Pay As You Earn, IBR/ICR, and Other
Regulatory Changes
Ed Brandt
ACS, A Xerox Company
Bob Sandlin
NTHEA/HESC
1
Negotiated Rulemaking 2012
Loans Team
• Meetings held in January, February and March 2012
• 25 Issues Discussed
• Consensus Reached
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2012 NCHER Knowledge Symposium
Negotiated Rulemaking 2012
• Issues divided into two regulatory packages
– 1st package contains IBR, ICR, Pay As You Earn and TPD
• Final Rule issued on November 1, 2012
• Generally effective July 1, 2013 with early implementation allowed for certain
FFELP IBR provisions and Pay As You Earn upon subsequent announcement in
Federal Register
– 2nd package will contain remaining issues
• NPRM now expected after Jan 1, 2013 with Final Rule sometime after that
• Generally effective July 1, 2014 as long as Final Rules published by
November 1, 2013 (early implementation is expected)
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DL Only IBR Change
• SAFRA/HCERA from 2010 amended HEA
– Effective for new Direct Loan borrowers on or after July 1, 2014, so was
only added into the Direct Loan regulations
– Percentage used in formula to determine eligibility and for calculating
maximum IBR/PFH payment decreases from 15% to 10%
– Maximum repayment period after which borrower qualifies for IBR
loan forgiveness is reduced from 25 years to 20 years
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FFEL Only IBR Change
• Borrowers who elect IBR on or after July 1, 2013 may no longer
exclude certain IBR-eligible loans from IBR
• A loan may only be excluded from IBR if the loan does not
otherwise qualify for IBR (Parent PLUS, for example)
• Consistent with treatment of federally held loans
• Borrowers who have previously excluded certain IBR-eligible
loans prior to July 1, 2013 may continue to do so
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FFEL Only IBR Change
• Adds documentation of a borrower’s spouse’s loan information to
the requirements for joint filers when the borrower’s spouse does
not have a loan relationship with the loan holder:
– Borrower must ensure spouse authorizes NSLDS access for loan holder or
servicer, or
– Provide other documentation of spouse’s loans
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FFEL & DL IBR Changes
• Adopts ED’s policy requiring at least one payment for borrowers
who leave IBR completely (Expedited-Standard) and then want to
move to a different repayment plan
– ED provided private guidance requiring such borrowers to make one full
Expedited-Standard payment before being able to change to new
repayment plan
– Agreed to allow loan holder to use reduced-payment forbearance to
lower the one monthly payment to a more reasonable amount
that the borrower must make
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FFEL & DL IBR Changes Documentation
• Replaces IRS consent requirement with more general requirement
for borrower to provide documentation of AGI acceptable to the
lender
– Tax returns no longer have to be signed (immediate policy change
announced in April 13, 2012 Notice)
– Transcripts from borrowers acceptable
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FFEL & DL IBR Changes Notifications
• Each of the following notifications must be “written”
• ED stated during negotiations that “written” includes electronic
means
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FFEL & DL IBR Changes Notifications
• Initial and Subsequent Eligibility Notice
– Sent when borrower requests and is determined eligible for IBR
– Must include monthly PFH payment and dates of annual payment period
– Must explain annual renewal and documentation requirements and
explanation of advance notice of renewal
– Must explain the consequences (conversion to Permanent-Standard and
capitalized interest) if the borrower does not provide renewal documentation
or no longer wishes to pay under PFH
– Must provide information about the borrower’s option to be
re-evaluated, at any time, if the borrower’s financial
circumstances change
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FFEL & DL IBR Changes Notifications
• PFH Annual Notice
– Loan holder must provide borrower with written notification requesting
AGI and family size for each subsequent year if borrower currently has a
PFH
– Notification must be sent no earlier than 90 days and no later than 60
days prior to the due date established by loan holder
– Must provide the due date by which the lender must receive the
renewal documentation, which can be no earlier than 35 days
prior to end of borrower’s annual payment period
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FFEL & DL IBR Changes Notifications
• PFH Annual Notice (continued)
– Must provide consequences if borrower fails to provide renewal documentation by
the10th day after the deadline established by the lender (allows for mail time)
– New monthly payment amount (Permanent-Standard) if borrower fails to provide
information
– Effective date of Permanent-Standard payment amount
– Explanation that interest will be capitalized at the end of the current annual payment
period
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FFEL & DL IBR Changes Notifications
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FFEL & DL IBR Changes Notifications
• No Longer Has PFH Notice
– Must be sent each time the lender determines the borrower no longer has
a PFH for the subsequent years but stays in IBR (either upon PFH
expiration or evaluation)
– Must provide the Permanent-Standard monthly payment amount
– Must provide an explanation that unpaid interest will be capitalized,
and
– Must provide information about the borrower’s option to be
re-evaluated, at any time, if the borrower’s financial
circumstances change
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FFEL & DL IBR Changes Notifications
• Permanent-Standard Annual Notice
– Must be sent each year that the borrower remains on
Permanent-Standard
– Must provide information about the borrower’s option to be
re-evaluated, at any time, if the borrower’s financial
circumstances change
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FFEL & DL IBR Changes Notifications
• Loan Forgiveness Notice
– No later than 6 months prior to anticipated date borrower will meet
forgiveness requirements, loan holder must send borrower written
notification that:
•
•
•
•
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Explains borrower is approaching forgiveness
Reminds borrower to continue to make payments
Provides general information on the current tax implications of forgiveness
Instructs borrower to contact Internal Revenue Service (IRS) for more
information on tax implications
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FFEL & DL IBR Changes Renewal Processing
• If loan holder receives the renewal information within 10 days of
the deadline provided to the borrower, the loan holder:
– Must promptly determine the borrower’s eligibility and new PFH
payment, and
– Must prevent the conversion to Permanent-Standard if unable to make
the determination before the end of the annual payment period
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FFEL & DL IBR Changes Renewal Processing
• If loan holder receives the renewal information within 10 days of
the deadline provided to the borrower and is unable to determine
the new PFH payment amount before the end of the annual
payment period, the loan holder must maintain the previous PFH
payment amount until able to determine new PFH payment
amount
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FFEL & DL IBR Changes Renewal Processing
• After determining the new PFH payment, the loan holder must review
any payments made by the borrower at the old PFH payment amount
and:
– If the new PFH payment amount is less than the borrower’s previous PFH
payment amount, make the appropriate adjustments by applying the extra
amount(s) in accordance with the IBR apportionment rules, and, without
borrower instruction to the contrary, do not apply the extra amount to future
payments (as opposed to what is required under 682.209(b)(2)(ii))
– If the new PFH payment amount is equal to or greater than the
borrower’s previous PFH payment amount, do not make any
adjustments and consider any payments made at the previous
amount to be sufficient
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FFEL & DL IBR Changes Renewal Processing
If loan holder receives the renewal information more than 10 days
after the deadline provided to the borrower, the loan has been
converted to Permanent-Standard, and the new PFH payment amount
is $0 or less than the previous PFH payment amount, the loan holder
may grant (ED will grant under DL) forbearance to cover any payments
that are or would be overdue at the time of determining the new PFH
payment amount. Interest after the date interest was previously
capitalized for Permanent-Standard may not be capitalized
for the period of this forbearance.
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FFEL & DL IBR Changes Renewal Processing
If loan holder receives the renewal information more than 10 days
after the deadline provided to the borrower and the loan holder is able
to determine the new PFH payment amount before the end of the
current PFH annual period, the loan holder may not convert the loan
to the Permanent-standard payment amount and capitalize
unpaid interest.
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FFEL & DL IBR Changes Technical Corrections
•
•
•
•
•
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Several minor technical corrections
Clarification on Expedited-Standard for consolidation loans
When forgiveness eligibility starts on consolidation loans
Borrower not qualifying for PFH remains on current repayment plan
Qualifying payments for loan forgiveness
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FFEL & DL IBR Changes Technical Corrections
• Adopts sub-regulatory guidance from ED regarding what qualifies as an
eligible payment for loan forgiveness:
– PFH payments, including $0 payments
– Permanent-Standard payments
– Any payment after July 1, 2009 made under an repayment plan that is not
less than the Standard-Standard payment amount, and
– Any payment after July 1, 2009 made on a regular, 10-year standard plan,
even if it is less than the Standard-Standard amount (this can happen
due to variable interest rate changes, SCRA interest rate limitation,
or any other reason the payment may need to be recalculated)
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Pay As You Earn
• Announced by President Obama in a White House Fact Sheet dated October
25, 2011
• Authorized under Section 455(d)(1)(D) of the Higher Education Act (income
contingent repayment)
• Only for select Direct Loan borrowers, due to budget constraints
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Pay As You Earn
• Early manifestation of the IBR structure that will otherwise apply to new
borrowers on/after July 1, 2014 (under the SAFRA).
– Payments equal to 10% of discretionary income, with equivalent eligibility criteria
– Forgiveness after 20 years of payments
• Current ICR will remain as an additional option and is not being replaced
– Will continue to be called ICR
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Pay As You Earn
• Eligible borrowers are those who have no outstanding DL or FFELP balance as
of October 1, 2007, and who receive:
– A Direct Loan disbursement on or after October 1, 2011; and/or
– A Direct Consolidation loan based on an application received on or after October 1,
2011, unless it repays a Direct or FFELP loan that was outstanding as of October 1,
2007 (including a Consolidation loan that repaid any such loans)
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Pay As You Earn
• Determination of Partial Financial Hardship (PFH) – Single borrowers and
married borrowers filing separately:
– The annual amount due on the borrower’s eligible loans (as calculated based on a
10-year standard plan) must exceed 10% of the borrower’s discretionary income (the
difference between the borrower’s AGI and 150% of the poverty guideline
applicable to the borrower’s family size).
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Pay As You Earn
• Determination of Partial Financial Hardship (PFH) – Married borrowers filing
jointly:
– The annual amount due on the borrower’s eligible loans and, if applicable, the
spouse’s loans (as calculated based on a 10-year standard plan) must exceed 10%
of the spouses’ combined discretionary income
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Pay As You Earn
• Other definitions – same as IBR:
– Eligible loan
– Adjusted gross income (AGI)
– Family size
– Poverty guidelines
– Standard-standard payment amount
– Permanent-standard payment amount
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Pay As You Earn
• If the borrower does not qualify for Pay As You Earn upon initial application,
their payment plan is assigned as it would be under IBR:
– If the borrower is entering repayment overall for the first time, they would be placed
on the standard plan
– If the borrower applied for Pay As You Earn while already on another plan, they
would simply remain on that other plan
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Pay As You Earn
• Payment adjustments – same as with IBR:
– Borrower has eligible loans that are not Direct loans
• Determine percentage that are Direct
– Married borrowers who file jointly and both have eligible loans
• Determine each borrower’s percentage of total debt
• Determine percentage that are Direct
– Could qualify for Pay As You Earn but not IBR
– Calculated payment less than $5 = $0; more than $5 but
less than $10 = $10
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Pay As You Earn
• Interest subsidy for subsidized loans (or subsidized portions of Consolidation
loans) – same as with IBR:
– If borrower’s payment is not sufficient to cover the monthly accrued interest, ED will not
charge the borrower for the remaining accrued interest
– Limited to continuous 3-year window from when borrower first went on IBR or Pay As You
Earn, including on any underlying loans. This is suspended only by periods of Economic
Hardship Deferment
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Pay As You Earn
• Payment term can exceed 10 years – same as IBR
• Payment application – same as IBR
–
–
–
–
Accrued interest
Collection costs
Late charges
Loan principal
• Prepayment rules – same as IBR
– PFH payment of $0 = no advancement of due date when payment > $0 is made
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Pay As You Earn
• Interest capitalization limitation:
– As with IBR, interest must be capitalized when the borrower no longer has a PFH; however,
the total capitalization for one continuous period under the Pay As You Earn umbrella may be
no more than 10% of the principal balance when the borrower entered that period
– After this 10% limit is reached, interest continues to accrue, but it is not capitalized while
borrower remains on Pay As You Earn
– Exceptions: periods of deferment and forbearance within a Pay As You Earn period, and
leaving the umbrella altogether
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Pay As You Earn
• If borrower no longer has a PFH, he/she remains in Pay As You Earn, but payment
goes to “permanent-standard” amount – calculated same as with IBR
– Repayment term under this plan may exceed 10 years (as with IBR).
• Leaving the Pay As You Earn umbrella:
– If the borrower chooses to leave the Pay As You Earn plan altogether, there is no “full
payment” requirement before moving to a new plan, but any new plan must be in
accordance with DL rules regarding repayment plan changes, and borrower must have
months remaining under any such plan
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Pay As You Earn
• Notification requirements – same as IBR:
– Approval notice after PFH payment established
– Warning notice of expiring PFH, up to 125 days prior to the end of the current PFH
period
– Notice of PFH expiration, if that occurs due to a denial or borrower inaction
– Annual notice inviting borrower to reapply for PFH, while borrower is on permanentstandard
– 6-month advance notice of anticipated loan forgiveness
– Notice of actual forgiveness, once that occurs
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Pay As You Earn
• Providing documentation for annual renewal
– If borrower submits required documentation within 10 days of the Department’s
stated deadline, same process as with IBR:
• ED promptly determines new payment amount
• Retention of current PFH amount until new amount is determined; payments count toward Public
Service Loan Forgiveness (if applicable)
• Same payment handling requirement
• New PFH period begins on the day after the end of the most recent annual payment period
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Pay As You Earn
• Annual renewal documentation (continued)
– If borrower submits required documentation more than 10 days after the Department’s stated
deadline, and loan is converted to permanent-standard as a result, similar process to IBR:
• If borrower qualifies for new PFH period, and new payment amount is $0 or less than old
amount, ED will grant non-capitalizing administrative forbearance to cover any delinquency
• Payments count toward Public Service Loan Forgiveness (if applicable)
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Pay As You Earn
•
To qualify for loan forgiveness, the borrower must participate in the Pay As You Earn
plan and do one or more of the following for a total of 20 years (after October 1,
2007):
–
–
–
–
–
–
•
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Make PFH payments (including $0)
Make permanent-standard payments after leaving PFH
Make payments under any plan that are not less than the standard-standard payment amount
Make payments under the standard (10-year) payment plan
Make payments under ICR-B or IBR (including $0)
Use economic hardship deferment
To keep forgiveness period at 20 years, borrower must not switch to ICR
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Pay As You Earn
• More loan forgiveness provisions:
– Payments on defaulted loans do not count toward the 20-year forgiveness period
– If borrower consolidates after accumulating months toward forgiveness, the 20-year
clock restarts, and the borrower must use Pay as You Earn on that new loan as well.
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DL ICR
• Traditional plan remains under the name “ICR”
• Still not available for Parent PLUS loans, but IS still available for
Consolidation loans which repaid parent PLUS loans
• Still provides for income-contingent payment amounts, regardless of
income and debt
• Still provides for loan forgiveness after 25 years of qualifying payments
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DL ICR Changes
• Definition of “poverty guideline” now aligns with IBR and Pay As You Earn:
– Outside the 50 dates, use poverty guidelines for the 48 contiguous states
• When first established on ICR, borrower must now make payments
equivalent to monthly interest until ED calculates the appropriate payment
amount based on income
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DL ICR Changes
• Treatment of married borrowers now aligns with IBR and Pay As You Earn:
– When determining the monthly payment under ICR, the spouses’ joint income is used
only if they filed a joint tax return; otherwise, only the applicant’s income is used
• First and second-year payers under ICR are no longer required to provide
alternative documentation of income exclusively; AGI now permitted
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DL ICR Changes
•
Replaces IRS consent requirement with more general requirement for borrower to annually
provide AGI documentation acceptable to ED
– No more five-year consent period
•
Payments previously made under Pay As You Earn now count toward the 25-year forgiveness
under ICR
•
There’s now a separate repayment period for each loan that enters repayment under ICR
•
Borrower must annually certify family size, or ED assumes family size of 1 (as with IBR and
Pay As You Earn)
– Previously, ED retained previously certified family size until borrower reported a change
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DL ICR Changes
•
•
•
Now the same 6-month advance notice of anticipated forgiveness and final forgiveness
confirmation notice required under IBR and Pay As You Earn regulations
New notification requirements for ICR throughout plan, equivalent to those required for
IBR and Pay As You Earn
New permanent-standard payment (same calculation) if annual renewal documentation
not provided timely
–
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Previously, loan would simply convert to the Standard plan
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DL ICR Changes
• Annual renewal documentation processing:
– If documentation provided within 10 days of ED’s stated deadline, same as with
Pay As You Earn and IBR:
• ED promptly determines new payment amount
• Retention of current ICR amount until new amount is determined; payments count toward Public
Service Loan Forgiveness (if applicable)
• Same payment handling requirement
• New ICR period begins on the day after the end of the most recent annual payment period
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DL ICR Changes
• Annual renewal documentation (continued)
–
If borrower submits required documentation more than 10 days after the Department’s
stated deadline, and loan is converted to permanent-standard as a result, similar process
to Pay As You Earn :
• If new payment amount is $0 or less than old amount, ED will grant non-capitalizing
administrative forbearance to cover any delinquency
• Payments count toward Public Service Loan Forgiveness (if applicable)
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IBR, Pay As You Earn, & ICR
• New HEROES Act regulatory waiver:
– Announced in Federal Register Vol. 77, No. 188, dated September 27, 2012, pages
59311-59318
– Effective as of that date
– Available to certain borrowers who are reaching the end of an annual payment period
under PFH or ICR but have not yet converted to permanent-standard.
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IBR, Pay As You Earn, & ICR
•
New HEROES Act regulatory waiver (continued):
– Available to borrowers who are unable to provide the required annual renewal
documentation by the deadline because they are:
• Serving on active duty or performing qualifying National Guard duty during a war, other military
operation, or national emergency; or
• Living or employed in an area that is declared a disaster area in connection with a national
emergency declared by the President
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IBR, Pay As You Earn, & ICR
•
New HEROES Act regulatory waiver (continued):
– Requires the servicer to keep the borrower on their current PFH or ICR payment until
they are able to provide the renewal documentation (up to 39 months)
– Three-year interest subsidy period is not extended by an equivalent number of
months
– Payments made during the extended PFH/ICR period under this waiver are still valid
PFH/ICR payments and thus count toward ultimate loan forgiveness.
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Reg Package #2 Issues
• FFEL lender repayment disclosures
– Borrowers who are having difficulty making payments
• Consensus regulation eliminates the disclosure if the borrower’s difficulty has
been resolved through previous contact
– Borrowers who are 60 days delinquent
• Consensus regulation requires the notice to be sent within five business days
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Reg Package #2 Issues
•
Mandatory Forbearance provisions for borrowers receiving
Department of Defense repayment benefits
– Consensus regulations:
• Amend the FFEL forbearance provision to cover all student loan repayment
programs administered by DOD
• Add the same forbearance provisions to the Direct Loan provisions
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Reg Package #2 Issues
•
Borrowers who are delinquent when authorized forbearance is
granted
– Consensus regulations expand authorization for FFEL lenders and ED to
grant administrative forbearance to a borrower to reduce or eliminate a
delinquency that exists at the beginning of an authorized deferment or
any authorized forbearance period
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Reg Package #2 Issues
•
Forbearance eligibility requirements for post-270 day
defaulted loan borrowers prior to claim payment or transfer to ED
default collections
– Consensus regulations:
• Require a written or verbal agreement to repay the debt for both defaulted FFEL
borrowers and Direct Loan borrowers
• Require that if the forbearance is obtained verbally, it can be no more than
for 120 days and require subsequent written notification to the borrower
of the agreement
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Questions?
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