ED Proposes Changes to Loan Rules
July 25, 2012
On July 17, the Department of Education published proposed rule changes that would create another extended payment option for Direct Loan program borrowers, implement statutory changes to the existing Income Based Repayment (IBR) plan, and streamline the application process for total and permanent disability discharges. Comments are due August 16.
This is one of two planned notices of proposed rulemaking stemming from a negotiated rulemaking effort that concluded in March. The second notice will encompass a broad updating of the rules for the FFEL and Direct Loan programs, following the cessation of new lending under the FFEL program.
The new Income Contingent Payment option-known as ICR-A to distinguish it from the existing ICR option (which will become ICR-B)-follows through on President Obama's "Pay as You Earn" initiative. It extends the terms enacted in the SAFRA Act for IBR beginning in 2014 to the ICR repayment program earlier.
Under the ICR-A and modified IBR options, eligible borrowers would have their loans forgiven after 20 years of making payments tied to their income level and family size, rather than 25 years of payments required under the existing plans. In addition, the new plans would be more generous in determining whether a borrower demonstrates a partial financial hardship, thus qualifying for the plan, and in calculating the amount of monthly payments.
New borrowers since October 1, 2007, who received a Direct Loan disbursement on or after October 1, 2012, are eligible for ICR-A. The IBR changes would take effect, by statute, for new borrowers on or after July 1, 2014.
Total and Permanent Disability Discharges
Over the years, ED has had difficulty establishing workable rules to govern the process for total and permanent disability (TPD) discharges. While each of the three federal loan programs-Direct, FFEL, and Perkins-has its own disability discharge regulations, the provisions are essentially the same. After hearing complaints about its current process being burdensome and confusing, ED conducted a thorough review.
The proposed changes would streamline the process, calling for borrowers to make a single discharge application to ED that would cover all of the borrower's federal loans. Loan holders (lenders or guaranty agencies for FFEL loans or institutions for Perkins loans) would not be involved in the application process, except to advise borrowers to notify ED of their intent to apply for a discharge and provide the borrower with necessary information. Under current rules, borrowers must apply separately to loan holders for each outstanding loan, and the loan holders must review the application before forwarding it to ED.
Other changes include:
- Addition of a definition for "borrower's representative" or "veteran's representative." References to a borrower or veteran in the TPD regulations include such a representative.
- Making ED the borrower's single point of contact. ED would be charged with identifying all of the applicant's loans and notifying loan holders to suspend collection activity for up to 120 days.
- Having institutions handle returns of payments made after a loan has been discharged due to total and permanent disability and assigned to ED. If an institution receives a payment on a Under current rules, the institution forwards such payments to ED, which refunds them to the borrower.
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