[Federal Register Volume 59, Number 245 (Thursday, December 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31354]


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[Federal Register: December 22, 1994]


_______________________________________________________________________

Part VII





Department of Education





_______________________________________________________________________



34 CFR Part 685




William D. Ford Federal Direct Loan Program; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 685

 
William D. Ford Federal Direct Loan Program

RIN 1840-AC11
AGENCY: Department of Education.

ACTION: Final standards, criteria, and procedures.

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SUMMARY: The Secretary of Education issues final standards, criteria, 
and procedures governing the alternative repayment and income 
contingent repayment (ICR) plans under the William D. Ford Federal 
Direct Loan (Direct Loan) Program for the academic year beginning July 
1, 1994.
    These standards, criteria, and procedures apply to loans under the 
Federal Direct Stafford/Ford Loan Program, the Federal Direct 
Unsubsidized Stafford/Ford Loan Program, the Federal Direct PLUS 
Program, and the Federal Consolidation Loan Program, collectively 
referred to as the Direct Loan Program.

EFFECTIVE DATE: December 22, 1994.

FOR FURTHER INFORMATION CONTACT: Ms. Rachel Edelstein, Room 3012, ROB-
3, 600 Independence Avenue, SW, Washington, D.C., 20202, telephone: 
(202) 708-9406. Individuals who use a telecommunications device for the 
deaf (TDD) may call the Federal Information Relay Service (FIRS) at 1-
800-877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION: The Student Loan Reform Act of 1993, enacted 
on August 10, 1993, established the Direct Loan Program under the 
Higher Education Act of 1965, as amended (HEA). See Subtitle A of the 
Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66). Under the 
Direct Loan Program, loan capital is provided directly to student and 
parent borrowers by the Federal Government rather than through private 
lenders. Borrowers under the Direct Loan Program are provided a range 
of repayment options, including an ICR plan.
    The HEA directs the Secretary to consult with members of the higher 
education community and to publish a notice of standards, criteria, and 
procedures for the program's first year in lieu of issuing regulations 
using the Department's usual procedures. The Secretary's 
representatives have consulted with representatives of students, 
colleges, universities, proprietary schools, and educational 
associations, as well as representatives of the financial aid 
community, in developing this notice. In particular, the Secretary's 
representatives have had extensive consultations with the other members 
of the Direct Student Loan Regulations Negotiated Rulemaking Advisory 
Committee established to develop proposed regulations for the second 
and subsequent years of the program. See the Secretary's announcement 
of his intention to establish this Committee at 58 FR 68619 (December 
28, 1993). The Secretary, in consultation with the above-discussed 
members of the higher education community, has determined that this 
notice is reasonable and necessary to the successful implementation of 
the first year of the program.
    This notice modifies the provisions of the ICR plan and the 
alternative repayment plan for the 1994-95 academic year.

I. Background

    On July 1, 1994, the Secretary published a final regulation 
governing the Direct Loan Program for the 1994-95 academic year. That 
regulation prescribes the formula used to determine the repayment 
amounts under the ICR plan for borrowers whose loans enter repayment 
during the 1994-95 academic year.
    On August 18, 1994, the same formula was published in a Notice of 
Proposed Rulemaking relating to the 1995-96 and subsequent years of the 
Direct Loan Program. The Secretary received 98 comments on that NPRM, 
most of which include discussion of the ICR plan. In response to those 
comments, the Secretary made several changes to the ICR plan for the 
1995-96 and subsequent academic years. The changes provide borrowers 
with better repayment terms than are currently available for the 1994-
95 academic year. For example, the limit on the amount of interest that 
will be capitalized (or added to principal) was reduced from 50 percent 
of the original principal to 10 percent of the original principal, 
thereby reducing the cost of borrowing significantly for some borrowers 
whose monthly payments are lower than the amount of interest accrued. 
The new ICR formula also lowers the required monthly payment for many 
borrowers who have lower incomes.
    This notice extends the revised ICR formula and its benefits, 
including the reduced level of capitalization, to borrowers whose loans 
enter repayment in the 1994-95 academic year. This notice also reduces 
the level of capitalization of interest on loans repaid under the 
alternative repayment plan for borrowers whose loans enter repayment in 
the 1994-95 academic year. Finally, this notice establishes a 30-year 
maximum repayment period for the alternative repayment plan.
    The Secretary believes that it is desirable for all Direct Loan 
borrowers who choose the ICR plan to be subject to the same formula 
during the first years of this new program. As of this date, no Direct 
Loan borrowers have entered repayment under the ICR formula published 
on July 1, 1994, but some Direct Loan borrowers will enter income 
contingent repayment before the 1994-95 academic year is over. This 
notice provides that the revised ICR plan will apply to those 
borrowers.
    The Secretary believes that applying one formula to all borrowers 
allows the Secretary to publish materials that clearly explain the 
repayment options to borrowers without having to discuss multiple 
formulas. Furthermore, having a single formula during the initial years 
of this program simplifies the administration of the program for 
schools and promotes a clear understanding of the repayment provisions.

II. Summary of Contents

Section 685.208  Repayment Plans

    The Secretary has established the maximum repayment period 
allowable under the alternative repayment plan at 30 years. Further, 
under the alternative plan, interest that accrues and is not paid will 
be capitalized annually until the outstanding principal is 10 percent 
greater than the original principal amount.

Section 685.209  Income Contingent Repayment Plan

    The Secretary has significantly modified the income contingent 
repayment (ICR) plan provisions. The Secretary is lowering the limit on 
interest capitalization that may occur when interest accrues, but is 
not paid, from 50 percent greater than the original principal amount to 
10 percent greater than the original principal amount. Also, monthly 
payments will be limited to 20 percent of discretionary income (AGI 
minus the poverty level appropriate to the family size). This change 
eliminates the need for the previous family size offset of $7 and 
provides a new cap on the amount of income assessed. The Secretary is 
including years of repayment under the 10-year standard repayment plan 
and the 12-year extended repayment plan as years eligible for 
determining the 25-year period for loan forgiveness. The monthly 
repayment amount below which no payment is required under the formula 
calculation is $15. Under the 12-year standard amortization cap, the 
minimum payment is $15 (that is, a borrower must pay at least $15 each 
month). The 12-year standard amortization cap calculation has been 
modified to provide for the recalculation of the cap following periods 
of negative amortization because these periods result in an increase in 
the outstanding loan balance. The payback rate for married borrowers 
paying jointly under ICR will be calculated on the outstanding debt at 
the time the borrowers are approved for joint repayment. For borrowers 
repaying jointly, payments will be applied to interest on both accounts 
prior to principal reduction in either.
    Section 685.209 (ICR plan) contains provisions governing the two 
monthly payment calculations, namely the formula amount and the capped 
amount, available for repayment of Direct Loans under the ICR plan. 
Borrowers may choose to repay either the formula amount or the capped 
amount. (See Appendix A for detailed examples illustrating, for single 
borrowers and for married borrowers who are repaying under the ICR 
plan, the calculations of the formula and capped monthly repayment 
amounts.)
Formula Amount
    Calculation of the ICR formula monthly payment amount is described 
in paragraph (b) of this section. In general, the borrower's annual 
repayment obligation is the borrower's AGI multiplied by a ``payback 
rate'' that is based on the borrower's debt. The monthly payment is the 
annual repayment obligation divided by 12. The ``payback rate'' varies 
from four to 15 percent, calculated as described in paragraph (b)(2). 
The payment amount cannot exceed 20 percent of discretionary income 
(AGI minus the annual poverty level appropriate to the family size) 
divided by 12. If the calculated monthly payment is less than $15, the 
borrower is not required to make a payment. When a borrower is not 
required to make a payment, interest on the principal accrues and will 
be capitalized until the limitation on capitalization is reached.
Capped Amount
    Calculation of the capped monthly payment amount is described in 
paragraph (c), and equals the monthly amount the borrower would repay 
over 12 years using standard amortization schedules. If the formula 
amount exceeds the capped amount, the borrower may choose to pay the 
capped amount. If the borrower chooses to pay the capped amount, the 
borrower's repayment period may be longer than if the borrower chooses 
to pay the higher formula amount.
Joint Repayment By Married Borrowers
    This section includes provisions for joint income contingent 
repayment of Direct Loans by married borrowers. Negative amortization 
is minimized by attributing joint repayments first to the interest due 
on each spouse's account and then to principal. A step-by-step 
calculation of a combined repayment amount is included as Example 2 in 
Appendix A.
Repayment Period
    Provisions governing the repayment period under ICR are contained 
in paragraph (d)(2). The maximum period is 25 years, excluding periods 
of authorized deferment and forbearance under Secs. 685.204 and 
685.205, respectively, and periods in which the borrower made payments 
under a repayment plan other than the 10-year standard or 12-year 
extended plans. The Secretary believes the exclusion of repayment 
periods under all other extended and graduated plans is needed to 
prevent potential borrower repayment abuses.
    If a borrower repays more than one loan under ICR and the loans 
enter repayment at different times, a separate repayment period for 
each loan begins when the loan enters repayment. This approach ensures 
that no loan will be repaid under ICR for more than 25 years. If loans 
enter repayment at the same time, a single repayment period applies.
    To encourage borrowers to begin repaying their loans and to limit 
negative amortization at the beginning of the repayment period, a 
borrower must make monthly payments of accrued interest until the 
Secretary calculates the borrower's monthly payment on the basis of the 
borrower's income. A borrower who is unable to make monthly payments of 
accrued interest or is unable to qualify for a deferment under 
Sec. 685.204, may request forbearance under Sec. 685.205.
Limit on Capitalization of Interest
    The Secretary believes a limit on the amount of interest that is 
added to principal (the capitalization of interest) is desirable to 
prevent an excessive increase in a borrower's debt burden when the 
borrower's income is insufficient to cover accruing interest. Paragraph 
(d)(3) permits capitalization of unpaid interest until the outstanding 
principal amount is 10 percent greater than the original principal 
amount, a decrease from the 50 percent proposed in the NPRM. 
Thereafter, unpaid interest accrues but is not capitalized.
Consent to Disclosure of Tax Return Information
    In order to repay a Direct Loan under ICR, a borrower must consent, 
on a form provided by the Secretary, to the disclosure of certain tax 
return information by the Internal Revenue Service to agents of the 
Secretary for purposes of calculating a monthly repayment amount and 
servicing and collecting a loan. The information subject to disclosure 
is taxpayer identity information as defined in 26 U.S.C. 6103(b)(6) 
(including such information as name, address, and social security 
number), tax filing status, and AGI. Paragraph (d)(5) describes the 
procedures for providing written consent and requires that consent be 
provided for a period of five years. If a borrower selects ICR but 
fails to provide or renew consent, or withdraws consent without 
selecting a different repayment plan, the Secretary designates the 10-
year standard repayment plan for the borrower.

III. Waiver of Rulemaking

    In accordance with the Administrative Procedures Act, 5 U.S.C. 553, 
it is the practice of the Secretary to offer interested parties an 
opportunity to comment on proposed regulations. However, Pub. L. 103-66 
permits the Secretary to publish a notice in lieu of regulations for 
the first year of the Direct Loan Program and exempts the contents of 
the notice from the rulemaking requirements of section 431 of the 
General Education Provisions Act (recently revised and renumbered by 
Pub. L. 103-382 as section 437). In developing this notice, the 
Secretary's representatives have consulted extensively with the other 
members of the Direct Student Loan Regulations Negotiated Rulemaking 
Advisory Committee established to develop proposed regulations for the 
second and subsequent years of the program, and has taken into 
consideration the public comments submitted in response to the 
Secretary's invitation in the August 18, 1994 Direct Loan NPRM. The 
timely implementation of the ICR plan for borrowers entering repayment 
in academic year 1994-1995 does not permit the solicitation of further 
public comment. A public comment period would seriously delay operation 
of the Direct Loan Program and would prevent borrowers entering 
repayment during the first year of the program from receiving the same 
benefits as borrowers who enter repayment in the second year of the 
program. Therefore, the Secretary finds that solicitation of public 
comments is impracticable and contrary to the public interest under 5 
U.S.C. 553(b)(B). For the same reasons, the Secretary has decided to 
waive the 30-day delayed effective date under 5 U.S.C. 553(d).

List of Subjects in 34 CFR Part 685

    Administrative practice and procedure, Colleges and universities, 
Education, Loan programs-education, Reporting and recordkeeping 
requirements, Student aid, Vocational education.

(Catalog of Federal Domestic Assistance Numbers: 84.268, William D. 
Ford Federal Direct Loan Program)

    Dated: December 16, 1994.
Richard W. Riley,
Secretary of Education.

    The Secretary revises part 685 of title 34 of the Code of Federal 
Regulations as follows:

PART 685--STANDARDS, CRITERIA, AND PROCEDURES FOR THE DIRECT LOAN 
PROGRAM

    1. The authority citation continues to read as follows:

    Authority: 20 U.S.C. 1087a et seq.

    2. Section 685.208 is amended by revising paragraph (g) to read as 
follows:


Sec. 685.208  Repayment plans.

* * * * *
    (g) Alternative repayment. (1) The Secretary may provide an 
alternative repayment plan for a borrower who demonstrates to the 
Secretary's satisfaction that the terms and conditions of the repayment 
plans specified in paragraphs (b) through (f) of this section are not 
adequate to accommodate the borrower's exceptional circumstances.
    (2) The Secretary may require a borrower to provide evidence of the 
borrower's exceptional circumstances before permitting the borrower to 
repay a loan under an alternative repayment plan.
    (3) If the Secretary agrees to permit a borrower to repay a loan 
under an alternative repayment plan, the Secretary notifies the 
borrower in writing of the terms of the plan. After the borrower 
receives notification of the terms of the plan, the borrower may accept 
the plan or choose another repayment plan.
    (4) A borrower shall repay a loan under an alternative repayment 
plan within 30 years of the date the loan entered repayment, not 
including periods of deferment and forbearance.
    (5) If the amount of a borrower's monthly payment under an 
alternative repayment plan is less than the accrued interest on the 
loan, the unpaid interest is capitalized until the outstanding 
principal amount is 10 percent greater than the original principal 
amount. After the outstanding principal amount is 10 percent greater 
than the original principal amount, interest continues to accrue but is 
not capitalized. For purposes of this paragraph, the original principal 
amount is the amount owed by the borrower when the borrower enters 
repayment.

(Authority: 20 U.S.C. 1087a et seq.)

    3. Section 685.209 is revised to read as follows:


Sec. 685.209  Income contingent repayment plan.

    (a) General. (1) Under the income contingent repayment plan 
described in Sec. 685.208(f), a borrower may choose to repay under the 
formula described in paragraph (b) of this section or may choose to 
have payments capped as described in paragraph (c) of this section. The 
amount calculated under paragraph (b) of this section is called the 
``formula amount,'' and the amount calculated under paragraph (c) of 
this section is called the ``capped amount.''
    (2) Borrowers may choose to repay either the formula amount or the 
capped amount when they enter repayment and may change between the 
options one time each year.
    (3) The Secretary may determine that special circumstances, such as 
a loss of employment by the borrower or the borrower's spouse, warrant 
an adjustment to the borrower's repayment obligations.
    (4) Married borrowers may repay their loans jointly if they meet 
the following requirements:
    (i) The spouses have both chosen either the formula amount or the 
capped amount.
    (ii) The spouses filed a joint Federal income tax return for the 
most recent year for which the Secretary has obtained income 
information.
    (iii) The spouses submit a written request to the Secretary that 
includes their names and social security numbers.
    (5) Examples of the calculation of monthly repayment amounts and 
tables that shows monthly repayment amounts for borrowers at various 
income and debt levels are included in appendix A to this part.
    (b) Formula amount. (1) General. (i) If a borrower chooses to pay 
the formula amount under the income contingent repayment plan, the 
borrower generally makes monthly payments that are calculated using a 
percentage of the borrower's Adjusted Gross Income (AGI) called the 
``payback rate.''
    (ii) A borrower's monthly payment is equal to the borrower's AGI 
multiplied by the payback rate, divided by 12 months. However, a 
borrower's monthly payment is never larger than 20 percent of the 
borrower's discretionary income as defined in paragraph (b)(1)(iii) of 
this section, divided by 12 months. Additionally, if the monthly 
repayment amount is less than $15, the borrower is not required to make 
a payment.
    (iii) For purposes of this section, discretionary income is defined 
as a borrower's AGI minus the amount of the ``HHS Poverty Guideline for 
all States (except Alaska and Hawaii) and the District of Columbia'' as 
published by the United States Department of Health and Human Services 
on an annual basis.1 If a borrower provides documentation 
acceptable to the Secretary that the borrower has more than one person 
in the borrower's family, the Secretary applies the HHS Poverty 
Guideline for the borrower's family size.
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    \1\The HHS Poverty Guidelines are available from the Office of 
the Assistant Secretary for Planning and Evaluation, Department of 
Health and Human Services (HHS), Room 438F, Humphrey Building, 200 
Independence Avenue, S.W., Washington, D.C. 20201.
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    (2) Payback rate. (i) A borrower's payback rate is based upon the 
borrower's Direct Loan debt when the borrower's first loan enters 
repayment and does not change unless the borrower obtains another 
Direct Loan or the borrower and the borrower's spouse obtain approval 
to repay their loans jointly under paragraph (a)(4) of this section. If 
the borrower obtains another Direct Loan, a new payback rate for all of 
the borrower's Direct Loans is calculated on the basis of the combined 
amounts of the loans when the last loan enters repayment. If the 
borrower and the borrower's spouse repay the loans jointly, the 
provisions under paragraph (b)(3) of this section apply.
    (ii) If the total amount of a borrower's Direct Loans is less than 
or equal to $1,000, the payback rate is four percent. If the total 
amount of a borrower's Direct Loans is greater than $1,000, the payback 
rate is four percent plus an additional percent that begins at zero and 
increases at a rate of 0.2 percent for each additional $1,000 borrowed 
up to a maximum payback rate of 15 percent.
    (iii) More specifically, if the total amount of a borrower's Direct 
Loans is greater than $1,000, the payback rate is the lesser of 0.15 or 
the following: 0.04 + (debt - 1,000) (0.000002).
    (3) Exception for certain married borrowers. (i) The combined 
monthly payment amount for married borrowers who repay their loans 
jointly under paragraph (a)(4) of this section and who repay the 
formula amount is the total of the individual monthly payment amounts 
for each borrower calculated under paragraph (b)(1)(ii) of this 
section.
    (ii) The payback rate for each borrower is calculated separately on 
the basis of the amount of the outstanding debt on the borrower's 
Direct Loans at the time the borrower enters into joint repayment with 
the borrower's spouse. For purposes of this paragraph, the Secretary 
assumes that the AGI for each borrower is proportionate to the relative 
size of the borrower's individual debt.
    (iii) For purposes of determining whether a borrower's payment 
amount is larger than 20 percent of the borrower's discretionary income 
under paragraph (b)(1)(ii), a portion of the appropriate HHS Poverty 
Guideline for the borrowers' family size is applied to each borrower in 
proportion to the relative size of the individual borrower's debts.
    (iv) If the combined monthly repayment amount is less than $15, the 
borrowers are not required to make a payment.
    (v) The amount of a borrower's individual monthly payment is 
applied to the borrower's debt, except that the Secretary credits joint 
payments toward interest accrued on any loan before any payment is 
credited to principal.
    (c) Capped amount. (1) General. If a borrower's monthly payments 
calculated under the formula amount as determined in paragraph (b) of 
this section are greater than the capped amount calculated under 
paragraph (c)(2), the borrower may choose to repay the capped amount.
    (2) Calculation of the capped amount. (i) The capped amount is the 
amount that a borrower would repay monthly over 12 years using standard 
amortization or $15, whichever is greater.
    (ii) The amount of the cap is recalculated on an annual basis to 
include changes in the variable rate.
    (iii) After periods in which a borrower makes payments that are 
less than interest accrued on the loan, the amount of the cap is 
recalculated. If the new cap is larger than the existing cap, the new 
cap is applied. If the new cap is smaller than or equal to the existing 
cap, the existing cap is applied.
    (3) Exception to the calculation of the capped amount for certain 
married borrowers. The capped amount for married borrowers who repay 
jointly under paragraph (a)(4) of this section is the same amount as 
calculated under paragraph (c)(2) of this section except that the 
amount is based on the combined Direct Loan debt of the borrowers.
    (d) Other features of the income contingent repayment plan. (1) 
Alternative documentation of income. If a borrower's AGI is not 
available or if, in the Secretary's opinion, the borrower's reported 
AGI does not reasonably reflect the borrower's current income, the 
Secretary may use other documentation of income provided by the 
borrower to calculate the borrower's monthly repayment amount.
    (2) Repayment period. (i) The maximum repayment period under the 
income contingent repayment plan is 25 years.
    (ii) The repayment period includes periods in which the borrower 
makes payments under the standard repayment plan and under extended 
repayment plans in which payments are based on a repayment period that 
is up to 12 years. The repayment period does not include periods in 
which the borrower makes payments under the graduated and alternative 
repayment plans or periods of authorized deferment or forbearance. The 
repayment period also does not include periods in which the borrower 
makes payments under an extended repayment plan in which payments are 
based on a repayment period that is longer than 12 years.
    (iii) If a borrower repays more than one loan under the income 
contingent repayment plan, a separate repayment period for each loan 
begins when that loan enters repayment.
    (iv) If a borrower has not repaid a loan in full at the end of the 
25-year repayment period under the income contingent repayment plan, 
the Secretary cancels the unpaid portion of the loan.
    (v) At the beginning of the repayment period under the income 
contingent repayment plan, a borrower shall make monthly payments of 
the amount of interest that accrues on the borrower's Direct Loans 
until the Secretary calculates the borrower's monthly repayment amount 
on the basis of the borrower's income.
    (3) Limitation on capitalization of interest. If the amount of a 
borrower's monthly payment is less than the accrued interest, the 
unpaid interest is capitalized until the outstanding principal amount 
is ten percent greater than the original principal amount. After the 
outstanding principal amount is ten percent greater than the original 
amount, interest continues to accrue but is not capitalized. For 
purposes of this paragraph, the original amount is the amount owed by 
the borrower when the borrower enters repayment.
    (4) Notification of terms and conditions. When a borrower elects or 
is required by the Secretary to repay a loan under the income 
contingent repayment plan, the Secretary notifies the borrower of the 
terms and conditions of the plan, including--
    (i) That the Internal Revenue Service will disclose certain tax 
return information to the Secretary or the Secretary's agents; and
    (ii) That if the borrower believes that special circumstances 
warrant an adjustment to the borrower's repayment obligations, as 
described in Sec. 685.209(a)(3), the borrower may contact the Secretary 
and obtain the Secretary's determination as to whether an adjustment is 
appropriate.
    (5) Consent to disclosure of tax return information. (i) A borrower 
shall provide written consent to the disclosure of certain tax return 
information by the Internal Revenue Service (IRS) to agents of the 
Secretary for purposes of calculating a monthly repayment amount and 
servicing and collecting a loan under the income contingent repayment 
plan. The borrower shall provide consent by signing a consent form, 
developed consistent with 26 CFR 301.6103(c)-1 and provided to the 
borrower by the Secretary, and shall return the signed form to the 
Secretary.
    (ii) The borrower shall consent to disclosure of the borrower's 
taxpayer identity information as defined in 26 U.S.C. 6103(b)(6), tax 
filing status, and AGI.
    (iii) The borrower shall provide consent for a period of five years 
from the date the borrower signs the consent form. The Secretary 
provides the borrower a new consent form before that period expires. 
The IRS does not disclose tax return information after the IRS has 
processed a borrower's withdrawal of consent.
    (iv) The Secretary designates the standard repayment plan for a 
borrower who selects the income contingent repayment plan but--
    (A) Fails to provide the required written consent;
    (B) Fails to renew written consent upon the expiration of the five-
year period for consent; or
    (C) Withdraws consent and does not select another repayment plan.
    (v) If a borrower defaults and the Secretary designates the income 
contingent repayment plan for the borrower but the borrower fails to 
provide the required written consent, the Secretary mails a notice to 
the borrower establishing a repayment schedule for the borrower.

(Approved by the Office of Management and Budget under control 
number 1840-0693)

(Authority: 20 U.S.C. 1087a et seq.)

    4. Appendix B is removed, and Appendix A to part 685 is revised to 
read as follows:

APPENDIX A--INCOME CONTINGENT REPAYMENT

Examples of the Calculation of Monthly Repayment Amounts

    Example 1. A single borrower with $12,500 of Direct Loans and an 
Adjusted Gross Income (AGI) of $25,000.

    Step 1: Calculate the payback rate. Because the borrower's debt is 
greater than $1,000, the payback rate is calculated on the basis of the 
formula in Sec. 685.209(b)(2)(iii), as follows:

     Subtract $1,000 from the total amount of the borrower's 
Direct Loans: ($12,500-$1,000=$11,500).

     Multiply the result by 0.000002: 
($11,500 x 0.000002=0.023).

     Add the result to 0.04: (0.04+0.023=0.063).

     The result is the payback rate.

    Step 2: Compare the calculated payback rate (0.063) to the maximum 
payback rate (0.15). Because the calculated rate is less than the 
maximum rate, the borrower's payback rate is 0.063.

    Step 3: Calculate the annual repayment amount by multiplying the 
borrower's AGI by the payback rate: ($25,000 x 0.063=$1,575).

    Step 4: Calculate the monthly repayment amount by dividing the 
annual repayment amount by 12 months: ($1,57512=$131.25).

    Step 5: Calculate the borrower's discretionary income (AGI minus 
HHS Poverty Guideline for a family of one): ($25,000-$7,360=$17,640).

    Step 6: Multiply the borrower's discretionary income ($17,640) by 
20 percent: ($17,640 x .2=3,528).

    Step 7: Divide the amount calculated in Step 6 by 12 months: 
($3,52812=$294).

    Step 8: Compare the amount calculated in Step 4 ($131.25) with the 
amount calculated in Step 7 ($294). The lower amount is the formula 
amount. The formula amount is $131.25. The borrower's monthly payment 
under the formula amount would be $131.25.

    Step 9: Compare the monthly formula amount ($131.25) to the $15 
floor repayment amount. Because the formula amount is greater than the 
$15 floor, the borrower's monthly formula amount is $131.25.
    Step 10: Compare the formula amount calculated in Step 9 ($131.25) 
to the capped amount, which is the monthly amount the borrower would 
repay under a 12-year standard amortization schedule. If the interest 
rate is seven percent, the 12-year standard amortization amount is 
approximately $10.28 for every $1,000 of debt. In this example, since 
the borrower has $12,500 in debt, the capped amount is approximately 
$128.50 ($10.28 x 12.5). Because the formula amount ($131.25) exceeds 
the capped amount ($128.50), the capped amount is the minimum monthly 
repayment. The borrower has the option of paying the formula amount (or 
any higher amount).
    Example 2. Married borrowers both repaying under the ICR plan with 
a combined Adjusted Gross Income (AGI) of $30,000. The husband has 
$5,000 of Direct Loans. The wife has $15,000 of Direct Loans. The 
couple has two children.
    Step 1: Calculate the husband's payback rate. Because his debt is 
greater than $1,000, the payback rate is calculated on the basis of the 
formula in Sec. 685.209(b)(2)(iii) as follows:
     Subtract $1,000 from the amount of the husband's loans: 
($5,000-$1,000=$4,000).
     Multiply the result by 0.000002: 
($4,000 x 0.000002=0.008).
     Add the result to 0.04: (0.04+0.008=0.048).
     The result is the husband's payback rate.
    Step 2: Compare the husband's calculated payback rate (0.048) to 
the maximum payback rate (0.15). Because the calculated rate is less 
than the maximum rate, the husband's payback rate is 0.048.
    Step 3: Calculate the husband's assumed AGI by multiplying the 
couple's total AGI ($30,000) by the amount of the husband's loans 
($5,000), divided by the total amount of the couple's debt ($20,000): 
($30,000 x $5,000$20,000=$7,500).
    Step 4: Calculate the husband's annual repayment amount by 
multiplying the husband's assumed AGI ($7,500) by his payback rate 
(0.048): ($7,500 x 0.048=$360).
    Step 5: Calculate the husband's monthly repayment amount by 
dividing his annual repayment amount by 12 months: 
($36012=$30).
    Step 6: Calculate the couple's discretionary income (AGI minus HHS 
Poverty Guideline for a family of four): ($30,000-14,800=$15,200).
    Step 7: Calculate the husband's portion of the couple's 
discretionary income by multiplying the couple's discretionary income 
($15,200) by the amount of the husband's loans ($5,000) divided by the 
total amount of the couple's debt ($20,000): 
($15,200 x $5,000$20,000=$3,800).
    Step 8: Multiply the husband's discretionary income by 20 percent: 
($3,800-.2=$760).
    Step 9: Divide the amount calculated in Step 8 by 12 months: 
($76012=$63.33).
    Step 10: Compare the monthly amount calculated in Step 5 ($30) with 
the monthly amount calculated in Step 9 ($63.33). The lower amount is 
the formula amount. The formula amount is $30. If the borrowers choose 
to repay the formula amount, the husband's payment would be $30.
    Step 11: Calculate the wife's payback rate. Because her debt is 
greater than $1,000, the payback rate is calculated on the basis of the 
formula in Sec. 685.209(b)(2)(iii) as follows:
     Subtract $1,000 from the amount of the wife's loans: 
($15,000-$1,000=$14,000).
     Multiply the result by 0.000002: 
($14,000 x 0.000002=0.028).
     Add the result to 0.04: (0.04+0.028=0.068).
     The result is the wife's payback rate.
    Step 12: Compare the wife's calculated payback rate (0.068) to the 
maximum payback rate (0.15). Because the calculated rate is less than 
the maximum rate, the wife's payback rate is 0.068.
    Step 13: Calculate the wife's assumed AGI by multiplying the 
couple's total AGI ($30,000) by the amount of the wife's loans 
($15,000), divided by the total amount of the couple's debt ($20,000): 
($30,000 x $15,000$20,000=$22,500).
    Step 14: Calculate the wife's annual repayment amount by 
multiplying the wife's assumed AGI ($22,500) by her payback rate 
(0.068): ($22,500 x 0.068=$1,530).
    Step 15: Calculate the wife's monthly repayment amount by dividing 
the annual repayment amount calculated in Step 14 ($1,530) by 12 
months: ($1,53012=$127.50).
    Step 16: Calculate the wife's portion of the couple's discretionary 
income by subtracting the husband's portion of the couple's 
discretionary income calculated in Step 7 ($3,800) from the couple's 
total discretionary income calculated in Step 6 ($15,200): 
($15,200-$3,800=$11,400).
    Step 17: Multiply the wife's discretionary income ($11,400) by 20 
percent: ($11,400 x .2=$2,280).
    Step 18: Divide the amount calculated in Step 17 by 12 months: 
($2,28012=$190).
    Step 19: Compare the monthly amount calculated in Step 15 ($127.50) 
with the monthly amount calculated in Step 18 ($190). The lower amount 
is the formula amount. The formula amount is $127.50. If the borrowers 
choose to repay the formula amount, the wife's payment would be 
$127.50.
    Step 20: Calculate the couple's combined monthly formula amount by 
adding the husband's monthly formula amount calculated in Step 10 ($30) 
and the wife's monthly formula amount calculated in Step 19 ($127.50): 
($30+$127.50=$157.50).
    Step 21: Compare the couple's combined monthly formula amount 
($157.50) to the $15 floor repayment amount. Because the combined 
formula amount is greater than the $15 floor, the couple's combined 
monthly formula amount is $157.50.
    Step 22: Compare the formula amount calculated in Step 21 ($157.50) 
to the capped amount, which is the amount the couple would repay under 
a 12-year standard amortization schedule. If the interest rate is seven 
percent, the capped amount is approximately $10.28 for every $1,000 of 
debt. In this example, since the couple has $20,000 in debt, the capped 
amount is approximately $205.60 ($10.28 x 20). Because the formula 
amount ($157.50) does not exceed the capped amount ($205.60), the 
couple's combined monthly repayment amount is the formula amount of 
$157.50.

    Note: The following tables will not appear in the Code of 
Federal Regulations.

BILLING CODE 4000-01-P

TR22DE94.001


TR22DE94.002

[FR Doc. 94-31354 Filed 12-21-94; 8:45 am]
BILLING CODE 4000-01-C