[Federal Register Volume 60, Number 182 (Wednesday, September 20, 1995)]
[Proposed Rules]
[Pages 48848-48856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23299]




[[Page 48847]]

_______________________________________________________________________

Part VII





Department of Education





_______________________________________________________________________



34 CFR Part 685



William D. Ford Federal Direct Loan Program; Proposed Rule

  Federal Register / Vol. 60, No. 182 / Wednesday, September 20, 1995 / 
Proposed Rules  

[[Page 48848]]


DEPARTMENT OF EDUCATION

34 CFR Part 685

RIN 1840-AC19


William D. Ford Federal Direct Loan Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: The Secretary of Education proposes to amend provisions of the 
income contingent repayment plan under the William D. Ford Federal 
Direct Loan (Direct Loan) Program regulations. The Secretary is 
amending these provisions to provide benefits to borrowers and protect 
the taxpayers' interests.

DATES: Comments on the proposed regulations must be received on or 
before October 31, 1995.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Ms. Rachel Edelstein, U.S. Department of Education, P.O. 
Box 23272, Washington, D.C. 20026-3272. Comments may also be sent via 
the internet to: [email protected].
    To ensure that public comments have maximum effect in developing 
the final regulations, the Department urges that each comment clearly 
identify the specific section or sections of the regulations that the 
comment addresses and that comments be in the same order as the 
regulations.
    Comments that concern information collection requirements must be 
sent to the Office of Management and Budget at the address listed in 
the Paperwork Reduction Act section of this preamble. A copy of those 
comments may also be sent to the Department representative named in the 
preceding paragraph.

FOR FURTHER INFORMATION CONTACT:
Ms. Rachel Edelstein, telephone: (202) 708-9406. (Internet address: 
direct [email protected]). 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:

Background

    On July 1, 1994, the Secretary published final regulations that 
included provisions for the income contingent repayment plan during 
Year One of the Direct Loan Program. The Higher Education Act of 1965, 
as amended (HEA), directed the Secretary, to the extent practicable, to 
develop proposed rules for the Direct Loan Program through a negotiated 
rulemaking process for the second and subsequent years of the program 
(1995-1996 and beyond). Therefore, following negotiated rulemaking, the 
Secretary published a Notice of Proposed Rulemaking on August 18, 1994, 
and final regulations on December 1, 1994, both of which included new 
provisions for the income contingent repayment plan of the Direct Loan 
Program. On December 22, 1994, the Secretary published regulations that 
revised the July 1, 1994, regulations to provide that provisions for 
income contingent repayment would be identical for Year One and Year 
Two of the Direct Loan Program. After a year of administering the 
Direct Loan Program, the Secretary proposes to make improvements to the 
existing income contingent repayment plan.

Provisions Proposed

    These proposed regulations include policies and procedures that 
would apply to borrowers who initially select the income contingent 
repayment plan under the Director Loan Program when they enter 
repayment on or after July 1, 1996 and borrowers who switch into the 
income contingent repayment on or after July 1, 1996. To improve the 
existing income contingent repayment plan, the Secretary proposes the 
following: To revise the income contingent repayment formula so that 
payments will increase more significantly as debt increases than under 
the current formula; to eliminate the minimum payment amount currently 
allowed under regulations so that more borrowers will be in the habit 
of repaying regularly; to alter the treatment of married borrowers when 
calculating the repayment amount by always including the income of the 
borrower and the borrower's spouse so that the Secretary may more 
accurately assess the married borrower's ability to repay; and to 
require alternative documentation of income for most borrowers in their 
first and second years of repayment, because, for most of these 
borrowers, the previous year's adjusted gross income (AGI) will not 
accurately reflect current income.

Summary of Contents

Revised Repayment Formula

    After administering the current income contingent loan repayment 
plan, the Secretary is proposing several ways to improve the repayment 
formula. The Statement of Managers language included in the Conference 
Report on the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-
66) stated that payments should generally be directly proportional to 
the amount borrowed in order to discourage over-borrowing. The current 
income contingent repayment plan increases borrowers' payments by only 
0.2 percent of income per $1,000 borrowed; therefore, increased 
borrowing affects monthly repayment amounts only negligibly. For 
example, a student who has borrowed $5,000 could continue to borrow 
until his or her loan balance reaches almost six times that amount 
($29,000) before the repayment amount doubles, and almost 11 times that 
amount ($53,000) before the repayment amount triples. Because payments 
do not increase significantly with the amount borrowed, the Secretary 
believes the current income contingent repayment plan may encourage 
over-borrowing.
    Under the proposed formula, borrowers' payments would equal the 12-
year amortization repayment amount for their outstanding loans 
multiplied by an income percentage factor that varies with annual 
income; however, borrowers would never pay more than 20 percent of 
their discretionary income. Discretionary income for single borrowers 
and single head of household borrowers is defined as adjusted gross 
income (AGI) minus $7,087; discretionary income for married borrowers 
is AGI minus $8,517. Therefore, under the revised formula, no payment 
will be required of single borrowers or single head of household 
borrowers with incomes of $7,087 or less, and no payments will be 
required of married borrowers with income of $8,517 or less. The 
Secretary believes that the threshold income levels discussed above are 
reasonable measures for determining discretionary income.
    Except for the protection that borrowers never pay more than 20 
percent of their discretionary income under the proposed formula, the 
formula increases payment amounts directly in proportion to the amount 
borrowed. Therefore, payments required under the proposed formula 
increase more significantly in relation to amounts borrowed than under 
the current formula, and this proposed plan is more likely to 
discourage over-borrowing than the current plan.
    Under the current formula, payments are a flat percentage of income 
for any given debt. Thus, as annual income rises from $10,000 to 
$100,000, the expected repayment amount increases by a factor of 10. 
This variance is too wide and results in a plan that is not useful for 
many borrowers because the monthly repayment amount is too large for 
higher income borrowers. The Secretary believes that it would be more 

[[Page 48849]]
appropriate to structure a plan so that, for any given debt level, the 
highest repayment amounts should be no more than four times the lowest 
payments for most borrowers.
    Because the new formula uses a factor relative to income and takes 
debt into greater consideration, payments are no longer a flat 
percentage of income. Under the proposed plan, while payments increase 
significantly in relation to amounts borrowed, the highest repayment 
amount at any debt level is no more than four times the lowest payment 
for that debt level. Limiting the variance in repayment amounts results 
in some borrowers at higher income levels repaying a smaller percentage 
of total income than borrowers at lower income levels with the same 
level of debt; however, the borrowers with higher income levels will 
make larger monthly payments than the borrowers with lower income 
levels. The income percentage factors ensure that payments increase 
with income, that borrowers pay what they can afford to pay, and that 
borrowers repay their loans within a reasonable period of time.
    Under the existing income contingent repayment plan, borrowers 
choose between two repayment formulas. The choice of two repayment 
calculation options may have confused borrowers. In addition, under one 
of these options, the ``capped amount,'' borrowers repay under an 
income contingent repayment plan that does not take income into 
account. Under the proposed plan, there is only one repayment formula. 
This change would reduce borrower confusion and simplify administration 
of the income contingent repayment plan.
    In addition to the improvements listed above, for many low- to 
middle-income borrowers the proposed formula plan offers lower monthly 
payment amounts. For borrowers with annual incomes between $15,000 and 
$35,000 and average levels of debt, the revised repayment formula 
offers lower monthly repayment amounts than the current plan. However, 
the proposed formula does not significantly increase the number of 
borrowers who have not paid in full after 25 years. In fact, for 
medium- and high-income borrowers, who represent 75 percent of total 
borrowers, the percentage who repay within 25 years increases.
    Finally, the current plan has been criticized for allowing 
borrowers to make monthly payments that are less than interest accrued 
(that is, borrowers may go into negative amortization). Recognizing 
that borrowers cannot always afford to make payments to cover interest, 
the Secretary also understands the importance of avoiding negative 
amortization whenever possible. Under the proposed plan, the overall 
percentage of borrowers who experience a period of negative 
amortization is expected to decrease slightly.
    Examples of the calculation of monthly repayment amounts, together 
with tables showing the repayment amounts for borrowers at various 
income and debt levels, are included in Appendix A to the regulations.

Minimum Payments

    Under the current plan, borrowers with a calculated monthly payment 
below $15 are not required to make any payment. The Secretary proposes 
to change this provision. Instead, all borrowers with a calculated 
repayment amount greater than zero would be required to make payments. 
Further, the Secretary proposes requiring borrowers with a calculated 
repayment amount that is at least 1 cent but less than $2.00 to make a 
two dollar payment. The Secretary believes that removing the minimum 
payment threshold promotes responsible repayment practices. Even if 
borrowers are required to repay only a small amount each month, this 
requirement will ensure that borrowers are in the habit of repaying and 
remain in contact with the Direct Loan Servicing Center. Under this 
approach, borrowers with very low incomes may still have a calculated 
monthly payment of zero.
    The Secretary also requests comments on establishing a policy 
whereby borrowers who are repaying under the income contingent 
repayment plan (and who are not in deferment or forbearance) would 
always make a monthly payment, even if their calculated monthly 
repayment amount is $0. The Secretary solicits comments and supporting 
arguments on whether requiring monthly payments of all borrowers would 
promote responsible repayment practices and help to prevent defaults. 
The Secretary also solicits comments and supporting evidence about what 
an appropriate minimum repayment level would be, if one were to be 
required.

Treatment of Married Borrowers

    Under the current regulations, a married borrower who files a 
Federal income tax return separately from his or her spouse is not 
required to provide any income information concerning his or her spouse 
(unless the spouses are repaying their loans jointly). The Secretary 
has determined that this policy may prevent an accurate assessment of 
the borrower's ability to repay the loan and may allow for uneven 
treatment of married borrowers, depending upon whether they file their 
income tax separately or jointly. Section 455(e)(3) of the HEA provides 
the Secretary with the authority to obtain additional information 
concerning a borrower's income when AGI does not reasonably reflect the 
borrower's income. Therefore, in order to assess accurately the 
borrower's ability to repay, the Secretary proposes requiring married 
borrowers who do not file joint tax returns with their spouses and who 
choose to repay under the income contingent repayment plan to obtain a 
consent to disclosure of tax information from their spouses. This 
policy will ensure that the Secretary obtains the AGI of both the 
borrower and the borrower's spouse; the couple's joint AGI will be used 
to calculate the borrower's repayment amount. However, the Secretary 
would not require a spouse's tax return information if the spouses are 
legally separated.
    In addition, under the current regulations, for married borrowers 
who each have loans and who choose to repay their loans jointly under 
the income contingent repayment plan, the Secretary assumes that the 
AGI for each married borrower is proportionate to the relative size of 
the borrower's individual debt. The Secretary proposes to eliminate the 
assumption that the AGI for each married borrower is proportionate to 
debt in order to assess more accurately borrowers' ability to repay. 
Under the proposed repayment formula, the repayment amounts for married 
borrowers who repay jointly are based on their combined AGIs and their 
combined debts. A step-by-step calculation of a combined amount is 
included as Example 2 in Appendix A.
    Married borrowers who each have outstanding balances on Direct 
Loans are not required to repay their loans jointly. However, even if 
only one borrower chooses to repay under the income contingent 
repayment plan, the Secretary will use the AGI of both spouses to 
determine the payback rate of the borrower who is repaying under the 
income contingent repayment plan.

Cohort of Borrowers Affected by New Plan

    When these regulations become effective, this new formula will 
apply to borrowers who select the income contingent repayment plan when 
they enter repayment and to borrowers who are in other repayment plans 
and switch into the income contingent repayment plan on or after July 
1, 1996. Borrowers 

[[Page 48850]]
who are already in repayment under the income contingent repayment plan 
will continue under the current formula, although they will be given 
the option of converting to the new formula.

Borrowers in Their First and Second Years of Repayment

    The Secretary proposes requiring borrowers who are in their first 
and second years of repayment and who are repaying under the income 
contingent repayment plan to submit alternative documentation of their 
income (that is, other than IRS-reported AGI) to the Secretary, when, 
in the Secretary's opinion, the borrower's reported AGI does not 
reasonably reflect the borrower's current income. Under current 
regulations, the previous year's IRS-reported AGI is used to calculate 
the monthly payment amount for all borrowers. However, borrowers in 
their first year of repayment have recently left school, and their 
incomes while in school were likely lower than their incomes after 
leaving school. Therefore, if these borrowers filed taxes while they 
were in school, the AGI representing the year prior to the year they 
entered repayment would not, in most cases, reflect their current 
income and their current ability to repay their loans. In addition, 
borrowers may need some time to find their first job after graduation. 
Therefore, the AGI the secretary would obtain for the borrower's second 
year of repayment still might not reflect current income. As discussed 
above, the HEA provides the Secretary with the authority to obtain 
additional information concerning a borrower's income when the AGI does 
not reasonably reflect the borrower's income (see section 455(e)(3) of 
the HEA). The Secretary believes that, for the majority of borrowers, 
the AGI will not accurately reflect a borrower's income or ability to 
repay during the first and second years of repayment. Therefore, the 
Secretary proposes to request alternative documentation of income from 
these borrowers under the statutory authority provided in the HEA, 
when, in the Secretary's opinion, the borrower's reported AGI does not 
reasonably reflect the borrower's current income.

Executive Order 12866

1. Assessment of Costs and Benefits

    These proposed regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this proposed regulatory 
action.
    The plan does not impose unacceptable new costs; it would increase 
costs of the Federal Government by an estimated $145 million over 5 
years. This increase in costs represents only a 2 percent increase in 
overall program costs. Costs increase under this proposed plan because 
low-income borrowers make lower payments than under the current formula 
and some do not fully repay; in addition, high-income high-debt 
borrowers repay their loans more quickly than under the current formula 
and, therefore, pay less in interest. Although not reflected in the 
cost estimate, this proposal may actually reduce long-term costs 
because under the income contingent repayment plan, defaults may 
decrease. Defaults may decrease because payments will be more 
affordable under the income contingent repayment plan than under other 
available repayment plans. The Secretary has determined that the 
potential costs associated with the proposed regulations are necessary 
for administering the income contingent repayment plan effectively and 
efficiently. Burdens specifically associated with information 
collection requirements, if any, are explained elsewhere in the 
preamble under the heading of Paperwork Reduction Act of 1995.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these proposed regulations, the Secretary has 
determined that the benefits of the proposed regulations justify the 
costs. A further discussion of the benefits and costs of the proposed 
regulations is contained in the summary of the provisions proposed.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal governments in the 
exercise of their governmental functions.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comment on 
whether there may be further opportunities to reduce any potential 
costs or increase potential benefits resulting from these proposed 
regulations without impeding the effective and efficient administration 
of the title IV, HEA programs.

2. Clarity of the Regulations

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these regulations 
easier to understand, including answers to questions such as the 
following: (1) Are the requirements in the regulations clearly stated? 
(2) Do the regulations contain technical terms or other wording that 
interferes with their clarity? (3) Does the format of the regulations 
(grouping and order of sections, use of headings, paragraphing, etc.) 
aid or reduce their clarity? Would the regulations be easier to 
understand if they were divided into more (but shorter sections? (A 
``section'' is preceded by the symbol ``Sec. '' and a numbered heading; 
for example, Sec. 685.209 Income Contingent Repayment Plan.) (4) Is the 
description of the proposed regulations in the ``Supplementary 
Information'' section of this preamble helpful in the understanding of 
the proposed regulations? How could this description be more helpful in 
making the proposed regulations easier to understand? (5) What else 
could the Department do to make the regulations easier to understand?
    A copy of any comments that concern whether these proposed 
regulations are easy to understand should also be sent to Stanley 
Cohen, Regulations Quality Officer, U.S. Department of Education, 600 
Independence Avenue, SW., (Room 5442 FOB-10), Washington, DC. 20202-
2110.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities. The regulations will affect borrowers who are in repayment. 
They will not have a significant economic impact on any small entities 
under the Regulatory Flexibility Act.

Paperwork Reduction Act of 1995

    Section 685.209 contains an information collection requirement. As 
required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 
the Department of Education has submitted a copy of this section to the 
Office of Management and Budget (OMB) for its review.

Collection of Information

    Income Contingent Repayment Plan Consent to Disclosure of Tax 
Information form from spouses of married borrowers who file separately 
and select the income contingent repayment plan and collection of 
alternative documentation of income from borrowers in their first and 
second years of repayment, when in the opinion of the Secretary, AGI 
does not reasonably reflect a borrower's current income.

[[Page 48851]]


Married Borrowers

    Under the current regulations, a married borrower who is not 
repaying jointly with his or her spouse is not required to provide any 
income information concerning his or her spouse unless the couple files 
their taxes jointly. The Secretary proposes requiring all spouses of 
married borrowers who choose to repay under income contingent repayment 
to complete the Income Contingent Repayment Plan Consent to Disclosure 
of Tax Information form. This policy will ensure that the Secretary 
obtains the AGI of both the borrower and the borrower's spouse and will 
enable to the Secretary to assess more accurately a borrower's ability 
to repay.

First and Second Year Borrowers

    The Secretary proposes requiring borrowers who are in their first 
and second years of repayment and who are repaying under the Income 
Contingent Repayment Plan to complete the Income Contingent Repayment 
Plan Request of Alternative Documentation of Income Form when, in the 
Secretary's opinion, AGI does not reasonably reflect the borrower's 
current income.
    Spouses of married borrowers would be required to provide consent 
to tax disclosure only once every five years. The Secretary estimates 
that all first and most second year borrowers would be required to 
provide alternative documentation of income annually, while in the 
first two years of repayment.
    Annual public reporting burden for this collection of information 
is estimated to average .32 hours for each of the estimated 230,288 
individuals providing information regarding Income Contingent Repayment 
Information (total annual reporting burden equals 73,692 hours).
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, room 10235, New Executive 
Office Building, Washington, D.C. 20503; Attention: Desk Officer for 
U.S. Department of Education.
    The Department considers comments by the public on this proposed 
collection of information in--
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Department, including whether the information will have practical use;
     Evaluating the accuracy of the Department's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to the Department on the 
proposed regulations.

Invitation To Comment

    Interested persons are invited to submit comments and 
recommendations regarding these proposed regulations. All comments 
submitted in response to these proposed regulations will be available 
for public inspection, during and after the comment period, in room 
4624, Regional Office Building 3, 7th and D Streets SW., Washington, 
DC, between the hours of 8:30 a.m. and 4 p.m., Monday through Friday of 
each week except federal holidays.

Assessment of Educational Impact

    The Secretary particularly requests comments on whether the 
proposed regulations in this document would require transmission of 
information that is being gathered by or is available from any other 
agency or authority of the United States.

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.

    Dated: September 13, 1995.
Richard W. Riley,
Secretary of Education.

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

    The Secretary proposes to amend Part 685 of Title 34 of the Code of 
Federal Regulations as follows:

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

    1. The authority citation continues to read as follows:

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

    2. Section 685.209 is amended by revising paragraphs (a) and (b); 
removing paragraph (c) and redesignating paragraph (d) as paragraph 
(c); in newly designated paragraph (c), redesignating paragraphs (c)(2) 
through (5) as (c)(4) through (7), respectively; and adding new 
paragraphs (c)(2) and (c)(3) to read as follows:


Sec. 685.209  Income contingent repayment plan.

    (a) Repayment amount calculation. (1) The amount the borrower would 
repay is based upon the borrower's Direct Loan debt when the borrower's 
first loan enters repayment, and this basis for calculation 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 (b)(2) of this section. If the borrower obtains another 
Direct Loan, the amount the borrower would repay is based on 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 
amount the borrowers would repay is based on both borrowers' Direct 
Loan debt at the time they enter joint repayment.
    (2) The annual amount payable under the income contingent repayment 
plan by a borrower is the lesser of--
    (i) The amount the borrower would repay annually over 12 years 
using standard amortization multiplied by an income percentage factor 
that corresponds to the borrower's adjusted gross income (AGI) as shown 
in the income percentage factor table in Appendix A; or
    (ii) 20 percent of discretionary income.
    (3) For purposes of this section, discretionary income is AGI 
minus--
    (i) For a single borrower, the lowest amount shown in the income 
percentage factor table in Appendix A for single borrowers;
    (ii) For a single head of household borrower, the lowest amount 
shown in the income percentage factor table in Appendix A for head of 
household borrowers; or
    (iii) For a married borrower, the lowest amount shown in the income 
percentage factor table in Appendix A for married borrowers.
    (4) For exact incomes not shown in the income percentage factor 
table in 

[[Page 48852]]
Appendix A, an income percentage factor is calculated, based upon the 
intervals between the incomes and income percentage factors shown on 
the table.
    (5) Each year, the Secretary recalculates the borrower's annual 
payment amount based on changes in the borrower's AGI, the variable 
interest rate, and the income percentage factors in Table A.
    (6) For purposes of the annual recalculation described in paragraph 
(a)(4), after periods in which a borrower makes payments that are less 
than interest accrued on the loan, the payment amount is recalculated 
based upon unpaid accrued interest and the highest outstanding 
principal loan amount (including amount capitalized) calculated for 
that borrower while paying under the income contingent repayment plan.
    (7) For each calendar year after calendar year 1996, the Secretary 
publishes in the Federal Register a revised income percentage factor 
table reflecting changes based on inflation. This revised table is 
developed by changing each of the dollar amounts contained in the table 
by a percentage equal to the estimated percentage changes in the 
Consumer Price Index (as determined by the Secretary) between December 
1995 and the December next preceding the beginning of such calendar 
year.
    (8) Examples of the calculation of monthly repayment amounts and 
tables that show monthly repayment amounts for borrowers at various 
income and debt levels are included in Appendix A to this part.
    (b) Treatment of married borrowers. (1) A married borrower who 
wishes to repay under the income contingent repayment plan and who has 
filed an income tax return separately from his or her spouse must 
provide his or her spouse's written consent to the disclosure of 
certain tax return information under paragraph (c)(5) of this section 
(unless the borrower is legally separated from his or her spouse). The 
AGI for both spouses is used to calculate the monthly repayment amount.
    (2) Married borrowers may repay their loans jointly. The 
outstanding balance on the loans of each borrower are added together to 
determine the borrowers' payback rate under (a)(1) of this section.
    (3) The amount of the payment applied to each borrower's debt is 
the proportion of the payments that equals the same proportion as that 
borrower's debt to the total outstanding balance, except that the 
payment is credited toward outstanding interest on any loan before any 
payment is credited toward principal.
    (c) * * *
    (2) First and second year borrowers. The Secretary requires 
alternative documentation of income from borrowers in their first and 
second years of repayment, when in the Secretary's opinion, the 
borrower's reported AGI does not reasonably reflect the borrower's 
current income.
    (3) Adjustments to repayment obligations. 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.
* * * * *
    3. 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, 8.25 
percent interest and an AGI of $25,000.
    Step 1: Determine annual payments based on what the borrower 
would pay over 12 years using standard amortization. To do this, 
multiply the principal balance by the constant multiplier for 8.25% 
interest (0.1315452). The constant multiplier is a factor used to 
calculate amortized payments at a given interest rate over a fixed 
period of time. (See the constant multiplier chart below to 
determine the constant multiplier you should use for the interest 
rate on the loan. If the exact interest rate is not listed, choose 
the next highest rate for estimation purposes.)

 0.1315452 x 12,500=1,644.315

    Step 2: Multiply the result by the income percentage factor 
shown in the income percentage factor table that corresponds to the 
borrower's income (if the income is not listed, you can 
``interpolate'' by following the instructions under the 
interpolation heading below):

 85.55% (0.8555) x 1,644.315=1,406.7115

    Step 3: Determine 20 percent of discretionary income. To do 
this, subtract the lowest income for single borrowers shown in the 
income percentage factor table from the borrower's income and 
multiply the result by 20%:

 $25,000-$7,087=$17,913
 $17,913 x 0.20=$3,582.60

    Step 4: Compare the amount from step 2 with the amount from step 
3. The lower of the two will be the borrower's annual payment 
amount. This borrower will be paying the amount calculated under 
step 2. To determine the monthly repayment amount, divide the annual 
amount by 12.

 1,406.711512=$117.23

    Example 2. Married borrowers both repaying under the income 
contingent repayment plan with a combined Adjusted Gross income 
(AGI) of $30,000. The husband has a Direct Loan balance of $5,000, 
and the wife has a Direct Loan balance of $15,000.
    Step 1: Add the Direct Loan balances of the husband and wife 
together to determine the aggregate loan balance.

 $5,000+$15,000=$20,000

    Step 2: Determine the annual payments based on what the couple 
would pay over 12 years using standard amortization. To do this, 
multiply the aggregate principal balance by the constant multiplier 
for 8.25% interest (0.1315452). (See the constant multiplier chart 
to determine the constant multiplier you should use for the interest 
rate on the loan. If the exact interest rate is not listed, choose 
the next highest rate for estimation purposes.)

 0.1315452 x 20,000=2630.904

    Step 3: Multiply the result by the income percentage factor 
shown in the income percentage factor table that corresponds to the 
couple's income (if the income is not listed, you can 
``interpolate'' by following the instructions under the 
interpolation heading below):

 82.74% (0.8274) x 2,630.904=2,176.80997

    Step 4: Determine 20 percent of the couple's discretionary 
income. To do this, subtract the lowest income for married borrowers 
shown in the income percentage factor table from the couple's income 
and multiply the result by 20%:

 $30,000-$8,517=$21,483
 $21,483 x 0.20=$4,296.60

    Step 5: Compare the amount from step 3 with the amount from step 
4. The lower of the two will be the annual payment amount. The 
married borrowers will be paying the amount calculated under step 3. 
To determine the monthly repayment amount, divide the annual amount 
by 12.

 $2,176.8099712=$181.40

    Interpolation: If your income does not appear on the income 
percentage factor table, you will have to calculate the income 
percentage factor through interpolation. For example, let's say you 
are single and your income is $26,000. To interpolate, you must 
first find the interval between the closest income listed that is 
less than $26,000 and the closest income listed that is greater than 
$26,000 (for this discussion, we'll call the result ``the income 
interval''):

 $27,122-$25,000=$2,122

Next, find the interval between the two income percentage factors 
that are given for these incomes (for this discussion, we'll call 
the result, the ``income percentage factor interval''):

 88.77-85.55=3.22

Subtract the income shown on the chart that is immediately less than 
$26,000 from $26,000:

 $26,000-$25,000=1,000

Divide the result by the number representing the income interval:

 1,0002,122=0.4713

Multiply the result by the income percentage factor interval:

 0.4713 x 3.22=1.52


[[Page 48853]]

Add the result to the lower income percentage factor used to 
calculate the income percentage factor interval for $26,000 in 
income:
 1.52+85.55=87.07%

                                            Income Percentage Factors                                           
                                            [Based on annual income]                                            
----------------------------------------------------------------------------------------------------------------
               Single                                Married                          Head of Household         
----------------------------------------------------------------------------------------------------------------
      Income         Percent factor         Income         Percent factor         Income         Percent factor 
----------------------------------------------------------------------------------------------------------------
7,087............             55.00              8,517              50.52              7,087              50.52 
9,752............             57.79             10,000              52.72             10,000              54.90 
10,000...........             58.03             12,678              56.68             11,183              56.68 
12,548...........             60.57             15,000              59.29             13,328              59.56 
15,000...........             65.42             18,139              62.83             15,000              62.92 
15,409...........             66.23             20,000              64.98             17,424              67.79 
18,139...........             71.89             23,536              69.07             20,000              72.39 
20,000...........             76.44             25,000              72.31             21,585              75.22 
21,585...........             80.33             29,127              81.46             25,000              82.87 
25,000...........             85.55             30,000              82.74             27,112              87.61 
27,112...........             88.77             35,000              90.09             30,000              92.80 
30,000...........             93.48             35,434              90.73             34,003             100.00 
34,003...........            100.00             40,000              96.87             35,000             100.00 
35,000...........            100.00             42,325             100.00             40,000             100.00 
40,000...........            100.00             50,000             100.00             40,895             100.00 
40,895...........            100.00             52.663             100.00             50,000             108.28 
49,152...........            111.80             60,000             106.92             51,233             109.40 
50,000...........            112.52             68,787             115.20             60,000             117.34 
60,000...........            121.01             70,000             115.76             68,462             125.00 
62,935...........            123.50             80,000             120.40             70,000             125.99 
70,000...........            128.27             90,000             125.04             80,000             132.46 
80,000...........            135.03             94,663             127.20             90,000             138.93 
89,137...........            141.20            100,000             128.73             92,583             140.60 
90,000...........            141.78            126,822             136.40            100,000             142.49 
100,000..........            148.52            150,000             142.02            129,481             150.00 
102,205..........            150.00            176,713             148.50            150,000             162.50 
150,000..........            179.93            200,000             162.71            200,000             192.95 
182,045..........            200.00            250,000                                                          
                                               261,096             193.23                                       
                                                                   200.00            211,581             200.00 
----------------------------------------------------------------------------------------------------------------


                                                                Constant Multiplier Chart                                                               
                                                                                                                                                        
                                                                                                                                                        
Interest Rate.......       7.00%       7.25%       7.43%       7.50%       7.75%       8.00%       8.25%       8.38%       8.50%       8.75%       9.00%
Annual Constant                                                                                                                                         
 Multiplier.........   0.1234056   0.1250112    0.126174   0.1266276   0.1282548    0.129894   0.1315452    0.132408   0.1332072    0.123488   0.1365636


BILLING CODE 4000-01-M

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[FR Doc. 95-23299 Filed 9-19-95; 8:45 am]
BILLING CODE 4000-01-C