56

9 Notification to borrowers who no longer qualify for PFH (e) (4) (e) (4) Adds a new requirement for a written notification to be sent by the loan holder to the borrower each time the loan holder makes a determination in a subsequent year that the borrower no longer has a partial financial hardship. The notice must include: The Permanent-standard payment amount the borrower will be required to pay. An explanation that the unpaid interest will be capitalized. Information regarding the borrower s option to request at any time that the loan holder re-evaluate the borrower s eligibility for partial financial hardship if the borrower s financial condition changes. An explanation that the borrower will be sent an annual notice of this option. In the Final Rule preamble (p ), ED clarified that this notice does NOT need to contain a statement advising the borrower that if the loan holder does do a re-evaluation, the loan holder will be sending another notice. That last sentence in (e)(4)(iii) and (e)(4)(iii) is just instructions for the loan holder. Page 9 of 56

10 Annual notification to borrowers in Permanentstandard (e) (5) (e) (5) Adds a new requirement for a written notification to be sent by the loan holder to the borrower each year that the borrower remains on the IBR plan but is making the Permanentstandard payment amount (is not in PFH). The notice must include: Information regarding the borrower s option to request at any time that the loan holder re-evaluate the borrower s eligibility for partial financial hardship if the borrower s financial condition changes. An explanation that the borrower will be sent an annual notice of this option. In the Final Rule preamble (p ), ED clarified that this notice does NOT have to contain a statement telling the borrower that if the loan holder does perform a re-evaluation, the loan holder will be sending another notice. That last sentence in (e)(4)(iii) and (e)(4)(iii) is just instructions for the loan holder. Repayment plan if borrower does not qualify for PFH Conversion to Permanentstandard (e) (6) (e) (6) (e) (7) (e) (7) New language clarifies that a borrower who is not on the IBR plan but later selects the IBR plan and does not provide the required documentation or does not qualify for PFH, remains on their current repayment plan that is in place at the time of the loan holder s determination. For borrowers currently in a PFH annual payment period, if the loan holder does not receive the renewal information within 10 days of the specified annual deadline date, the loan holder converts the loan to the Permanentstandard payment amount, unless the loan holder is able to determine the borrower s new PFH payment amount before the end of the current annual payment period in spite of the borrower s tardiness. For example, if a borrower is on a graduated repayment plan at the time of request for the IBR plan, the failure to meet the IBR requirements does not remove the borrower from the graduated repayment plan. In the Final Rule preamble (p ), ED clarified in the regulations that if a loan holder is able to process the late renewal documentation before the end of the annual payment period, then the loan holder may do so to prevent the loan from converting to Permanent-standard. Page 10 of 56

11 Loan holder processing of borrower s timely renewal response (e) (8)(i) and (ii) (e) (8)(i) If the loan holder receives the required renewal information within 10 days of the specified annual deadline date, the loan holder must promptly determine the borrower s new PFH payment amount. If the loan holder is unable to make the determination of the new PFH payment amount before the end of the current annual payment period, the loan holder must prevent the conversion to Permanent-standard and capitalization of interest, and maintain the previous PFH payment amount until the loan holder is able to determine the new PFH payment amount. If, after determining the new PFH payment amount, the new PFH payment amount is less than the borrower s previous PFH payment amount, the loan holder must make the appropriate adjustment to the borrower s account to reflect any payments the borrower may have made at the previous PFH payment amount after the end of the most recent annual payment period. The FFEL industry asked for prevent or remediate the conversion to Permanent-standard during the rulemaking sessions but ED did not accept remediate as an option for the loan holder. ED declined to define promptly in the Final Rule. Industry best practices should ensure that the loan holder establishes a deadline date plus 10 days that will allow for plenty of time for the loan holder to process the renewal in order to avoid the need for these adjustments. The loan holder does not advance the due date (unless the borrower requests otherwise) if the adjustment made would result in the old PFH payment amount being one or more additional monthly payments at the new PFH payment amount. Any adjusted payments must be applied in accordance with the IBR allocation rules, i.e., interest first, etc. Page 11 of 56

12 Loan holder processing of borrower s timely renewal response ED s processing of borrower s timely renewal response Loan holder processing of borrower s untimely renewal response and administrative forbearance for delinquent payments upon late renewal (e) (8)(iii) (e) (8)(ii) (e) (8)(i)(C) (e)(9) (f)(16) (e)(9)(i) If the new PFH payment is equal to or greater than the previous PFH payment after the loan holder determines the new PFH payment, no adjustments are required. The new annual payment period established after determining the new payment amount as described above, begins on the day after the end of the most recent annual payment period. Any payments that the borrower continued to make at the old payment amount before the new payment amount was determined are considered to be qualifying payments under Public Service Loan Forgiveness (PSLF) as long as the payments meet the other PSLF requirements. If the loan holder receives the renewal documentation more than 10 days after the specified annual deadline date and the loan is converted to Permanent-standard, upon determining that the borrower has a partial financial hardship (PFH) based on the new documentation, the loan holder may grant an administrative forbearance to cover any payments that are due or would be overdue, provided that the new PFH payment amount is $0 or is less than the previous PFH payment amount. In the Final Rule preamble (pp ), ED added a new paragraph to clarify that the annual payment period does not change for a borrower after the new PFH payment is calculated when the loan holder receives the renewal information in a timely manner but is unable to determine the new PFH payment before the end of the current annual payment period. Interest that was capitalized at the time of the conversion to Permanent-standard (at the end of the prior annual payment period) does not have to be reversed, even if some of the payments that are being covered by the administrative forbearance are prior PFH payments that are overdue. ED clarified in the Final Rule preamble (p ) that capitalization of interest is not a penalty, but rather is a result of the borrower s failure to comply Page 12 of 56

13 Interest that accrues during the portion of this administrative forbearance that covers payments that are overdue after the end of the prior annual payment period cannot be capitalized. with the terms and conditions of the repayment plan that the borrower chose and compliance with those terms and conditions is ultimately the borrower s responsibility. Giving loan holders discretion to limit interest capitalization would lead to inconsistent treatment of borrowers or mandating limitation of interest capitalization to only the period of time that borrower was late would not be systemically feasible. Noted difference between the FFEL and Direct Loan provision is that a FFEL lender may grant and ED grants. In the Final Rule preamble (p ), ED stated that they cannot mandate that a FFELP loan holder grant this administrative forbearance, but they expect FFELP loan holders to do so. ED added a new administrative forbearance to (f)(16). ED declined to change the regulations to state less than or equal to the old PFH payment as ED believes that a borrower whose PFH payment did not change is not in a worsening financial condition. ED also declined to allow for other exceptional circumstances as this could lead to inconsistent treatment of borrowers. Need clarification as to whether the interest that is not capitalized is included in the average daily balance of unpaid interest for purposes of SAP during the new PFH annual payment period. Page 13 of 56

14 ED s processing of borrower s untimely renewal response IBR loan forgiveness eligible payments (e) (9)(ii) (f) (1) (f) (1) Any payments that the borrower continued to make at the old payment amount before the new payment amount was determined are considered to be qualifying payments under PSLF as long as the payments meet the other PSLF requirements. Makes technical corrections to the list of payments that qualify toward IBR forgiveness. Qualifying payments remain as: PFH payments. Permanent-standard payments. Payments at least as much as the Standard-standard payment amount made on any repayment plan. Payments made on a 10-year standard repayment plan, regardless of the amount (allows for 10-year standard payments that are adjusted due to interest rate changes due to such situations as SCRA and annual updates). Months of Economic Hardship Note to Team FFELP: in conversation with Pam and Brian with FFEL industry during Neg, Pam indicated that interest that accrues during the IBR umbrella is ok to include, but not interest that accrues before IBR starts when we mentioned our outstanding issue with OGC and how that answer would affect this non-capping. However, there was not time to get further clarification of this from Pam or Brian. Although ED discussed in the Final Rule preamble (p ) the need for this paragraph on payments made when the borrower was late in submitting renewal information, it is still not clear. Any payments the borrower made after conversion to Permanent-standard would be either PFH or Permanent-standard payments and those qualify anyway. This was a technical correction requested by the FFEL industry and agreed to by ED in sub-regulatory guidance. The proposed Direct Loan regulations also make technical clarifications to the ICR payments that qualify for IBR forgiveness. In the Final Rule preamble (p ), ED stated that qualifying payments made on a FFEL program loan are not counted as qualifying payments under the Direct Loan program IBR, ICR or Pay As You Earn forgiveness. Also qualifying payments made under one of the Direct Loan income-driven repayment plans do not count toward IBR forgiveness on a Page 14 of 56

15 IBR loan forgiveness determining the IBR forgiveness start date IBR loan forgiveness ineligible payments IBR loan forgiveness processing and notice (f) (3) (f) (3) (f) (5) (f) (4) (g) (f) (5) deferment. For purposes of Direct Loan IBR, ICR and Pay As You Earn payments, including payments of $0. Makes technical corrections to language on determining the IBR forgiveness start date on Consolidation loans, which is when the borrower makes a qualifying payment or receives an economic hardship deferment on the Consolidation loan, even if that Consolidation loan has not been in IBR yet. Also clarifies that a Consolidation loan must be an eligible Consolidation loan. Clarifies that payments made on a defaulted loan are not made under a qualifying repayment plan, so they do not count toward IBR forgiveness. Adds clarifying language that the loan holder is responsible to determine when the borrower has met the loan forgiveness requirements and the borrower is not required to submit any request for forgiveness. Also adds a new written notice that must be sent to the borrower no later the 6 months prior to the anticipated date the borrower will meet the forgiveness requirements. The notice must include: An explanation that the borrower is approaching the anticipated forgiveness date, borrower s FFEL program loans. This was a technical correction requested by the FFEL industry and agreed to by ED in sub-regulatory guidance. Originally, during the rulemaking sessions, this notice was proposed to include the anticipated date of forgiveness and the anticipated amount. ED agreed to make the notice more generic to avoid any potential issues with providing anticipated information that could change based on borrower action or inaction. In the Final Rule preamble (p ), ED clarified that the information given in this notice is as of the date of the notice as the actual forgiveness date and/or amount could change based on action or inaction on the borrower s part. Page 15 of 56

16 A reminder to the borrower to continue making the scheduled monthly payment amounts, and General information on the then current treatment of the forgiveness amount for tax purposes, and instruct the borrower to contact the IRS for more information. Also provides clarification on the tax information regarding the amount that is actually forgiven, i.e., the loan holder must send the same general information on the then current treatment of the forgiveness amount. Direct Loan IBR changes - prepayment Direct Loan IBR changes IBR interest subsidy (c) (2), (3) and (4) (b) (3) Adds language in the Direct Loan regulations to clarify ED s responsibilities for loan forgiveness processing to conform to the FFEL regulations. Adds language consistent with FFEL regulations that describes ED s handling of prepayments made by a borrower under IBR. Adds language stating that any period of Pay As You Earn interest subsidy previously used by the borrower counts against the three-year Direct Loan IBR interest subsidy period. ED added this new language in response to comments received on the NPRM stating that it appeared that the borrower could continue to move between the Direct Loan IBR and Pay As You Earn repayment plans and continually renew the 3-year limit on interest subsidy. ED stated in the Final Rule preamble (p ) that this was not the intent of the regulations and would be inconsistent with the HEA. Interest subsidy received in IBR and PAYE all counts toward 3-year maximum. Page 16 of 56

17 Direct Loan IBR changes July 1, 2014 statutory change (a) (4) Adds a new definition of New borrower that means an individual who has no outstanding Direct Loan or FFELP loan balance on July 1, 2014, or who has no outstanding Direct Loan or FFELP loan balance on the date he or she obtains a loan after July 1, This definition of New borrower will pertain to the borrowers who will receive the 7/1/2014 IBR statutory changes that occurred in HCERA (SAFRA) of This change is only effective for Direct Loans but not FFELP loans. Direct Loan IBR changes July 1, 2014 statutory change (a) (5)(i) and (ii) Adds to the definition of Partial financial hardship to reflect the statutory change to 10 percent of the difference between a New borrower s AGI and 150 percent of the poverty guideline applicable to the borrower s family size. The 15 percent definition will remain in place for those borrowers who do not meet the New borrower definition. Direct Loan IBR changes July 1, 2014 statutory change (b) (1) Adds to the calculation of the borrower s total aggregate payment amount the statutory change to 10 percent of the difference between a New borrower s AGI and 150 percent of the poverty guideline applicable to the borrower s family size. Direct Loan IBR changes July 1, 2014 statutory change (f) (1) Adds the statutory change for New borrowers that allows for IBR loan forgiveness after 20 years. Additional conforming changes are made throughout paragraph (f) to reflect the forgiveness period applicable to the two cohorts of borrowers. The 25-year IBR loan forgiveness period will remain in place for those borrowers who do not meet the New borrower definition. Pay As You Earn Plan (*Note: Federal ister dated December 7, announced early implementation of Pay As You Earn plan to be ) Page 17 of 56

18 Pay As You Earn plan Establishes the Pay As You Earn plan as a new available repayment plan for eligible borrowers * This is the vehicle for President Obama s Pay As You Earn initiative, announced in 10/2011. ED is citing its authority under Section 455(d)(1)(D) of the HEA as justification for these regulations. Definition - adjusted gross income (AGI) (1)(i) The borrower s adjusted gross income, as reported to the IRS. For a married borrower filing jointly, the AGI is the combined income of both spouses For a married borrower filing separately, the AGI is the borrower s income only. The name of the plan was changed from ICR-A to Pay As You Earn, in response to suggestions from multiple commenters to the NPRM. Definition - discretionary income N/A The amount by which the borrower s AGI (or the borrower s and spouse s combined AGI, as applicable) exceeds 150 percent of the poverty guideline for the borrower s family size and State of residence. This term is not defined within the regulation itself but is commonly used in the industry and makes describing other sections of the Pay As You Earn regulations easier. Definition - eligible loan (for determining plan eligibility) Definition eligible loan types (for the (1)(ii) (a) (2)(i)(D) and (iii)(d) Any Direct or FFELP loans, except for the following: Defaulted loans Parent PLUS loans Consolidation loans which repaid one or more Parent PLUS loans The following loan types are eligible for the Pay As You Earn plan: Direct subsidized loans This is only for purposes of determining the borrower s student loan debt-to-income ratio eligibility for the Pay As You Earn plan. In other words, FFEL loans are part of the borrower s applicable student loan indebtedness for purposes of determining eligibility; they are not eligible for the Pay As You Earn plan themselves. Page 18 of 56

19 Pay As You Earn plan itself) Definition - eligible new borrower (1)(iii) Direct unsubsidized loans Direct Grad PLUS loans Direct Consolidation loans that did not repay a Parent PLUS loan (FFELP or Direct) Any individual who: Had neither an outstanding Direct or FFELP loan as of 10/1/2007 nor an outstanding Direct or FFELP loan on the date he/she received a new loan after 10/1/2007, and Receives a disbursement of a Direct loan (subsidized, unsubsidized, or student PLUS) on/after 10/1/2011 and/or a Direct Consolidation loan based on an application received by Direct on/after 10/1/2011. In order for a borrower to be an eligible new borrower based on a Direct Consolidation application received by Direct on/after 10/1/2011, the Consolidation loan must have 1) directly repaid loans that fell within the 10/1/2007 parameters, or 2) repaid a Consolidation loan that repaid loans that fell within the 10/1/2007 parameters. For example, if the borrower applied for a new Consolidation loan on 11/1/2011, in order to repay a Consolidation loan made on 7/1/2008, but the 7/1/2008 loan repaid a loan made on 09/1/2007, the borrower would not be an eligible new borrower for purposes of Pay As You Earn. Some commenters to the NPRM objected to these limitations altogether, believing all borrowers should have access to the new plan, whereas others recommended basing eligibility on award or calendar years so as to minimize borrower confusion. In the Final Rule preamble to the 11/01/ (p ), ED cited budget constraints as the insurmountable barrier to the first recommendation (and to the use of award years specifically), but also pointed out, with examples, why the fiscal year approach was the most favorable to borrowers, outweighing, in their estimation, any possible confusion. Page 19 of 56

20 Definition - family size Definition - partial financial hardship (PFH) (1)(iv) (1)(v) The number determined by counting the borrower, the borrower s spouse, and the borrower s children, including unborn children who will be born during the current year, if the children receive more than half their support from the borrower. This also includes other individuals who, at the time the borrower applies for IBR: Live with the borrower; and Receive more than half their support from the borrower and will continue to receive this support from the borrower for the remainder of the current year. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. A circumstance in which: For a borrower who files an individual federal tax return, the annual amount due on all of the borrower's eligible loans, as calculated under a standard repayment plan based on a 10-year repayment period, using the greater of the amount due at the time the borrower initially entered repayment or at the time the borrower elects the Pay As You Earn plan, exceeds 10 percent of the borrower s discretionary income; or For a married borrower who files a joint federal tax return with his or her spouse, the annual amount due on all of the borrower's eligible loans and, if applicable, the spouse's eligible loans, as calculated under a standard Page 20 of 56

21 Definition - Permanentstandard payment Definition - PFH payment amount N/A N/A repayment plan based on a 10-year repayment period, using the greater of the amount due at the time the loans initially entered repayment or at the time the borrower or spouse elects the Pay As You Earn plan, exceeds 10 percent of the borrower's and spouse's combined discretionary income. The payment amount under the Pay As You Earn umbrella that the borrower is assigned when he/she no longer has a PFH, opt out of PFH, or does not provide updated income and family size documentation at the end of a PFH year. This is calculated when the borrower first begins repayment under the Pay As You Earn plan, and it is what the borrower would pay under a standard repayment plan, based on a 10-year amortization of the total outstanding balance of his/her eligible loans at that time. The payment amount under the Pay As You Earn umbrella that is assigned when the borrower provides the necessary documentation showing they have a PFH. The payment amount is 10 percent of the borrower s discretionary income, divided by 12. This term is not used in the Pay As You Earn regulations; however, it is commonly used in the industry and makes describing other sections of the Pay As You Earn regulations easier. In the Final Rule preamble (pp ), ED clarified that a new Permanent-standard amount is calculated when the borrower first switches from IBR to Pay As You Earn (or vice versa). We believe these amounts are then fixed for the life of the borrower s loan; for example, a borrower who switches from IBR to Pay As You Earn to IBR will not have a new Permanent-standard amount for their second go-around in IBR. The Permanent-standard payment, in this situation, will remain what was calculated when the borrower entered IBR the first time. This term is not used in the Pay As You Earn regulations; however, it is commonly used in the industry and makes describing other sections of the Pay As You Earn regulations easier. Page 21 of 56

22 Definition - poverty guideline Basic eligibility criteria PFH payment allocation among eligible loans borrowers filing separately PFH payment allocation among eligible loans married borrowers filing jointly (1)(vi) (2)(i) (2)(ii)(A) (2)(ii)(B) The income categorized by State and family size in the poverty guidelines published annually by the United States Department of Health and Human Services pursuant to 42 U.S.C. 9902(2). If a borrower is not a resident of a State identified in the poverty guidelines, the poverty guideline to be used for the borrower is the poverty guideline for the relevant family size and the 48 contiguous States. A borrower may select the Pay As You Earn plan only if he has a PFH. The borrower's aggregate monthly loan payments are limited to no more than 10 percent of their discretionary income, divided by 12. If the total amount of the borrower's eligible loans is not comprised solely of Direct Loans, ED determines the borrower's adjusted monthly payment by multiplying the calculated payment by the percentage of the total outstanding principal amount of the borrower s eligible loans that is comprised of Direct Loans. If both the borrower and his spouse have eligible loans and filed a joint federal tax return, ED determines (1) Each borrower's percentage of the couple's total eligible loan debt; (2) The adjusted monthly payment for each borrower by multiplying the calculated payment by the percentage determined in paragraph (a)(2)(ii)(b)(1) of this section; Page 22 of 56

23 Calculated PFH payments of under $5.00 Calculated PFH payments of between $5.00 and $10.00 Negatively amortizing payment amounts interest subsidy (2)(ii)(C) (2)(ii)(D) (2)(iii) and (3) If the borrower's loans are held by multiple holders, the borrower's adjusted monthly Direct Loan payment by multiplying the payment determined in paragraph (a)(2)(ii)(b)(2) of this section by the percentage of the total outstanding principal amount of the borrower s eligible loans that are Direct Loans; If the calculated amount under paragraph (a)(2)(i), (a)(2)(ii)(a), or (a)(ii)(2)(b) is less than $5.00, the borrower's monthly payment is $0.00. If the calculated amount under paragraph (a)(2)(i), (a)(2)(ii)(a), or (a)(ii)(2)(b) is equal to or greater than $5.00 but less than $10.00, the borrower's monthly payment is $ If the borrower's monthly payment amount is not sufficient to pay the accrued interest on the borrower's Direct Subsidized loan or the subsidized portion of a Direct Consolidation Loan, ED does not charge the borrower the remaining accrued interest for a period not to exceed three consecutive years from the established repayment period start date on that loan under the Pay As You Earn plan. Any period during which ED has previously not charged the borrower accrued interest on an eligible loan under IBR counts toward the maximum three years of subsidy under Pay As You Earn. On a Direct Consolidation Loan that In the Final Rule preamble (p ), ED clarified that the three-year subsidy clock begins ticking when the borrower first enters either IBR or Pay As You Earn; it does not re-start if, for example, the borrower switches from IBR to Pay As You Earn (or vice versa). We will need guidance from ED on how this will be affected by the new 150 percent interest subsidy issue moving forward. Based on this response from ED, as well as comments from Committee members with direct knowledge of ED policy, we believe the three-year subsidy window clearly begins on the day the Page 23 of 56

24 repays loans on which ED has not charged the borrower accrued interest, the three-year period includes the period for which ED did not charge the borrower accrued interest on the underlying loans. This three-year period does not include any period during which the borrower receives an economic hardship deferment. borrower first enters either IBR or Pay As You Earn, even if that initial payment is not less than the monthly accruing interest. However, there are two potential concerns with this regulatory language, which might warrant follow-up with ED: The second-to-last sentence of this paragraph suggests that only the period of time for which a subsidy was actually awarded on the underlying loans would count against the three-year subsidy window on the Direct Consolidation loan. For example, let s say Bobby Borrower began repayment under IBR on an underlying loan on 1/1/2010, but did not have a negatively amortizing payment amount for that PFH year. He then used another year of PFH beginning 1/1/2011, this time with a negatively amortizing payment amount, and then consolidated into Direct on 1/1/. In this case, based on this regulatory language, Bobby might still have two years of subsidy availability on the Consolidation loan instead of one, because the only period for which ED did not charge the borrower accrued interest on the underlying loans was the period from 1/1/2011 to 12/31/2011. The regulation only refers to interest that the Secretary has previously not charged. Technically, the only loans on which ED charges, or does not charge, interest are Direct loans and federally-held FFELP loans. In the case of commercial FFELP loans, the entity charging or not charging interest is the loan holder. Thus, since the regulation only refers to periods for which ED did not charge interest as those periods Page 24 of 56

25 Interest capitalization during Pay As You Earn periods Extension of repayment term to accommodate low payment (2)(iv) (2)(v) and (vi) Any accrued interest not waived by ED due to negative amortization is capitalized when the borrower no longer has a PFH, and when the borrower elects to leave Pay As You Earn altogether. For each continuous period of Pay As You Earn, the cumulative interest capitalized after PFH periods can be no more than 10 percent of the borrower s outstanding principal balance at the time they entered that Pay As You Earn period. Once this limit is reached, interest will continue to accrue but will not be capitalized, unless and until the borrower elects to leave Pay As You Earn or acquires a deferment or forbearance. If the borrower s monthly PFH payment is not sufficient to reduce the principal balance, principal payments are postponed until the borrower no longer has a PFH or leaves Pay As You Earn altogether. which count against the three-year subsidy window, one could infer that any periods for which the loan holder billed the government for the IBR subsidy interest do not count against the subsidy window if and when the loan becomes federally held (through Consolidation or Put). Meaning, a borrower in this situation could receive a full three-year subsidy period by having their loan purchased or consolidated by ED, regardless of how much IBR time they used in FFELP. For example, if the borrower first enters Pay As You Earn with a principal balance of $20,000, the total amount of interest that can be capitalized during that Pay As You Earn period, due specifically to the expiration of PFH, is $2,000. If the borrower then chooses to leave Pay As You Earn, any unpaid interest at that point is capitalized. Then, if the borrower re-enters Pay As You Earn when their principal balance is $15,000, ED will capitalize up to $1,500 when the new PFH periods expire. ED confirmed that if the borrower chooses to acquire a deferment or forbearance during a Pay As You Earn period, the interest accrued during those periods can be capitalized and does NOT count against the 10 percent limit. Page 25 of 56

26 amounts Payment attribution Prepayment rules Borrower no longer having a PFH (3)(i) (3)(ii) (iv) (4)(i) The Pay As You Earn repayment period may be longer than 10 years. ED will apply any payments made during the Pay As You Earn period in the following order: A) Accrued interest. B) Collection costs. C) Late charges. D) Loan principal. The borrower may prepay all or part of his loan while on Pay As You Earn, without penalty, and the normal prepayment rules will apply, except when the borrower s PFH payment amount is $0.00. In that case, ED will still apply the payment as stipulated in paragraph (a)(3)(i) but will not advance the next payment due date. If the borrower no longer has a PFH because he no longer qualifies, opted out, or did not timely provide updated income and family size documentation at the end of their most recent PFH year, but chose to remain on the Pay As You Earn plan, he will be assigned the previously calculated Permanent-standard payment amount. The regulations technically state that this is only the maximum amount that the borrower would be required to pay in this situation, suggesting a lower amount could be assigned instead. However, at the negotiating table, ED indicated that, in practice, this is definitively the payment amount and not just a maximum. Borrowers exiting Pay As You Earn altogether (4)(ii) If the borrower accepts this option, his repayment term may exceed 10 years. If the borrower chooses to exit the Pay As You Earn plan altogether, he may change to whatever alternate plan for which he still has repayment months available. For example, if the borrower already spent 11 years on Pay As You Earn, they would not be able to change to a 10-year Standard repayment plan. However, they could change to a 25-year Extended Page 26 of 56

27 plan. Documentatio n requirements Pay As You Earn approval notice (5)(i) (5)(ii) ED determines whether a borrower has a PFH for the year the borrower selects Pay As You Earn and for each subsequent year that the borrower remains on the plan. To make this determination, ED requires the borrower to: A) Provide documentation, acceptable to ED, of the borrower s AGI; B) If the borrower's AGI is not available, or if ED believes that the borrower's reported AGI does not reasonably reflect his current income, provide other documentation to verify income; and C) Annually certify the borrower's family size. If the borrower fails to certify family size, ED assumes a family size of one for that year. After determining that the borrower has a PFH, for the year the borrower initially elects the Pay As You Earn plan and for each subsequent year, ED sends the borrower a written notification that provides the borrower with A) The borrower s PFH payment amount, and the time period during which this scheduled monthly payment amount will apply ( annual payment period ); B) Information about the requirement for the borrower to annually provide the information described in paragraph (a)(5)(i), if the borrower chooses to retain a PFH payment amount after the initial In the Final Rule preamble (p ), ED acknowledged that married borrowers who file separately but live in community property states, where each spouse would be deemed to have an AGI that is one-half of the total income between both spouses, could be unfairly disadvantaged (or advantaged) by having to use their AGI when applying for Pay As You Earn. However, they also clarified that this was an appropriate situation for the use of alternative documentation, as authorized within the regulation, and they indicated they would take an alternative documentation approach in these situations with respect to Direct and federally held FFELP loans. At the negotiating table, ED confirmed that, if the borrower gets a PFH payment amount recalculation in the middle of an annual payment period that will be the beginning of a new annual payment period. Page 27 of 56

28 Annual reminder notice PFH borrowers (5)(iii) year on the plan, and an explanation that the borrower will be notified in advance of the date by which ED must receive this information; C) An explanation of the consequences (use of a family size of 1 or outright conversion to Permanent-standard and capitalization of interest) if the borrower does not provide the required information; and D) Information about the borrower s option to request, at any time during the borrower s current annual payment period, that ED recalculate the borrower s monthly payment amount if the borrower s financial circumstances have changed and the income amount that was used to calculate the borrower s current monthly payment no longer reflects the borrower s current income. If ED recalculates the borrower s monthly payment amount based on the borrower s request, ED re-sends the borrower this same approval notification. For each subsequent year that a borrower retains a PFH payment, ED notifies the borrower in writing of the requirements in paragraph (a)(5)(i) no later than 60 days and no earlier than 90 days prior to the date specified in paragraph (a)(5)(iii)(a). The notification provides the borrower with A) The date, no earlier than 35 days before Page 28 of 56