On November 1, the Department of Education issued final rules largely removing loan holders, including institutions for Perkins loans, from the process of granting loan discharges based on total and permanent disability. The rules also implement President Obama's "Pay as You Earn" initiative to ease loan repayment obligations for some borrowers. The rules take effect on July 1, 2013.
Although the final rules largely adhere to the proposed rules that were published on July 17, some changes were made in response to comments received by ED.
Total and Permanent Disability Discharges
Under the new rules, borrowers seeking a discharge based on total and permanent disability will apply directly to ED. ED will then be responsible for informing loan holders. Under the current system, borrowers had to go through each lender. Throughout the discharge process, ED will be the single point of contact for borrowers. The primary responsibility of institutions and other loan holders will be to refer borrowers with disabilities to ED, cease or resume collection activities, and discharge the loan as appropriate. Institutions are not reimbursed by the federal government for Perkins loans that are discharged for total and permanent disability.
Arguably the biggest change to the final regulation is ED's decision to allow a notice of award from the Social Security Administration for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) to suffice for purposes of eligibility for a total and permanent disability. The SSA determination must indicate that the borrower's eligibility will be reviewed on a five- to seven-year schedule which equates to a classification of "medical improvement not expected." Some SSDI and SSI awards require more frequent reviews, which ED concluded would not comport with the statutory requirements for total and permanent disability discharges of federal student loans. Although ED had refused to rely on SSA determinations when the proposed rules were drafted by a negotiated rulemaking team last spring, an outpouring of comments in response to the notice of proposed rulemaking was persuasive.
Income Contingent Repayment
The new rules will make new, more generous repayment options for federal student loans available sooner than they would have under statutory changes enacted several years ago. In the final rules, ED decided to name the new option under income-contingent repayment (ICR) program for the Pay as You Earn initiative, rather than labeling the new one as ICR-A and the existing program as ICR-B. Under the Pay as You Earn and modified income-based repayment (IBR) options, eligible borrowers will 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 are 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, 2011, are eligible for Pay as You Earn. The IBR changes will take effect, by statute, for new borrowers on or after July 1, 2014.
These changes have not been without controversy. The New American Foundation, a D.C.-based think tank, released an analysis two weeks before the final rules were published, arguing that the plan will disproportionally benefit higher income borrowers.