Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program, 63232-63259 [E8-24922]

Agencies

• DEPARTMENT OF EDUCATION

[Federal Register Volume 73, Number 206 (Thursday, October 23, 2008)]
[Rules and Regulations]
[Pages 63232-63259]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-24922]



[[Page 63231]]

-----------------------------------------------------------------------

Part II





Department of Education





-----------------------------------------------------------------------



34 CFR Parts 674, 682, and 685



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

Federal Register / Vol. 73, No. 206 / Thursday, October 23, 2008 / 
Rules and Regulations

[[Page 63232]]


-----------------------------------------------------------------------

DEPARTMENT OF EDUCATION

34 CFR Parts 674, 682, and 685

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


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: Final regulations.

-----------------------------------------------------------------------

SUMMARY: The Secretary amends the Federal Perkins Loan (Perkins Loan) 
Program, Federal Family Education Loan (FFEL) Program, and William D. 
Ford Federal Direct Loan (Direct Loan) Program regulations to implement 
provisions of the College Cost Reduction and Access Act of 2008 (CCRAA) 
(Pub. L. 110-84), including the statutory provisions that establish the 
Income-Based Repayment (IBR) plan and the Public Service Loan 
Forgiveness Program.

DATES: Effective Date: These regulations are effective July 1, 2009.
     Implementation date: The Secretary has determined, in accordance 
with section 482(c)(2)(A) of the Higher Education Act of 1965, as 
amended (HEA) (20 U.S.C. 1089(c)(2)(A)), that institutions, lenders, 
guaranty agencies, and loan servicers that administer the Perkins Loan, 
FFEL and Direct Loan programs, may, at their discretion, choose to 
implement the new and amended provisions of Sec. Sec.  674.34, 682.210, 
682.211, and 685.204 governing the military service and post-active 
duty student deferments, including related forbearance provisions 
contained in these final regulations on or after November 1, 2008. For 
further information, see the section entitled Implementation Date of 
These Regulations in the SUPPLEMENTARY INFORMATION section of this 
preamble.

FOR FURTHER INFORMATION CONTACT: For information related to the IBR 
plan, Pamela Moran or John Kolotos. Telephone: (202) 502-7732 or (202) 
502-7762 or via the Internet at: Pamela.Moran@ed.gov or 
John.Kolotos@ed.gov. For information related to the Public Service Loan 
Forgiveness Program, Nikki Harris. Telephone: (202) 219-7050 or via the 
Internet at: Nikki.Harris@ed.gov. For information related to the 
economic hardship deferment, the military service deferment, or the 
post-active duty student deferment, Vanessa Freeman. Telephone: (202) 
502-7523 or via the Internet at: Vanessa Freeman@ed.gov. For 
information related to not-for-profit loan holders, Pamela Moran. 
Telephone: (202) 502-7732 or via the Internet at: Pamela.Moran@ed.gov.
    If you use a telecommunications device for the deaf (TDD), 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 in this section.

SUPPLEMENTARY INFORMATION: On July 1, 2008, the Secretary published a 
notice of proposed rulemaking (NPRM) for the Perkins Loan, FFEL, and 
Direct Loan Programs in the Federal Register (73 FR 37694).
    In the preamble to the NPRM, the Secretary discussed on pages 37695 
through 37697 the major regulations proposed in that document to 
implement provisions of the CCRAA, including the following:
     Amending Sec. Sec.  674.34 and 682.210, which govern 
economic hardship deferments in the Perkins Loan and FFEL programs to 
define the term ``family size'', clarify that the poverty guidelines 
used in determining economic hardship are issued by the U.S. Department 
of Health and Human Services (HHS), provide that the poverty guideline 
used for a borrower who is not a resident of a State identified in the 
poverty guidelines is the poverty guideline for the relevant family 
size for the 48 contiguous States, and eliminate the economic hardship 
deferment categories based on the 20/220 provisions.
     Amending Sec. Sec.  674.34(i)(3), 682.210(u)(3), and 
685.204(f)(1)(ii) to clarify that a borrower's eligibility for a post-
active duty student deferment terminates 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 a grace period is not 
required to waive the grace period to use the 13-month post-active duty 
student deferment.
     Amending Sec. Sec.  674.34(i)(2)(i) and (ii), 
682.210(u)(2)(i) and (ii), and 685.204(f)(2)(i) and (ii) to clarify 
that, for purposes of the post-active duty student deferment, active 
State duty for members of the National Guard includes both active State 
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 State duty under which a governor, with the 
approval of the President or the U.S. Secretary of Defense, activates 
members of the National Guard and the activities are paid for with 
Federal funds.
     Amending Sec. Sec.  674.34(i)(2)(iv), 682.210(u)(2)(iv), 
and 685.204(f)(2)(iv) to specify that active duty for purposes of the 
active duty deferment does not include a borrower who is serving full-
time in a permanent position with the National Guard, unless the 
borrower is reassigned as part of a call-up to active duty service.
     Amending Sec. Sec.  674.34(h)(7), 682.210(t)(9), and 
685.204(e)(7) to authorize loan holders to grant a military service 
deferment to an otherwise eligible borrower for an initial deferment 
period not to exceed 12 months based on a request from either the 
borrower or the borrower's representative.
     Amending Sec. Sec.  674.34(i)(4), 682.210(u)(4), and 
685.214(f)(4) to 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 these separate deferments runs 
concurrently.
     Amending Sec.  682.211(h) to require a FFEL loan holder to 
grant a mandatory forbearance to a borrower who is called to active 
State duty for more than 30 days 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.
     Adding new Sec. Sec.  682.215(a) and 685.221(a) to 
incorporate the statutory definition of the term partial financial 
hardship, and define related terms including Adjusted Gross Income 
(AGI), family size, poverty guideline, and eligible loan.
     Adding new Sec. Sec.  682.215(b) and 685.221(b) to 
incorporate the statutory formula for calculating a monthly payment 
under the IBR plan, adjusting that payment when the borrower's loans 
are held by more than one loan holder, and establishing minimum payment 
amounts.
     Adding new Sec. Sec.  682.215(b), 682.215(c), 685.221(b), 
and 685.221(c), and amending Sec.  682.300(b) to incorporate the 
statutory provisions requiring IBR payments to be applied first toward 
interest due on the loan, next toward any fees, and then to the loan 
principal, and to provide that if the borrower's payment is 
insufficient to pay accrued interest, the Department pays (or on a 
Direct Loan, does not charge) the accrued interest on an eligible 
subsidized loan for a period of three consecutive years from the date 
the borrower initially began repayment on each loan under the IBR plan.

[[Page 63233]]

     Adding new Sec. Sec.  682.215(d) and 685.221(d) to 
establish the terms and repayment amounts for a borrower who no longer 
has a partial financial hardship but wants to continue making income-
based payments under IBR, or for a borrower who wants to leave the IBR 
plan entirely.
     Adding new Sec. Sec.  682.215(e) and 685.221(e) to 
establish the procedures a loan holder must follow to determine 
annually whether a borrower has a partial financial hardship by 
verifying the borrower's AGI and family size. If the borrower does not 
provide family size information, the loan holder uses a family size of 
one.
     Adding new Sec. Sec.  682.215(f) and 685.221(f) to 
establish the conditions that a borrower must satisfy to qualify for 
loan forgiveness under IBR, establish how a loan holder determines 
whether a borrower made qualifying payments, and provide that the 
Department will repay or cancel the loan after 25 years if the borrower 
makes qualifying payments and meets certain requirements.
     Amending Sec.  682.302(a) to provide for a separate 
calculation of the special allowance rate for the unpaid accrued 
interest on a loan in repayment under the IBR plan.
     Amending Sec.  685.209(c) to identify the periods 
specified in section 455(e) of the HEA that count toward the 25-year 
repayment requirement under the Income Contingent Repayment (ICR) plan, 
and to provide that repayment periods will continue to count for 
certain borrowers currently in ICR.
     Amending Sec.  682.302(f) to incorporate statutory changes 
to the definition of not-for-profit holder and to describe the 
circumstances in which a State or non-profit entity is deemed to be 
owned or controlled by a for-profit entity.
     Adding a new Sec.  685.219(c) to incorporate the statutory 
requirements that a borrower must satisfy to qualify for public service 
loan forgiveness and provide that a borrower in an AmeriCorps position 
may make qualifying payments by using his or her AmeriCorps education 
award.
     Adding a new Sec.  685.219(b) to define several terms 
including employee, full-time, public interest law, and public service 
organization, needed to implement the public service loan forgiveness 
program.
     Adding a new Sec.  685.219(d) and (e) to provide that the 
Department will cancel any balance remaining on a loan for a borrower 
who works in a qualifying public service job and who makes 120 
qualifying payments while employed in such a job and requests loan 
forgiveness on a form provided by the Department.
     Amending Sec. Sec.  682.201 and 685.220 to provide that a 
FFEL borrower may obtain a Direct Consolidation loan for the purpose of 
using the public service loan forgiveness program.
    There are no significant differences between the NPRM and these 
final regulations resulting from public comments.
    In addition to the changes necessary to implement provisions of the 
CCRAA, these final regulations also incorporate certain changes made to 
the HEA by the Higher Education Opportunity Act (HEOA) (Pub. L. 110-
315) enacted on August 14, 2008. These changes are:
     Amending Sec. Sec.  682.215(a)(2) and 685.221(a)(2) to 
exclude defaulted loans from the category of eligible loans for IBR 
repayment and deleting the proposed amendments to Sec. Sec.  
682.215(g)(7), 682.410(b)(5)(vi)(G), and (b)(9)(i)(D) that regulated a 
guaranty agency's consideration of a defaulted loan for IBR and the 
reimbursement to a guaranty agency on a defaulted loan that was 
forgiven under IBR.
     Amending the definition of Public Service Organization in 
Sec.  682.219 for the purpose of the Public Service Loan Forgiveness 
program to replace in paragraph (5)(i) the term ``public child care'' 
with the phrase ``early childhood education (including licensed or 
regulated child care, Head Start, and State-funded pre-kindergarten)''; 
and to add in paragraph (5)(i) a parenthetical statement after ``public 
health'' that reads ``(including nurses, nurse practitioners, nurses in 
a clinical setting and full-time professionals engaged in health care 
practitioner occupations and health care support occupations as such 
terms are defined by the Bureau of Labor Statistics).''
     Amending the definition of Government employee in Sec.  
682.219 for the purpose of the Public Service Loan Forgiveness program 
to exclude members of the U.S. Congress.
    Because these amendments merely implement statutory changes made to 
the HEA by the HEOA, we do not discuss them in the Analysis of Comments 
and Changes section.

Waiver of Proposed Rulemaking and Negotiated Rulemaking Regulations 
Implementing the HEOA

    Under the Administrative Procedure Act (APA) (5 U.S.C. 553), the 
Department is generally required to publish an NPRM and provide the 
public with an opportunity to comment on proposed regulations prior to 
issuing final regulations. In addition, all Department regulations for 
programs authorized under title IV of the HEA are subject to the 
negotiated rulemaking requirements of section 492 of the HEA. However, 
the APA provides that an agency is not required to conduct notice-and-
comment rulemaking when the agency for good cause finds that notice and 
comment are impracticable, unnecessary or contrary to the public 
interest. Similarly, section 492 of the HEA provides that the Secretary 
is not required to conduct negotiated rulemaking for title IV, HEA 
program regulations if the Secretary determines that applying that 
requirement is impracticable, unnecessary or contrary to the public 
interest within the meaning of the APA.
    Although the regulations implementing the HEOA are subject to the 
APA's notice-and-comment and the HEA's negotiated rulemaking 
requirements, the Secretary has determined that it is unnecessary to 
conduct negotiated rulemaking or notice-and-comment rulemaking on the 
limited regulatory changes. These changes simply amend the Department's 
regulations to reflect statutory changes made by the HEOA that are 
already effective. The Secretary does not have discretion as to whether 
or how to implement these changes.

Implementation Date of These Regulations

    Section 482(c) of the HEA requires that regulations affecting 
programs under title IV of the HEA be published in final form by 
November 1 prior to the start of the award year (July 1) to which they 
apply. However, that section also permits the Secretary to designate 
any regulation as one that an entity subject to the regulation may 
choose to implement earlier and the conditions under which the entity 
may implement the provisions early.
    Consistent with the intent of this regulatory effort to strengthen 
and improve the administration of the title IV, HEA programs, the 
Secretary is using the authority granted her under section 482(c) of 
the HEA to designate the new and amended provisions in Sec. Sec.  
674.34, 682.210, 682.211, and 685.204 governing the military service 
deferment and post-active duty student deferment, including related 
forbearance provisions for early implementation at the discretion of 
each institution, lender, guaranty agency, or servicer, as appropriate.

Analysis of Comments and Changes

    Except as noted above in regard to the limited regulations 
implementing provisions of the HEOA, the regulations in this document 
were developed

[[Page 63234]]

through the use of negotiated rulemaking. Section 492 of the HEA 
requires that, before publishing any proposed regulations to implement 
programs under title IV of the HEA, the Secretary must obtain public 
involvement in the development of the proposed regulations. After 
obtaining advice and recommendations, the Secretary must conduct a 
negotiated rulemaking process to develop the proposed regulations. All 
proposed regulations must conform to agreements resulting from the 
negotiated rulemaking process unless the Secretary reopens that process 
or explains any departure from the agreements to the negotiated 
rulemaking participants.
    These regulations were published in proposed form on July 1, 2008, 
in conformance with the consensus of the negotiated rulemaking 
committee. Under the committee's protocols, consensus meant that no 
member of the committee dissented from the agreed-upon language. The 
Secretary invited comments on the proposed regulations by August 15. 
More than 1700 parties submitted comments, many of which were 
substantially similar. An analysis of the comments and the changes in 
the regulations since publication of the NPRM follows.
    We group major issues according to subject, with appropriate 
sections of the regulations referenced in parentheses. We discuss other 
substantive issues under the sections of the regulations to which they 
pertain. Generally, we do not address minor, non-substantive changes.

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

    Comment: Many commenters objected to the proposed elimination of 
what has been referred to as the ``20/220'' debt-to-income eligibility 
criterion for an economic hardship deferment in the title IV student 
loan programs. Medical and dental school students and residents, 
medical and dental school administrators, and major medical and dental 
associations voiced particular concern about the impact of the 
elimination of the 20/220 debt-to-income test on medical and dental 
interns and residents with high debt burdens and limited income during 
several years of required additional training that coincide with the 
borrower's first few years of loan repayment. The commenters believed 
that the impact of eliminating this criterion would be particularly 
acute for those borrowers pursuing their additional training in urban 
areas with high living costs. The commenters urged the Secretary to use 
the discretion provided to her under section 435(o)(1)(B) of the HEA to 
establish additional criteria for economic hardship deferments to 
either reinstate the 20/220 test permanently or to provide an 
equivalent loan deferment funding mechanism to help these types of 
borrowers. The commenters contended that doing so would enable these 
borrowers to continue to have the option to postpone loan payments. The 
commenters noted that the only other option for these borrowers would 
be to request a period of forbearance during which interest would be 
capitalized during this crucial period of training.
    Several commenters argued that the loss of this repayment option 
will deter new physicians from pursuing primary care and research 
specialties, pursuing a career with the public health service, or 
practicing medicine in underserved areas, in lieu of more lucrative 
specialties.
    A commenter who represents participating Federal Perkins Loan 
schools and loan servicers argued that the rationale for eliminating 
the 20/220 economic hardship category in the FFEL and Direct Loan 
Programs (i.e., the availability of the new IBR plan and program costs) 
does not apply to the Federal Perkins Loan program. The commenter 
believed that there are no Federal costs associated with deferments 
granted in the Federal Perkins Loan program and noted that IBR is not 
available to Perkins Loan borrowers except through loan consolidation 
in the FFEL or Direct Loan Programs, which also results in the loss to 
the borrower of several Federal Perkins loan benefits. Consequently, 
the commenter asked the Department to retain the 20/220 debt-to-income 
criterion for an economic hardship deferment in the Federal Perkins 
Loan Program regulations.
    A few commenters recommended that the definition of ``family size'' 
for the purpose of the economic hardship deferment be revised to 
specify the period of time a borrower must provide support to ``other 
individuals'' in order to include those individuals in the borrower's 
family size. To ensure consistent application of the definition of 
``family size'' in the regulations for IBR, as the Secretary indicates 
she intended, the commenters recommended that the prescribed period be 
specified to be ``the year the borrower certifies family size.'' 
Additionally, the same commenters recommended that the definition of 
``family size'' be further modified for both IBR and economic hardship 
deferment purposes to include the borrower's unborn children who will 
be born during the year in which the borrower will be certifying family 
size and for whom the borrower will be providing more than half their 
support to ensure consistency with the definition of ``household size'' 
used in the Free Application for Federal Student Aid (FAFSA).
    An organization that includes FFEL Program lenders and loan 
servicers noted that the July 1, 2009, effective date for the 
elimination of the 20/220 debt-to-income economic hardship criterion 
did not appear to permit a lender to grant a deferment on or after July 
1, 2009, to an eligible borrower for a retroactive deferment period 
that began prior to July 1, 2009, as would normally be the case for 
deferments granted under the FFEL Program. The commenter requested that 
the Department clarify the implementation of the effective date to 
allow a lender to grant such a deferment to an eligible borrower after 
July 1, 2009, for up to a 12-month period for a deferment period that 
starts prior to that date.
    Discussion: The Department did not eliminate the 20/220 rule in the 
final regulations published on November 1, 2007, (72 FR 61959) so that 
borrowers could temporarily continue to qualify for an economic 
hardship deferment on that basis and to ease the transition for 
affected borrowers until the newly created IBR plan becomes available 
on July 1, 2009. Congress eliminated the 20/220 rule from the HEA and 
effectively replaced it with the new IBR plan, which will provide 
assistance to more borrowers with high levels of debt over a much 
longer period of limited earnings than the economic hardship deferment.
    The IBR plan does not provide for postponing all borrower payments 
for a period of time like a deferment. It provides for reduced payments 
when a borrower can demonstrate partial financial hardship. Depending 
upon the borrower's circumstances, IBR payments may be less than 
accrued interest and some borrowers may not be required to make a 
payment. A borrower has a partial financial hardship if the annual 
amount due on all of his or her 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 AGI and 150 
percent of the poverty line income for the borrower's family size. If 
the borrower's monthly payment amount is not sufficient to cover the 
accruing interest on the borrower's subsidized Stafford Loans (or on 
the portion of the borrower's Consolidation Loan that represents 
subsidized Stafford Loans), the

[[Page 63235]]

Secretary pays the unpaid accrued interest for a period of up to three 
consecutive years from the point the borrower entered the IBR plan on 
the loan. Any unpaid accruing interest on the same borrower's 
unsubsidized Stafford Loans would be capitalized less frequently under 
IBR than it otherwise would be under either an economic hardship 
deferment or during a forbearance period. The Department believes that 
this plan will be advantageous to many borrowers, including borrowers 
who would have been eligible for the economic hardship deferment under 
the 20/220 criterion.
    The Department disagrees with the commenter's recommendation that 
the 20/220 economic hardship eligibility criterion be retained in the 
Federal Perkins Loan Program. The commenter is correct that IBR is not 
available to Federal Perkins Loan borrowers unless they consolidate 
their Perkins loans into a FFEL or Direct Consolidation Loan and that a 
Perkins Loan borrower loses the various employment-related Perkins Loan 
cancellation opportunities and other benefits by consolidating. Perkins 
Loan holders, however, may provide low-income borrowers with relief 
from high payments under Sec.  674.33(c)(2) by extending the borrower's 
repayment period for up to an additional 10 years for low-income 
individuals, which will, in most cases, result in reduced monthly 
payment amounts.
    The Department disagrees with the contention that there would be no 
Federal costs in keeping the 20/220 provision for the Federal Perkins 
Loan Program. The Perkins loan fund is a Federal asset and, during 
deferment periods, the fund loses both borrower principal payments and 
interest that would otherwise accrue and be paid by the borrower.
    The Department also does not believe it is appropriate to continue 
the 20/220 economic hardship criterion only for borrowers in the 
Perkins Loan Program, the title IV loan program with the lowest average 
indebtedness and the most generous repayment terms. Finally, the 
Department believes that since Perkins Loan borrowers generally also 
have FFEL or Direct Loans, the regulations that govern the economic 
hardship deferment should be consistent across all the title IV student 
loan programs.
    With regard to the comments on the definition of ``family size,'' 
we disagree that for purposes of determining family size the period a 
borrower must provide support to other individuals is the same period 
as that specified for purposes of IBR. Borrowers requesting a deferment 
are certifying to their eligibility for the period for which they are 
requesting the deferment, and a borrower's family size is relevant for 
that period. Under the IBR plan, borrowers certify to their family size 
so that the loan holder can determine a borrower's eligibility for the 
year the borrower elects the plan, and for each subsequent year that 
the borrower remains on the plan. The period for which a borrower may 
request a deferment will often differ from the initial and each 
subsequent year a borrower is repaying under the IBR plan. However, we 
agree that the time period for which the borrower certifies family size 
for purposes of the IBR plan should be clearer in the regulations. We 
also agree that an unborn child may be included if that child will be 
born during the year the borrower certifies family size or for the 
period the borrower requests an economic hardship deferment.
    The Department agrees that a loan holder may grant an economic 
hardship deferment under the 20/220 criterion to an eligible borrower 
who requests a deferment after July 1, 2009, for a deferment period 
that began prior to July 1, 2009, and is for a period not to exceed 12 
months from that pre-July 1, 2009, start date. No additional economic 
hardship deferment periods may be granted based on that criterion to 
the borrower at the conclusion of that deferment period, or for any 
deferment request on or after July 1, 2009, for a deferment period that 
begins on or after that date.
    Changes: We have added the phrase ``at the time the borrower 
certifies family size'' to the definition of ``family size'' in 
Sec. Sec.  682.215(a)(3) and 685.221(a)(3) for purposes of the IBR 
plan. We have also amended the definition of family size for purposes 
of the economic hardship deferment and the IBR plan in Sec. Sec.  
674.34(e)(8)(ii), 682.210(s)(6)(ix), 682.215(a)(3), and 685.221(a)(3) 
to clarify that an unborn child is included if that child will be born 
in the year the borrower certifies family size.

Military Service Deferment and Post-Active Duty Student Deferment 
(Sec. Sec.  674.34, 682.210, 682.211, and 682.204)

    Comment: One commenter asked that we clarify that all borrowers who 
return to school on at least a half-time basis after being demobilized 
from active duty military service, lose the ability to defer payments 
via the post-active duty student deferment. The commenter believed that 
the reference in the proposed regulations to ``the conclusion of the 
borrower's active duty military service and any applicable grace 
period'' could create a loophole for borrowers who re-enroll after 
their date of demobilization but prior to the end of their grace 
period. The commenter believes that this language would unintentionally 
allow ineligible borrowers to receive deferments.
    Another commenter asked the Department to clarify that the 
mandatory forbearance described in Sec.  682.211(h)(2)(iii) does not 
cover National Guard members who are called to Federal active duty if 
the active duty does not fall under a war, a military operation as 
defined in 10 U.S.C. 101(a)(13), or a national emergency declared by 
the President due to a terrorist attack. Another commenter also 
recommended that the same mandatory forbearance provision be amended to 
clarify that the forbearance would begin after the borrower ceases at 
least half-time enrollment.
    Discussion: The reference in the proposed regulations governing the 
post-active duty student deferment to the expiration of the borrower's 
applicable grace period was not intended to provide a borrower who 
returns to school after being demobilized, but before using the full 
grace period on a loan, with an opportunity to retain unlimited 
eligibility for the post-active duty student deferment after completing 
school or dropping to less than half-time enrollment, which could be 
many years later. Under these final regulations, all borrowers who 
return to at least half-time enrollment following demobilization will 
lose eligibility for the deferment. Eligible borrowers who do not 
return to school after being demobilized, however, will receive their 
full grace period on a loan before the 13-month post-active duty 
student deferment period would begin.
    With regard to the comment on clarifying the applicability of 
mandatory forbearance, we note that the provision in Sec.  
682.211(h)(2)(iii) mentioned by the commenter only applies to members 
of the National Guard who qualify for a post-active duty student 
deferment. A member of the National Guard cannot qualify for a post-
active duty student deferment for Federal duty. A member of the 
National Guard may only qualify for the post-active duty student 
deferment for active State duty. The active State duty may be paid for 
with State funds, as provided in Sec.  682.210(u)(2)(i), or with 
Federal funds, as provided in Sec.  682.210(u)(2)(ii). But, in both 
cases, the member of the National Guard is on active State duty, not on 
Federal duty.
    A member of the National Guard on Federal duty is on ``full-time 
National Guard duty'', as that term is defined in

[[Page 63236]]

10 U.S.C. 101(d)(5). The post-active duty student deferment only 
applies to borrowers on active duty as defined in 10 U.S.C. 101(d)(1). 
The definition of ``active duty'' in section 101(d)(1) explicitly 
excludes ``full-time National Guard duty''. Therefore, a borrower on 
``full-time National Guard duty'' may not qualify for a post-active 
duty student deferment, or for the mandatory forbearance specified in 
Sec.  682.211(h)(2)(iii).
    A borrower on ``full-time National Guard duty'' may qualify for a 
military service deferment, if the borrower meets the other eligibility 
criteria for the military service deferment. A forbearance covering the 
period of active duty military service is not necessary for a borrower 
who qualifies for a military service deferment.
    We agree with the commenter that the mandatory forbearance period 
would begin only after the borrower ceases at least half-time 
enrollment.
     Changes: Section 682.211(h)(2)(iii)(B) has been amended to specify 
that the mandatory forbearance period for a FFEL loan in repayment 
begins on the day after the borrower ceases enrollment on at least a 
half-time basis.

Income-Based Repayment (IBR) Plan

General Comments

    Comment: A couple of commenters recommended that a borrower's total 
student loan debt, including private education loans and the Federal 
student loan debt held by all the borrower's loan holders, be 
considered when calculating the borrower's maximum payment amount under 
the IBR plan. Another commenter asked that the Department provide 
reduced interest rates, or forgiveness of a portion of the loan 
principal, during periods of financial hardship when a borrower is 
making payments. This commenter also recommended that lenders use a 
standardized format to explain the determination of the payment amount 
under IBR to the borrower, so that both the calculation and the source 
of information can be verified.
    One commenter recommended that we include illustrations that 
demonstrate a borrower's successful compliance or technical 
noncompliance with the IBR requirements in the final regulations.
    A few commenters noted that a lender may use alternative 
documentation to verify the borrower's income when the borrower's AGI 
is not available, or the loan holder suspects that the AGI does not 
accurately reflect the borrower's current income. These commenters 
recommended that the borrower, as well as the lender, have the option 
to provide alternative documentation in place of the AGI. Another 
commenter recommended that we not use AGI at all, but rely on current 
year income instead.
    Another commenter noted that the IRS disclosure form that will be 
used to determine a borrower's AGI permits the IRS to provide AGI and 
``other'' tax information to the lender. This commenter recommended 
that ``other'' be removed from the regulations, so that extraneous tax 
information is not provided to lenders.
    Discussion: The HEA provisions governing IBR do not authorize the 
use of non-Federal education debt in determining whether a borrower has 
a partial financial hardship or in calculating IBR payment amounts. Nor 
does the law provide for reduced interest rates for borrowers in IBR, 
or for loan forgiveness before the borrower has made 25 years of 
payments. The Secretary does not have the authority to make these 
changes to the IBR plan. However, as specified in Sec.  
682.215(b)(1)(i), loan holders must take into account a borrower's 
eligible Federal student loans held by all of the borrower's loan 
holders when determining monthly payment amounts.
    The Department thanks the commenter for the recommendation that 
lenders use a standardized format to provide IBR payment amount 
information to a borrower. This is an operational issue and the 
Department will consider the commenter's recommendation when developing 
operational guidance to implement the IBR plan.
    The Department does not generally include illustrations in its 
regulations, but will consider providing examples and illustrations, as 
necessary, in other operational guidance, training materials, and 
consumer information developed to implement IBR.
    The IBR provisions of the HEA require the use of the borrower's AGI 
to determine whether a borrower has a partial financial hardship. The 
Department believes that using AGI from the borrower's most recent tax 
return is the most accurate method to document and verify the 
borrower's annual income for the purpose of calculating IBR payment 
amounts. However, we recognize that, in some cases a tax return AGI 
will not be available, or will not accurately reflect the borrower's 
current financial circumstances. Therefore, the regulations allow a 
loan holder to use alternative documentation of the borrower's income 
under those circumstances. It is up to the loan holder to decide if it 
is appropriate to use alternative documentation. However, a borrower 
may alert the loan holder to any changed financial circumstances that 
may support the use of alternate documentation.
    The consent form the borrower signs is an IRS form, not a 
Department of Education form. The IRS consent form is used for many 
purposes unrelated to the IBR plan. The ``other'' tax information 
referenced in the regulations includes any other tax information 
covered by the standard IRS form. Tax information covered by the 
consent form but not needed for IBR determinations would not need to be 
tracked or captured in any way by the loan holder.
    Changes: None.

Electing IBR

    Comment: Several commenters opined that, under the proposed 
regulations, low-income borrowers who have partially paid the principal 
on their loans and have less than 10 years remaining to repay their 
loans would not qualify for lower payments under the IBR plan even if 
the borrowers' loan payments were high. The commenters argued that 
these borrowers would not be considered to have partial financial 
hardships based on a 10-year repayment of their current loan balance. 
The commenters recommended that the regulations be changed to use the 
borrowers' current payments to determine if the borrowers would be 
eligible for lower IBR payments. They contend that this would avoid 
penalizing borrowers who made payments on their loans, but who might 
benefit from the IBR plan.
    Discussion: The commenters misinterpreted the proposed regulations, 
which reflect the statutory requirement by providing that a borrower 
may elect the IBR plan only if the borrower has a partial financial 
hardship. In determining whether a borrower has a partial financial 
hardship, the loan holder compares two amounts: (1) The annual amount a 
borrower would pay, at the time the borrower initially entered 
repayment, on the total outstanding balance of his or her loans, based 
on a standard repayment over a 10-year repayment period; and (2) the 
annual amount the borrower would pay under the income-based provisions. 
The commenters' belief that the borrower's current loan balance would 
be used as the first part of this comparison is not accurate. Rather, 
the first part of the comparison uses the annual amount determined as 
of the date the borrower entered

[[Page 63237]]

repayment, without regard to the borrower's current payments.
    Changes: None.
    Comment: A group of commenters noted that because the HEOA amended 
the HEA with respect to the eligibility of defaulted borrowers for the 
IBR plan, the Department should revise the regulations to reflect that 
change and clarify that borrowers who are in default are not eligible 
for the IBR plan for their defaulted loans.
    Discussion: The Department agrees that under the HEA, as amended by 
the HEOA, a defaulted borrower is not entitled to elect IBR as a 
repayment plan. Upon default, a loan is due and payable in full by the 
borrower and the borrower no longer has the option to choose among the 
pre-default repayment plans. Under section 422(j) of the HEA, as 
amended by the HEOA, the Secretary has discretion to require a borrower 
of a defaulted FFEL loan to repay the loan under the IBR plan after it 
is assigned to the Department by a guaranty agency, and to require 
borrowers of other defaulted FFEL and Direct Loans held by the 
Department to also pay under the IBR plan.
    Changes: Section 682.215(a)(2) has been amended to exclude 
defaulted loans from the category of eligible loans for IBR repayment. 
Proposed Sec. Sec.  682.215(g)(7) and 682.410(b)(5)(vi)(G) and 
(b)(9)(i)(D), which would have regulated a guaranty agency's 
consideration of a defaulted loan for IBR and reimbursement to a 
guaranty agency on a defaulted loan that was forgiven under IBR have 
been removed.

IBR Payment Amounts

    Comment: Many commenters argued that the proposed regulations for 
the IBR plan would disadvantage married borrowers in cases where the 
borrower and his or her spouse both have outstanding loans, file a 
joint Federal tax return, and both qualify for IBR. In these cases, 
married borrowers could pay up to double the monthly loan payment of 
two unmarried borrowers in a similar financial situation. Each of the 
two married borrowers could be required to make payments representing 
up to 30 percent of discretionary income (the amount of a borrower's 
income that exceeds 150 percent of the poverty guideline applicable to 
the borrower's family size) whereas the HEA limits payments under the 
IBR plan to 15 percent of discretionary income. The commenters 
contended that this approach amounts to a ``double-counting penalty'' 
because the proposed regulations assumed that each spouse has access to 
the couple's total discretionary income, without considering that the 
other spouse is also making loan payments from the same discretionary 
income. To avoid this penalty for married borrowers, the commenters 
suggested that we consider both spouses' loan debt (instead of just the 
borrower's loan debt) in determining eligibility for the IBR plan.
    Discussion: This issue was raised during the negotiated rulemaking 
sessions to develop the proposed regulations and was discussed in the 
preamble to the NPRM (73 FR 37698-37699). As the Department noted in 
that discussion, section 493C(a) of the HEA provides that only the 
borrower's loan debt is considered when determining whether the 
borrower has a partial financial hardship. Moreover, section 493C(d) of 
the HEA specifically provides for considering the individual AGI of a 
married borrower only when the borrower and his or her spouse file 
separate Federal tax returns. Thus, the policy advocated by these 
commenters would not be consistent with the HEA.
    Changes: None.
    Comment: A group of commenters asked the Department to confirm in 
the preamble to the final regulations that lenders may use the 
Department's National Student Loan Data System (NSLDS) to determine the 
number and amount of loans a borrower has that are eligible to be 
included in the IBR plan. The commenters said that a lender would need 
access to NSLDS because a borrower may choose which eligible loans he 
or she wants to include under the IBR plan, and a lender needs to know 
how much the borrower owes to other lenders to calculate the payment 
amount under the IBR plan.
    Discussion: The Department agrees that lenders may use NSLDS for 
this purpose.
    Changes: None.
    Comment: Several commenters indicated that the IBR regulations for 
monthly payments of $0.00 and $10.00 were clear in the proposed 
regulations except when the borrower's eligible loans are held by 
multiple lenders. The commenters recommended that when there are 
multiple lenders, the application of the IBR regulations for monthly 
payments of $0.00 and $10.00 should apply at the lender level rather 
than at the borrower level.
    Discussion: We agree.
    Changes: Sections 682.215(b)(1)(ii) and (iii) and 685.221(b)(2)(ii) 
and (iii) have been revised to provide that the $0.00 and $10.00 
monthly payment regulations also apply when the borrower has multiple 
loan holders.
    Comment: Several commenters asserted that the NPRM did not clearly 
state when the three-year period during which the Secretary pays a 
borrower's unpaid accrued interest under the IBR plan would begin. The 
proposed regulations stated that this period would begin on ``the date 
the borrower initially began repayment on each loan under the income-
based repayment plan''. The commenters recommended that the regulations 
specify that this period begins with the established payment period 
start date on the loan. The commenters also stated that it was unclear 
under the proposed regulations whether the amount of the subsidy 
payment on behalf of the borrower was based on the borrower's monthly 
scheduled payment amount or the borrower's actual payment amount, and 
recommended that the subsidy payment be based on the borrower's actual 
payment. In addition, several commenters recommended that the 
regulations clarify that the 3-year interest subsidy period excludes 
any period during which the borrower receives an economic hardship 
deferment.
    Discussion: The Department agrees that the ``established payment 
period start date'' is the appropriate date for beginning the three-
year period during which the Secretary pays interest on the borrower's 
behalf. The Department also agrees that the regulations should reflect 
the provision in section 493C(b)(3) of the HEA that excludes periods of 
economic hardship deferment from the 3-year subsidy period. The 
Secretary disagrees, however, that the subsidy payment amount should be 
based on the actual payment of the borrower rather than the borrower's 
monthly scheduled payment amount. A borrower's scheduled monthly 
payment amount, regardless of whether it covers accrued interest, is 
the borrower's payment obligation. During the 3-year period, the 
Department's obligation under the law is to pay only the amount of 
unpaid accrued interest that is not the borrower's obligation to pay 
during this period.
    Changes: Sections 682.215(b)(4) and 682.300(b)(1)(iv) have been 
amended to clarify that the 3-year period during which the Secretary 
will pay interest for a borrower under the IBR plan begins on the 
borrower's established repayment period start date and excludes any 
period during which the borrower receives an economic hardship 
deferment. Similar changes have also been made to Sec.  685.221(b)(2) 
for the Direct Loan Program.
    Comment: Several commenters noted that there are three types of 
repayment amounts calculated under the IBR plan. The first repayment 
amount is calculated to determine whether a

[[Page 63238]]

borrower has a partial financial hardship and is the annual payment 
amount calculated for a 10-year repayment period under Sec.  
682.209(a)(6)(vi) of the FFEL Program regulations and is based on the 
loan balance outstanding when the borrower initially entered repayment 
on the loan. The second calculated payment amount is the maximum 
monthly payment amount calculated when a borrower no longer has a 
partial financial hardship or no longer wishes to make IBR based 
payment amounts but stays within the IBR plan, and is based on a 10-
year repayment period using the loan balance outstanding when the 
borrower began repayment on the loan under the IBR plan. The third 
payment amount is calculated when the borrower elects to leave the IBR 
plan entirely and is calculated, for a Stafford Loan, on the time 
remaining on a 10-year repayment period using the borrower's 
outstanding balance on the loan when the borrower discontinued paying 
under the IBR plan, and for a Consolidation Loan, on the remaining 
repayment period using the borrower's outstanding balance on the loan 
and on other student loans that were outstanding when the borrower 
discontinued paying under the IBR plan. During the negotiated 
rulemaking process, the non-Federal negotiators from the FFEL industry 
used the terms standard-standard, standard-permanent, and standard-
expedited to designate these three calculated amounts and the 
commenters recommended that the Department incorporate these terms into 
the regulations for ease of understanding.
    Discussion: The Department thanks the commenters for suggesting 
these terms. However, these terms are not used in the HEA and the 
Department does not believe that they should be used in the program 
regulations. These terms may be used for illustrative and training 
purposes in nonregulatory guidance.
    Changes: None.
    Comment: Several commenters recommended that we include preamble 
language to clarify that the $50 minimum payment rule that generally 
applies in the FFEL Program would apply to the monthly payment 
calculated when a borrower no longer has a partial financial hardship. 
These commenters also believed that the proposed regulations regarding 
the maximum monthly payment amount could be interpreted to give the 
borrower the discretion to make a lower payment. They recommended that 
we clarify the regulations to specify that the loan holder, not the 
borrower, determines this payment amount.
    Discussion: We agree that the minimum monthly payment of $50 
applies when the borrower no longer has a partial financial hardship. 
We also agree that the maximum monthly repayment amount is an amount 
determined by the loan holder, not by the borrower, based on a FFEL 
standard repayment plan with a 10-year repayment period.
    Changes: Section 682.215(d)(1)(i) has been revised to clarify that 
the loan holder determines the monthly payment amount.
    Comment: Several commenters recommended that the regulations in 
proposed Sec.  682.215(c)(3) that require a loan holder to apply any 
prepayment amount or any amount that exceeds the monthly payment amount 
consistent with the requirements of Sec.  682.209(b)(2)(ii) and which 
would advance the borrower's payment due date under certain 
circumstances, should not apply when a borrower's monthly payment 
amount is $0.00.
    Discussion: We agree that there is no need to advance the next 
monthly due date under 34 CFR Sec.  682.215(c)(3) when a borrower sends 
in a prepayment at a time when the borrower's monthly payment amount is 
$0.00. The prepayment amount should be applied in the order specified 
in Sec.  682.215(c)(1): interest, collection costs, late charges, and 
loan principal.
    Changes: Section 682.215(c)(3) has been revised to clarify that the 
requirement to advance a payment due date applies only when the 
prepayment amount equals or exceeds the monthly payment amount of 
$10.00 or more. We also have added a new Sec.  682.215(c)(4) to clarify 
that when the prepayment amount exceeds the monthly payment amount of 
$0.00, the prepayment amount is applied consistent with Sec.  
682.215(c)(1).

Documentation and Verification Requirements

    Comment: Under the proposed regulations, if a borrower selects the 
IBR plan, but does not provide or renew the required written consent 
for income verification, or withdraws consent and does not select 
another repayment plan, the lender places the borrower in the IBR plan, 
and the borrower is required to make payments based on a 10-year FFEL 
standard repayment plan. Several commenters recommended that the 
Department revise the regulations to clarify that if a borrower 
requests IBR, but does not provide documentation to prove partial 
financial hardship, then the request must be denied and the borrower 
must remain in his current repayment plan or choose another plan for 
which he is eligible.
    Discussion: The regulations address the impact of a borrower's 
failure to submit required documentation for the IBR plan in two 
places. Under Sec.  682.209(a)(6)(v)(C), a lender must deny a 
borrower's request for an IBR repayment schedule if the borrower does 
not submit the required documentation within the time specified by the 
lender. The provisions in Sec. Sec.  682.215(e)(2)(i) and 
685.221(e)(2)(i) that are discussed by the commenters apply only to 
borrowers who are already in the IBR plan, but in a subsequent year 
fail to renew their written consent for income verification. We agree 
to revise the regulations to clarify this distinction.
    Changes: Sections 682.215(e)(2)(i) and 685.221(e)(2)(i) have been 
revised to clarify that if a borrower who is already in the IBR plan 
fails to renew his or her consent for income verification, the loan 
holder treats the borrower in the same way as a borrower who no longer 
has a partial financial hardship.
    Comment: The proposed regulations require a loan holder to 
determine whether a borrower has a partial financial hardship each year 
the borrower is in the IBR plan. Several commenters argued that a 
borrower who no longer has a partial financial hardship but remains in 
the IBR plan should not be required to provide partial financial 
hardship eligibility documentation for subsequent years.
    Discussion: Section 493C(c) of the HEA requires a loan holder to 
verify each year that a borrower has a partial financial hardship and 
is eligible for IBR. The regulations must reflect this requirement.
    Changes: None.
    Comment: Under the proposed regulations, in determining whether a 
borrower has a partial financial hardship, the family size 
determination defaults to one for any year for which a borrower does 
not certify family size. Some commenters suggested that family size 
default instead to the family size previously certified by the 
borrower.
    Discussion: The Department believes that defaulting to the prior 
year's family size would be a disincentive for borrowers in the IBR 
plan to provide to loan holders timely, updated information on their 
family size. Moreover, allowing family size to default to the 
borrower's family size for the prior year would increase Federal costs 
and would require a budgetary offset.
    Changes: None.

[[Page 63239]]

Processing Loan Forgiveness in the IBR Plan

    Comment: Under the proposed regulations, if a borrower leaves the 
IBR plan, the borrower must pay under the FFEL standard repayment plan, 
and the lender recalculates the borrower's monthly payments based on 
the time remaining in the standard 10-year repayment period. Several 
commenters believed the time that the borrower is in the IBR plan 
should be treated like a deferment or forbearance and should not be 
counted towards the 10-year repayment period. These commenters argued 
that borrowers should have the option to switch out of the IBR plan to 
any repayment plan for which they are eligible--not just the FFEL 
standard repayment plan--and effectively have a full repayment period 
available to them after leaving the IBR plan.
    Discussion: Section 493C(b)(8) of the HEA specifies that a borrower 
who is repaying a loan under the IBR plan may, at any time, terminate 
repayment under the IBR plan and ``repay such loan under the standard 
repayment plan.'' The law does not give the borrower the option to 
choose a different repayment plan when terminating repayment under the 
IBR plan. Nor is there authority in the HEA to treat the borrower's 
time in the IBR plan as a deferment or forbearance that is excluded 
from the repayment period. However, the HEA does not require that 
borrowers stay in the standard 10-year repayment plan for the remaining 
life of the loan. As with any other borrower in the FFEL and Direct 
Loan programs, these borrowers may request a change in repayment plan 
no more frequently than annually as provided in the HEA. However, since 
the maximum repayment periods under other FFEL and Direct Loans 
repayment plans, except extended repayment and Consolidation, are 10 
years, in most circumstances the repayment options for the borrower 
will be severely limited depending on the period of time the borrower 
remained in the IBR plan.
    Changes: None.
    Comment: Several commenters stated that they believe that under the 
HEA any borrower payment that is not less than either the payment 
calculated based on a 10-year repayment plan using the outstanding 
balance when the borrower began repayment, or the payment based on a 
10-year repayment plan using the outstanding balance when the borrower 
first began IBR, should count toward the 25-year forgiveness period. 
The commenters asked that this reading of the HEA be reflected in the 
regulations.
    Discussion: Section 493C(b)(7) of the HEA specifically lists the 
types of payments and payment plans that qualify the borrower for IBR 
loan forgiveness. Only payments made under the specified repayment 
plans and for the stipulated amounts count toward the 25 year period 
for forgiveness.
    Changes: None.
    Comment: The loan holder must request payment from the guaranty 
agency no later than 60 days after the loan holder determines that the 
borrower qualifies for loan forgiveness. Several commenters noted that 
the actual date a borrower qualifies for loan forgiveness under the IBR 
plan is a date the lender tracks, and recommended that that date be the 
start date for the 60-day filing period, rather than the date the 
lender makes the determination that the borrower qualifies, as provided 
for in the proposed regulations.
    Discussion: We disagree with the commenters' recommendation. In the 
case of other loan discharges under the HEA, the trigger date for 
lender filing deadlines is the date the lender makes a determination of 
the borrower's eligibility, or the date the borrower submits a written 
request for discharge. The trigger date is not the actual date that the 
borrower became eligible for the discharge. We believe that IBR loan 
forgiveness should be treated similarly to loan discharges in this 
regard, with the 60-day filing period beginning on the date the lender 
determines that the borrower qualifies for loan forgiveness.
    Changes: None.
    Comment: Several commenters urged the Department to provide 
specific guidance regarding qualifying loan payments for the 25-year 
IBR loan forgiveness in light of the HEOA change to the HEA that 
excludes defaulted borrowers from IBR. The commenters asked whether all 
pre-default, post-default, and loan rehabilitation payments would count 
towards satisfying the 25-year payment requirement.
    Discussion: When a borrower defaults on a loan, the loan is 
immediately due and payable in full. Any payments made by a borrower to 
the holder of the defaulted loan are not made under an authorized 
repayment plan. Payments made under a rehabilitation agreement with the 
holder are payments made on a defaulted loan. The Department believes 
that the result of the change made by the HEOA is that only pre-default 
payments will be considered qualifying payments for the purpose of the 
25-year IBR forgiveness, unless the borrower is in an authorized post-
default IBR plan on a defaulted loan held by the Department. However, a 
borrower repaying under the IBR plan who defaults, then successfully 
rehabilitates the defaulted loan, and then returns to IBR on the 
rehabilitated loan would simply resume the 25-year repayment period for 
forgiveness.
    Changes: Section 682.215(f) has been revised to specify that 
payments made on a defaulted loan are not made under a qualifying 
repayment plan and therefore, do not count toward the 25-year 
forgiveness period. A conforming change has been made to Sec.  
685.221(f).
    Comment: Several commenters recommended that the regulations 
specify that a holder must promptly return any payment received on a 
loan after the guaranty agency pays the holder the forgiveness amount.
    Discussion: We agree.
    Changes: We have added a new Sec.  682.215(g)(8) to the 
regulations, to read: ``The loan holder must promptly return to the 
sender any payment received on a loan after the guaranty agency pays 
the loan holder the amount of loan forgiveness.''
    Comment: Under the proposed regulations, a loan holder must provide 
the borrower with information on the required handling of the 
forgiveness amount. Some commenters requested that the Department 
clarify in the preamble that it is inappropriate for a holder to 
provide tax advice and that holders could comply with the regulatory 
requirement by directing the borrower to the IRS Web site or to IRS 
Publication 970 for more information. The commenters also pointed out 
that this provision is not in the corresponding section in the Direct 
Loan program regulations.
    Discussion: A loan holder is expected to make a general disclosure 
to the borrower on what it believes to be the current tax treatment of 
such amounts and is encouraged to refer borrowers to the IRS for 
further information. The Department will provide similar information to 
Direct Loan borrowers but the Direct Loan program regulations do not 
need to be amended since the Secretary does not issue regulations to 
govern the Department.
    Changes: None.
    Comment: The proposed regulations provide that if a guarantor does 
not pay an IBR loan forgiveness claim, the lender resumes collection 
activity on the loan. Several commenters requested that we specify that 
the lender may capitalize the interest that accrued but was not paid on 
the loan for the period during which the borrower's obligation to repay 
the loan was suspended.
    Discussion: In general, we agree that interest that accrued during 
the period when collection on the loan is

[[Page 63240]]

suspended while the loan forgiveness claim is being processed should be 
capitalized. However, the loan holder should not benefit if the loan 
holder submits the claim for forgiveness in error. Therefore, we have 
modified the regulations to provide for capitalization only if the 
forgiveness claim is not submitted by the lender in error.
    Changes: Section 682.215(g) has been revised by adding the 
following sentence: ``Unless the denial of the forgiveness claim was 
due to an error by the lender, the lender may capitalize, in accordance 
with Sec.  682.202(b), any interest accrued and not paid during this 
period.''

Eligible Not-for-Profit Holder Definition (Sec.  682.302(f)(3))

    Comment: On the issue of determining when a for-profit controls a 
not-for-profit holder, several commenters representing FFEL industry 
members stated that a distinction made in the preamble to the NPRM 
between family members employed as lower level employees at a not-for-
profit loan holder and those employed in more responsible positions is 
not reflected in the regulations. The commenters believed that the 
proposed regulations relating to a for-profit entity exercising control 
over a State or non-profit entity leave to the discretion of the 
Secretary the determination of whether the nature of a family member's 
employment is likely to affect the integrity of decisions made by a 
non-profit entity's boards or committee. The commenters pointed out 
that in very large organizations someone could be in a ``responsible 
position'' but have no influence or control over student loans. The 
commenters asked the Department to clarify that the Secretary has the 
discretion to determine whether a family member could be employed at a 
non-profit organization in a responsible position unrelated to student 
loans.
    Discussion: The Department agrees that the proposed regulations do 
not draw any distinction based on the level of a family member's 
employment in determining whether that employment or appointment by a 
for-profit entity constitutes control of the non-profit entity. We 
note, however, that Sec.  682.302(f)(3)(vi)(B) assumes that the 
employment or appointment of a family member at any level of employment 
constitutes controlling influence of the non-profit entity unless the 
Secretary specifically determines otherwise. The Secretary will 
examine, among other factors, the family member's level of employment 
or appointment in determining whether that employment affects the 
integrity of the non-profit entity's decisions.
    Changes: None.
    Comment: Several commenters representing FFEL industry participants 
noted that State and non-profit entities are often required to create 
and use special purpose entities in connection with financing the 
origination or purchase of FFEL Program loans. This kind of special 
purpose entity is often called a ``bankruptcy remote vehicle'' because, 
although it was created by, and may appear to be a subsidiary or 
affiliate of, the State or non-profit entity, its asset and liability 
structure and its legal structure and status make its obligations 
secure in the event of the bankruptcy of the non-profit entity parent 
or guarantor. Such a special purpose entity is separate from the State 
or non-profit entity. By complying with various criteria established by 
bond rating agencies or lenders that support its bankruptcy remote 
status, its loans and other assets are viewed as sufficiently protected 
from claims by creditors of the State or non-profit entity in the event 
of such a bankruptcy. The commenters noted that the Department has 
previously taken the position that an eligible lender trustee may 
qualify as an eligible not-for-profit holder when it is acting on 
behalf of a special purpose entity related to a State or non-profit 
entity, even though the special purpose entity--and not the State or 
non-profit entity--held beneficial or legal ownership, or both, of the 
loans. The proposed regulations as drafted would have disqualified 
loans for which a State or non-profit entity was not the sole 
beneficial owner. Commenters asked that the Department specify in the 
final regulations that the Department considers loans that would 
qualify for the higher special allowance payment (SAP) rate if owned 
directly by an eligible not-for-profit holder that is a State or non-
profit entity will qualify for that rate if now owned solely by its 
related special purpose entity.
    Discussion: The Department acknowledges that the use of a special 
purpose entity, sometimes called a ``bankruptcy remote vehicle,'' is 
often a required element of financing FFEL program loan originations 
and purchases by State and non-profit entities. Because the special 
purpose entity holds ben