[Federal Register Volume 60, Number 231 (Friday, December 1, 1995)]
[Rules and Regulations]
[Pages 61820-61828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29207]




[[Page 61819]]

_______________________________________________________________________

Part VIII





Department of Education





_______________________________________________________________________



34 CFR Part 685



William D. Ford Federal Direct Loan Program; Final Rule

  Federal Register / Vol. 60, No. 231 / Friday, December 1, 1995 / 
Rules and Regulations   

[[Page 61820]]


DEPARTMENT OF EDUCATION

34 CFR Part 685

RIN 1840-AC19


William D. Ford Federal Direct Loan Program

AGENCY: Department of Education.

ACTION: Final regulations.

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

SUMMARY: The Secretary of Education amends provisions of the 
regulations governing 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.

EFFECTIVE DATE: These regulations take effect July 1, 1996. However, 
affected parties do not have to comply with the information collection 
requirements in Sec. 685.209 until the Department of Education 
publishes in the Federal Register the control number assigned by the 
Office of Management and Budget (OMB) to these information collection 
requirements. Publication of the control number notifies the public 
that OMB has approved these information collection requirements under 
the Paperwork Reduction Act of 1995.

FOR FURTHER INFORMATION CONTACT: Ms. Rachel Edelstein, Program 
Specialist, Direct Loan Policy Group, Policy Development Division, U.S. 
Department of Education, Room 3053, ROB-3, 600 Independence Avenue, SW, 
Washington, D.C. 20202-5400. 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:

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 (NPRM) 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.
    On September 20, 1995, the Secretary published a notice of proposed 
rulemaking (60 FR 48848), proposing to make improvements to the 
existing income contingent repayment plan. These changes were proposed 
for Year Three of the program and beyond. The following section 
summarizes the major revisions to the proposed rule.

Substantive Revisions to the Proposed Rule

Section 685.209(a)(3)

     The definition of ``discretionary income'' under the 
proposed income contingent repayment plan has been revised. Under these 
final regulations, discretionary income is now defined as the 
borrower's adjusted gross income (AGI) minus the United States 
Department of Health and Human Services (HHS) poverty level appropriate 
to the borrower's family size. This is the same definition of 
discretionary income as in existing regulations.

Appendix A

     The income percentage factor chart has been revised so 
that there are only two categories of borrowers: single and married/
head of household. Therefore, married and head-of-household borrowers 
with the same family size, income, and debt make the same payments. 
Under the proposed income contingent repayment plan, head-of-household 
borrowers actually made higher payments than married borrowers with the 
same income and debt levels; the Secretary has determined that head-of-
household borrowers should not be required to make higher payments than 
married borrowers with the same debt and income.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 19 parties 
submitted comments on the proposed regulations. An analysis of the 
comments and the changes follows. Major issues are grouped according to 
subject, with references to the appropriate sections of the 
regulations. Technical and other minor changes, and suggested changes 
the Secretary is not legally authorized to make under the applicable 
statutory authority, generally are not addressed.

Revising Income Contingent Repayment

    Comments: A number of commenters recommended that any revisions to 
the plan be brought about through negotiated rulemaking. These 
commenters noted that the existing repayment plan was developed through 
extensive negotiated rulemaking.
    Discussion: Section 457 of The HEA requires the Secretary to 
conduct negotiated rulemaking for the Direct Loan Program only to the 
extent practicable. This section does not require negotiated rulemaking 
for amendments to existing regulations. Further, the Secretary does not 
believe that it is practicable to conduct negotiated rulemaking for 
amendments to these regulations. Negotiated rulemaking is a lengthy 
process that would have prevented implementation of the revised income 
contingent repayment plan for the 1996-1997 academic year. For these 
amendments, the Secretary has decided not to use the negotiated 
rulemaking process to solicit input from the higher education 
community. In the Secretary's opinion, the revised income contingent 
repayment plan is an improvement over the existing plan, and borrowers 
should be able to benefit from these regulatory revisions as soon as 
possible. Further, a number of commenters supported the Secretary's 
proposal to revise the existing plan.
    Changes: None.

Required Minimum Payment

    Comments: In response to the Secretary's request for comments 
regarding a required minimum payment for all borrowers, one commenter 
recommended establishing a minimum payment of $15.00 for all borrowers, 
including those with a calculated repayment amount of $0. Another 
commenter advocated establishing a minimum payment of $2.00, if the 
Secretary were to require a minimum payment from all borrowers. A third 
commenter suggested that borrowers simply send in a coupon on a monthly 
basis in place of a payment amount.
    Most commenters argued against requiring a payment from a borrower 
whose calculated repayment amount is $0. In addition, many commenters 
questioned whether collecting $2.00 payments would be cost-effective. 
One commenter stated that borrowers with a calculated payment of less 
than $2.00 would not likely have a checking account and that the 
requirement to make these minimal payments would, 

[[Page 61821]]
therefore, be burdensome. To reduce burden and improve the cost-
effectiveness of collection efforts, several commenters suggested that 
the Secretary bill borrowers with minimal monthly payments on a 
quarterly or annual basis.
    One commenter questioned whether the Secretary would send 
delinquency notices to borrowers with $2.00 monthly payments who are 
$4.00 behind in payments (that is, two months behind in payments).
    Discussion: The Secretary agrees with those commenters who argued 
that borrowers with a calculated monthly payment amount of $0 should 
not be required to make monthly payments. In addition, the Secretary 
agrees with commenters that collecting $2.00 monthly payments may not 
be cost-effective. The Secretary has determined that requiring a $5.00 
minimum monthly payment of borrowers whose calculated monthly payment 
amount is greater than $0 but less than or equal to $5.00 would be more 
cost-effective and would better promote responsible repayment practices 
than establishing a minimum $2.00 payment amount. In addition, the 
Secretary believes that this change in policy will not impose a 
significant burden on borrowers. Therefore, the Secretary has decided 
to require a $5.00 minimum monthly payment of borrowers whose 
calculated monthly payment amount is greater than $0 but less than or 
equal to $5.00.
    In response to concerns that monthly billing will be burdensome for 
borrowers with minimal monthly repayment amounts, the Secretary will 
consider carefully the option of billing these borrowers on a quarterly 
or other less frequent basis. The Secretary has not prescribed billing 
cycles or billing frequency in these regulations and thus has the 
flexibility to change billing frequency if this action is warranted.
    The Secretary considers a borrower to be delinquent after the 
borrower has missed a monthly payment. Therefore, a borrower with 
required $5.00 monthly payments who is $10.00 behind in payments is 
considered to be delinquent, and the Secretary would send a delinquency 
notice to the borrower.
    Changes: None.

Comment Period

    Comments: Several commenters were concerned that the comment period 
was too short, especially considering that the Department published six 
NPRMs, all with comment periods ending at approximately the same time.
    Discussion: In the six NPRMs referred to above, the Secretary 
proposed numerous improvements and necessary changes to the Student 
Financial Assistance Program. The ``Master Calendar'' provisions 
contained in section 482 of the HEA require that regulations be 
published in final form by December 1 prior to the start of the award 
year for which they will become effective. Because of the importance of 
implementing these changes and improvements for the award year 
beginning July 1, 1996, the Secretary established a comment period that 
would allow publication of these final regulations by December 1, 1995, 
consistent with the ``Master Calendar'' timeframe. The Secretary always 
endeavors to provide as long a comment period as possible.
    Changes: None.

Section 685.209(a) Repayment Amount Calculation

    Comments: Several commenters expressed support for the new 
repayment amount calculation provisions. Many commenters approved of 
the Secretary's simplifying the existing income contingent repayment 
plan, which requires borrowers to choose between two formulas, so that 
there is only one formula. However, several commenters expressed 
objections to the new formula. For example, in response to the 
Secretary's statement in the preamble to the NPRM that the revised 
income contingent repayment plan will discourage over-borrowing, 
several commenters argued that the Secretary should not attempt to 
discourage over-borrowing through the income contingent repayment plan. 
One commenter suggested that the Secretary's efforts to discourage 
over-borrowing will result in a repayment plan that will prevent 
borrowers from entering public service and will discourage borrowers 
from choosing high-tuition institutions, even if they wish to attend 
such institutions.
    With regard to specific problems commenters identified in the new 
income contingent repayment plan, numerous commenters noted that the 
new formula makes no adjustment for family size. To address this 
problem, several commenters recommended that the Secretary incorporate 
into the new plan the current income contingent repayment plan's 
definition of discretionary income, which takes family size into 
account. Another commenter suggested offering forbearance to borrowers 
with larger households. Similarly, several commenters were concerned 
that the levels of discretionary income the plan established are well 
below the poverty level for borrowers with dependents. In addition, 
commenters argued that the level of discretionary income for single 
borrowers and head-of-household borrowers should not be identical.
    Other commenters noted that head-of-household borrowers would make 
higher payments than married borrowers with the same level of income 
and debt, due to the income percentage factors applicable to the two 
categories of borrowers. These commenters questioned whether this 
outcome of the proposed formula is appropriate. Another commenter who 
commented on the income percentage factors asked when the Secretary 
would apply the annually updated income percentage factors--each 
January 1st or when the Secretary obtains updated income data.
    One commenter stated that the proposed revision to the income 
contingent repayment plan violates section 455(e)(4) of the HEA because 
the proposed calculation amount is relative to income and debt, and the 
statute states only that payments should be relative to income.
    Finally, one commenter questioned whether the effect of the revised 
income contingent repayment plan would result in middle-class borrowers 
supporting lower-income borrowers.
    Discussion: The Secretary agrees with the commenters that using 
only one formula to calculate repayment under the income contingent 
repayment plan will simplify the income contingent repayment option. 
While several commenters objected to the Secretary's attempt to 
discourage over-borrowing, the Secretary believes that it is fiscally 
irresponsible to structure an income contingent repayment plan that 
encourages over-borrowing. As stated in the preamble to the September 
20, 1995, NPRM, the Secretary believes that the existing income 
contingent repayment plan may encourage over-borrowing because 
borrowers' payments increase only negligibly as debt increases. To 
remove this incentive to over-borrow, the Secretary believes it is 
appropriate to revise the plan so that payments increase significantly 
with amounts borrowed.
    The Secretary disagrees with the commenter who stated that the 
proposed revision to the income contingent repayment plan is in 
violation of the HEA because it bases payments on income and debt. The 
existing plan also bases payments on income and debt. The new plan 
simply takes the amount borrowed into greater consideration than the 
existing plan. Contrary to this commenter's suggestion, section 
455(e)(4) of the HEA does not prohibit the Secretary from taking into 
account a borrower's debt 

[[Page 61822]]
level when determining repayment schedules. The statute requires that 
income be included but does not address the factors which the Secretary 
may, in his discretion, include.
    The Secretary agrees with the commenters that payments should be 
adjusted for family size, that discretionary income levels for single 
and head-of-household borrowers should not be identical, and that 
payments for head-of-household borrowers should not be higher than 
those for married borrowers with the same income and debt levels. In 
order to revise the regulations accordingly, the Secretary has amended 
the definition of discretionary income. Under the revised regulations, 
discretionary income is now defined as AGI minus poverty levels 
established by HHS; these poverty levels take family size into account.
    In response to the commenter's question as to when the Secretary 
would apply the adjusted income percentage factor, the Secretary will 
apply new income percentage factors and new HHS Poverty Guidelines at 
the same time that new interest rates are applied: each July 1st.
    Finally, the Secretary assures the commenter who suggested that 
middle-income borrowers may be supporting lower-income borrowers that 
there is no cross-subsidization under either the existing or the 
revised income contingent repayment plan.
    Changes: The income percentage chart has been revised to reflect 
only two categories of borrowers: single and married/head of household. 
Because the income percentage factors applicable to married and head-
of-household borrowers will be identical, married and head-of-household 
borrowers with the same family size, income, and debt make the same 
monthly payments.
    Section 685.209(a)(3) has been revised so that discretionary income 
is now defined as AGI minus the amount of the ``HHS Poverty Guidelines 
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. For residents of Alaska and Hawaii, 
discretionary income is defined as a borrower's AGI minus the amounts 
in the ``HHS Poverty Guidelines for Alaska'' and the ``HHS Poverty 
Guidelines for Hawaii'' respectively. These guidelines adjust for 
family size.
    Comments: One commenter stated that the Secretary should make the 
new income contingent repayment plan formula available on software, so 
that borrowers can calculate their payments. This commenter suggested 
extending the comment period until 30 days after this software becomes 
available. In addition, this commenter suggested that the final 
regulation should include charts showing typical repayments over 25 
years. In these charts, the commenter suggested that the Secretary show 
both the accrual and capitalization of interest during periods of 
negative amortization and during periods of positive amortization.
    Discussion: The Secretary is considering making available to the 
public software for income contingent repayment calculations. However, 
the Secretary cannot extend the comment period until this software is 
available without seriously delaying the effective date of the 
regulations. In addition, the Secretary is not including charts showing 
typical repayments over 25 years. The Secretary will make such charts 
available in informational repayment materials provided to borrowers.
    Changes: None.

Section 685.209(b) Treatment of Married Borrowers

    Comments: Several commenters approved of the Secretary's treatment 
of married borrowers under the new income contingent repayment plan. 
However, one commenter argued against the Secretary's requiring 
borrowers who file their income tax separately from their spouse to 
obtain consent to disclosure of tax return information from their 
spouse. This commenter stated that the proposed policy would prohibit 
borrowers whose spouses are unwilling to provide this consent to 
disclosure from repaying under the income contingent repayment plan. 
Also, this commenter asked how the Secretary would determine whether 
the borrower is married.
    One commenter suggested an alternative to the wording in the NPRM 
that provides that married borrowers who are legally separated are not 
required to obtain their spouse's consent to tax return disclosure. 
This commenter stated that the regulations should provide that the 
borrower is not required to obtain this consent to disclosure if the 
borrower provides proof that he or she is living apart from the spouse 
and has filed for divorce. According to this commenter, some states do 
not recognize the status of being legally separated.
    One commenter questioned whether there were any provisions for 
married couples who choose to repay their loans jointly under the 
income contingent repayment plan and subsequently divorce and wish to 
separate their payments.
    Discussion: The Secretary feels strongly that repayment amounts for 
married borrowers must be based on the income of the borrower and the 
borrower's spouse. This policy will ensure that payments from married 
borrowers are calculated based on an accurate assessment of the 
borrower's ability to repay. The Direct Loan Program offers borrowers a 
variety of repayment plans; therefore, a married borrower who is unable 
to repay under the income contingent repayment plan because the spouse 
is unwilling to provide consent to disclosure of tax return information 
would be eligible to repay under any of the other Direct Loan repayment 
plans. Further, the Secretary intends to update income information 
concerning borrowers' spouses annually.
    To respond to the commenter's concern regarding how the Secretary 
would determine whether or not the borrower is married, the Secretary 
obtains a borrower's filing status (married, single, or head of 
household) from the Internal Revenue Service (IRS) when AGI information 
is reported. The Secretary acknowledges that some states do not 
recognize the status of ``legally separated'' and has made a change 
accordingly. Finally, with regard to the commenter's concern that 
married borrowers who have been repaying jointly should be able to 
begin repaying separately should they divorce, the Secretary assures 
the commenter that borrowers in joint repayment can always begin 
repaying separately at any time by changing their repayment plan 
option.
    Changes: Section 685.209(b)(1) has been revised so that a married 
borrower who has filed taxes separately from his or her spouse and is 
``separated'', rather than ``legally separated'', is not required to 
provide his or her spouse's written consent to disclosure of tax return 
information.

Section 685.209(c)(2)  Alternative Documentation of Income

    Comments: One commenter advocated allowing all borrowers to submit 
alternative documentation of income to establish monthly payments under 
the income contingent repayment plan while the Direct Loan Servicer is 
waiting for adjusted gross income (AGI) information from the IRS. 
Another commenter asked the Secretary to clarify whether the Secretary 
would require alternative documentation of income from borrowers who 
have been in repayment for a number of years but are in their first 
year of repayment under a Direct Consolidation Loan. In addition, this 
commenter noted that a 

[[Page 61823]]
borrower may be in the first two years of repayment on some loans but 
may have been in repayment for a longer period of time on other loans. 
Finally, this commenter asked whether the Secretary would collect 
alternative documentation of income from a borrower and the borrower's 
spouse, if the borrower is in his or her first or second year of 
repayment and is married.
    Discussion: With regard to the comment that all borrowers be 
allowed to submit alternative documentation of income while the 
Servicer is waiting for AGI, the Secretary may use other documentation 
of income provided by the borrower if AGI is not available or if, in 
the Secretary's opinion, the borrower's reported AGI does not 
reasonably reflect current income. Therefore, if a borrower's AGI will 
not reflect current income, the borrower can submit alternative 
documentation of income to the Servicer before IRS-reported AGI becomes 
available.
    The Secretary intends to collect alternative documentation of 
income from borrowers in their first and second years of repayment, 
when IRS-reported AGI does not reasonably reflect the borrower's 
current income. The Secretary will likely collect alternative 
documentation of income from borrowers who are in their first and 
second years of repayment on any of their loans, even if they have been 
in repayment for a longer period of time on other loans. These 
borrowers have recently completed school and, therefore, the prior 
year's AGI is unlikely to reflect current income.
    On the other hand, the Secretary does not intend to collect 
alternative documentation of income from borrowers who have been in 
repayment for more than two years but have recently changed into the 
income contingent repayment plan or from borrowers who have recently 
consolidated and chosen to repay under this plan. These borrowers have 
not recently left school and have likely been working. For these 
borrowers, the prior year's AGI will probably reflect the current 
year's income.
    Finally, the Secretary intends to collect alternative documentation 
of income from the borrower and the borrower's spouse if the borrower 
is in his or her first or second year of repayment and AGI does not, in 
the Secretary's opinion, accurately reflect the borrower's current 
income. The Secretary will collect this alternative documentation of 
income from the spouse of these borrowers in order to assess accurately 
the borrower's ability to repay.
    Changes: None.

Section 685.209(c)(5)  Limitation on Capitalization of Interest

    Comments: One commenter mistakenly believed that the Secretary has 
removed the existing limit on capitalization.
    Discussion: The Secretary has not removed the existing limit on 
capitalization, which provides that unpaid interest is capitalized only 
until the outstanding principal amount is ten percent greater than the 
original principal amount. While the Secretary has revised certain 
provisions under the income contingent repayment plan, the Secretary 
has not altered the provision that limits interest capitalization under 
the income contingent repayment plan.
    Changes: None.

Section 685.209(c)(4)(iv)  Forgiveness after 25 Years of Repayment

    Comments: Several commenters asked whether the Secretary is 
pursuing a legislative solution to the current tax problem under the 
income contingent repayment plan (that is, the problem that any amount 
forgiven at the end of 25 years is treated as income).
    Discussion: The Secretary is working with the Department of the 
Treasury to pursue a legislative solution to the tax liability problem 
under the income contingent repayment plan. The Department included its 
proposal to remove the tax liability under the income contingent 
repayment plan in the Administration's Sallie Mae privatization bill 
that was submitted to Congress.
    Changes: None.

Executive Order 12866

    These final 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 regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those determined by the 
Secretary as necessary for administering this program effectively and 
efficiently.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these final regulations, the Secretary has 
determined that the benefits of the regulations justify the costs.
    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.

Summary of Potential Costs and Benefits

    The potential costs and benefits of these final regulations are 
discussed elsewhere in this preamble under the following heading: 
Analysis of Comments and Changes.

Assessment of Educational Impact

    In the NPRM, the Secretary requested comments on whether the 
proposed regulations would require transmission of information that is 
being gathered by or is available from any other agency or authority of 
the United States. Based on the response to the proposed rules and on 
its own review, the Department has determined that the regulations in 
this document do not 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.

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

    Dated: November 27, 1995.
Richard W. Riley,
Secretary of Education.

    The Secretary amends 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); redesignating newly redesignated 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 

[[Page 61824]]
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 debts 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 to this part; or
    (ii) 20 percent of discretionary income.
    (3) For purposes of this section, discretionary income is defined 
as a borrower's AGI minus the amount of the ``HHS Poverty Guidelines 
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 For residents of Alaska and 
Hawaii, discretionary income is defined as a borrower's AGI minus the 
amounts in the ``HHS Poverty Guidelines for Alaska'' and the ``HHS 
Poverty Guidelines for Hawaii'' respectively. 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 Guidelines for the borrower's family size.

    \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
---------------------------------------------------------------------------

    (4) For exact incomes not shown in the income percentage factor 
table in 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, the income percentage factors in the table in Appendix 
A, and updated HHS Poverty Guidelines (if applicable).
    (6) For purposes of the annual recalculation described in paragraph 
(a)(5) of this section, 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 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 balances 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 to Part 685--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 calculate 
the applicable income percentage factor 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 (HHS poverty level for a family of 
one) from the borrower's income and multiply the result by 20%:

 $25,000-$7,470=$17,530
 $17,530 x 0.20=$3,506

    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. This couple has 
no children.
    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 

[[Page 61825]]
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 calculate the 
applicable income percentage factor 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 (HHS poverty level for a 
family of 2) from the couple's income and multiply the result by 
20%:

 $30,000-$10,030=$19,970
 $19,970 x 0.20=$3,994

    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''):

 $27,112-$25,000=$2,112

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:

 1,0002,112=0.4735

Multiply the result by the income percentage factor interval:

 0.4735 x 3.22=1.52

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%

BILLING CODE 4000-01-P

[[Page 61826]]
[GRAPHIC][TIFF OMITTED]TR01DE95.000



[[Page 61827]]
[GRAPHIC][TIFF OMITTED]TR01DE95.001



[[Page 61828]]
[GRAPHIC][TIFF OMITTED]TR01DE95.002



[FR Doc. 95-29207 Filed 11-30-95; 8:45 am]
BILLING CODE 4000-01-C