Pay As You Earn, IBR/ICR, and Other Regulatory Changes

Pay As You Earn, IBR/ICR, and Other Regulatory

ChangesEd Brandt

ACS, A Xerox CompanyBob SandlinNTHEA/HESC

1

Negotiated Rulemaking 2012Loans Team

• Meetings held in January, February and March 2012

• 25 Issues Discussed• Consensus Reached

Navigating the Sea of Change 2012 NCHER

Knowledge Symposium2

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)



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



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



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



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



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



FFEL & DL IBR Changes Notifications

• Each of the following notifications must be “written”

• ED stated during negotiations that “written” includes electronic means




• 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




• 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




• 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







• 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




• 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




• 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:• 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



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




• 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 Navigating the Sea of Change

2012 NCHER Knowledge Symposium

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• 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




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.




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.



FFEL & DL IBR Changes Technical Corrections

• 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

forgivenessNavigating the Sea of Change


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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)



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



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



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)



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).



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



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



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



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 = $10Navigating the Sea of Change


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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



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



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



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 planNavigating the Sea of Change


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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 permanent-standard– 6-month advance notice of anticipated loan

forgiveness– Notice of actual forgiveness, once that occursNavigating the Sea of Change


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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 periodNavigating the Sea of Change


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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)



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):– 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 ICRNavigating the Sea of Change


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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.



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 paymentsNavigating the Sea of Change


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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



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



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 changeNavigating the Sea of 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– Previously, loan would simply convert to the Standard

planNavigating the Sea of Change


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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 periodNavigating the Sea of Change


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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)



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.



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



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. Navigating the Sea of Change


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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



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 provisionsNavigating the Sea of Change


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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



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



Navigating the Sea of Change 2012 NCHER Knowledge Symposium

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Pay As You Earn, IBR/ICR, and Other Regulatory Changes