Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program, 37694-37725 [E8-14140]

Agencies

• DEPARTMENT OF EDUCATION

[Federal Register Volume 73, Number 127 (Tuesday, July 1, 2008)]
[Proposed Rules]
[Pages 37694-37725]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-14140]



[[Page 37693]]

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Part IV





Department of Education





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34 CFR Parts 674, 682, and 685



 Federal Perkins Loan Program, Federal Family Education Loan Program, 
and William D. Ford Federal Direct Loan Program; Proposed Rule

Federal Register / Vol. 73, No. 127 / Tuesday, July 1, 2008 / 
Proposed Rules

[[Page 37694]]


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DEPARTMENT OF EDUCATION

34 CFR Parts 674, 682, and 685

[Docket ID ED-2008-OPE-0009]
RIN 1840-AC94


Federal Perkins Loan Program, Federal Family Education Loan 
Program, and William D. Ford Federal Direct Loan Program

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan 
(Perkins Loan) Program, Federal Family Education Loan (FFEL) Program, 
and William D. Ford Federal Direct Loan (Direct Loan) Program 
regulations. These proposed regulations are needed to implement 
provisions of the Higher Education Act of 1965 (HEA), as amended by the 
College Cost Reduction and Access Act of 2007 (CCRAA).

DATES: We must receive your comments on or before August 15, 2008.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via postal mail, commercial delivery, or hand delivery. We will not 
accept comments by fax or by e-mail. Please submit your comments only 
one time, in order to ensure that we do not receive duplicate copies. 
In addition, please include the Docket ID at the top of your comments.
     Federal eRulemaking Portal: Go to https://
www.regulations.gov to submit your comments electronically. Information 
on using Regulations.gov, including instructions for accessing agency 
documents, submitting comments, and viewing the docket, is available on 
the site under ``How To Use This Site.''
     Postal Mail, Commercial Delivery, or Hand Delivery. If you 
mail or deliver your comments about these proposed regulations, address 
them to Nikki Harris, U.S. Department of Education, 1990 K Street, NW., 
room 8033, Washington, DC 20006-8502.

    Privacy Note: The Department's policy for comments received from 
members of the public (including those comments submitted by mail, 
commercial delivery, or hand delivery) is to make these submissions 
available for public viewing on the Federal eRulemaking Portal at 
https://www.regulations.gov. All submissions will be posted to the 
Federal eRulemaking Portal without change, including personal 
identifiers and contact information.


FOR FURTHER INFORMATION CONTACT: Nikki Harris, U.S. Department of 
Education, 1990 K Street, NW., room 8033, Washington, DC 20006-8502. 
Telephone: (202) 219-7050 or via the Internet at: Nikki.Harris@ed.gov.
    If you use a telecommunications device for the deaf, call the 
Federal Relay Service (FRS), toll free, at 1-800-877-8339.
    Individuals with disabilities can obtain this document in an 
alternative format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed under FOR FURTHER 
INFORMATION CONTACT.

SUPPLEMENTARY INFORMATION:

Invitation To Comment

    As outlined in the section of this notice entitled ``Negotiated 
Rulemaking,'' significant public participation, through three public 
hearings and four negotiated rulemaking sessions, has occurred in 
developing this notice of proposed rulemaking (NPRM). Therefore, in 
accordance with the requirements of the Administrative Procedure Act, 
the Department invites you to submit comments regarding these proposed 
regulations on or before August 15, 2008. To ensure that your comments 
have maximum effect in developing the final regulations, we urge you to 
identify clearly the specific section or sections of the proposed 
regulations that each of your comments addresses and to arrange your 
comments in the same order as the proposed regulations.
    We invite you to assist us in complying with the specific 
requirements of Executive Order 12866, including its overall 
requirements to assess both the costs and the benefits of the intended 
regulation and feasible alternatives, and to make a reasoned 
determination that the benefits of this intended regulation justify its 
costs. Please let us know of any further opportunities we should take 
to reduce potential costs or increase potential benefits while 
preserving the effective and efficient administration of the programs.
    During and after the comment period, you may inspect all public 
comments about these proposed regulations by accessing Regulations.gov. 
You may also inspect the comments in person in room 8033, 1990 K 
Street, NW., Washington, DC between the hours of 8:30 a.m. and 4 p.m. 
Eastern Time, Monday through Friday of each week except Federal 
holidays.

Assistance to Individuals With Disabilities in Reviewing the Rulemaking 
Record

    On request, we will supply an appropriate aid, such as a reader or 
print magnifier, to an individual with a disability who needs 
assistance to review the comments or other documents in the public 
rulemaking record for these proposed regulations. If you want to 
schedule an appointment for this type of aid, please contact the person 
listed under FOR FURTHER INFORMATION CONTACT.

Negotiated Rulemaking

    Section 492 of the HEA requires the Secretary, before publishing 
any proposed regulations for programs authorized by title IV of the 
HEA, to obtain public involvement in the development of the proposed 
regulations. After obtaining advice and recommendations from the 
public, including individuals and representatives of groups involved in 
the Federal student financial assistance programs, the Secretary must 
subject the proposed regulations to a negotiated rulemaking process. 
All proposed regulations that the Department publishes on which the 
negotiators reached consensus must conform to final agreements 
resulting from that process unless the Secretary reopens the process or 
provides a written explanation to the participants stating why the 
Secretary has decided to depart from the agreements. Further 
information on the negotiated rulemaking process can be found at http:/
/www.ed.gov/policy/highered/reg/hearulemaking/2008/index2008.html. 
    On October 22, 2007,the Department published a notice in the 
Federal Register (72 FR 59494) announcing our intent to establish up to 
two negotiated rulemaking committees to prepare proposed regulations. 
One committee would focus on issues related to the new TEACH Grant 
Program (TEACH Grant Committee). A second committee would address 
Federal student loans (Loans Committee). The notice requested 
nominations of individuals for membership on the committees who could 
represent the interests of key stakeholder constituencies on each 
committee. The Loans Committee met to develop proposed regulations 
during the months of January 2008, February 2008, March 2008, and April 
2008. This NPRM resulted from the work of the Loans Committee and 
proposes regulations relating to the administration of the Federal 
student loan programs.
    The Department developed a list of proposed regulatory provisions 
from advice and recommendations submitted by individuals and 
organizations as testimony to the Department in a series of three 
public hearings held on:

[[Page 37695]]

     November 2, 2007, at the Sheraton New Orleans, New 
Orleans, Louisiana.
     November 16, 2007, at the U.S. Department of Education in 
Washington, DC.
     November 29, 2007, at the Manchester Grand Hyatt San 
Diego, San Diego, California.
    In addition, the Department accepted written comments on possible 
regulatory provisions submitted directly to the Department by 
interested parties and organizations. A summary of all comments 
received orally and in writing is posted as background material in the 
docket. Transcripts of the regional meetings can be accessed at https://
www.ed.gov/policy/highered/reg/hearulemaking/2008/index2008.html. 
    Staff within the Department also identified issues for discussion 
and negotiation.
    At its first meeting, the Loans Committee reached agreement on its 
protocols and proposed agenda. These protocols provided that the non-
Federal negotiators would participate in the negotiated rulemaking 
process based on each Committee member's experience and expertise and 
would not represent specific constituencies.
    The Loans Committee included the following members:
     Luke Swarthout, U.S. Public Interest Research Group, and 
Rebecca Thompson (alternate), United States Student Association.
     Carrie Steere-Salazar, Association of American Medical 
Colleges, and Radhika Miller (alternate), National Lawyers Guild 
Partnership for Civil Justice.
     Deanne Loonin, National Consumer Law Center, and Lauren 
Saunders (alternate), National Consumer Law Center.
     Allison Jones, California State University, and Anna 
Griswold (alternate), Pennsylvania State University.
     Eileen O'Leary, National Direct Student Loan Coalition, 
and Kathleen Koch (alternate), Seattle University School of Law.
     George Chin, University Director of Student Financial 
Assistance, The City University of New York, and John Curtice 
(alternate), The State University of New York System Administration.
     Mark Pelesh, Corinthian Colleges, and Tammy Halligan, 
(alternate), Career College Association.
     Tom Levandowski, Wachovia Corporation, and Walter Balmas 
(alternate), MyRichUncle Student Loans.
     Scott Giles, Vermont Student Assistance Corporation, and 
Phil Van Horn (alternate), Wyoming Student Loan Corporation.
     Gene Hutchins, New Jersey Higher Education Student 
Assistance Authority, and Dick George (alternate), Great Lakes Higher 
Education Guaranty Corporation.
     Wanda Hall, Edfinancial Services, and Robert Sommer 
(alternate), Sallie Mae.
     Martin Damian, Windham Professionals, and Carl Perry 
(alternate), Progressive Financial Services, Inc.
     Anne Gross, National Association of College and University 
Business Officers, and Larry Zaglaniczny (alternate), National 
Association of Student Financial Aid Administrators.
     Dan Madzelan, U.S. Department of Education.
    These protocols also provided that, unless agreed to otherwise, 
consensus on all of the amendments in the proposed regulations had to 
be achieved for consensus to be reached on the entire NPRM. Consensus 
means that there must be no dissent by any member.
    During its meetings, the Loans Committee reviewed and discussed 
drafts of proposed regulations. At the final meeting in April 2008, the 
Loans Committee reached consensus on all of the proposed regulations in 
this document. More information on the work of the Loans Committee can 
be found at https://www.ed.gov/policy/highered/reg/hearulemaking/2008/
loans.html.
    Following the Loans Committee's final meeting the proposed 
regulations were reviewed by the Department of Defense (DOD) and the 
Department of Health and Human Services (HHS). Based on the comments we 
received from DOD and HHS, we made technical changes to the proposed 
regulations.
    HHS pointed out that the correct technical term for the specific 
set of dollar figures published annually by HHS for use in determining 
eligibility for certain programs is ``the poverty guidelines'' rather 
than ``the poverty line guidelines.'' The poverty guidelines are used 
to determine whether a title IV borrower is eligible for an economic 
hardship deferment or has a partial financial hardship under the IBR 
plan. HHS recommended that we replace all references to ``the poverty 
line guidelines'' in the proposed regulations with the term ``poverty 
guidelines.'' We agreed and made this change.
    DOD questioned one provision in the proposed definition of ``active 
duty'' for purposes of determining a borrower's eligibility for the 
post-active duty student deferment in the Federal Perkins, FFEL, and 
Direct Loan programs. DOD indicated that the reference to ``section 
101(19) of title 32'' in proposed 34 CFR 674.34(i)(2)(iv), 
682.210(u)(2)(iv), and 685.204(f)(2)(iv) was incorrect because State 
active duty, which is not Federally funded, would not be covered under 
section 101(19) of title 32, but under State law and regulations. To 
correct the reference and to accomplish the goal of the proposed 
provision, which was to exclude from deferment eligibility those 
individuals who are employed in permanent full-time positions with the 
National Guard unless they are subject to a further call-up to active 
State duty, DOD recommended language that we have substantively 
incorporated in the relevant sections of the proposed regulations.
    These proposed regulations would implement a new loan repayment 
plan and a new loan forgiveness program created by the CCRAA. In 
addition, these proposed regulations would implement several other 
provisions enacted by the CCRAA that relate to the title IV HEA loan 
programs.
    The CCRAA added a new income-based repayment (IBR) plan to the FFEL 
and Direct Loan Programs. Under the IBR plan, effective July 1, 2009, a 
borrower who has a partial financial hardship is eligible to make 
reduced monthly payments on his or her loan for a period of up to 25 
years, after which the Secretary cancels any remaining principal and 
accrued interest on the loan, provided the borrower meets certain 
requirements.
    The CCRAA also added the new Public Service Loan Forgiveness 
program to the Direct Loan Program. Under this loan forgiveness 
program, the Secretary forgives any remaining principal and accrued 
interest on a borrower's eligible Direct Loan if, after October 1, 
2007, the borrower makes 120 monthly payments on the loan while the 
borrower is employed full-time in a public service job. The CCRAA 
provides that a FFEL borrower may obtain a Direct Consolidation Loan if 
the borrower wants to participate in the Public Service Loan 
Forgiveness Program, but this provision does not take effect until July 
1, 2008.
    This NPRM also addresses changes made by the CCRAA to military and 
economic hardship deferments, special allowance payments, and not-for-
profit holders under the FFEL Program.

Significant Proposed Regulations

    We group major issues according to subject, with appropriate 
sections of the proposed regulations referenced in parentheses. We 
discuss substantive issues under the sections of the

[[Page 37696]]

proposed regulations to which they pertain. Generally, we do not 
address proposed regulatory provisions that are technical or otherwise 
minor in effect.

Economic Hardship Deferment (Sec. Sec.  674.34 and 682.210)

    Statute: Section 435(o) of the HEA defines economic hardship as 
when a borrower is working full-time and is earning an amount that does 
not exceed either an amount equal to 150 percent of the poverty 
guideline applicable to the borrower's family size or the Federal 
minimum wage rate. The poverty guidelines are issued annually by the 
Department of Health and Human Services (HHS). The statute also 
authorizes the Secretary to establish other criteria by regulation. Any 
regulatory criteria added by the Secretary would have to consider a 
borrower's income and debt-to-income ratio as primary factors.
    Current Regulations: The regulations governing the economic 
hardship deferment in the FFEL, Direct Loan, and Federal Perkins Loan 
programs were amended on November 1, 2007 (72 FR 61960) to incorporate 
the change in the eligibility standard enacted as part of the CCRAA. 
The CCRAA changed the applicable standard used to determine eligibility 
for the deferment from ``an amount equal to 100 percent of the poverty 
line for a family of two, as determined in accordance with section 
673(2) of the Community Service Block Grant Act'' to ``an amount equal 
to 150 percent of the poverty line applicable to the borrower's family 
size, as determined in accordance with section 673(2) of the Community 
Service Block Grant Act.'' The current regulations also include 
criteria under which a borrower could qualify for the deferment if the 
borrower is: (1) Working full-time and has a Federal educational debt 
burden that equals or exceeds 20 percent of the borrower's monthly 
income, and that income, minus the borrower's Federal education debt 
burden, is less than 220 percent of either the Federal minimum wage 
rate or the poverty guideline, or (2) working less than full-time and 
has a monthly income that does not exceed twice the Federal minimum 
wage rate or poverty guideline and, after deducting the borrower's 
Federal education debt burden, the remaining amount of that income does 
not exceed the Federal minimum wage rate or the poverty guideline.
    Proposed Regulations: The Secretary proposes to amend the 
regulations governing eligibility for an economic hardship deferment to 
include a definition of family size. The proposed definition of family 
size would be the number that is determined by counting the borrower, 
the borrower's spouse, and the borrower's children, if the children 
receive more than half their support from the borrower. A borrower's 
family size could include other individuals if, at the time the 
borrower requests the economic hardship deferment, the other 
individuals reside with the borrower and receive more than half of 
their support from the borrower, and if they will continue to receive 
that support from the borrower. The kinds of support provided by the 
borrower to the individual could include money, gifts, loans, housing, 
food, clothes, car, medical and dental care, and payment of college 
costs.
    The proposed regulations also would remove the reference to 
``section 673(2) of the Community Service Block Grant Act'' and 
substitute, in its place, a reference to ``the Department of Health and 
Human Services guidelines pursuant to 42 U.S.C. 9902(2).'' The 
regulations also would specify that 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 used for the 48 contiguous States.
    Finally, the proposed regulations would eliminate both the economic 
hardship criterion for a borrower who is working full-time and has a 
20/220 debt-to-income ratio, and the corresponding debt-to-income ratio 
criterion for a borrower who is working part-time.
    Reasons: A definition of family size is not currently part of the 
poverty guidelines. A definition is now necessary because the 
applicable poverty guideline used to determine whether a borrower has 
an economic hardship is based on the borrower's family size at the time 
the borrower requests, or applies for renewed eligibility for, the 
deferment. A standard definition is needed to ensure that borrowers are 
treated equitably in determining economic hardship. Because they share 
the same statutory basis in section 435(o) of the HEA, the proposed 
definition of family size for the purpose of determining eligibility 
for an economic hardship deferment is also the definition proposed for 
use to determine a borrower's partial economic hardship under the new 
IBR plan.
    The proposed regulations would clarify that HHS is the source of 
the poverty guidelines and provide guidance on the treatment of a 
borrower who is not residing in a ``State'' identified in the poverty 
guidelines. In particular, the proposed regulations address situations 
in which a borrower resides in a foreign country when the borrower 
applies for the deferment. Some non-Federal negotiators indicated that 
they believed that the Department's prior operational guidance on 
economic hardship deferments directed them to use the poverty guideline 
for the State in which the borrower last resided. However, the 
borrower's last residence in that State might be many years in the past 
and irrelevant to the borrower's current circumstances. Moreover, such 
an approach could result in using a more favorable poverty guideline 
for borrowers who formerly resided in either Alaska or Hawaii than 
borrowers who formerly lived in one of the 48 contiguous States. In 
light of these factors, the negotiators decided that using the 
contiguous 48-State poverty guideline for borrowers living outside the 
United States would be more equitable for similarly situated borrowers.
    The CCRAA eliminated the provision in section 435(o) of the HEA 
under which a borrower could be considered to have an economic hardship 
if the borrower was working full-time and had a Federal educational 
debt burden that equaled or exceeded 20 percent of the borrower's 
adjusted gross income (AGI). Previously, borrowers were eligible for an 
economic hardship deferment if they could demonstrate that they were 
working full-time and had a Federal education debt burden that equaled 
or exceeded 20 percent of the borrower's income, and that the 
borrower's income minus the borrower's Federal education debt burden 
would leave the borrower with an available income that was less than 
220 percent of the Federal minimum wage rate or an amount equal to 150 
percent of the poverty guideline based on the borrower's family size. A 
comparable debt-to-income ratio provision applied to borrowers working 
less than full-time. This has been referred to as ``the 20/220 rule.''
    The Department retained the 20/220 rule in regulations published on 
November 1, 2007, so that borrowers could continue to qualify for an 
economic hardship deferment on this basis until the newly created IBR 
plan became operational on July 1, 2009. Consequently, a borrower who 
is in an economic hardship deferment under either one of the debt-to-
income provisions (applicable to borrowers working full-time or on a 
less than full-time basis), with a deferment period that starts prior 
to July 1, 2009, will continue in that status for one year after the 
start date of that deferment period. However, no subsequent economic 
hardship deferment will be available under that

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criterion for any deferment request made on or after July 1, 2009.
    Some non-Federal negotiators asked the Department to retain the 20/
220 rule. They argued that the elimination of the rule would have an 
adverse impact on borrowers (i.e., some borrowers who would not have to 
make payments under the 20/220 rule would now be required to make 
payments), particularly on medical and other health professionals who 
have a large amount of student loan debt and will spend a number of 
years in low paying medical internships and residencies as part of 
their training. The Department believes, however, that Congress 
intended to eliminate the 20/220 rule and replace it with the new IBR 
plan that is meant to provide assistance to this kind of borrower 
during periods of limited earnings. Both the definition of partial 
financial hardship for purposes of the IBR plan and the criteria for 
economic hardship deferment are based on the definition of economic 
hardship in section 435(o) of the HEA. The Congress expanded the 
potential applicability of a partial financial hardship, which supports 
IBR eligibility, by changing the applicable poverty guideline for 
eligibility in section 435(o)(1)(A)(ii), while at the same time 
deleting section 435(o)(1)(B), which specifically supported the 20/220 
criteria for the economic hardship deferment. The Department's action 
to retain the 20/220 rule in the November 1, 2007, regulations was 
designed to ease the transition for affected borrowers until the IBR 
plan is implemented.
    Although the IBR plan, unlike a deferment, does not permit a 
borrower to postpone payments, it does provide for reduced payments 
because borrowers who initially select the IBR plan must have a partial 
financial hardship. A borrower has a partial financial hardship if the 
annual amount due on all eligible loans, as calculated under a standard 
repayment plan based on a 10-year repayment period, is more than 15 
percent of the difference between the borrower's most recent, 
documented AGI and 150 percent of the poverty guideline for the 
borrower's family size. Some borrowers in the IBR plan will not be 
required to make monthly loan payments. Other borrowers will have 
monthly payment amounts that are much less than those normally 
calculated under a standard repayment plan.

Military Service Deferment and Post-Active Duty Student Deferment 
(Sec. Sec.  674.34, 682.210, 682.211, and 685.204)

    Statute: The Higher Education Reconciliation Act of 2005 (HERA) 
established a new military service deferment in the FFEL, Direct Loan, 
and Federal Perkins Loan programs for military personnel and members of 
the National Guard who are called to active duty military service 
during a war or other military operation or national emergency. The 
CCRAA expanded the military service deferment to allow all eligible 
borrowers to receive the deferment on all their outstanding title IV 
loans, rather than just on loans that were first disbursed on or after 
July 1, 2001, and eliminated the maximum three-year limit on the 
deferment. The CCRAA also extended the military service deferment for 
an additional 180 days following the date the borrower is demobilized 
from the qualifying active duty service. The expansion of the military 
deferment is for all periods of active duty service that include 
October 1, 2007, or begin on or after that date.
    The CCRAA also created a new post-active duty student deferment in 
the FFEL, Direct Loan, and Federal Perkins Loan programs for members of 
the National Guard or Armed Forces Reserve, and members of the Armed 
Forces who are in a retired status who are called or ordered to active 
duty service. The deferment is available for up to 13 months following 
the borrower's demobilization from active duty service. To be eligible, 
the borrower must have been called to active duty service while the 
borrower was enrolled in a program of instruction at an eligible 
institution or within six months of having been enrolled. The deferment 
expires if the borrower reenrolls in school. Active duty for the 
purpose of this deferment is defined in the CCRAA as active duty as the 
term is used in 10 U.S.C. section 101(d)(1); however, it does not 
include active duty for attendance at a service school or for training 
duty, and it does include active duty of members of the National Guard 
(``active State duty''). Consistent with the date of enactment of the 
CCRAA, the deferment is available to an eligible borrower who was 
serving on active duty on October 1, 2007, or was called to active duty 
service on or after that date.
    Current Regulations: The FFEL, Direct Loan, and Federal Perkins 
Loan program regulations governing the military service deferment were 
amended on November 1, 2007, to reflect the expansion of deferment 
benefits resulting from the CCRAA. The references in prior regulations 
to a three-year time limit and its applicability only to loans first 
disbursed on or after July 1, 2001 were removed from the regulations, 
and the new 180-day post-active duty deferment was added. A provision 
for the new 13-month post-active duty student deferment and the 
statutory definition of the term ``active duty'' for purposes of this 
deferment were also added to the regulations.
    Proposed Regulations: The proposed regulations would clarify the 
current regulations, incorporate guidance on the deferments that was 
provided to program participants in Dear Colleague Letter GEN-08-01 
(issued January 8, 2008), and would provide relief to borrowers who may 
qualify for a post-active duty student deferment after demobilization, 
but do not qualify for the military service deferment during their 
active State duty service.
    The proposed regulations would clarify that the expansion of the 
military service deferment to include a 180-day post demobilization 
period, and the post-active duty student deferment would be available 
to borrowers who were serving on active duty on October 1, 2007, or who 
are called to active duty on or after that date. The proposed 
regulations in Sec. Sec.  674.34(i)(3), 682.210(u)(3), and 
685.204(f)(1)(ii) would also clarify that a borrower's eligibility for 
the post-active duty student deferment terminates only if the borrower 
returns to enrolled student status on at least a half-time basis, and 
that a borrower returning from active duty who is in the grace period 
on a loan is not required to waive the grace period to use the 13-month 
post-active duty student deferment. The proposed regulations in 
Sec. Sec.  674.34(i)(2)(i) and (ii), 682.210(u)(2)(i) and (ii), and 
685.204(f)(2)(i) and (ii) would also clarify that active State duty for 
members of the National Guard includes, for purposes of the post-active 
duty student deferment, both active duty under which a Governor 
activates members of the National Guard under State statute or policy 
and the activities are paid for with State funds, and active duty under 
which a Governor is authorized, with the approval of the President or 
U.S. Secretary of Defense to activate members of the National Guard and 
the activities are paid for with Federal funds. The proposed 
regulations in Sec. Sec.  674.34(i)(2)(iv), 682.210(u)(2)(iv), and 
685.204(f)(2)(iv) would also specify that active duty for this purpose 
does not include a borrower who is serving in a full-time, permanent 
position of employment with the National Guard,

[[Page 37698]]

unless the borrower is reassigned as part of a call-up to active duty 
service. At the recommendation of DOD, the incorrect reference to 
section 101(19) of title 32, U.S.C. has been removed, as discussed 
elsewhere in this preamble.
    The proposed regulations also incorporate the Department's earlier 
guidance (Dear Colleague Letter GEN-08-01) on implementation of the 
CCRAA military-related deferment provisions. As provided in that 
guidance, the proposed regulations in Sec. Sec.  674.34(h)(7), 
682.210(t)(9), and 685.204(e)(7) would authorize loan holders to grant 
a military service deferment to an otherwise eligible borrower for an 
initial deferment period not to exceed 12 months from the date the 
borrower's qualifying active duty service begins based on a request 
from either the borrower or the borrower's representative. Consistent 
with that earlier guidance, although supporting documentation is not 
required for this initial 12-month deferment period, it is required for 
any subsequent deferment period. Additionally, Sec. Sec.  674.34(i)(4), 
682.210(u)(4), and 685.214(f)(4) of the proposed regulations would 
specify that if a borrower is eligible for both the 180-day military 
service deferment following the borrower's demobilization, and the 13-
month post-active duty student deferment, the borrower's eligibility 
for those separate deferments runs concurrently.
    Finally, a change has been proposed in the FFEL program regulations 
in Sec.  682.211(h) governing mandatory forbearance that would require 
the loan holder to grant forbearance to a borrower who is called to 
active State duty for more than a 30-day period and who does not 
qualify for a military service deferment during the active State duty 
service period, but who qualifies for the post-active duty student 
deferment.
    Reasons: The negotiators agreed that the regulations governing the 
two military service-related deferments required clarifying amendments, 
and that the Department's earlier guidance should be included in the 
proposed regulations to ease program administration. That guidance 
addressed the October 1, 2007, effective date for the new benefits, and 
clarified that a borrower who received a military service deferment 
that began prior to October 1, 2007, would qualify for the extra 180 
days of deferment if the borrower's period of military service included 
the October 1, 2007, date.
    Non-federal negotiators noted that the post-active duty student 
deferment does not relieve a borrower of the obligation to make 
payments on a student loan during the borrower's period of active duty 
military service. A borrower in an in-school status would be required 
to make payments after the initial grace period elapses. A borrower 
receiving an in-school deferment would be required to make payments on 
a student loan after the borrower drops below half-time status at the 
school and reports for active duty service.
    The non-federal negotiators recommended that the Department provide 
for a mandatory forbearance to cover this gap, so that borrowers who 
will qualify for a post-active duty student deferment, but are no 
longer in an in-school status or qualify for an in-school deferment, 
will not be obligated to make loan payments during the period of active 
duty service.
    The Department agreed with the non-federal negotiators. The 
proposed revisions to Sec.  682.211(h) provide for the mandatory 
forbearance to begin after the initial grace period elapses, for 
borrowers in an in-school status, and to begin after the borrower 
ceases enrollment, for borrowers who are in an in-school deferment at 
the time of the call to active duty.
    Some of the non-Federal negotiators expressed concern over the 
confusion that may result for borrowers and those assisting them with 
respect to the different eligibility requirements for the two different 
military service-related deferments. The negotiators discussed 
different approaches to providing information on the various forms of 
relief available to title IV student loan borrowers called to active 
duty military service, such as charts and brochures, but determined 
that these efforts were operational in nature and would not affect the 
regulations.

Income-Based Repayment Plan

Definitions (Sec. Sec.  682.215(a) and 685.221(a))

Partial Financial Hardship

    Statute: Section 493C(a)(3) of the HEA provides that a borrower has 
a partial financial hardship if the annual amount due on all of the 
borrower's eligible FFEL and Direct Loans (as calculated under a 
standard repayment plan based on a 10-year repayment period) exceeds 15 
percent of the difference between the borrower's AGI and 150 percent of 
the poverty guideline for the borrower's family size. If a married 
borrower files a separate Federal income tax return, section 493C(d) of 
the HEA provides that only the borrower's income and student debt are 
used in determining the amount of the borrower's payment under the IBR 
plan.
    Proposed Regulations: Proposed Sec. Sec.  682.215(a)(4) and 
685.221(a)(4) would incorporate the statutory definition of the term 
partial financial hardship. The proposed regulations would also 
incorporate the terms and definitions of ``AGI,'' ``family size,'' and 
``poverty guideline'' from existing Sec.  682.210, which addresses how 
to determine whether a borrower qualifies for an economic hardship 
deferment.
    Under the proposed regulations, AGI would mean the income reported 
by the borrower to the Internal Revenue Service (IRS). For a married 
borrower filing jointly, AGI would include both the borrower's and 
spouse's income. If a married borrower files separately, AGI would 
include only the borrower's income.
    Under the proposed regulations, family size would include the 
borrower, the borrower's spouse, and the borrower's children if the 
children receive more than half their support from the borrower. Other 
individuals could be included in family size if, at the time the 
borrower certifies family size, those other individuals live with the 
borrower and receive more than half their support from the borrower and 
will continue to receive this support for the year the borrower 
certifies family size. Support would include money, gifts and payment 
of other expenses, including college costs.
    Under the proposed regulations, poverty income would be the income 
categorized by State and family size in the poverty guidelines.
    Finally, under the proposed regulations, the term ``eligible loan'' 
would refer to any outstanding FFEL or Direct Loan made to a borrower, 
except for a FFEL or Direct PLUS Loan made to a parent borrower or a 
FFEL or Direct Consolidation Loan that repaid a FFEL or Direct PLUS 
Loan made to a parent borrower.
    Reasons: For consistency and ease of administering the title IV 
loan programs, the definitions of AGI, family size, and poverty 
guidelines would be the same in all sections of the regulations to 
which they apply. While supporting this approach, some non-Federal 
negotiators suggested that AGI or the total amount of eligible loans 
should be adjusted in cases when a married borrower and his or her 
spouse both have outstanding loans, file a joint Federal tax return, 
and both qualify for IBR. In these cases, the combined monthly student 
loan payments of the borrower and the spouse could exceed the 15 
percent payment threshold under the IBR plan. The Department 
acknowledged this possibility but noted that the negotiators' suggested 
change would be

[[Page 37699]]

inconsistent with the HEA. First, section 493C(d) of the HEA, as 
amended by Public Law 110-153, specifically provides for considering 
the individual AGI of one married borrower only when the borrower and 
the borrower's spouse file separate Federal tax returns. Second, 
section 493C(a)(3)(A) of the HEA requires that only the borrower's 
eligible loans, not the spouse's, are considered in determining whether 
the borrower has a partial financial hardship.

Income-Based Payment Amount (Sec. Sec.  682.215(b) and 685.221(b))

    Statute: Under section 493C(b)(1) of the HEA, the monthly payment 
amount of a borrower who qualifies for a partial financial hardship is 
determined by calculating 15 percent of the amount obtained by 
subtracting 150 percent of the borrower's poverty guideline from the 
borrower's AGI, and then dividing this amount by 12 (an example of this 
calculation is provided in Appendix A of this preamble).
    Proposed Regulations: If a borrower's eligible loans are held by 
more than one loan holder, proposed Sec. Sec.  682.215(b)(1) and 
685.221(b)(2) would require each loan holder to adjust the amount of a 
borrower's calculated monthly payment. The borrower's adjusted monthly 
payment would be determined by multiplying the calculated monthly 
payment amount by the percentage of the total outstanding principal 
amount of eligible loans held by that holder (see the example in 
Appendix A of this preamble).
    If the borrower's calculated monthly payment is less than $5.00, 
the borrower would not be required to make a payment. If the borrower's 
calculated monthly payment is between $5.00 and $10.00, the borrower 
would be required to make a $10.00 payment.
    Reasons: Without the proposed adjustment by each loan holder of the 
borrower's eligible loans, a borrower who selects the IBR plan with two 
or more loan holders would have to make total monthly payments in 
excess of the statutory maximum.
    With regard to minimum monthly payment amounts, the Department 
initially proposed to adopt the $5.00 minimum monthly payment provision 
used in the Direct Loan Program income contingent repayment (ICR) plan. 
Under the ICR plan, a minimum payment of $5.00 is required whenever the 
borrower's calculated monthly payment is greater than zero but equal to 
or less than $5.00. The non-Federal negotiators argued that, because a 
borrower's calculated monthly payment amount under the IBR plan could 
be zero, a minimum $5.00 payment (or any payment amount over zero) 
would violate the 15 percent payment threshold. As a result, the 
Department agreed to allow zero payment amounts, which will require no 
collection action on the part of the loan holder. However, as an 
administrative matter, taking into consideration the cost of processing 
payments, the non-Federal negotiators agreed to the Department's 
proposal to establish a minimum payment of $10.00 whenever the 
borrower's calculated monthly payment is between $5.00 and $10.00. This 
represents a compromise approach for dealing with de minimis payment 
amounts for borrowers with low income and high debt. On one hand, it 
satisfies the concern of the non-Federal negotiators that a borrower 
with a calculated payment at or near zero should not have to make any 
payments. On the other hand, setting the minimum payment at $10 (an 
amount agreed to by the Loans Committee as part of the negotiations) 
mitigates the financial risk to FFEL loan holders, servicers, and the 
Department that the marginal cost of processing the payment is not more 
than the payment amount.

Borrower Payments (Sec. Sec.  682.215(b), 682.215(c), 685.221(b), 
685.221(c), and 682.300(b))

    Statute: Section 493C(b)(2) of the HEA specifies that monthly loan 
payments made under the IBR plan are applied first toward interest due 
on the loan, next toward any fees, and then to the principal balance of 
the loan. In addition, section 493C(b)(3) provides that if the 
borrower's monthly payment does not cover the accrued interest on a 
subsidized loan, the Secretary will pay the interest for up to three 
years after the date the borrower elects IBR. The three-year period 
does not include any period during which a borrower receives an 
economic hardship deferment.
    Proposed Regulations: Proposed Sec. Sec.  682.215(c) and 685.221(c) 
would incorporate the provisions from the HEA regarding the order in 
which IBR payments are to be applied by a loan holder.
    Proposed Sec. Sec.  682.215(b)(4) and 682.300(b)(1)(iv) and 
(b)(2)(x) would provide that, if the borrower's payment is insufficient 
to pay the accrued interest on a loan, the Secretary pays the accrued 
interest on a subsidized Stafford Loan, or on the subsidized portion of 
a Consolidation Loan, to the FFEL loan holder for up to three 
consecutive years from the date that the borrower initially began 
repayment on each loan under the IBR plan. In the Direct Loan Program, 
proposed Sec.  685.221(b)(3) would provide that the Secretary will not 
charge interest to borrowers during this three-year period. In the 
proposed regulations for both the FFEL and Direct Loan Programs, the 
three-year period would not include any period during which a borrower 
receives an economic hardship deferment.
    Reasons: Some of the non-Federal negotiators believed that the 
statutory provisions regarding the three-year interest subsidy period 
were ambiguous in three respects. First, these negotiators believed 
that the date that a borrower elects the IBR plan could be interpreted 
to mean the date the borrower notified the holder, or any other date up 
to the date the borrower makes a payment under the IBR plan. Second, 
they believed it was unclear whether the three-year period was 
applicable to each of the borrower's loans or was the cumulative period 
of the borrower's eligibility for the subsidy payments. The proposed 
regulations would address both of these issues by providing that the 
three-year period starts on the date the borrower initially begins 
repayment on each loan under the IBR plan.
    Third, some of the non-Federal negotiators did not agree with the 
Department's determination that the three-year period is a consecutive 
period. The Department notes that section 493C(b)(3)(A) of the HEA 
specifically states that the subsidy period starts on the date the 
borrower selects the IBR plan and provides for only one type of 
interruption or break in the three-year period--economic hardship 
deferments. Therefore, once the subsidy period begins, it runs 
continuously for three years as long as the borrower's monthly payment 
under the IBR plan is not sufficient to pay the accrued interest on the 
borrower's loan.

Changes in Payment Amount (Sec. Sec.  682.215(d) and 685.221(d))

    Statute: For a borrower who no longer has a partial financial 
hardship, or who no longer wants to continue making income-based 
payments under the IBR plan, section 493C(b)(6) of the HEA provides 
that the maximum monthly payment the borrower may be required to make 
must not exceed the monthly amount calculated for the borrower under a 
10-year repayment period when the borrower first entered IBR. Under 
either of these circumstances, the repayment period may exceed 10 
years. Section 493C(b)(8) of the HEA also provides that a borrower who 
is paying under the IBR plan may elect, at any time, to terminate 
payment under the IBR plan and repay under the standard repayment plan.

[[Page 37700]]

    Proposed Regulations: Proposed Sec. Sec.  682.215(d) and 685.221(d) 
would provide for the recalculation of the borrower's monthly payment 
if the borrower no longer has a partial financial hardship, chooses to 
stop making income-based payments, or elects to leave the IBR plan 
entirely.
    The proposed regulations provide that if a borrower no longer has a 
partial financial hardship or wishes to stop making income-based 
payments, but remains within the IBR plan, the maximum monthly amount 
that the borrower would be required to repay must be recalculated. The 
recalculated amount the borrower would be required to repay is the 
amount the borrower would have paid under the standard repayment plan 
with a 10-year repayment period based on the eligible loans that were 
outstanding at the time the borrower began repayment under the IBR 
plan. The proposed regulations would also provide that the borrower's 
total repayment period based on the recalculated payment amount may 
exceed 10 years.
    If a borrower no longer wishes to pay under the IBR plan, the 
proposed regulations would require the borrower to pay under the 
standard repayment plan for the remaining term available based on the 
borrower's initial standard repayment disclosure. The loan holder would 
recalculate the borrower's monthly payment based on the time remaining 
under the maximum 10-year repayment period for the amount of the 
borrower's loans that were outstanding at the time the borrower 
discontinued paying under the IBR plan. For a Consolidation Loan 
borrower who elects to leave the IBR plan, the applicable repayment 
period would be the repayment period remaining based on the total 
amount of that loan and the balance on other student loans that were 
outstanding at the time the borrower discontinued paying under the IBR 
plan.
    Reasons: The proposed regulations would reflect the statutory 
provisions in section 493C(b)(6) of the HEA, which require a loan 
holder to recalculate the borrower's monthly payment if the borrower no 
longer has a partial financial hardship, chooses to stop making income-
based payments, or leaves the IBR plan entirely. The proposed 
regulations would also provide for a different calculation of monthly 
payment amounts for Consolidation Loans when a borrower elects to leave 
the IBR plan and must repay under a standard repayment plan. The 
Department is proposing this distinction because a Consolidation Loan 
can have a repayment period of up to 30 years. The negotiators agreed 
with this approach.

Eligibility Documentation and Verification (Sec. Sec.  682.215(e) and 
685.221(e))

    Statute: Section 493C(c) of the HEA requires the Department to 
establish procedures for annually determining whether a borrower 
qualifies for IBR. These procedures include verifying the borrower's 
annual income and the annual amount due on the borrower's loans, and 
other procedures necessary to effectively implement the IBR plan.
    Proposed Regulations: Under proposed Sec. Sec.  682.215(e) and 
685.221(e), the loan holder would determine whether a borrower has a 
partial financial hardship to qualify for the IBR plan for the year the 
borrower initially selects the plan and for each subsequent year that 
the borrower remains in the plan.
    To make this determination, the loan holder would require the 
borrower to (1) provide written consent to the disclosure of AGI and 
other tax return information by the IRS to the loan holder, and (2) 
annually certify family size. The borrower would provide consent by 
signing a consent form and returning it to the loan holder. If the 
borrower's AGI is not available, or the loan holder believes that the 
borrower's reported AGI does not reasonably reflect the borrower's 
current income, the proposed regulations would allow the loan holder to 
use other documentation provided by the borrower (for example, a 
current pay stub or unemployment benefits letter) to verify income. If 
the borrower fails to respond to a loan holder's request to certify 
family size for a particular year, the loan holder must assume a family 
size of one for that year.
    The proposed regulations would require the loan holder to place the 
borrower in a standard repayment plan if the borrower selects the IBR 
plan, but fails to provide the required written consent necessary for 
the loan holder to determine whether the borrower initially qualifies 
for the IBR plan. The proposed regulations also designate the 
recalculated monthly payment option as discussed under the ``Changes in 
Payment Amount'' for a borrower who no longer has a partial financial 
hardship or a borrower who fails to renew the required written consent 
for income verification (or withdraws that consent) but does not select 
another repayment plan.
    Reasons: If a borrower initially selects the IBR plan but fails to 
provide the necessary consent for securing income information, the loan 
holder would place the borrower into the standard repayment plan. This 
approach is consistent with the current FFEL and Direct Loan 
regulations that provide for a borrower to be placed on the standard 
repayment plan if the borrower selects the income-sensitive repayment 
plan in the FFEL Program or the ICR plan in the Direct Loan Program, 
but then fails to provide the information or authorization that is 
necessary for the borrower to enter that repayment plan.
    The non-Federal negotiators proposed that borrowers should be 
allowed to provide consent for the disclosure of income information for 
multiple years, rather than annually. Although the Department does not 
object to this proposal, the forms used to provide consent are IRS-
produced forms. The Department has no authority to specify the period 
of time an IRS consent form may cover, so the proposed regulations do 
not specify the duration of the consent form.
    The Department initially proposed that a loan holder would 
automatically change the borrower's repayment option if the borrower 
fails to provide annual information on family size. The non-Federal 
negotiators recommended that the Department instead allow the 
borrower's family size to default to one in these cases to allow the 
loan holder to recalculate the borrower's eligibility for a partial 
financial hardship. If the borrower no longer qualifies for a partial 
financial hardship based on a family size of one, the loan holder would 
recalculate the borrower's monthly payment as discussed under ``Changes 
in Payment Amount.'' The Department agreed with this proposal.

Loan Forgiveness (Sec. Sec.  682.215(f) and 685.221(f))

    Statute: Section 493C(b)(7) of the HEA provides that the Department 
will repay or cancel the outstanding balance and accrued interest on an 
eligible loan for a borrower who participates in the IBR plan for a 
period not to exceed 25 years and meets certain requirements or makes 
qualifying payments during the maximum 25-year period.
    Proposed Regulations: Sections 682.215(f) and 685.221(f) of the 
proposed regulations would: (1) Establish the conditions that a 
borrower must satisfy to qualify for loan forgiveness under the IBR 
plan; (2) identify the beginning date of the 25-year period for 
determining whether a borrower made qualifying payments or received 
economic hardship deferments during that period; and (3) provide that 
the Department will repay or cancel the outstanding balance and accrued 
interest on an eligible loan at the end of the 25-year period.

[[Page 37701]]

    Under the proposed regulations, a borrower would qualify for loan 
forgiveness after 25 years as long as the borrower participated in the 
IBR plan at any time during that period and satisfied at least one of 
the following conditions:
     Made reduced monthly payments on the loan under a partial 
financial hardship, including a payment of zero dollars.
     Made reduced monthly payments on the loan after the 
borrower no longer had a partial financial hardship or stopped making 
income-based payments.
     Made monthly payments under any repayment plan that were 
not less than the amount required under a FFEL or Direct Loan standard 
repayment plan with a 10-year repayment period based on when the 
borrower initially entered repayment.
     Made monthly payments under the FFEL standard repayment 
plan based on a 10-year repayment period for the amount of the 
borrower's loans that were outstanding at the time the borrower first 
selected the IBR plan.
     Paid a Direct Loan under the income contingent repayment 
(ICR) plan.
     Received an economic hardship deferment on an eligible 
loan.
    Except for borrowers who repaid Direct Loans under the ICR plan, 
under proposed Sec.  685.221(f)(3)(ii) the beginning date of the 25-
year period would be no earlier than July 1, 2009, which is the 
effective date for the implementation of the IBR plan. In general, 
after the borrower selects the IBR plan, the loan holder would 
establish the beginning date by determining when the borrower made a 
qualifying payment or received an economic hardship deferment on the 
loan on or after July 1, 2009. However, under Sec.  685.221(f)(3)(i) of 
the proposed regulations, for a borrower who made payments under the 
Direct Loan Program ICR plan, the beginning date would be the date the 
borrower made a payment on the loan under that plan any time after July 
1, 1994. For borrowers who consolidate their eligible loans, the 25-
year period would restart from the date of the consolidation.
    Under proposed Sec. Sec.  682.215(f)(4) and 685.221(f)(4), the 
Secretary would pay (for a FFEL loan) or forgive (for a Direct Loan) 
the outstanding balance and accrued interest on the eligible loan after 
the guaranty agency or the Department determines that the borrower 
satisfies the loan forgiveness requirements.
    Reasons: With regard to establishing the beginning date of the 25-
year period, some of the non-Federal negotiators suggested that 
qualifying payments made by an otherwise eligible borrower at any time 
before July 1, 2009 (i.e., retroactive payments), should count toward 
the 25-year forgiveness period. The Department considered, but did not 
adopt this suggestion, for three reasons. First, the statute does not 
support a general rule that payments made before the effective date of 
the IBR plan (July 1, 2009) should count toward the forgiveness period. 
Second, allowing retroactive payments would substantially increase 
costs to the Federal government and the taxpayers (for more detail see 
the discussion under the Regulatory Impact Analysis section of the 
preamble). Third, it would be administratively difficult, if not 
impossible in some cases, for a loan holder to determine the beginning 
date of the 25-year period before July 1, 2009, because there was no 
expectation of loan forgiveness, and therefore, no basis to require 
loan holders to track and maintain data on individual loan payments in 
the manner needed to readily identify qualifying payments under the IBR 
plan.
    The Department was able, however, to reach a compromise on this 
issue with the non-Federal negotiators for a group of borrowers that 
the negotiators acknowledged as the most vulnerable and needy. The 
Department agreed to count retroactive payments made by borrowers in 
the Direct Loan Program ICR plan for two reasons. First, there are no 
material administrative costs because the Department has readily 
available payment data for ICR borrowers. Second, we do not believe 
there would be any additional program costs because borrowers repaying 
their loans under the Direct Loan Program ICR plan are already on a 
path to loan forgiveness.
    The proposed conditions and qualifying payments that a borrower 
must satisfy for loan forgiveness would parallel the statutory 
requirements. Some non-Federal negotiators encouraged the Department to 
consider establishing a loan forgiveness period of less than 25 years. 
The negotiators suggested a 20-year period, stating that the 25-year 
period is only a statutory maximum. The Department could not adopt this 
suggestion for two reasons. First, reducing the forgiveness period to 
20 years would increase Federal costs (for more detail see the 
discussion under the Regulatory Impact Analysis section of the 
preamble). Second, as a policy matter, the Department believes that the 
loan forgiveness periods for IBR and ICR should be the same for these 
borrowers because they are in similar circumstances.

Loan Forgiveness Processing and Payment (Sec.  682.215(g))

    Statute: The HEA does not address procedures for IBR loan 
forgiveness processing and payment with respect to FFEL loan holders 
and guaranty agencies.
    Proposed Regulations: Proposed Sec.  682.215(g) would establish 
deadlines for FFEL loan holders and guaranty agencies for processing 
loan forgiveness claims. A loan holder would be required to request 
payment from a guaranty agency no later than 60 days from the date the 
holder determines that a borrower qualifies for loan forgiveness. 
Within 45 days of receiving the lender's request, the guaranty agency 
would need to determine if the borrower satisfies the forgiveness 
requirements and notify the lender of that determination. Finally, the 
proposed regulations would require the loan holder to notify the 
borrower of the guaranty agency's determination within 30 days.
    In addition, the proposed regulations would address how the loan 
holder and guaranty agency resolve any differences between the 
outstanding balance of the borrower's eligible loans and the 
forgiveness amount, and how a borrower is treated if it is determined 
that the borrower is not eligible for loan forgiveness. Although the 
Department has not included comparable processes in the Direct Loan 
Program regulations, the Department intends to follow the same deadline 
and notification provisions specified in these proposed FFEL 
regulations.
    Reasons: The non-Federal negotiators supported including these 
processing requirements in the proposed regulations to provide for the 
timely processing of IBR forgiveness claims. The deadlines for lenders 
and guaranty agencies to process IBR loan forgiveness claims are 
consistent with the deadlines used for other loan discharges.

Special Allowance Payments for Income-based Loans (Sec.  682.302(a))

    Statute: For loans in repayment under the IBR plan, section 
493C(b)(9) of the HEA requires that the special allowance payment to a 
lender be calculated separately on the principal balance of the loan 
and on any unpaid accrued interest. In addition, section 493C(b)(3)(B) 
provides that accrued interest may be capitalized only when the 
borrower: (1) Elects to leave the IBR plan; or (2) begins making 
payments of not less than the amount the borrower would have made under 
a standard 10-year repayment plan based on the outstanding amount of 
the borrower's

[[Page 37702]]

loan at the time the borrower began repayment under the IBR plan.
    Current Regulations: Current Sec.  682.302(a) provides for special 
allowance payments by the Secretary to loan holders in the FFEL 
Program. A special allowance payment is generally described as a 
subsidy payment made to a FFEL lender under a formula provided in the 
HEA that ensures that the lender will receive a market-based rate on a 
FFEL loan regardless of what the student or parent borrower pays.
    Proposed Regulations: Proposed Sec.  682.302(a) would add to the 
current regulations a separate calculation of the special allowance 
rate for the unpaid accrued interest on a loan in repayment under the 
IBR plan. The current provisions for calculating the special allowance 
payment rate on the unpaid principal balance of a loan (including 
capitalized interest) would remain unchanged. However, the proposed 
regulations would require that, when computing the special allowance 
rate on the unpaid accrued interest for a borrower in IBR, the 
applicable interest rate used in the calculation would be zero.
    Reasons: The Department initially proposed calculating the special 
allowance payment to be paid on the unpaid accrued interest for a 
borrower in the IBR plan in the same way that the special allowance 
payment would be calculated for other loans. Some of the non-Federal 
negotiators argued, however, that since accrued unpaid interest on an 
income-based loan can only be capitalized under limited circumstances, 
or may never be capitalized, the yield on the principal balance of an 
income-based loan would be less than the yield that would otherwise be 
obtained on the same type of loan when accrued unpaid interest is 
capitalized and becomes part of the loan principal. Moreover, the yield 
on the income-based loan would have been further reduced under the 
Department's initial approach (the special allowance rate for the 
unpaid accrued interest would be reduced by the applicable interest 
rate of the loan). The Department agreed.

Income Contingent Repayment Plan--Maximum Repayment Period (Sec.  
685.209(c))

    Statute: Section 455(e) of the HEA specifies the periods that count 
toward the maximum 25-year repayment period under the ICR plan in the 
Direct Loan Program.
    Current Regulations: Current Sec.  685.209(c) establishes the 
repayment period for Direct Loans under the ICR plan.
    Proposed Regulations: Proposed Sec.  685.209(c)(4) would parallel 
the provisions in the HEA by counting the following periods toward the 
maximum 25-year repayment requirement:
     Periods in which the borrower makes payments under the ICR 
plan on loans that are not in default.
     Periods in which the borrower makes reduced monthly 
payments under the IBR plan or a recalculated reduced monthly payment 
after the borrower no longer has a partial financial hardship or stops 
making income-based payments.
     Periods in which the borrower made monthly payments under 
the standard repayment plan after leaving the IBR plan.
     Periods in which the borrower makes payments under the 
standard repayment plan.
     Periods after October 1, 2007, in which the borrower makes 
monthly payments under any other repayment plan that are not less than 
the amount required under the standard repayment plan.
     Periods of economic hardship deferment after October 1, 
2007.
    In addition to the provisions reflecting the statutory 
requirements, the Department proposes to maintain the current provision 
in Sec.  685.209(c)(4)(ii)(A)(2). This current provision applies to 
borrowers who entered repayment before October 1, 2007, with repayment 
periods of not more than 12 years and who made payments under either of 
the extended repayment plans, or, for Direct Consolidation Loan 
borrowers, made payments under the standard repayment plan. October 1, 
2007, is the effective date of the maximum ICR repayment period 
provisions in the CCRAA.
    Reasons: The proposed changes are necessary to reflect the 
statutory requirements. The Department proposes to maintain the current 
provisions to allow the periods that now count toward the 25-year 
repayment timeframe to continue to be counted for these borrowers.

Eligible Not-For-Profit Holder Definition (Sec.  682.302)

    Statute: Section 435(p) of the HEA, added by the CCRAA, included 
the new term ``eligible not-for-profit holder'' to describe a State or 
non-profit entity that may receive a higher special allowance payment 
(SAP) rate on loans it holds than other lenders. Regulations issued by 
the Department on November 1, 200