[Federal Register Volume 77, Number 137 (Tuesday, July 17, 2012)]
[Proposed Rules]
[Pages 42086-42148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-15888]



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Vol. 77

Tuesday,

No. 137

July 17, 2012

Part II





Department of Education





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34 CFR Parts 674, 682 and 685





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

  Federal Register / Vol. 77 , No. 137 / Tuesday, July 17, 2012 / 
Proposed Rules  

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DEPARTMENT OF EDUCATION

34 CFR Parts 674, 682, and 685

RIN 1840-AD05
[Docket ID ED-2012-OPE-0010]


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

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Federal Perkins Loan 
(Perkins Loan) program, Federal Family Education Loan (FFEL) program, 
and William D. Ford Federal Direct Loan (Direct Loan) program 
regulations. The proposed regulations would implement a new Income 
Contingent Repayment (ICR) plan in the Direct Loan program based on the 
President's ``Pay As You Earn'' repayment initiative, incorporate 
recent statutory changes to the Income Based Repayment (IBR) plan in 
the Direct Loan and FFEL programs, and streamline and add clarity to 
the total and permanent disability discharge process for borrowers in 
the title IV, HEA loan programs. The proposed regulations implementing 
a new ICR Plan and the statutory changes to the IBR plan would assist 
borrowers in repaying their loans while the proposed changes to the 
total and permanent disability discharge process would reduce burden 
for borrowers who are disabled and seeking a discharge of their title 
IV debt.

DATES: We must receive your comments on or before August 16, 2012.

ADDRESSES: Submit your comments through the Federal eRulemaking Portal 
or via postal mail, commercial delivery, or hand delivery. We will not 
accept comments by fax or by email. To ensure that we do not receive 
duplicate copies, please submit your comments only once. In addition, 
please include the Docket ID at the top of your comments.
     Federal eRulemaking Portal: Go to www.regulations.gov to 
submit your comments electronically. Information on using 
Regulations.gov, including instructions for accessing agency documents, 
submitting comments, and viewing the docket, is available on the site 
under ``How To Use This Site.''
     Postal Mail, Commercial Delivery, or Hand Delivery: If you 
mail or deliver your comments about these proposed regulations, address 
them to Jessica Finkel, U.S. Department of Education, 1990 K Street 
NW., Room 8031, Washington, DC 20006-8502.
    Privacy Note: The Department's policy is to make all comments 
received from members of the public available for public viewing in 
their entirety on the Federal eRulemaking Portal at 
www.regulations.gov. Therefore, commenters should be careful to include 
in their comments only information that they wish to make publicly 
available.

FOR FURTHER INFORMATION CONTACT: Jessica Finkel, U.S. Department of 
Education, 1990 K Street NW., Room 8031, Washington, DC 20006-8502. 
Telephone: (202) 502-7647 or by email at: [email protected]. If you 
use a telecommunications device for the deaf (TDD) or a text telephone 
(TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-
8339.
    Individuals with disabilities can obtain this document in an 
accessible format (e.g., Braille, large print, audiotape, or compact 
disc) on request to the contact person listed under FOR FURTHER 
INFORMATION CONTACT.

SUPPLEMENTARY INFORMATION:

Executive Summary

    Purpose of This Regulatory Action: The combination of increased 
enrollment and rising tuition has contributed to a significant increase 
in student loan debt among Americans. The ability of recent college 
graduates to find immediate employment with wages adequate enough to 
repay this debt has been challenged.
    For Federal student loan borrowers who suffer from a total and 
permanent disability (TPD), the Department's current disability 
discharge process has led to inconsistencies in determining their 
eligibility for discharge and created undue hardship.
    Based on the results of the negotiated rulemaking process and the 
advice and recommendations submitted by individuals and organizations 
in public hearing testimony and in written comments submitted to the 
Department, the proposed regulations would create a new Income 
Contingent Repayment (ICR) plan in the Direct Loan program based on the 
President's ``Pay As You Earn'' repayment initiative, incorporate 
recent statutory changes to the Income Based Repayment (IBR) plan in 
the Direct Loan and FFEL programs, and streamline and add clarity to 
the total and permanent disability discharge process for borrowers in 
the title IV, HEA loan programs.
    Summary of the Major Provisions of This Regulation: Action: The 
NPRM proposes regulations that would--
     Create a new ICR plan (proposed ICR-A) in the Direct Loan 
program based on the President's Pay As You Earn repayment initiative. 
The proposed regulations support the administration's goal of making 
the statutory improvements made by the SAFRA Act included in the Health 
Care and Reconciliation Act of 2010 (Pub. L. 111-152) to the IBR plan 
available to some borrowers earlier than July 1, 2014, and make 
technical corrections and minor changes to the current ICR plan 
regulations, including the addition of provisions related to 
notification of income documentation requirements and the ICR loan 
forgiveness process.
     Incorporate statutory changes to the IBR plan that were 
made by the SAFRA Act and add new provisions related to notification of 
income documentation requirements, repayment options after leaving the 
IBR plan, and the IBR loan forgiveness process.
     Revise Perkins Loan and FFEL program regulations to permit 
borrowers to apply directly to the Department for a total and permanent 
disability discharge. In the Direct Loan program, borrowers would 
continue to apply directly to the Department for total and permanent 
disability discharges, as they do under the current Direct Loan 
regulations.
     Modify regulations in the Perkins Loan, FFEL, and Direct 
Loan programs to provide more detailed information to borrowers in 
letters explaining why a disability discharge has been denied.
     Define the term ``borrower's representative'' for purposes 
of the disability discharge application process and state that 
references to a borrower or a veteran in the total and permanent 
disability discharge regulations include a borrower's representative or 
a veteran's representative.
     Specify that the Department denies a disability discharge 
request and collection resumes on the borrower's loans if the borrower 
receives a disbursement of a new title IV loan or receives a new TEACH 
Grant made on or after the date the physician certified the borrower's 
disability discharge application and before the date the Department 
makes a decision on the borrower's application for a total and 
permanent disability discharge.
     Specify that, if a borrower's Perkins Loan, FFEL, or 
Direct Loan program loan is reinstated, it returns to the status that 
would have existed if the total and permanent disability discharge 
application had not been received.
     Make corresponding changes to the total and permanent 
disability application process based on a certification from the 
Department of Veterans Affairs.


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Please refer to the Significant Proposed Regulations section of this 
preamble for a fuller discussion of the major provisions contained in 
this NPRM.
    Chart 1 summarizes the proposed regulations and related benefits, 
costs, and transfers that are discussed in more detail in the 
Regulatory Impact Analysis of this preamble. The Department estimates 
that approximately 1.6 million borrowers could take advantage of the 
proposed ICR-A repayment plan with another million borrowers being 
affected by the statutory changes to the IBR plan reflected in the 
proposed regulations. Significant benefits of these proposed 
regulations include a streamlined process for total and permanent 
disability discharges, enhanced notifications related to TPD, IBR, and 
ICR application and servicing processes, and reduced monthly payments 
for borrowers in partial financial hardship (PFH) status as a result of 
using a lower PFH threshold of 10 percent. The net budget impact of the 
proposed regulations is $2.1 billion over the 2012 to 2021 loan 
cohorts.

              Chart 1--Summary of the Proposed Regulations
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     Issue and key features            Benefits         Cost/transfers
------------------------------------------------------------------------
              Income Contingent Repayment (34 CFR part 685)
------------------------------------------------------------------------
Establishes ICR-A repayment plan  Enhanced cash       Estimated net
 with features of IBR as revised   management option   budget impact of
 by SAFRA for new borrowers on     for borrowers.      $2.1 billion over
 or after 10/1/2007 with a loan                        the 2012-2021
 disbursement made on or after                         loan cohorts.
 10/1/2011. ICR-A retains a cap
 on interest capitalization from
 current ICR.
Establishes threshold for PFH at  Reduced payments
 10% for ICR-A borrowers.          and shorter
                                   forgiveness
                                   period may
                                   encourage
                                   acknowledgement
                                   and payment of
                                   debt.
Loan forgiveness after 20 years   Reduced monthly
 of qualifying payments compared   payments may
 to 25 years under current         allow greater
 regulations.                      participation in
                                   the economy.
Retains current ICR program as    ICR-B leaves an
 ICR-B.                            income driven
                                   repayment option
                                   available to all
                                   borrowers.
Establishes process for borrower
 notification and processing of
 loan forgiveness by loan
 holders.
------------------------------------------------------------------------
                Income Based Repayment (34 CFR part 685)
------------------------------------------------------------------------
Incorporates statutory changes    Benefits mirror
 from SAFRA.                       those associated
                                   with proposed ICR
                                   changes.
Threshold for PFH reduced from
 15% to 10% for new borrowers
 after 7/1/2014.
Loan forgiveness after 20 years
 of qualifying payments compared
 to 25 years under current
 regulations.
------------------------------------------------------------------------
        Income Based Repayment (34 CFR part 685, 34 CFR part 682)
------------------------------------------------------------------------
A smaller payment amount made     Improved            No net budget
 under a forbearance can qualify   notifications       impact from
 as the single payment made in     around annual       proposed
 standard repayment plan for       recertification     regulations.
 borrower leaving IBR to select    of income may
 another repayment plan.           reduce number of
                                   borrowers removed
                                   from PFH for
                                   paperwork reasons.
Modified notification and income  ..................  Estimated
 documentation requirements for                        paperwork
 borrowers in IBR.                                     compliance costs
                                                       of approximately
                                                       $570,000
                                                       annually.
Establishes process for borrower
 notification and processing of
 loan forgiveness by loan
 holders.
------------------------------------------------------------------------
  Total and Permanent Disability (34 CFR 674.61; 34 CFR 682.402; 34 CFR
                                685.213)
------------------------------------------------------------------------
Creates single discharge          Simplifies process  Estimated
 application process through the   for borrowers.      paperwork
 Department for all of a                               compliance burden
 borrower's FFEL, Direct Loans,                        of approximately
 and Perkins loans.                                    $725,000.
Specifies that borrower's         Departmental
 representative will receive all   processing should
 notifications and can be          increase
 involved in all aspects of the    consistency of
 process.                          TPD
                                   determinations.
Enhanced notifications,           Process changes
 including more detailed reasons   could reduce
 for denials and information       reinstatements
 about options for reapplying.     for paperwork
                                   reasons.
Revised treatment of payments
 made following a TPD discharge.
Creation of standard form for
 reporting income during 3-year
 post-discharge monitoring
 period.
------------------------------------------------------------------------

    Invitation To Comment: As outlined in the Negotiated Rulemaking 
section of this notice, significant public participation, through three 
public hearings and three negotiated rulemaking sessions, has occurred 
in

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developing this notice of proposed rulemaking (NPRM). We invite you to 
submit comments regarding these proposed regulations. To ensure that 
your comments have maximum effect in developing the final regulations, 
we urge you to identify clearly the specific section or sections of the 
proposed regulations that each of your comments addresses and to 
arrange your comments in the same order as the proposed regulations.
    We invite you to assist us in complying with the specific 
requirements of Executive Order 12866 and 13563 and their overall 
requirement of reducing regulatory burden that might result from these 
proposed regulations. Please let us know of any further ways we could 
reduce potential costs or increase potential benefits while preserving 
the effective and efficient administration of the Department's programs 
and activities.
    During and after the comment period, you may inspect all public 
comments about these proposed regulations by accessing Regulations.gov. 
You may also inspect the comments in person, in Room 8031, 1990 K 
Street NW., Washington, DC, between 8:30 a.m. and 4:00 p.m., Washington 
DC time, Monday through Friday of each week except Federal holidays. 
Please contact the person listed under FOR FURTHER INFORMATION CONTACT.
    Assistance to Individuals with Disabilities in Reviewing the 
Rulemaking Record: On request we will provide an appropriate 
accommodation or auxiliary aid to an individual with a disability who 
needs assistance to review the comments or other documents in the 
public rulemaking record for these proposed regulations. If you want to 
schedule an appointment for this type of accommodation or auxiliary 
aid, please contact the person listed under FOR FURTHER INFORMATION 
CONTACT.

Negotiated Rulemaking

    Section 492 of the Higher Education Act of 1965, as amended, 
requires the Secretary, before publishing any proposed regulations for 
programs authorized by title IV of the HEA, to obtain public 
involvement in the development of the proposed regulations. After 
obtaining advice and recommendations from the public, including 
individuals and representatives of groups involved in the Federal 
student financial assistance programs, the Secretary must establish a 
negotiated rulemaking committee and subject the proposed regulations to 
a negotiated rulemaking process. All proposed regulations that the 
Department publishes on which the negotiators reached consensus must 
conform to final agreements resulting from that process unless the 
Secretary reopens the process or provides a written explanation to the 
participants stating why the Secretary has decided to depart from the 
agreements. Further information on the negotiated rulemaking process 
can be found at: www2.ed.gov/policy/highered/reg/hearulemaking/2011/loans.html.
    On May 5, 2011, the Department published a notice in the Federal 
Register (76 FR 25650) announcing our intent to establish up to two 
negotiated rulemaking committees to prepare proposed regulations. One 
committee would focus on issues related to streamlining institutional 
reporting requirements and proposed regulations regarding better State 
identification of low-performing teacher preparation programs pursuant 
to sections 205 and 207 of the HEA through focusing reporting on 
improved measures of program quality. A second committee (the ``Loans 
Committee'') would address Federal student loan issues. The regulations 
considered by the second committee would: Implement changes made by the 
SAFRA Act (Pub. L. 111-152), which ended the making of new loans in the 
Federal Family Educational Loan (FFEL) program as of July 1, 2010; make 
improvements to the income-contingent and income-based repayment plans; 
and improve the process for consideration of applications for total and 
permanent disability discharges. The notice requested nominations of 
individuals for membership on the committees who could represent the 
interests of key stakeholder constituencies on each committee.
    The Department developed a list of proposed regulatory provisions 
from advice and recommendations submitted by individuals and 
organizations in testimony submitted to the Department in a series of 
three public hearings and a roundtable discussion held on:
     May 12, 2011, at Tennessee State University, Nashville, 
Tennessee.
     May 16, 2011, at Pacific Lutheran University, Tacoma, 
Washington.
     May 19, 2011, at Loyola University-Lakeshore Campus, 
Chicago, Illinois.
     May 26, 2011, at College of Charleston, Charleston, South 
Carolina.
    In addition, the Department accepted written comments on possible 
regulatory provisions submitted directly to the Department by 
interested parties and organizations. Transcripts of the regional 
meetings can be accessed at www2.ed.gov/policy/highered/reg/hearulemaking/2011/loans.html and is also accessible in the rulemaking 
docket on www.regulations.gov.
    Staff within the Department also identified issues for discussion 
and negotiation.
    The Loans Committee included the following members:
     Mr. Getachew Kassa, Legislative Director, United States 
Student Association and Mr. Abou Amara, Jr. (alternate), President, 
Graduate and Professional Student Association, University of Minnesota, 
Twin Cities.
     Ms. Deanne Loonin, National Consumer Law Center, and Ms. 
Radhika Miller (alternate), Program Manager, Educational Debt Relief 
and Outreach, Equal Justice Works.
     Ms. Jennifer Mishory, Deputy Director, Young Invincibles, 
and Ms. Maureen Thompson (alternate), The Hastings Group, LLC.
     Ms. Margaret Rodriguez, Senior Associate Director of 
Financial Aid, University of Michigan and Chair, National Direct 
Student Loan Coalition, and Ms. Elizabeth Hicks (alternate), Executive 
Director Student Financial Services, Massachusetts Institute of 
Technology.
     Mr. David Glezerman, Assistant Vice President and 
University Bursar, Temple University, and Ms. Maria Livolsi 
(alternate), Student Loan Service Center, State University of New York.
     Mr. Robert Perrin, President, Williams & Fudge, Inc.
     Mr. Todd Leatherman, Executive Director, Office of 
Consumer Protection, Office of the Kentucky Attorney General, and Ms. 
Michele Casey (alternate), Assistant Attorney General, Consumer Fraud 
Bureau Office of the Illinois Attorney General.
     Ms. Cristi Millard, Director of Financial Aid, Salt Lake 
Community College, and Mr. Chris Christensen, (alternate) Director of 
Financial Aid, Johnson County Community College, Kansas.
     Ms. Kris Wright, Director, Office of Student Finance, 
University of Minnesota and Executive Council Member and Secretary, 
National Direct Student Loan Coalition, and Ms. Elaine Papas-Varas 
(alternate), University Director of Student Financial Aid and Director 
of the Primary Care Practitioner Loan Redemption Program of New Jersey 
University of Medicine and Dentistry of New Jersey.
     Ms. Yvonne Gutierrez-Sandoval, Senior Associate Director 
of Financial Aid, Pitzer College, and Mr. Jeffrey A. Gall (alternate), 
Associate Dean, Office of Student Financial Services, Georgetown 
University.
     Mr. Tom Sakos, Director of Student Lending and Regulatory 
Quality

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Assurance, DeVry Inc., and Mr. Anthony Fragomeni (alternate), Director 
of Governmental Affairs, Empire Education Group and Chairman, American 
Association of Cosmetology Schools' Government Relations Team.
     Ms. Betsy Mayotte, Director, Regulatory Compliance and 
Privacy, American Student Assistance, and Mr. Scott Giles (alternate), 
Vice President for Operations, Social Marketing and Strategy, Vermont 
Student Assistance Corporation.
     Mr. Robert Sandlin, Director of Policy and Compliance, 
Higher Education Servicing Corporation, and Ms. Vicki Shipley 
(alternate), Senior Advisor, National Council of Higher Education Loan 
Programs.
     Mr. Albert Gray, Executive Director and CEO, Accrediting 
Council for Independent Colleges and Schools, and Ms. Sharon Tanner 
(alternate), CEO, National League for Nursing Accreditation.
     Ms. Pamela Moran and Ms. Gail McLarnon, U.S. Department of 
Education.
    The Loans Committee met to develop proposed regulations during the 
months of January, February, and March of 2012. These proposed 
regulations reflect the work of this second committee and proposes 
regulations relating to the administration of the Federal student loan 
programs, specifically changes governing the ICR and IBR plans, and the 
process for making TPD discharge determinations. These proposed 
regulations also include certain technical changes to the regulations 
that are needed to reflect recent amendments to the HEA and to correct 
certain technical errors. These types of changes are not normally 
subject to the statutory requirements for negotiated rulemaking and 
public notice and comment. However, since those changes affected the 
regulations that would be considered by the negotiated rulemaking 
committee, the Secretary chose to include those changes in the proposed 
regulations to be considered by the committee to ensure that the 
committee could evaluate the full scope of changes to those 
regulations.
    At its first meeting, the Loans Committee reached agreement on its 
protocols and proposed agenda. The Committee's protocols provided that, 
unless agreed to otherwise, for the committee to be considered to have 
reached consensus on the regulations, consensus must be reached on all 
of the proposed regulations. Consensus means that there must be no 
dissent by any member in order for the Committee to be considered to 
have reached agreement.
    During its first meeting, the Loans Committee agreed to negotiate 
an agenda of 25 student loan related issues. The most significant 
issues: Developing regulations necessary to implement the President's 
``Pay As You Earn'' repayment initiative; developing regulations to 
incorporate statutory changes in the Income-Based Repayment Plan (IBR) 
and to address certain problems in the administration of the IBR and 
Income-Contingent Repayment plans; to overhaul the total and permanent 
disability discharge process; to update the FFEL program regulations to 
eliminate obsolete and unnecessary provisions governing loan 
origination and disbursement; to revise the Direct Loan program 
regulations to eliminate cross reference to the FFEL program 
regulations; to revise regulations governing the determination of a 
defaulted borrower's reasonable and affordable payment amount for 
purposes of rehabilitation of the borrower's defaulted loan; to revise 
the regulations governing administrative wage garnishment (AWG) for 
defaulted borrowers in the FFEL program; and to provide for consistent 
treatment of borrowers requesting forbearance on or after the 270th day 
of delinquency. The Department stated its commitment to publishing the 
regulations to implement the Pay As You Earn repayment initiative and 
to overhaul and improve the total and permanent disability discharge 
process for borrowers as soon as possible.
    During the development of proposed regulatory language and prior to 
the second meeting of the Committee, the Department concluded that the 
scope and volume of the likely resulting proposed regulations resulting 
from the agenda approved by the Committee would require extensive and 
significant changes to regulations. In particular, updating the FFEL 
program regulations and major changes to the Direct Loan regulations 
involved making changes to the entirety of those program regulations. 
The Department determined that it was unlikely that one NPRM reflecting 
all of the issues could be published by the deadline established by 
section 482(c) of the HEA. To ensure the earliest possible 
implementation of the Pay As You Earn repayment initiative and the 
revised total and permanent disability discharge regulations, which 
will provide significant benefits to student loan borrowers, the 
Department determined that two NPRMs would result from the Committee's 
work.
    During the second meeting of the Committee, the Department 
explained to the Committee members that one NPRM would contain proposed 
regulations to implement the Pay As You Earn repayment initiative, to 
incorporate statutory changes in the IBR plan, to make other changes to 
improve the administration of the IBR and ICR plans, and to overhaul 
the total and permanent disability discharge process. The second NPRM 
would contain all the remaining proposed regulations that were on the 
Committee's agenda, including proposed regulations involving 
rehabilitation of defaulted loans and AWG in the FFEL program. The 
Department also explained that any final regulations published as a 
result of the second NPRM would not be published by November 1, 2012, 
and therefore would not become effective until July 1, 2014, under the 
master calendar provisions of section 482(c)(1) the HEA. The Department 
committed, however, to authorize, to the extent possible, early 
implementation of the final regulations published as a result of the 
second NPRM under the Secretary's authority to designate regulatory 
provisions for early implementation by program participants under 
section 482(c)(2) of the HEA.
    At the final meeting in March 2012, the Loans Committee reached 
consensus on the full agenda of loans issues. This document represents 
the first of two NPRMs resulting from the Committee's negotiations. It 
contains proposed regulations to: Implement the Pay As You Earn 
repayment initiative; incorporate statutory changes in the IBR plan; 
make certain improvements in the administration of the IBR and ICR 
plans; and overhauling the total and permanent disability discharge 
process.
    More information on the work of the Loans Committee can be found 
at: www.ed.gov/policy/highered/reg/hearulemaking/2008/loans.html.

Summary of Proposed Changes

Income Contingent Repayment

    The proposed regulations create a new ICR plan (proposed ICR-A) 
based on the President's Pay As You Earn repayment initiative and 
proposes to make technical corrections and other minor changes to the 
current ICR plan (proposed ICR-B). The proposed changes to ICR-B 
include the addition of provisions related to notification of income 
documentation requirements and the ICR loan forgiveness process.
    Under the proposed regulations, ICR-A would be available to a new 
borrower who: (1) Did not have an outstanding student loan as of 
October 1, 2007, or as of the date he or she received a new loan after 
October 1, 2007; and (2) received a disbursement of a Direct

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Subsidized Loan, a Direct Unsubsidized Loan or a student Direct PLUS 
Loan on or after October 1, 2011, or receives a Direct Consolidation 
Loan based on an application received on or after October 1, 2011, 
except if the Direct Consolidation Loan repays a Direct or FFEL loan 
made before October 1, 2007. The proposed regulations for the ICR-A 
program would incorporate the following provisions from the statutory 
amendments to IBR that become effective on July 1, 2014:
     A borrower's maximum annual payment amount under the ICR-A 
plan would be capped at 10 percent of the difference between the 
borrower's AGI and 150 percent of the annual poverty guideline amount 
for the borrower's State and family size.
     Borrowers who repay under the ICR-A plan would qualify for 
forgiveness of any remaining loan balance after 20 years of qualifying 
payments and periods of economic hardship deferment.
     To qualify for the ICR-A plan and to continue to make 
income-contingent payments under that plan, a borrower would be 
required to have a partial financial hardship. A borrower would be 
considered to have a partial financial hardship if the annual amount 
due on all of the borrower's eligible Direct Loan and FFEL Program 
loans, as calculated based on a standard repayment plan with a 10-year 
repayment period, exceeds 10 percent of the difference between the 
borrower's AGI and 150 percent of the annual poverty guideline amount 
for the borrower's State and family size.
     For married borrowers who file a joint Federal tax return, 
the determination of a borrower's partial financial hardship status 
would be based on the combined income of both spouses and, if the 
spouse also has eligible loans, the combined eligible loan debt of both 
individuals. For a married borrower who files an individual Federal tax 
return, only the borrower's income and loan debt would be considered.
     The ICR-A plan will be available to any borrower who is 
repaying a non-defaulted Direct Loan, except for a parent Direct PLUS 
loan or a Direct Consolidation loan that repaid a parent Direct or FFEL 
PLUS loan. As with IBR, parent Direct PLUS Loans and Direct 
Consolidation Loans that repaid parent Direct PLUS Loans or parent 
Federal PLUS Loans would not be eligible for repayment under the ICR-A 
plan.
     Unpaid accrued interest would be capitalized only if a 
borrower repaying under the ICR-A plan is determined to no longer have 
a partial financial hardship, or if the borrower chooses to leave the 
ICR-A plan.
     For a borrower whose scheduled payment under the ICR-A 
plan is less than the amount of interest that accrues each month, the 
Secretary would pay the remaining interest for a period of three 
consecutive years from the date the borrower begins repayment under the 
ICR-A plan, excluding periods of economic hardship deferment.
    A Direct Loan borrower who is not a parent Direct PLUS borrower 
will continue to be able to select the ICR-B plan as one of the 
available repayment plans. These proposed regulations also incorporate 
the proposed IBR regulations regarding the treatment of married 
borrowers and borrowers who fail to provide required documentation of 
income into the current ICR/ICR-B regulations.

Income Based Repayment

    The proposed regulations incorporate statutory changes to the IBR 
plan that were included in the SAFRA Act and add new provisions related 
to notification of income documentation requirements, repayment options 
after leaving the IBR plan, and the IBR loan forgiveness process.
    SAFRA changes:
    Proposed Sec.  685.221(a)(4) would reflect the statutory definition 
of ``new borrower'' for purposes of the changes to the IBR program as 
an individual who has no outstanding balance on a Direct Loan or a FFEL 
program loan on July 1, 2014, or who has no outstanding balance on such 
a loan on the date he or she obtains a loan after July 1, 2014.
    The proposed regulations would revise the definition of ``partial 
financial hardship'' in Sec.  685.221(a)(5) to reflect the statutory 
provision and state that for new borrowers after July 1, 2014, a 
borrower is considered to have a partial financial hardship if the 
annual amount due on all of the borrower's eligible Direct Loan and 
FFEL Program loans, as calculated based on a standard repayment plan 
with a 10-year repayment period, exceeds 10 percent of the difference 
between the borrower's AGI and 150 percent of the annual poverty 
guideline amount for the borrower's family size. The proposed 
regulations would revise Sec.  685.221(b)(1) to provide that for a new 
borrower after July 1, 2014, the maximum IBR monthly payment amount 
during periods of partial financial hardship may not exceed 10 percent 
of the amount by which the borrower's AGI exceeds 150 percent of the 
poverty guideline amount for the borrower's family size, divided by 12.
    Finally, the proposed regulations would revise Sec.  685.221(f) to 
provide that a new borrower who has participated in the IBR plan 
qualifies for loan forgiveness after 20 years of qualifying payments 
and periods of economic hardship deferment.
    Provisions that affect all IBR participants:
    The proposed IBR regulations would also:
     Revise the partial financial hardship (PFH) determination 
process and modify notification, income documentation requirements, 
rights and responsibilities of borrowers who have been found qualified 
for IBR.
     Improve notifications requirements for borrowers who are 
eligible or approaching eligibility for loan forgiveness.
     Revise payment requirements for borrowers who leave IBR. A 
borrower who leaves the IBR plan and is placed on the standard 
repayment plan may change to a different repayment plan after making 
one monthly payment under the standard repayment plan. Under the 
proposed regulations, the single payment made under the standard 
repayment plan could include a smaller payment amount paid under a 
reduced payment forbearance agreement with the loan holder or the 
Secretary.

Total and Permanent Disability Discharge

    The proposed regulations will revise Perkins and FFEL regulations 
to provide for direct application to the Department for total and 
permanent disability discharges. They will modify regulations in the 
Perkins, FFEL, and Direct Loan program to provide more detailed 
information to borrowers in the letters explaining decisions to deny 
discharge applications and the proposed regulations would modify the 
Perkins, FFEL, and Direct Loan regulations to specify that the 
Department will collect income documentation from borrowers during the 
post-discharge monitoring period on an OMB-approved form.
    The proposed total and permanent disability regulations would:
     Revise certain provisions to specify that a borrower's 
representative may be involved in any part of the total and permanent 
disability total and permanent disability process and must receive all 
notifications sent to the borrower.
     Extend the loan suspension window to 120 days from 60 days 
after a borrower has notified the loan holder(s) of his or her intent 
to apply for a discharge.
     Extend the deadline to submit an application for total and 
permanent

[[Page 42091]]

disability to 90 days after the date of the physician's certification 
that a borrower has a total and permanent disability.
     Revise the total and permanent disability discharge 
application process so that a borrower applies for total and permanent 
disability directly to the Department and that the Department directly 
notifies the borrower's Perkins and FFEL lenders upon approval of the 
application for total and permanent disability discharge.
     Revise provisions related to a borrower's responsibilities 
to report income annually after a discharge has been granted and 
specify that the Department will create an OMB approved form for 
reporting earnings during the monitoring period.
     Revise provisions to require that payments made by the 
borrower after a disability discharge has been granted are returned to 
the borrower.
     Revise the application process by streamlining the 
approval process where the borrower's documentation is for applications 
from the Department of Veterans Affairs to ensure consistency.
     Update the regulations governing the actions of FFEL 
lender and guaranty agencies in the disability discharge process to 
reflect the new single application process.
     Propose regulations to specify that if the borrower 
receives a disbursement of a new title IV loan or receives a new TEACH 
Grant made on or after the date the physician certified the borrower's 
discharge application and before the date the Secretary grants a total 
and permanent disability discharge, the Secretary will deny the 
borrower disability discharge application and resume collection on the 
borrower's loans.
     Revise provisions to require that the loans of a borrower 
who is denied a total and permanent disability discharge are reinstated 
as if the total and permanent disability application was never 
submitted.

Significant Proposed Regulations

    We group major issues according to subject, with appropriate 
sections of the proposed regulations referenced in parentheses. We 
discuss other substantive issues under the sections of the proposed 
regulations to which they pertain. Generally, we do not address 
proposed regulatory provisions that are technical or otherwise minor in 
effect.

Total and Permanent Disability Discharge (34 CFR 674.61, 682.402, and 
685.213)

    Background: After receiving significant public criticism in 
February 2011 that the Department's total and permanent disability 
discharge process lacked transparency and was unduly burdensome and 
costly for borrowers, the Department undertook a comprehensive review 
of the process. Before initiating this review, the Department had 
already begun making improvements such as: Streamlining the review 
process to ensure that the physician's certification received primary 
consideration in discharge decisions, performing outreach to borrowers 
to ensure that supplemental information from physicians is received 
timely, and improving information flow to help borrowers understand the 
process. We made other improvements when the Department designated a 
single contractor to manage the total and permanent disability 
discharge process in 2012, including the creation of a new Web site 
through which borrowers can track the status of their applications, 
clearer correspondence with borrowers, and borrower notifications at 
regular milestones as the application process progresses.
    As a result of the comprehensive review and ongoing efforts to 
identify procedural deficiencies, the Department also committed to 
considering changes to the regulations governing the total and 
permanent disability discharge process. In the Federal Register notice 
published on October 28, 2011 (76 FR 66880), announcing our intent to 
establish a negotiated rulemaking committee on the Federal student loan 
programs, we included three topics for discussion related to loan 
discharges based on total and permanent disability:
     Establishing a single total and permanent disability 
application process;
     Improvements to borrower notification of denial; and
     Improvements in post-discharge monitoring of employment 
earnings.
    These proposed regulations would revise Sec. Sec.  674.61, 
682.402(c), and 685.213 to require Perkins Loan and FFEL borrowers to 
apply directly to the Department for a total and permanent disability 
discharge and to provide increased transparency in the notifications a 
Perkins Loan, FFEL, and Direct Loan borrower receives when an 
application for discharge is denied. Finally, after discussions with 
the non-Federal negotiators, the Department committed to the 
development of a new Federal form that would assist borrowers in 
providing the Department with documentation of the borrower's annual 
earnings from employment during the three-year post-discharge 
monitoring period. The sections that follow describe in more detail 
these changes and other clarifying changes made by the Loans Committee 
to improve the total and permanent disability process.

Use of Terms (34 CFR 674.61(b)(1), 682.402(c)(1), and 685.213(a)(4))

    Statute: Section 437(a)(1) of the HEA, which is applicable to the 
Direct Loan Program under section 455(a)(1) of the HEA, and section 
464(c)(1)(F) of the HEA provide for a discharge of a borrower's FFEL, 
Perkins Loan, or Direct Loan program loan if the borrower becomes 
totally and permanently disabled as determined in accordance with the 
Secretary's regulations, or if the borrower is unable to engage in any 
substantial gainful activity by reason of any medically determinable 
physical or mental impairment that can be expected to result in death 
or has lasted, or can be expected to last, for a continuous period of 
not less than 60 months.
    Current Regulations: Section 682.402(c)(2) of the FFEL program 
regulations authorize a borrower's representative to submit a total and 
permanent disability discharge application on behalf of a borrower. 
Sections 674.61(b)(6), 682.402(c)(6), and 685.213(b)(5) of the Perkins 
Loan, FFEL, and Direct Loan program regulations, respectively, provide 
that the borrower's representative may assume the borrower's 
responsibilities to provide notifications to the Secretary about 
address changes and annual earnings after the borrower has received a 
discharge based on total and permanent disability. However, current 
regulations do not define the term ``borrower's representative.''
    Section 682.402(c) of the FFEL program regulations use the terms 
``lender'' and ``guaranty agency,'' as those terms are defined in 
682.200(b).
    Proposed Regulations: The proposed regulations would add new 
Sec. Sec.  674.61(b)(1)(ii), 682.402(c)(1)(iv)(A), and 685.213(a)(4) to 
the Perkins Loan, FFEL, and Direct Loan program regulations and specify 
that a ``borrower's representative'' or a ``veteran's representative'' 
is any individual, including a member of the borrower's or veteran's 
family or an attorney, authorized to act on behalf of the borrower or 
the veteran with respect to the borrower's or veteran's application for 
a total and permanent disability discharge. Under the proposed 
regulations, references to a ``borrower'' or a ``veteran'' in the total 
and permanent disability discharge regulations would include a 
borrower's representative or a veteran's representative. The proposed 
regulations would clarify that a

[[Page 42092]]

representative may act on behalf of the borrower to apply for a 
discharge, provide notifications or information to the Secretary in 
connection with a discharge application, and to receive notifications 
from the Secretary.
    The proposed regulations would add a new Sec.  682.402(c)(1)(iv)(B) 
to the FFEL regulations to clarify that for purposes of the FFEL total 
and permanent disability discharge regulations, the term ``lender'' 
would include a guaranty agency that holds a borrower's FFEL loan at 
the time the borrower applies for a total and permanent disability 
discharge. This proposed change would reflect current practice. 
Currently, if the guaranty agency is the loan holder at the time the 
borrower requests a total and permanent disability discharge, the 
guaranty agency carries out the responsibilities of a FFEL lender with 
regard to the borrower's discharge request (except for claim filing 
requirements).
    The proposed regulations would add a new Sec.  682.402(c)(1)(iv)(C) 
to the FFEL regulations to clarify that references in the total and 
permanent disability discharge regulations to ``the applicable guaranty 
agency'' refer to the guaranty agency that guaranteed the loan.
    Reasons: The current regulations specifically allow a borrower's 
representative to submit a total and permanent disability discharge 
application on behalf of the borrower only in the FFEL program. While 
discussing the role of the borrower's representative in helping a 
borrower apply for discharge of a FFEL loan based on a total and 
permanent disability, a non-Federal negotiator requested that the 
regulations be amended to clarify that a borrower's representative may 
represent the borrower throughout the process, not just during the 
initial application stage. Currently, as a matter of practice, the 
Department allows representatives to represent borrowers throughout the 
total and permanent disability discharge process in all of the title IV 
loan programs. However, a non-Federal negotiator argued that the 
practice is not consistently followed by loan servicers and others 
participating in the title IV loan programs and should be formalized by 
including it in the regulations. The non-Federal negotiator was 
particularly concerned that borrowers' representatives do not always 
receive the notifications that the borrower receives. The non-Federal 
negotiator requested that the regulations be amended to specify that 
both the borrower and the borrower's representative (if any) receive 
notices.
    The Department agreed and, for consistency, added a paragraph to 
the proposed regulations for all of the title IV student loan programs 
stating that the term ``borrower'' includes a borrower's 
representative, if applicable. Under the proposed regulations any 
notice sent to a borrower must also be sent to the borrower's 
representative if the borrower has one. In addition, both the borrower 
and the borrower's representative may provide notifications and 
information in connection with the borrower's total and permanent 
disability discharge.
    The Department also agreed to develop a new release form that the 
borrower can use to designate a representative to act on behalf of the 
borrower with respect to the borrower's request for a disability 
discharge.
    The non-Federal negotiator also requested that the Department add 
language to the proposed regulations specifying that a borrower's 
representative could be an attorney. The Department agreed and added 
language to the Perkins Loan, FFEL, and Direct Loan program proposed 
regulations providing that an attorney could be a borrower's 
representative.
    Other non-Federal negotiators requested that the proposed 
regulations clarify the role of a guaranty agency that holds a 
borrower's FFEL loan at the time the borrower applies for a total and 
permanent disability discharge. Under current practice, the guaranty 
agency carries out the functions of a FFEL lender with regard to the 
borrower's discharge request. The Department proposes to reflect this 
practice by adding a provision to the regulations specifying that the 
term ``lender,'' as used in the FFEL program disability discharge 
regulations, means a guaranty agency if the guaranty agency holds the 
loan at the time the borrower applies for a total and permanent 
disability discharge.
    The current total and permanent disability discharge regulations do 
not specifically address borrowers with FFEL program loans held by more 
than one lender and possibly guaranteed by more than one guaranty 
agency. The proposed regulations, as discussed in the next section, 
would specifically address how discharge applications from these 
borrowers will be handled. Therefore, the proposed regulations use the 
term ``the applicable guaranty agency.'' Some non-Federal negotiators 
recommended that the proposed regulations specify that the term 
``applicable guaranty agency'' means the guaranty agency that 
guaranteed the FFEL loan for which the borrower has requested a 
discharge. The Department agreed that this change would improve the 
clarity of the proposed regulations.

Total and Permanent Disability Discharge Application Process (34 CFR 
674.61(b)(2), 682.402(c)(2), and 685.213(b))

    Statute: The HEA does not specify the application process for a 
borrower applying for a total and permanent disability discharge.
    Current Regulations: Currently, a borrower who has title IV loans 
held by two or more lenders must apply separately to each lender for a 
total and permanent disability discharge. The borrower must provide a 
total and permanent disability discharge application certified by a 
physician to each lender that holds title IV loans owed by the 
borrower. After the application is received, the title IV lender 
suspends collection activity on the borrower's Perkins Loan, FFEL, or 
Direct Loan program loans, in accordance with Sec. Sec.  
674.61(b)(2)(iv), 682.402(c)(7)(i), or 685.213(b)(1). Each loan holder 
processes the disability discharge application separately.
    Under Sec.  674.61(b)(2)(iv)(A) of the Perkins Loan program 
regulations, the institution that awarded the Perkins Loan reviews the 
borrower's disability discharge application. If the institution 
determines that the application supports the conclusion that the 
borrower is totally and permanently disabled, the institution assigns 
the loan to the Secretary.
    Under Sec.  682.402(c)(7)(ii) of the FFEL regulations, the FFEL 
program lender reviews the borrower's disability discharge application. 
If the lender determines that the application supports the conclusion 
that the borrower is totally and permanently disabled, the lender files 
a disability discharge claim with the guaranty agency. The guaranty 
agency reviews the application and, if it concurs with the lender's 
determination, approves the discharge claim in accordance with Sec.  
682.402(c)(7)(iv). After approving the claim, the guaranty agency 
assigns the loan to the Secretary in accordance with Sec.  
682.402(c)(7)(vi)(A).
    Under Sec.  685.213(b)(1) of the Direct Loan regulations, the 
borrower applies directly to the Secretary for a total and permanent 
disability discharge.
    Under Sec. Sec.  674.61(b)(3), 682.402(c)(3), and 685.213(b)(2), 
the Secretary makes the final determination of eligibility for a total 
and permanent disability discharge in the Perkins Loan, FFEL, and 
Direct Loan Programs.
    Proposed Regulations: The proposed regulations would revise 
Sec. Sec.  674.61(b)(2) and 682.402(c)(2) of the Perkins Loan and FFEL 
program regulations to have borrowers submit applications for total

[[Page 42093]]

and permanent disability discharges directly to the Secretary. In the 
Direct Loan Program, borrowers would continue to submit applications 
directly to the Secretary.
    Under the proposed single application process for total and 
permanent disability discharges, if a borrower notifies a Perkins loan 
school or a FFEL program lender that holds his or her loan and claims 
to be totally and permanently disabled, the school or lender would 
direct the borrower to notify the Secretary of the borrower's intent to 
apply for a discharge and would provide the borrower with the 
information necessary to do so.
    Under proposed Sec. Sec.  674.61(b)(2)(ii) and 682.402(c)(2)(ii), 
after a Perkins Loan or FFEL borrower notifies the Secretary of his or 
her intent to apply for a total and permanent disability discharge, the 
Secretary would--
     Provide the borrower with information needed to apply for 
the discharge;
     Identify all title IV loans owed by the borrower and 
notify the lenders of those loans of the borrower's intent to apply for 
the discharge;
     Direct the lenders to suspend collection efforts on those 
loans for up to 120 days; and
     Inform the borrower that collection will resume on the 
borrower's title IV loans if the borrower does not submit a total and 
permanent disability discharge application within 120 days.
    The Secretary would carry out the same actions for Direct Loan 
borrowers who notify the Secretary that the borrower claims to be 
totally and permanently disabled under proposed Sec.  685.213(b)(1).
    Under proposed Sec. Sec.  674.61(b)(2)(iii) and 682.402(c)(2)(iii) 
of the Perkins Loan program and FFEL program regulations, Perkins 
schools and FFEL lenders will resume collection on the borrower's loans 
if the borrower does not submit the total and permanent disability 
discharge application within 120 days. The Perkins loan school or FFEL 
lender would be deemed to have exercised forbearance during the 
suspension period. In the FFEL program, the lender could capitalize 
interest that accrued during the suspension period. Under proposed 
Sec.  682.402(c)(2)(iii), a guaranty agency, even if it is acting as a 
lender for purposes of a total and permanent disability discharge 
request, would not be permitted to capitalize accrued interest.
    Under proposed Sec. Sec.  674.61(b)(2)(v) through (b)(2)(viii), 
682.402(c)(2)(iv) through (c)(2)(viii), and 685.213(b)(3), a Perkins 
Loan, FFEL, or Direct Loan borrower must submit the total and permanent 
disability discharge application to the Secretary. The application must 
include a certification by a physician who is a doctor of medicine or 
osteopathy legally authorized to practice in a State, affirming that 
the borrower is totally and permanently disabled as described in the 
regulations. The borrower must submit the disability discharge 
application to the Secretary within 90 days of the date the physician 
certified the application.
    Generally, the 90-day period for submitting the total and permanent 
disability discharge application would overlap with the 120-day 
suspension period referenced earlier in this section. The 120-day 
suspension period would begin on the date the Secretary notifies the 
borrower's title IV lenders of the borrower's intent to apply for a 
total and permanent disability discharge. The 90-day period would begin 
on the date the physician certifies the total and permanent disability 
application.
    After receiving the total and permanent disability discharge 
application, the Secretary notifies the borrower's title IV loan 
holders that the Secretary has received the application. This 
notification would direct the borrower's loan holders either to suspend 
collection activity or to maintain the suspension of collection 
activity on the borrower's title IV loans.
    If the application is incomplete, the Secretary requests the 
missing information from the borrower or the physician who certified 
the application. An application is incomplete if information requested 
on the application--such as a borrower's signature, a physician's 
signature, or a physician's license number--is not provided.
    Under proposed Sec. Sec.  674.61(b)(2)(ix) and 682.402(c)(2)(ix) 
after receiving the discharge application, the Secretary would send a 
notification to the borrower that would--
     State that the application will be reviewed by the 
Secretary;
     Inform the borrower of the suspension of collection 
activity on the borrower's title IV loans while the Secretary reviews 
the application; and
     Explain the process for the Secretary's review.
    The Secretary would send the same notification to Direct Loan 
borrowers after receipt of the discharge application.
    Reasons: Under the Department's proposed regulations, a borrower 
would submit one total and permanent disability discharge application 
directly to the Secretary and this would eliminate the need for 
borrowers to submit separate discharge applications to each of their 
loan holders.
    The Department's proposal eliminates the requirement that each of a 
borrower's loan holders (and guaranty agencies, in the FFEL program) 
review the borrower's total and permanent disability discharge 
application. The proposal eliminates redundant reviews of total and 
permanent disability discharge applications and reduces administrative 
burden on lenders and guaranty agencies in the title IV programs.
    The Department believes that the streamlined total and permanent 
disability discharge process would provide many benefits to borrowers. 
The proposed regulations would--
     Simplify the process for the borrower;
     Establish a single point of contact provided to the 
borrower in the instructions for submitting his or her application;
     Reduce the length of time needed to process applications;
     Provide more consistency in determinations;
     Provide more uniformity in the communications sent to 
borrowers throughout the discharge process; and
     Ensure that all of a borrower's title IV loans that are 
eligible for a total and permanent disability discharge are discharged 
at the same time, reducing instances of ``straggler'' loans that the 
borrower may forget to include when applying for a discharge.
    The non-Federal negotiators supported the Department's goal to 
simplify the application process for a total and permanent disability 
discharge. However, the non-Federal negotiators raised some concerns 
about the proposed single application process. The negotiated language 
in these proposed regulations addresses the majority of these concerns.
    Under the Department's initial proposal, the first title IV lender 
that the borrower contacted would suspend collection activity on the 
borrower's loans for up to 90 days. The Secretary would notify the 
borrower's other title IV loan holders to suspend collection after the 
borrower notified the Secretary of his or her intent to apply for a 
total and permanent disability discharge. Non-Federal negotiators were 
concerned that beginning the suspension of collection activity on 
different dates would be confusing for borrowers. They were also 
concerned that the 90-day suspension period would not be sufficient 
time for a borrower to obtain the physician certification needed to 
apply for the discharge. The negotiators

[[Page 42094]]

stated that it would be preferable for the suspension of collection 
activity to last for up to 120 days and for it to begin on the same 
date for all of the borrower's title IV loans. The non-Federal 
negotiators recommended that the suspension of collection activity not 
begin on any of the borrower's title IV loans until after the borrower 
contacted the Secretary. The Department agreed and modified the 
proposed regulations accordingly.
    Some non-Federal negotiators recommended that the suspension of 
collection activity also include a suspension of payments collected 
from borrowers through administrative wage garnishment (AWG) and the 
Treasury Offset Program (TOP). The Department did not agree. Borrowers 
applying for total and permanent disability discharges are, by 
definition, unable to engage in substantial gainful activity. 
Therefore, AWG should not be an issue for these borrowers. With regard 
to TOP, the Department reiterated its current policy on stopping TOP 
offsets. The submission of a total and permanent disability discharge 
application does not, in and of itself, demonstrate that a borrower is 
eligible for the discharge. Given the administrative effort and timing 
issues associated with stopping TOP, it may not be in the best 
interests of the taxpayers or the borrower to suspend TOP based solely 
on the filing of the discharge application. If a borrower's loan 
account has been certified for TOP, the Secretary or a guaranty agency 
is not required to stop TOP offsets while the borrower is preparing to 
submit the total and permanent disability discharge application or 
during its review. The Secretary or guaranty agency may, however, stop 
or reduce TOP offsets during this period if it believes such action is 
warranted in the borrower's particular circumstances.
    If a determination is made that the borrower is eligible for a 
total and permanent disability discharge, the Secretary or guaranty 
agency must promptly inactivate TOP offsets on the account. After the 
borrower's loan is discharged, all payments on the loan received after 
the date of the physician's certification, including payments obtained 
through a TOP offset, are refunded to the borrower.
    The proposed single application process would be consistent with 
the Department's current TOP practices. If the borrower's account is 
not certified in TOP at the time the borrower contacts the Secretary to 
request a total and permanent disability discharge, the Secretary or 
guaranty agency would not take steps to initiate TOP during the 
suspension of collection activity under proposed Sec. Sec.  
674.61(b)(2)(ii)(C), 682.402(c)(2)(ii)(C), and 685.213(b)(1). However, 
if the account is already certified in TOP at the time the borrower 
contacts the Department, neither the Department nor the guaranty agency 
would be required to stop TOP until the Department determines that the 
borrower is eligible for a total and permanent disability discharge.
    Non-Federal negotiators representing guaranty agencies expressed 
concerns that the proposed changes would limit the role of guaranty 
agencies in the total and permanent disability discharge process. Under 
the new process, the guaranty agencies would be notified of a 
borrower's eligibility for a total and permanent disability discharge 
but would not receive copies of the borrower's applications or of any 
accompanying medical documentation. These non-Federal negotiators 
stated that this lack of information would hinder the agencies' ability 
to assist borrowers through the discharge process.
    The Department declined to modify the proposed regulations to 
require that guaranty agencies receive copies of the total and 
permanent disability discharge applications. Under the proposed 
regulations, guaranty agencies and lenders would not conduct medical 
reviews of disability discharge applications. Therefore, there is no 
need for lenders or agencies to receive the applications. The 
Department believes that a requirement that disability discharge 
applications be provided to guaranty agencies would be contrary to the 
goal of streamlining the disability discharge application process. In 
addition, the Department notes that nothing prevents a borrower from 
voluntarily providing this documentation to a guaranty agency.

Secretary's Review of Total and Permanent Disability Discharge 
Applications (34 CFR 674.61(b)(3), 682.402(c)(3), and 685.213(b)(2))

    Statute: The HEA does not specify the procedures for the 
Secretary's review of total and permanent disability discharge 
applications.
    Current Regulations: If the Secretary determines that a title IV 
borrower qualifies for a total and permanent disability discharge, the 
Secretary discharges the loan and, in accordance with Sec. Sec.  
674.61(b)(3)(i), 682.402(c)(3)(ii), and 685.213(b)(2)(ii), the 
Secretary notifies the borrower that the Secretary has approved the 
total and permanent disability discharge request. The notification 
explains to the borrower the terms and conditions under which the 
Secretary will reinstate the discharged loan.
    If the Secretary does not approve the total and permanent 
disability discharge request, the Secretary notifies the borrower that 
it has denied the disability discharge application and that collection 
will resume on the borrower's loan, in accordance with Sec. Sec.  
674.61(b)(3)(ii), 682.402(c)(3)(iii), and 685.213(b)(2)(iii).
    Proposed Regulations: Under proposed Sec. Sec.  674.61(b)(3)(iii) 
and 682.402(c)(3)(iii), if the Secretary determines that the borrower 
qualifies for a total and permanent disability discharge, the Secretary 
would notify the borrower's Perkins and FFEL lenders that the Secretary 
approved the application and would provide the date that the physician 
certified the total and permanent disability discharge application.
    For Perkins Loan borrowers, the Secretary would direct the 
institution to assign the borrower's Perkins Loans to the Department. 
Proposed Sec.  674.61(b)(3)(iv) would require the institution to assign 
the Perkins Loan to the Secretary within 45 days of receiving the 
notification.
    For FFEL borrowers, the Secretary would direct the FFEL lender to 
submit a disability claim to the applicable guaranty agency.
    If the Secretary determines that the borrower does not qualify for 
a total and permanent disability discharge, the Secretary notifies the 
borrower and the lender that the Secretary denied the total and 
permanent disability discharge application under proposed Sec. Sec.  
674.61(b)(3)(vi), 682.402(c)(3)(v), and 685.213(b)(4)(iv). The 
notification would include--
     The reason or reasons for the denial;
     A statement that the loan is due and payable to the lender 
under the terms of the promissory note and that the loan will return to 
the status that would have existed had the total and permanent 
disability discharge application not been received;
     A statement that the lender will notify the borrower of 
the date the borrower must resume making payments on the loan or, in 
the case of a Direct Loan, the date that the borrower must resume 
making payments on the Direct Loan;
     An explanation that the borrower is not required to submit 
a new total and permanent disability discharge application if the 
borrower requests that the Secretary re-evaluate the application for 
discharge by providing, within 12 months of the date of the 
notification,

[[Page 42095]]

additional information that supports the borrower's eligibility for 
discharge; and
     An explanation that if the borrower does not request re-
evaluation of the borrower's prior discharge application within 12 
months of the date of the notification, the borrower must submit a new 
total and permanent disability discharge application to the Secretary 
if the borrower wishes the Secretary to re-evaluate the borrower's 
eligibility.
    Under proposed Sec. Sec.  674.61(b)(3)(vii), 682.402(c)(3)(vi), and 
685.213(b)(4)(v), if the borrower requests re-evaluation of his or her 
application or submits a new disability discharge application, the 
request must include new information regarding the borrower's disabling 
condition that was not available at the time the Secretary reviewed the 
borrower's initial application for a total and permanent disability 
discharge.
    Reasons: The Department is proposing to change the regulations to 
reflect its current practice of providing detailed information in the 
notifications that are sent to borrowers about their disability 
discharge applications. The proposed regulations are based on letters 
that are currently available for use for total and permanent disability 
discharges but that are not used consistently. The Department believes 
that describing the content of these letters would ensure that the 
information provided in the notifications is consistent, and would 
provide more transparency to borrowers regarding the reasons for the 
denial of their application, as well as information on the options the 
borrower has to request that the disability discharge request be re-
evaluated.

Treatment of Disbursements of Title IV Loans and Receipt of Title IV 
Loans After the Physician Certification Date (34 CFR 674.61(b)(4), 
674.61(b)(5), 682.402(c)(4), 682.402(c)(5), 685.213(b)(3), and 
685.213(b)(4))

    Statute: Sections 437(a)(1), which is applicable to the Direct Loan 
program under section 455(a)(1) of the HEA, and section 464(k) of the 
HEA authorize the Secretary to develop safeguards to prevent fraud and 
abuse in the discharge of title IV loans due to total and permanent 
disability.
    Current Regulations: Under Sec.  674.61(b)(4), 682.402(c)(4), or 
685.213(b)(3) of the Perkins Loan, FEEL, and Direct Loan program 
regulations, respectively, if a borrower received a title IV loan or a 
TEACH Grant prior to the date of the physician's certification of the 
borrower's total and permanent disability discharge application and a 
disbursement of that loan or grant occurs while the borrower's 
discharge request is being processed, the processing of the discharge 
request is suspended, until the borrower returns the full amount of the 
disbursement.
    Proposed Regulations: The proposed regulations do not change the 
current requirements for disbursements of loans made prior to the date 
of the physician's certification. The proposed regulations would add 
new Sec. Sec.  674.61(b)(5), 682.402(c)(5), and 685.213(b)(6) to 
specify that if the borrower receives a disbursement of a new title IV 
loan or receives a new TEACH Grant made on or after the date the 
physician certified the borrower's discharge application and before the 
date the Secretary grants a total and permanent disability discharge, 
the Secretary will deny the borrower's disability discharge application 
and collection will resume on the borrower's loans.
    Reasons: The current total and permanent disability discharge 
regulations address late disbursements of loans received prior to a 
physician's certification of the borrower's disability discharge 
application and after a discharge has been granted. However, the 
current regulations do not address a situation in which a borrower 
receives a disbursement of a new title IV loan or a new TEACH Grant 
made on or after the date the physician certified the application, but 
before the date the Secretary discharges the loan. The Department is 
proposing to provide in the regulations that a borrower is not eligible 
for a discharge if the borrower receives a new title IV loan or TEACH 
Grant while the Department is reviewing his or her total and permanent 
disability discharge application. When a borrower takes out a title IV 
loan or receives a TEACH Grant, the borrower makes a commitment either 
to repay the loan or to teach for four years. If a borrower actively 
seeks a new title IV loan or TEACH Grant shortly after the borrower is 
certified as totally and permanently disabled by a physician, it raises 
the question of whether the borrower actually intends to repay the loan 
or to teach. The proposed regulations would preclude a borrower from 
receiving a title IV loan or TEACH Grant, only to have the loan or 
teaching obligation discharged a short time later.
    The non-Federal negotiators agreed with this proposed change. 
However, there was some discussion on how to track receipt of a new 
title IV loan or TEACH Grant by a borrower. The Department proposed 
using the disbursement date of a new title IV loan or TEACH Grant to 
determine receipt and the non-Federal negotiators agreed.

Reinstatement of Loans and Borrower Responsibilities After Discharge 
(34 CFR 674.61(b)(6), 674.61(b)(7), 682.402(c)(6), 682.402(c)(7), 
685.213(b)(7), and 685.213(b)(8))

    Statute: Sections 437(a)(1) of the HEA, which is applicable to the 
Direct Loan program under section 455(a)(1) of the HEA, and section 
464(k) of the HEA authorize the Secretary to promulgate regulations to 
reinstate a borrower's obligation to repay a FFEL, Perkins Loan, or 
Direct Loan program loan that was discharged due to a disability if, 
after the discharge, the borrower receives another title IV loan or has 
earned income in excess of the poverty line, or under other 
circumstances that the Secretary determines to be necessary.
    Current Regulations: Sections 674.61(b)(5), 682.402(c)(5), and 
685.213(b)(4) of the current regulations specify that a Perkins Loan, 
FFEL, or Direct Loan program loan that has been discharged due to a 
total and permanent disability will be reinstated if, within three 
years of the date of the discharge, the borrower--
     Has annual earnings from employment that exceed 100 
percent of the poverty guideline for a family of two;
     Receives a new TEACH Grant or a new title IV loan, except 
for a Consolidation Loan; or
     Fails to return any disbursement the borrower receives 
after the discharge date of a title IV loan or TEACH Grant received 
prior to the discharge date.
    Under Sec. Sec.  674.61(b)(6), 682.402(c)(6), and 685.213(b)(5), 
during the three-year period after the discharge date, a Perkins Loan, 
FFEL, or Direct Loan borrower must--
     Notify the Secretary of any changes to the borrower's 
address or phone number;
     Notify the Secretary if the borrower's annual earnings 
exceed 100 percent of the poverty line for a family of two; and
     Provide the Secretary, upon request, with documentation of 
the borrower's annual earnings from employment.
    Current regulations do not specify a format or process for 
providing documentation of annual earnings to the Secretary.
    Proposed Regulations: The proposed regulations would not change the 
conditions for reinstating a loan that has been discharged due to a 
total and permanent disability. However, we are proposing to modify 
Sec. Sec.  674.61(b)(6)(ii)(B), 682.402(c)(6)(ii)(B), and 
685.213(b)(7)(ii)(B) to provide that, if a

[[Page 42096]]

borrower's Perkins Loan, FFEL, or Direct Loan program loan is 
reinstated, it returns to the status it would have had if the total and 
permanent disability discharge application had not been received. 
Current regulations do not address the status of a loan that has been 
reinstated.
    The proposed regulations would make one change to the regulations 
describing the borrower's responsibilities after the borrower has 
received a total and permanent disability discharge. Under proposed 
Sec. Sec.  674.61(b)(7)(iii), 682.402(c)(7)(iii), and 
685.213(b)(8)(iii), a Perkins Loan, FFEL, or Direct Loan borrower would 
be required to provide the Secretary, on request, with documentation of 
annual earnings from employment on a form provided by the Secretary.
    Reasons: Borrowers whose loans have been discharged based on a 
disability must provide documentation of their income to the Secretary 
for three years after the date of the discharge. It is the Department's 
experience that borrowers who are totally and permanently disabled and 
who have little or no income are often unsure how to document their 
income.
    During the negotiations, the Department initially proposed shifting 
the three-year period during which the borrower would have to provide 
income information to three calendar years (January 1 to December 31) 
after the discharge was granted. The Department proposed this approach 
because it would allow borrowers to meet the income documentation 
requirement by submitting tax returns for each calendar year after the 
discharge.
    Non-Federal negotiators objected to this proposal. They noted that 
it would stretch out the post-discharge review period for borrowers--in 
some cases to almost four years instead of three. The non-Federal 
negotiators also pointed out that low-income individuals may not be 
required to file tax returns, so the proposed solution would not 
resolve the problem for the many borrowers who qualify for a discharge 
but are not required to file tax returns.
    The Department responded by proposing to revise the regulations to 
require that a borrower submit income information on a form provided by 
the Secretary. The Department intends to develop a form that will be 
available by the time these regulations become effective. Borrowers 
will be required to submit the form to the Secretary to document their 
annual earnings. The form will require the borrower to certify the 
borrower's annual earnings from employment and will require the 
borrower to submit documentation to support the earnings information, 
if the borrower has such documentation. The documentation may include 
income tax returns, documentation of eligibility for Social Security 
disability benefits, or other documentation that supports the amount 
certified by the borrower.
    The proposed regulations do not specify the content of the form, 
but the form will be made available for public comment before it is 
approved for use.

Return of Payments After a Total and Permanent Disability Assignment 
(34 CFR 674.61(b)(8), 682.402(c)(8), 682.402(r)(2), 682.402(r)(3), and 
685.213(b)(4)(iii))

    Statute: The HEA does not specify the treatment of payments 
received on a title IV loan after the borrower has received a total and 
permanent disability discharge on the loan.
    Current Regulations: Sections 674.61(b)(7)(i) and 674.61(b)(7)(iii) 
of the Perkins Loan program regulations require an institution that 
receives a payment on a Perkins loan after it has assigned the loan to 
the Secretary during the disability discharge process to forward the 
payment to the Secretary. If the Secretary discharges the loan, the 
Secretary returns to the sender any payments made after the date of the 
physician's certification of the borrower's discharge application.
    Section 682.402(c)(7)(vii) of the FFEL regulations requires a 
lender to forward to the guaranty agency any payment received on a FFEL 
loan after the lender receives a claim payment from the guaranty 
agency.
    Section 682.402(r)(2) of the FFEL regulations requires a guaranty 
agency that receives a payment on a loan after it has assigned the loan 
to the Secretary during the disability discharge process to forward the 
payment to the Secretary. At the time the guaranty agency forwards the 
payment to the Secretary, it must notify the borrower that there is no 
need to continue to make payments on the loan. Under current Sec.  
682.402(r)(3), the Secretary returns the payments to the borrower after 
the Secretary makes a final determination to discharge the loan due to 
a total and permanent disability.
    Section 685.213(b)(2)(ii) of the Direct Loan program regulations 
requires the Secretary, after discharging a Direct Loan, to return to 
the sender any payments received after the date of the physician's 
certification of the borrower's discharge application.
    Proposed Regulations: Under proposed Sec.  674.61(b)(8), if an 
institution receives a payment on a Perkins loan that has been assigned 
to the Secretary based on the Secretary's determination of the 
borrower's eligibility for a total and permanent disability discharge, 
the institution returns the payment to the sender.
    Under proposed Sec.  682.402(c)(8)(i)(C), after receiving a 
disability discharge claim payment from the guaranty agency, the FFEL 
lender must return to the sender any payments it receives after the 
date the physician certified the borrower's loan discharge application 
and any payments received after claim payment.
    Under proposed Sec.  682.402(r)(2), a guaranty agency must return 
to the sender any payments it receives on a FFEL loan that has been 
assigned to the Secretary based on the Secretary's determination of the 
borrower's eligibility for a total and permanent disability discharge.
    Under proposed Sec.  682.402(r)(3), after the Secretary discharges 
a FFEL loan, the Secretary returns to the sender any payments it 
receives on the loan after the date the borrower became totally and 
permanently disabled.
    Under proposed Sec.  685.213(b)(4)(iii) of the Direct Loan program 
regulations, after the Secretary discharges a Direct Loan, the 
Secretary returns to the sender any payments received after the date of 
the physician's certification of the borrower's discharge application.
    Reasons: Under the proposed regulations, the assignment of a 
Perkins loan or the filing of a disability claim on a FFEL loan would 
not occur until after the Secretary has determined that the borrower 
qualifies for a total and permanent disability discharge. Therefore, 
there is no reason for payments received after those dates to be 
forwarded to the guaranty agency or to the Secretary. The Department is 
proposing to have the payments returned to the sender.
Total and Permanent Disability Discharge Application Process for 
Applications Based on Documentation From the Department of Veterans 
Affairs (34 CFR 674.61(c), 682.402(c)(9), and 685.213(c))
    Statute: Sections 437(a)(2), which is applicable to the Direct Loan 
program under section 455(a)(1) of the HEA, and section 
464(c)(1)(F)(iv) of the HEA provide that a FFEL, Perkins Loan, or 
Direct Loan borrower who has been determined by the Department of 
Veterans Affairs (VA) to be unemployable due to a service-connected 
disability and who provides documentation of that determination to the 
Secretary is considered totally and permanently disabled for the 
purpose of discharging the borrower's title IV loans. Section 437(a)(2) 
further specifies that a

[[Page 42097]]

borrower who provides such documentation shall not be required to 
present additional documentation for the purpose of determining 
eligibility for a total and permanent disability discharge.
    Current Regulations: Sections 674.61(c), 682.402(c)(8), and 
685.213(c) of the Perkins Loan, FFEL, and Direct Loan program 
regulations describe the process for a veteran who is applying for a 
total and permanent disability discharge based on a determination by 
the VA that the veteran is unemployable due to a service-connected 
disability. The total and permanent disability discharge process based 
on VA documentation is similar to the total and permanent disability 
discharge process for non-veterans in the three loan programs, with a 
few major exceptions.
    Sections 674.61(c)(2)(ii), 682.402(c)(8)(i), and 685.213(c)(1) of 
the current regulations require the veteran to submit to the Secretary 
documentation from the VA demonstrating that the veteran is 
unemployable due to a service-connected disability. This documentation 
takes the place of the physician's certification of total and permanent 
disability required of other borrowers.
    The Perkins Loan and FFEL program regulations do not currently 
require the institution or guaranty agency to assign the loan to the 
Secretary if the institution or guaranty agency determines that the VA 
documentation supports the veteran's eligibility for a discharge. 
Sections 674.61(c)(2)(iii)(A) and 682.402(c)(8)(ii)(D) specify that the 
institution or guaranty agency is only required to submit the total and 
permanent disability discharge application and the VA documentation to 
the Secretary.
    The three-year post-discharge monitoring period that generally 
applies to borrowers after the Secretary grants a total and permanent 
disability discharge does not apply to loans discharged based on 
documentation from the VA. The Secretary does not reinstate a loan that 
has been discharged based on documentation from the VA.
    Proposed Regulations: The total and permanent disability discharge 
application process for veterans who rely on documentation from the VA 
in proposed Sec. Sec.  674.61(c), 682.402(c)(9), and 685.213(c) matches 
the proposed regulations for total and permanent disability discharge 
applications for non-veterans. The exceptions in the current 
regulations discussed above are retained in the proposed regulations. 
Title IV loans discharged based on documentation from the VA are not 
assigned to the Secretary, are not subject to the three-year post 
discharge monitoring period, and are not reinstated.
    In addition, under proposed Sec. Sec.  674.61(c)(3)(iv)(E), 
682.402(c)(9)(xi)(E), and 685.213(c)(2)(ii)(E), the notification to a 
veteran whose disability discharge request based on documentation from 
the VA has been denied would include information on how the veteran may 
apply for a total and permanent disability discharge under the regular 
process for non-veterans, if the documentation from the VA indicates 
that the veteran might qualify for a total and permanent disability 
discharge under that standard.
    Reasons: The Department believes that the disability application 
process for veterans relying on a certification from the VA should be 
similar to the regular disability discharge process. Maintaining 
similar processes for both types of disability discharges will create 
less administrative burden for participants in the title IV loan 
programs and less confusion for borrowers. In addition, the Department 
believes that veterans will benefit by applying the changes proposed 
for the disability discharge process for non-veterans to the process 
for disability discharges based on VA documentation. Therefore, the 
Department is proposing to streamline the disability discharge process 
for veterans in the same manner that we are proposing to streamline the 
regular process.
FFEL Lender and Guaranty Agency Roles (34 CFR 682.402(c)(8), 
682.402(g)(1), 682.402(g)(2), 682.402(h)(1), and 682.402(h)(3))
    Statute: The HEA does not specify any particular roles for lenders 
or guaranty agencies in the processing of total and permanent 
disability discharges.
    Current Regulations: Under Sec.  682.402(c)(7)(i) of the FFEL 
regulations, if a borrower contacts a FFEL lender requesting a total 
and permanent disability discharge of a loan, the lender continues 
collection activity on the loan until it receives a disability 
discharge application certified by a physician or a letter from a 
physician asking for additional time to determine if the borrower is 
totally and permanently disabled. In the former situation, the lender 
suspends collection activity once it receives the application. In the 
latter, if the lender does not receive the total and permanent 
disability discharge application within 60 days of the physician's 
letter, the lender resumes collection activity. The lender also resumes 
collection activity on the loan if it receives the total and permanent 
disability discharge application and determines that the borrower does 
not qualify for a disability discharge. The lender may capitalize 
interest that accrued during the suspension of collection activity in 
accordance with Sec.  682.402(c)(7)(iii).
    If the lender receives the disability discharge application and 
determines that the application supports the conclusion that the 
borrower is totally and permanently disabled, the lender submits a 
disability claim to the guaranty agency, as specified in Sec.  
682.402(c)(7)(ii). Sections 682.402(g)(2)(i) and 682.402(g)(1)(iv) 
require the lender to submit the disability claim within 60 days of the 
date the lender determines that the borrower is totally and permanently 
disabled and to include a copy of the physician's certification of 
total and permanent disability with the claim.
    Section 682.402(h)(1)(i)(B) requires a guaranty agency to pay the 
lender's claim within 90 days of the date it was filed, if the guaranty 
agency agrees with the determination of the lender. Under Sec.  
682.402(h)(3)(ii)(B), the amount payable on an approved disability 
discharge claim includes unpaid interest that accrued on the loan 
during the period the guaranty agency needed to review and approve the 
claim, not to exceed 90 days.
    Under Sec.  682.402(c)(7)(viii), the Secretary reimburses the 
guaranty agency for the disability claim after the agency pays the 
claim to the lender. Section 682.402(c)(7)(ix) requires the guaranty 
agency to assign the loan to the Secretary after the guaranty agency 
pays the disability claim.
    Section 682.402(c)(7)(v) requires a guaranty agency to return the 
disability claim to the lender if the guaranty agency does not agree 
with the lender's determination that the borrower is totally and 
permanently disabled. If the disability claim is returned by the 
guaranty agency, the lender notifies the borrower that the application 
has been denied.
    Proposed Regulations: Proposed Sec.  682.402(c)(2)(ii)(C) 
eliminates the option for a physician to submit a letter requesting 
additional time to submit the total and permanent disability discharge 
application. Under the proposed regulations, the Secretary would direct 
all of the borrower's title IV lenders to suspend collection efforts 
for up to 120 days after the borrower informs the Secretary that he or 
she intends to apply for a total and permanent disability discharge.

[[Page 42098]]

    Under proposed Sec.  682.402(g)(1)(iv), a FFEL lender would not 
submit a copy of the total and permanent disability discharge 
application with the disability discharge claim it files with the 
guaranty agency. Instead, the FFEL lender would provide the guaranty 
agency with the notification the lender received from the Secretary 
directing the lender to submit the disability claim.
    Under proposed Sec.  682.402(g)(2), a FFEL lender must file a 
disability claim within 60 days of receiving the notice from the 
Secretary directing the lender to file the claim. Under proposed Sec.  
682.402(h)(3)(iii)(A), the amount of the claim payment by the guaranty 
agency includes interest that accrued on the loan for up to 45 days 
during which the guaranty agency processed the disability claim. Under 
proposed Sec.  682.402(c)(8)(i)(D), the Secretary reimburses the 
guaranty agency for the disability claim after the guaranty agency pays 
the claim to the lender. Under proposed Sec.  682.402(c)(8)(i)(E), the 
guaranty agency assigns the loan to the Secretary within 45 days of the 
date the guaranty agency paid the disability claim and receives the 
reimbursement payment from the Secretary.
    Reasons: The Department is eliminating the option for a physician 
to submit a letter requesting more time for the borrower to submit a 
total and permanent disability discharge application because we believe 
that requiring such a letter would be cumbersome under the new process. 
The proposed regulations would provide a uniform period of suspension 
of collection activity for all borrowers.
    The regulations specify that a FFEL lender may capitalize interest 
that accrues during the suspension period if the borrower does not 
submit a total and permanent disability discharge request, or if the 
request is denied. This provision is the same in the current 
regulations.
    The proposed reductions in FFEL claim filing periods are intended 
to improve the timeliness with which a disability claim is processed in 
the FFEL program. Since neither the FFEL lender nor the guaranty agency 
would conduct medical reviews of the total and permanent disability 
discharge applications under the proposed new process, the Department 
believes that the timeframes for processing total and permanent 
disability discharge requests can be shortened.
    The proposed regulations would specify a timeframe for a guaranty 
agency or Perkins school to assign a loan to the Secretary. The 
Department believes that specifying a timeframe for assignments will 
help to ensure that loans that qualify for a disability discharge are 
assigned to the Secretary promptly so the Secretary may complete the 
discharge.
    Initially the Department proposed that guaranty agencies would be 
required to assign a FFEL loan to the Secretary within 30 days of a 
claim payment. Non-Federal negotiators representing guaranty agencies 
indicated that their current practice is to assign loans after receipt 
of the Federal reimbursement payment, not within a set number of days 
after a claim payment. In response to their concerns, the Department 
revised the proposed regulations to provide that a loan must be 
assigned within 45 days after receipt of the Federal reimbursement 
payment.

Income-Contingent Repayment Plans

Pay As You Earn Initiative (ICR-A Plan)

    Statute: Section 455(d)(1)(D) of the HEA authorizes the Secretary 
to offer an income-contingent repayment (ICR) plan with varying annual 
repayment amounts based on the income of the borrower, paid over an 
extended period of time prescribed by the Secretary, not to exceed 25 
years. Section 455(e) of the HEA authorizes the Secretary to establish 
ICR plan repayment schedules through regulations.
    Current Regulations: Under current 34 CFR 685.209, the annual 
amount payable by a borrower under the ICR plan may not exceed 20 
percent of the borrower's discretionary income, and the maximum ICR 
repayment period is 25 years. If a loan has not been repaid at the end 
of the 25-year period, the unpaid portion of the loan is forgiven.
    Proposed Regulations: In October 2011, President Obama announced 
the Pay As You Earn repayment initiative to help student loan borrowers 
reduce their monthly payments. The Pay As You Earn initiative reflected 
in these proposed regulations would be available to borrowers who: (1) 
did not have an outstanding loan under the Direct Loan or FFEL programs 
as of October 1, 2007, or as of the date they received a new loan after 
October 1, 2007; and (2) receive a disbursement of a Direct Subsidized 
Loan, a Direct Unsubsidized Loan or a student Direct PLUS Loan on or 
after October 1, 2011, or receive a Direct Consolidation Loan based on 
an application received on or after October 1, 2011, unless the Direct 
Consolidation Loan repays a Direct or FFEL loan that was outstanding as 
of October 1, 2007. The Pay As You Earn initiative reflected in these 
proposed regulations will cap a borrower's annual payment amount at 10 
percent of the borrower's discretionary income and provide for 
forgiveness of any remaining loan balance after 20 years of repayment. 
These terms reflect changes to the separate income-based repayment 
(IBR) plan that will go into effect for new borrowers on or after July 
1, 2014. To offer this repayment relief to borrowers earlier, the 
Secretary is using his authority to establish an ICR plan by 
regulation. The proposed regulations also make other changes to the ICR 
repayment plan to implement the Pay As You Earn initiative. The 
Secretary is proposing to implement the Pay As You Earn initiative as a 
new ``ICR-A'' plan in Sec.  685.209(a). However, the Secretary realizes 
that for a small number of borrowers who would otherwise qualify for 
the IBR plan or the proposed ICR-A plan, the current ICR repayment plan 
may be more beneficial. Accordingly, the Secretary is proposing to 
retain the current ICR repayment plan as the ``ICR-B plan,'' with 
certain changes as discussed below, in new Sec.  685.209(b).
    The proposed ICR-A plan would generally have the same terms and 
conditions as the IBR plan that will be available to new borrowers on 
or after July 1, 2014. The terms and conditions of the proposed ICR-A 
plan include the following:
     A borrower's maximum annual payment amount would be capped 
at 10 percent of the difference between the borrower's AGI and 150 
percent of the annual poverty guideline amount for the borrower's State 
and family size.
     Borrowers who repay under the ICR-A plan would qualify for 
forgiveness of any remaining loan balance after 20 years of qualifying 
payments and periods of economic hardship deferment.
     To initially qualify and to continue to make income-
contingent payments under the plan, a borrower would be required to 
have a partial financial hardship. A borrower would be considered to 
have a partial financial hardship if the annual amount due on all of 
the borrower's eligible Direct Loan and FFEL program loans, as 
calculated based on a standard repayment plan with a 10-year repayment 
period, exceeds 10 percent of the difference between the borrower's AGI 
and 150 percent of the annual poverty guideline amount for the 
borrower's State and family size.
     For married borrowers who file a joint Federal tax return, 
the determination of a borrower's partial financial hardship status 
would be based on the combined income of both spouses and, if the 
spouse also has eligible loans, the combined eligible loan debt of both 
individuals. For a

[[Page 42099]]

married borrower who files an individual Federal tax return, only the 
borrower's income and loan debt would be considered.
     The ICR-A plan will be available to any borrower who is 
repaying a non-defaulted Direct Loan, except for a parent Direct PLUS 
loan or a Direct Consolidation loan that repaid a parent Direct or FFEL 
PLUS loan. As with IBR, parent Direct PLUS Loans and Direct 
Consolidation Loans that repaid parent Direct PLUS Loans or parent 
Federal PLUS Loans would not be eligible for repayment under the ICR-A 
plan.
     The term ``eligible loan'' would be defined as including 
any outstanding non-defaulted Direct Loan or FFEL program loan, except 
for a parent Direct PLUS loan, a parent Federal PLUS Loan, or a Direct 
Consolidation Loan or Federal Consolidation Loan that repaid a parent 
Direct PLUS Loan or parent Federal PLUS loan. The term ``eligible 
loan'' is used in connection with determining whether a borrower has, 
or continues to have, a partial financial hardship and, for a borrower 
who has eligible loans with more than one loan holder, to determine the 
borrower's prorated monthly payment amount under the ICR-A plan.
     Unpaid accrued interest would be capitalized only if a 
borrower repaying under the ICR-A plan is determined to no longer have 
a partial financial hardship, or if the borrower chooses to leave the 
ICR-A plan.
     For a borrower whose scheduled payment is less than the 
amount of interest that accrues each month on a subsidized loan or on 
the subsidized portion of a consolidation loan, the Secretary would not 
charge the borrower the remaining interest for a period of three 
consecutive years from the date the borrower begins repayment under the 
ICR-A plan, excluding periods of economic hardship deferment.
    The ICR-A plan would also include certain changes that we are 
proposing to make to the IBR plan as discussed below under ``Income-
Based Repayment Plan.'' Other terms and conditions of the proposed ICR-
A plan are explained below.
    Reasons: To support the Administration's goal of making it easier 
for borrowers to repay their Federal student loans, the Secretary is 
using his authority under section 455(d)(1)(D) of the HEA to implement 
the Pay As You Earn initiative as a second type of ICR plan in the 
Direct Loan Program.

Access to the ICR-A Plan

    Statute: Under section 455(d)(1)(D) of the HEA, the ICR plan is 
available to repay any Direct Loans except for Direct PLUS Loans made 
to parent borrowers.
    Current Regulations: Current regulations in Sec.  685.208(a) 
provide that all Direct Loan borrowers except parent Direct PLUS Loan 
borrowers may repay their loans under the ICR plan.
    Proposed Regulations: The proposed regulations would amend the 
provisions in Sec.  685.208(a) related to borrower eligibility for the 
various Direct Loan repayment plans by adding a reference to the ICR-A 
plan and by providing that any type of Direct Loan could be repaid 
under the ICR-A plan except for a parent Direct PLUS Loan or a Direct 
Consolidation Loan that repaid a parent Direct PLUS Loan or a parent 
Federal PLUS Loan. In the regulations governing the ICR plan, proposed 
Sec.  685.209(a) would provide that the ICR-A plan is available to 
borrowers who meet both of the following criteria:
    (1) Did not have an outstanding loan under the Direct Loan or FFEL 
programs as of October 1, 2007, or as of the date they received a new 
loan after October 1, 2007; and
    (2) Receive a disbursement of a Direct Subsidized Loan, a Direct 
Unsubsidized Loan or a student Direct PLUS Loan on or after October 1, 
2011, or receive a Direct Consolidation Loan based on an application 
received on or after October 1, 2011, unless that Direct Consolidation 
Loan repays a Direct or FFEL loan that was outstanding as of October 1, 
2007.
    Reasons: The Department is proposing to make the ICR-A plan 
available to new borrowers in fiscal year 2008 who receive a new loan 
in fiscal year 2012 or later. Fiscal years 2008 and 2012 began on 
October 1, 2007, and October 1, 2011, respectively. The proposed 
definition of ``eligible new borrower'' in Sec.  685.209(a)(1)(iii) as 
an individual who had no outstanding balance on a Direct Loan or FFEL 
program loan as of October 1, 2007, or who had no outstanding balance 
on such a loan on the date the borrower obtained a loan after October 
1, 2007, is consistent with the manner in which eligibility for the 
Direct Loan and FFEL teacher loan forgiveness programs is specified 
under Sec. Sec.  685.217(a)(1) and 682.216(a)(1), respectively. To 
ensure that new borrowers in fiscal year 2008 who are enrolled during 
the 2011-2012 academic year can qualify for the ICR-A plan, the 
proposed regulations would specify that receipt of a new loan in fiscal 
year 2012 or later means receipt of any disbursement of a Direct 
Subsidized Loan, a Direct Unsubsidized Loan, or a student Direct PLUS 
Loan on or after October 1, 2011. This means, for example, that a new 
borrower in 2008 who received the first disbursement of a 2011-2012 
academic year loan in August or September 2011 (i.e., in fiscal year 
2011) and who will graduate in the spring of 2012 would nonetheless be 
eligible for the ICR-A plan if a subsequent disbursement of that loan 
is made on or after October 1, 2011, in fiscal year 2012. The 
Department believes that offering the ICR-A plan to this population 
will provide a significant benefit to a group of student loan borrowers 
who are among those most likely to face difficulty repaying their loans 
under other repayment plans, while at the same time limiting additional 
costs to taxpayers.
    The proposed regulations would also allow a borrower to choose the 
ICR-A plan if the borrower takes out a Direct Consolidation Loan on or 
after October 1, 2011. The Department originally proposed that a 
borrower could meet the requirement to receive a new loan in fiscal 
year 2012 or later by receiving a Direct Consolidation Loan based on an 
application received on or after October 1, 2011. In response to a 
request for clarification from a non-federal negotiator, the Department 
expanded the original proposal to clarify that an individual who 
receives a Direct Consolidation Loan based on an application received 
on or after October 1, 2011, is not eligible for the ICR-A plan if the 
Direct Consolidation Loan repays a loan that would otherwise make the 
borrower ineligible based on the requirement to be a new borrower as of 
October 1, 2007. For example, a borrower could not qualify for the ICR-
A plan by obtaining a Direct Consolidation Loan (based on an 
application received on or after October 1, 2011) that repays earlier 
loans made to the borrower that were owed as of October 1, 2007. 
However, a borrower who had no outstanding balance on a Direct Loan or 
a FFEL program loan at the time the borrower obtained new loans after 
October 1, 2007, could qualify for ICR-A if he or she receives a Direct 
Consolidation Loan based on an application received on or after October 
1, 2011, that repays the earlier loans made after October 1, 2007.

Interest Capitalization Under the ICR-A Plan

    Statute: Section 455(e)(5) of the HEA authorizes the Secretary to 
promulgate regulations limiting the amount of interest that may be 
capitalized on loans repaid under the ICR plan and specifying the 
timing of capitalization under the plan.
    Current Regulations: Under Sec.  685.202(b)(4), generally the 
Secretary capitalizes unpaid interest annually for borrowers repaying 
under the ICR plan.

[[Page 42100]]

Current Sec.  685.209(c)(5) further provides that if a borrower's 
monthly payment under the ICR plan is less than the accrued interest, 
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 amount, interest continues to accrue but is not capitalized.
    Proposed Regulations: Under proposed Sec.  685.209(a)(2)(iv)(A), 
for borrowers repaying a Direct Loan under the ICR-A plan, unpaid 
accrued interest would be capitalized, as under the IBR plan, when a 
borrower is determined to no longer have a partial financial hardship 
or when a borrower chooses to leave the ICR-A plan. However, proposed 
Sec.  685.209(a)(2)(iv)(B) would limit the amount of interest that is 
capitalized while a borrower is repaying under the ICR-A plan to 10 
percent of the loan principal balance at the time the borrower entered 
the ICR-A plan. For borrowers who remain on the ICR-A plan after the 10 
percent limit has been reached, interest would continue to accrue but 
would not be capitalized.
    Reasons: Some of the non-Federal negotiators asked the Department 
to consider a proposal to cap the amount of interest and fees that may 
be charged to borrowers under both the ICR plan (including the proposed 
ICR-A plan) and the IBR plan at 150 percent of the loan principal 
amount. The negotiators suggested that this approach could be 
implemented at no additional cost to the taxpayer because it would not 
reduce the total amount paid by a borrower under the ICR or IBR plan 
but would lower the total loan amount forgiven at the end of the ICR or 
IBR repayment period. This would benefit borrowers by reducing the loan 
amount that could potentially be treated as taxable income if a 
borrower ultimately receives ICR or IBR loan forgiveness.
    The Department considered this proposal but determined that the 
Secretary does not have the authority under the HEA to stop charging 
interest to borrowers under the ICR or IBR plans after the amount of 
accrued interest has reached a certain percentage of the loan 
principal.
    Under the FFEL Program, lenders would have a contractual right to 
payment of the interest that would otherwise accrue on a loan but which 
would be capped prior to loan forgiveness under the proposal from the 
non-Federal negotiators. This would involve making significant Federal 
outlays to FFEL lenders that the Secretary does not have the legal 
authority to make.
    As an alternative, the Department proposed to include in the ICR-A 
regulations a provision comparable to the current ICR provision that 
limits the amount of interest that may be capitalized to 10 percent of 
the original principal amount. Under the proposed regulations for the 
ICR-A plan, unpaid accrued interest would be capitalized (as under the 
IBR plan) when a borrower is determined to no longer have a partial 
financial hardship or chooses to leave the ICR-A plan. However, the 
amount of accrued interest that may be capitalized when a borrower is 
determined to no longer have a partial financial hardship would be 
limited to 10 percent of the original loan principal balance when the 
borrower entered repayment under ICR-A. For borrowers who remain on the 
ICR-A plan, interest would continue to accrue after the 10 percent 
limit on capitalization has been reached, but there would be no further 
capitalization. If a borrower chooses to leave the ICR-A plan, the 10 
percent limit on capitalization of interest would not apply.

Borrower Options After Leaving the ICR-A Plan

    Statute: Section 455(d)(3) of the HEA provides that a Direct Loan 
borrower may change repayment plans under such terms and conditions as 
may be established by the Secretary.
    Current Regulations: Direct Loan borrowers, including borrowers 
repaying their loans under the ICR plan, are subject to the 
requirements of Sec.  685.210(b) that govern changing repayment plans 
in the Direct Loan program. The regulations provide that a borrower may 
change his or her repayment plan at any time after the loan enters 
repayment by notifying the Secretary but may not change to a repayment 
plan that has a maximum repayment period of less than the number of 
years the loan has already been in repayment. For example, a borrower 
who has paid for 13 years under the extended repayment plan or the ICR 
plan cannot then change to the 10-year standard repayment plan.
    Borrowers may, however, change to the ICR or IBR plans at any time. 
A borrower who is repaying a defaulted loan under the ICR plan may not 
change to another repayment plan unless the borrower was required to 
and made an ICR payment on the loan in each of the three prior months, 
or the borrower was not required to make an ICR payment but made three 
reasonable and affordable payments on the loan in each of the three 
prior months, and the Secretary approves the borrower's request to 
change repayment plans. Current regulations provide that if a borrower 
changes to a different repayment plan, the repayment period under the 
new plan is calculated from the date the loan initially entered 
repayment, except that if a borrower changes to the ICR plan or the IBR 
plan, the repayment period is determined in accordance with the 
regulations for those repayment plans.
    Proposed Regulations: The proposed regulations for the ICR-A plan 
in Sec.  685.209(a)(4)(ii), consistent with current ICR regulations, 
would provide that a borrower who wishes to leave the ICR-A repayment 
plan may change to a different repayment plan in accordance with the 
provisions in Sec.  685.210(b) that are described earlier under 
``Current Regulations.''
    Reasons: As previously explained, the proposed ICR-A plan shares 
many of the features of the IBR plan. As a result, the Department 
initially proposed requiring borrowers who choose to leave the ICR-A 
plan to repay under the standard repayment plan, as IBR borrowers are 
required to do under section 493C(b)(8) of the HEA. However, several 
non-Federal negotiators pointed out that the ICR plan is not governed 
by a statutory requirement comparable to the statutory requirement for 
borrowers repaying under the IBR plan. Those negotiators argued that 
imposing such a regulatory requirement on ICR-A borrowers would pose a 
hardship on borrowers and be an unnecessary impediment to a borrower 
being able to leave the ICR-A plan and begin immediate repayment under 
another plan that may be better suited to the borrower's individual 
circumstances. After further consideration, the Department modified the 
proposed ICR-A regulations to reflect the same regulatory approach to 
changing repayment plans that applies to borrowers repaying under the 
existing ICR plan (the proposed ICR-B plan).

Current ICR Plan (ICR-B Plan)

Borrower Access to the ICR-B Plan

    Statute: Section 455(d)(1) of the HEA requires the Secretary to 
offer Direct Loan borrowers a variety of repayment plans. The repayment 
plans offered include a standard repayment plan, a graduated repayment 
plan, an extended repayment plan for certain borrowers, an ICR plan 
(except for parent Direct PLUS loan borrowers), and beginning July 1, 
2009, an IBR plan (except for parent Direct PLUS Loan borrowers and 
borrowers of Direct Consolidation Loans that repaid parent Direct PLUS 
Loans or parent Federal PLUS Loans). The ICR plan must provide for the 
payment of

[[Page 42101]]

varying annual repayment amounts based on the income of the borrower 
paid over an extended period of time prescribed by the Secretary, not 
to exceed 25 years. Section 455(d)(2) of the HEA authorizes the 
Secretary to designate the standard, graduated, or extended repayment 
plan for a borrower who fails to choose a repayment plan, and section 
455(d)(4) of the HEA authorizes the Secretary to provide, on a case-by-
case basis, an alternative repayment plan if none of the available 
repayment plans are adequate to address a borrower's exceptional 
circumstances.
    Current Regulations: Under Sec.  685.208(a), the existing ICR plan 
(referred to in these proposed regulations as the ICR-B plan) is 
available to all Direct Loan borrowers except for parent borrowers of 
Direct PLUS loans. The Department's regulations do not include any 
other limitations on borrower access to the ICR plan. Section 
685.209(c)(7)(iv) provides that if a borrower fails to provide consent 
for the Secretary to obtain tax return information necessary for the 
Secretary to determine the borrower's ICR monthly payment amount, the 
Secretary designates the standard repayment plan for the borrower.
    Proposed Regulations: Proposed Sec.  685.208(a) would allow a 
Direct Loan borrower (other than a parent Direct PLUS borrower) to 
continue to be able to select the ICR-B plan as one of the available 
repayment plans.
    Reasons: The Department initially proposed to limit borrower access 
to the ICR-B plan, after implementation of the ICR-A plan, to those 
borrowers who would not otherwise have access to any other ``income-
driven'' repayment plan (i.e., the current IBR plan, the IBR plan for 
new borrowers on or after July 1, 2014, or the proposed ICR-A plan). 
The Department believed that having too many income-driven repayment 
plans would be confusing to borrowers and would make it more difficult 
for them to determine which plan would best meet their needs. The 
Department also believed that offering multiple income-driven plans 
with similar terms and conditions would make it more difficult for the 
Department to promote these plans and to inform borrowers of the 
benefits available under each plan. However, several non-Federal 
negotiators stated that maintaining the fullest possible menu of 
repayment plan options would be in the best interests of borrowers. 
These negotiators felt that some borrowers, even those who qualify for 
the IBR or ICR-A plans, may view the ICR-B repayment plan as simpler 
and a better fit for them, and therefore full access to the current ICR 
plan should be retained. After further consideration of this issue, the 
Department decided to retain full borrower access to the ICR-B 
repayment plan.
    Table 1 summarizes the borrower eligibility requirements for the 
current IBR plan, the proposed IBR plan revisions for new borrowers on 
or after July 1, 2014, the proposed ICR-A plan, and the current ICR 
plan (proposed ICR-B plan):

                             Table 1--Eligibility for Income-Driven Repayment Plans
----------------------------------------------------------------------------------------------------------------
                                                       Proposed revised
                                                       IBR (with 07/01/                           Current ICR
                                      Current IBR       2014 statutory      Proposed ICR-A     (proposed ICR-B)
                                                           changes)
----------------------------------------------------------------------------------------------------------------
Loan Program and Eligible          Direct      Direct      Direct      Direct
 Borrowers.                        Loan Program.       Loan Program only.  Loan Program only.  Loan Program
                                   FFEL        Only new    Only new    only.
                                   Program.            borrowers as of     borrowers in 2008   FFEL
                                                       July 1, 2014:.      who receive a       borrowers may
                                                      [cir] Must have no   Direct Loan         qualify through
                                                       outstanding         disbursement in     consolidation
                                                       Direct Loan or      2012 or later:.     into the Direct
                                                       FFEL balance as    [cir] Must have no   Loan Program.
                                                       of July 1, 2014     outstanding
                                                       or on the date a    Direct Loan or
                                                       new Direct Loan     FFEL balance as
                                                       is received after   of October 1,
                                                       July 1, 2014.       2007 or on the
                                                                           date a new Direct
                                                                           Loan or FFEL
                                                                           Program loan is
                                                                           received after
                                                                           October 1, 2007;
                                                                           and.
                                                                          [cir] Must receive
                                                                           a disbursement of
                                                                           a Direct Loan on/
                                                                           after October 1,
                                                                           2011, or receive
                                                                           a Direct
                                                                           Consolidation
                                                                           Loan based on an
                                                                           application
                                                                           received on/after
                                                                           October 1, 2011.
                                                                           FFEL new
                                                                           borrowers in 2008
                                                                           may qualify
                                                                           through
                                                                           consolidation
                                                                           into the Direct
                                                                           Loan Program.
 
----------------------------------------------------------------------------------------------------------------


[[Page 42102]]

    The Department will make information available to borrowers to 
assist them in understanding their repayment plan options and 
determining their eligibility for the various income-driven plans.

Treatment of Married Borrowers Under the ICR-B Plan

    Statute: Section 455(e)(2) of the HEA provides for an income-
contingent repayment plan with a repayment amount based on the 
borrower's AGI or, if the borrower is married and files a joint Federal 
income tax return, based on the adjusted gross income (AGI) of the 
borrower and the spouse. In accordance with section 455(e)(3) of the 
HEA, if the AGI of a borrower repaying under the income-contingent 
repayment plan is unavailable or does not reasonably reflect the 
borrower's current income, the borrower is required to provide other 
documentation of income acceptable to the Secretary, and the Secretary 
uses that documentation to determine the repayment amount.
    For the IBR plan, section 493C(d) of the HEA provides that if a 
married borrower repaying under the IBR plan files a separate Federal 
income tax return from his or her spouse, only the borrower's AGI is 
used to determine the borrower's IBR payment amount.
    Current Regulations: Under current Sec.  685.209(b)(1), if a 
married borrower chooses to repay under the income-contingent repayment 
plan, the AGI for both spouses is used to calculate the borrower's 
monthly payment amount, regardless of whether the borrower and spouse 
file a joint Federal income tax return or separate Federal tax returns. 
If a married borrower files a separate Federal income tax return from 
his or her spouse, the borrower's spouse must provide consent for the 
disclosure of the spouse's income.
    Proposed Regulations: Proposed Sec.  685.209(b)(2)(i) would provide 
that if a married borrower repaying under the ICR-B plan files a 
Federal income tax return separately from his or her spouse, only the 
borrower's AGI would be used to determine the borrower's monthly ICR-B 
payment amount. The joint income of both spouses would be used only if 
the borrower files a joint Federal income tax return.
    Reasons: The treatment of married borrowers under the current ICR 
plan regulations is based on section 455(e)(3) of the HEA, which allows 
the Secretary to use other documentation of income provided by the 
borrower to determine the ICR payment amount if the borrower's AGI does 
not reasonably reflect the borrower's current income. At the time the 
current ICR regulations were developed, the Department believed that if 
a married borrower filed a separate tax return from his or her spouse, 
using only the borrower's AGI would not provide for an accurate 
determination of the monthly amount the borrower could afford to repay.
    Accordingly, the current ICR regulations provide for consideration 
of the combined incomes of both spouses, even when married borrowers 
file separate Federal income tax returns. In contrast, the HEA provides 
that for a married borrower who chooses to repay under the IBR plan, 
the combined income of the borrower and the borrower's spouse is used 
to determine the monthly IBR payment amount only if the borrower and 
spouse file a joint Federal income tax return. To provide for 
consistent treatment of married borrowers in all of the repayment plans 
under which the monthly payment amount is based on the borrower's 
income, the Department believes it is appropriate to amend the 
regulations for the current ICR plan so that if a married borrower 
repaying under the ICR-B plan files a Federal income tax return 
separately from his or her spouse, only the borrower's AGI would be 
used to determine the borrower's monthly ICR-B payment amount. The 
joint income of both spouses would be used only if the borrower files a 
joint Federal income tax return.

Borrowers Repaying Under the ICR-B Plan Who Fail To Provide Required 
Documentation of Income

    Statute: The HEA does not address the treatment of borrowers 
repaying under the ICR plan who fail to provide the annual income 
information required by the Secretary to determine the monthly ICR 
payment amount.
    Current Regulations: Current Sec.  685.209(c)(7)(iv) provides that 
if a borrower selects the ICR plan but fails to provide the required 
consent to the disclosure of income information, fails to renew a 
previously provided written consent after it has expired, or withdraws 
consent and does not select another repayment plan, the Secretary 
designates the standard repayment plan for the borrower. For the IBR 
plan, current Sec.  685.221(e)(2) provides that, under these same 
circumstances, the Secretary recalculates the borrower's monthly 
payment and the maximum recalculated amount the borrower is required to 
repay is the amount that would be required under a standard repayment 
plan with a 10-year repayment period, based on the amount of the 
borrower's loans that were outstanding at the time the borrower 
selected the IBR plan. In such cases, the repayment period based on the 
recalculated payment amount may exceed 10 years.
    Proposed Regulations: Under proposed Sec.  685.209(b)(3)(vi)(D), a 
borrower currently repaying under the ICR-B plan who fails to provide 
the annual income information needed to determine the borrower's 
monthly payment amount would be treated the same as a borrower repaying 
under the IBR plan who does not provide the required information needed 
to determine the IBR payment amount, as described in the prior 
discussion of the current regulations and explained in the following 
discussion of changes to the IBR plan.
    Reasons: Under the current regulations, a borrower repaying under 
ICR who does not provide the require consent to disclosure of income 
information is required to repay under the standard repayment plan. 
However, in some cases, a borrower may have been in repayment under the 
ICR plan longer than the maximum repayment period under the standard 
repayment plan. Placing the borrower on the standard repayment plan 
would thus conflict with the provision in Sec.  685.210(b) that 
prohibits a borrower from changing to a repayment plan with a maximum 
repayment period of less than the number of years the borrower's loan 
has already been in repayment. The proposed regulations address this 
issue by conforming the ICR-B regulations with the current IBR 
regulations governing the treatment of borrowers who fail to provide 
required income documentation and provide greater consistency in the 
treatment of borrowers under the various income-driven repayment plans.

Other Changes to the Current ICR Plan (ICR-B Plan)

    Statute: The HEA does not address the changes discussed in this 
section.
    Current Regulations: Final regulations published on October 23, 
2008 (73 FR 63232), inadvertently deleted Sec.  685.209(c)(4)(iii), 
(iv), and (v) from the ICR plan regulations. Paragraph (c)(4)(iii) 
provided that if a borrower repays more than one loan under the ICR 
plan, a separate repayment period for each loan begins when that loan 
enters repayment. Paragraph (c)(4)(iv) stated that if a borrower has 
not repaid a loan in full at the end of the 25-year repayment period, 
the Secretary cancels the unpaid portion of the loan. Paragraph 
(c)(4)(v) provided that at the beginning of the repayment period under 
the ICR plan, a borrower is required to make monthly payments of the 
amount of interest that accrues until

[[Page 42103]]

the Secretary calculates the monthly payment amount based on the 
borrower's income.
    Current Sec.  685.209(c)(2) specifies that the Secretary requires 
alternative documentation of income from borrowers in their first and 
second years of repayment, when the Secretary believes that the 
borrower's reported AGI does not reasonably reflect the borrower's 
current income.
    Current Sec.  685.209(c)(7) requires a borrower who repays under 
the ICR plan to provide written consent to the disclosure of certain 
tax return information by the Internal Revenue Service (IRS) to the 
Secretary for purposes of determining the borrower's ICR payment 
amount. A borrower is required to provide consent for a period of five 
years.
    Proposed Regulations: The proposed regulations restore the 
provisions inadvertently deleted from Sec.  685.209(c)(4)(iii) through 
(v) in 2008 and place them in new Sec. Sec.  685.209(b)(1)(x), 
(b)(3)(iii)(C), and (b)(3)(iii)(D). The proposed regulation would 
remove the current provision in Sec.  685.209(c)(2) related to 
alternative documentation of income for borrowers in their first and 
second year of repayment. In addition, the proposed regulations would 
replace the IRS consent requirement in current Sec.  685.209(c)(7) with 
a more general requirement in new Sec.  685.209(b)(3)(vi) for the 
borrower to provide acceptable documentation, as determined by the 
Secretary, of the borrower's AGI.
    Reasons: Restoring the three deleted provisions corrects a 
technical error resulting from the October 23, 2008 final regulations. 
The Department believes that the current provision in Sec.  
685.209(c)(2) is unnecessary, since current Sec.  685.209(c)(1) (to be 
retained as proposed Sec.  685.209(b)(3)) already permits the Secretary 
to require alternative documentation of income if a borrower's AGI does 
not reasonably reflect current income.
    The Department is proposing to replace the current IRS consent 
requirement with a requirement for the borrower to provide acceptable 
documentation of AGI because the existing consent regulations no longer 
reflect current operational procedures in the Direct Loan Program. The 
consent process described in current Sec.  685.209(c)(7) was developed 
in consultation with the IRS at the beginning of the Direct Loan 
Program. However, there have been increasing delays in obtaining 
information from the IRS. The Secretary now obtains the necessary 
income information for most borrowers repaying under ICR through other 
means, such as by having borrowers submit copies of their most recently 
filed Federal income tax returns. The proposed rules are consistent 
with that practice. Further, the proposed regulation is consistent with 
efforts the Department is currently undertaking to streamline the 
application and income verification process, by working with the IRS, 
so that borrowers can more easily enroll and participate in the ICR and 
IBR repayment plans.

Income-Based Repayment Plan

Partial Financial Hardship (34 CFR 685.221(a)(5)), Income-Based Payment 
Amount (Sec.  685.221(b)(1)), and Loan Forgiveness Period (Sec.  
685.221(f))

    Statute: Section 493C of the HEA authorized the IBR plan for Direct 
Loan and FFEL program borrowers. To initially qualify for the IBR plan 
and to continue to make income-based payments under that plan, a 
borrower must have a partial financial hardship. Section 493C(a)(3) of 
the HEA provides that a borrower has a partial financial hardship if 
the annual amount due on all of the borrower's eligible Direct Loan and 
FFEL program loans, as calculated based on a standard repayment plan 
with a 10-year repayment period, exceeds 15 percent of the difference 
between the borrower's adjusted gross income (AGI) and 150 percent of 
the annual poverty guideline amount for the borrower's family size and 
State. During any period when a borrower who is repaying under the IBR 
plan has a partial financial hardship, the borrower's monthly loan 
payment may not exceed 15 percent of the difference between the 
borrower's AGI and 150 percent of the applicable annual poverty 
guideline amount, divided by 12.
    Section 493C(b)(7) of the HEA provides that a borrower who has 
participated in the IBR plan qualifies for forgiveness of any remaining 
loan balance after making qualifying payments (including periods of 
economic hardship deferment) over a period of time prescribed by the 
Secretary, not to exceed 25 years.
    The SAFRA Act included in the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152) made two changes to the 
terms and conditions of the IBR plan. First, section 2213 of the SAFRA 
Act amended section 493C(a)(3) of the HEA by changing the percentage 
used in the formula for determining whether a borrower has a partial 
financial hardship and for calculating the maximum IBR payment amount 
during periods of partial financial hardship from 15 percent to 10 
percent. Second, the maximum repayment period after which a borrower 
repaying under the IBR plan qualifies for forgiveness of any remaining 
loan balance was changed from 25 years to 20 years. These amendments 
apply only to new Direct Loan borrowers on or after July 1, 2014. For 
all other borrowers repaying under IBR, the current 15 percent and 25-
year provisions would continue to apply.
    Current Regulations: The current IBR plan regulations in Sec.  
685.221 reflect the 15 percent standard for determining whether a 
borrower has a partial financial hardship and for calculating the 
maximum IBR payment amount during periods of financial hardship. In 
this preamble, this income-based monthly payment amount that applies 
during a period of partial financial hardship is referred to as the 
``monthly PFH payment amount.'' The current regulations also provide 
that a borrower qualifies for loan forgiveness after making the 
equivalent of 25 years of payments through a combination of qualifying 
payments and periods of economic hardship deferment.
    Proposed regulations: Proposed Sec.  685.221(a)(4) would define 
``new borrower'' for purposes of the changes to the IBR plan as an 
individual who has no outstanding balance on a Direct Loan or FFEL 
program loan on July 1, 2014, or who has no outstanding balance on such 
a loan on the date he or she obtains a loan after July 1, 2014. This is 
consistent with the definition of ``new borrower'' as used for purposes 
of teacher loan forgiveness under Sec.  685.217(a)(1).
    The proposed regulations would revise the definition of ``partial 
financial hardship'' in Sec.  685.221(a)(5) to reflect the statutory 
provision and state that for new borrowers after July 1, 2014, a 
borrower is considered to have a partial financial hardship if the 
annual amount due on all of the borrower's eligible Direct Loan and 
FFEL Program loans, as calculated based on a standard repayment plan 
with a 10-year repayment period, exceeds 10 percent of the difference 
between the borrower's AGI and 150 percent of the annual poverty 
guideline amount for the borrower's family size. The proposed 
regulations would revise Sec.  685.221(b)(1) to provide that for a new 
borrower after July 1, 2014, the maximum IBR monthly payment amount 
during periods of partial financial hardship may not exceed 10 percent 
of the amount by which the borrower's AGI exceeds 150 percent of the 
poverty guideline amount for the borrower's family size, divided by 12.

[[Page 42104]]

    Finally, the proposed regulations would revise Sec.  685.221(f) to 
reflect the statutory changes made by the SAFRA Act and provide that a 
new borrower who has participated in the IBR plan qualifies for loan 
forgiveness after 20 years of qualifying payments and periods of 
economic hardship deferment.
    Reasons: The proposed regulations implement statutory provisions 
that were added to the HEA by the SAFRA Act. Because the changes to the 
IBR plan made by the SAFRA Act apply only to new borrowers on or after 
July 1, 2014, and because the SAFRA Act ended the authority of lenders 
to make new loans under the FFEL Program effective July 1, 2010, the 
proposed changes apply only in the Direct Loan Program regulations.
    In response to a request for clarification from one of the non-
Federal negotiators, the Department clarified that qualifying payments 
made during the 25-year or 20-year (as applicable) IBR repayment period 
do not have to be consecutive payments. Unless the regulations 
specifically state that payments must be consecutive to meet the 
requirements of a particular provision, it is intended that the 
payments need not be consecutive.

Repayment of Loans Under the IBR Plan

    Statute: The HEA does not address the changes discussed in this 
section.
    Current Regulations: For the Direct Loan Program, current Sec.  
685.208(a)(4) requires that all of a borrower's Direct Loans be repaid 
under the same repayment plan unless a loan is not eligible for 
repayment under that plan. For the FFEL Program, current Sec.  
682.215(b)(3) provides that if a borrower selects the IBR plan, the 
loan holder must require that all of the borrower's eligible loans owed 
to that holder be repaid under the IBR plan, unless the borrower 
requests otherwise.
    Proposed Regulations: Proposed Sec.  682.215(b)(3) would require a 
borrower who chooses the IBR plan to repay all of his or her loans 
under the IBR plan, unless some of the borrower's loans are not 
eligible for repayment under IBR. As a result of this change, a 
borrower who chooses the IBR plan would no longer be able to request 
that one or more IBR-eligible loans be excluded from that plan.
    Reasons: The Department is proposing this change to provide 
consistency with the Direct Loan Program regulations.

Annual IBR Partial Financial Hardship Assessment

    Statute: Section 493C(c) of the HEA provides for the Secretary to 
establish procedures for annually determining a borrower's eligibility 
to make income-based payments (i.e., to determine each year whether a 
borrower who initially qualified for the IBR plan continues to have a 
partial financial hardship). These procedures include verifying the 
borrower's annual income, verifying the annual amount due on the 
borrower's eligible loans, and any other procedures necessary to 
implement the IBR plan.
    Under section 493C(b)(6) of the HEA, if a borrower repaying under 
the IBR plan is determined to no longer have a partial financial 
hardship or chooses to no longer make income-based payments, the 
borrower's monthly payment amount is recalculated and is no longer 
based on the borrower's income. In this situation, proposed Sec.  
682.215(e)(8)(ii) provides the maximum recalculated monthly payment 
amount the borrower would pay on the borrower's eligible loans under a 
standard repayment plan with a 10-year payment period, based on the 
loan amount owed at the time the borrower selected the IBR plan. The 
repayment period based on the recalculated payment amount may exceed 10 
years. In accordance with section 493C(b)(3)(B) of the HEA, unpaid 
interest is capitalized if a borrower is determined to no longer have a 
partial financial hardship or chooses to stop making income-based 
payments.
    Current Regulations: Under current Sec.  685.221(e)(1) and Sec.  
682.215(e)(1), the Secretary or the FFEL loan holder determines whether 
a borrower has a partial financial hardship for the year the borrower 
selects the plan and for each subsequent year that the borrower remains 
on the plan. To make this determination, the Secretary or the loan 
holder requires the borrower to provide documentation of his or her 
income and to annually certify the borrower's family size.
    Under current Sec.  685.221(e)(1)(i) and Sec.  682.215(e)(1)(i), 
the Secretary or the FFEL loan holder determines whether a borrower has 
a partial financial hardship by requiring the borrower to provide 
written consent to the disclosure of AGI by the IRS. If the borrower's 
AGI is unavailable or the Secretary or loan holder believes that the 
borrower's reported AGI does not reasonably reflect current income, the 
Secretary or the loan holder may use other documentation provided by 
the borrower to verify income (``alternative documentation of 
income''). In subregulatory guidance issued in a June 12, 2009, 
electronic announcement posted on the Department's Information for 
Financial Aid Professionals Web site, the Department authorized FFEL 
loan holders to accept a signed copy of the borrower's most recently 
filed Federal income tax return as an alternative to requiring the 
borrower to provide written consent to the disclosure of AGI by the 
IRS. The Department adopted this same practice in the Direct Loan 
Program.
    In accordance with current Sec.  685.221(e)(2) and Sec.  
682.215(e)(2), if a borrower who is repaying under the IBR plan fails 
to renew the required consent to disclosure of AGI by the IRS, or 
withdraws consent and does not select another payment plan, the 
borrower's monthly payment amount is recalculated in accordance with 
Sec.  685.221(d)(1) or Sec.  682.215(d)(1). In addition, unpaid 
interest is capitalized in accordance with Sec.  685.221(b)(4) and 
Sec.  682.215(b)(5). The same treatment applies if a borrower fails to 
provide a copy of his or her most recently filed Federal tax return (if 
used as an alternative to written consent to disclosure of AGI) or 
fails to provide alternative documentation of income if required to do 
so by the Secretary or the loan holder.
    Sections 685.221(d)(1) and 682.215(d)(1) reflect the statutory 
requirement in section 493C(b)(6) of the HEA for the recalculation of a 
borrower's monthly payment amount if a borrower repaying under the IBR 
plan is determined to no longer have a partial financial hardship or 
chooses to stop making income-based payments. If a borrower fails to 
provide the required income documentation needed by the Secretary or 
the loan holder to determine whether the borrower continues to have a 
partial financial hardship, the borrower is considered to no longer 
have a partial financial hardship. The maximum recalculated monthly 
payment amount for a borrower who is determined to no longer have a 
partial financial hardship is the amount the borrower would be required 
to pay under a standard repayment plan with a 10-year payment period, 
based on the amount owed on the borrower's loans at the time the 
borrower selected the IBR plan. In this preamble, this recalculated 
payment amount is referred to as the ``permanent standard amount.''
    Proposed Regulations: The proposed regulations would add several 
new written notifications to borrowers and other provisions related to 
the initial and annual determination of partial financial hardship 
status and the

[[Page 42105]]

consequences if a borrower fails to provide documentation of income or 
other information required for the annual partial financial hardship 
assessment. The proposed regulations would also modify the income 
documentation requirements and, for the FFEL Program, add a requirement 
for some married borrowers to provide the loan holder with information 
related to the eligible loan debt of the borrower's spouse. Finally, 
the proposed regulations would clarify the treatment of borrowers who 
request a change from another repayment plan to the IBR plan but who do 
not provide the information required to determine eligibility for the 
IBR plan.
    Under proposed Sec.  685.221(e)(2) and Sec.  682.215(e)(2), the 
Secretary or the FFEL loan holder, after making a determination that a 
borrower has a partial financial hardship to qualify for the IBR plan 
for the year the borrower initially selects the plan and for any 
subsequent year that the borrower has a partial financial hardship, 
would send the borrower a written notification that would include the 
following information:
     The borrower's scheduled monthly PFH payment amount and 
the time period during which that monthly PFH payment amount will would 
apply (``annual payment period'');
     Information about the requirement for the borrower to 
annually provide income information; in some cases for married FFEL 
Program borrowers, to provide information about the eligible loans of 
the borrower's spouse; and to certify family size, if the borrower 
chooses to remain on the IBR plan after the borrower's first year on 
the plan;
     An explanation that the borrower would be notified in 
advance of the date by which the Secretary or loan holder must receive 
this information;
     An explanation of the consequences if the borrower does 
not provide the required information each year;
     An explanation of the consequences if the borrower no 
longer wishes to repay under IBR; and
     Information about the borrower's option to request, at any 
time during the borrower's current annual payment period, that the 
Secretary or the loan holder recalculate the borrower's monthly PFH 
payment amount if the borrower's financial circumstances have changed 
and the income amount that was used to calculate the borrower's current 
monthly PFH payment amount no longer reflects the borrower's current 
income. If the monthly PFH payment amount is recalculated based on the 
borrower's request, the Secretary or the loan holder would send the 
borrower a written notification that includes the borrower's new 
calculated monthly PFH payment amount, new annual payment period, and 
the other information just described.
    Under proposed new Sec.  685.221(e)(3) and Sec.  682.215(e)(3), for 
each subsequent year that a borrower repaying under the IBR plan has a 
partial financial hardship, the Secretary or the loan holder would 
establish the date by which the income information and other 
documentation required for the annual partial financial hardship 
assessment must be received (``annual deadline''), and would send the 
borrower a written notification in advance of the annual deadline 
informing the borrower of the annual documentation requirement. The 
proposed regulations would provide for the Secretary or the loan holder 
to send advance notification of the annual documentation requirement to 
the borrower no later than 60 days and no earlier than 90 days before 
the annual deadline. The annual deadline established by the Secretary 
or the loan holder for receipt of the required documentation could not 
be earlier than 35 days before the end of the borrower's current annual 
payment period. The notification of the annual documentation 
requirement would have to include the following information:
     The annual deadline by which the Secretary or the loan 
holder must receive the required information; and
     The consequences if the Secretary or the loan holder does 
not receive the required information within 10 days following the 
annual deadline, including the borrower's recalculated permanent 
standard monthly payment amount, the effective date for the 
recalculated monthly payment, and an explanation that unpaid accrued 
interest will be capitalized at the end of the borrower's current 
annual payment period.
    Proposed Sec.  685.221(e)(4) and Sec.  682.215(e)(4) would provide 
that each time the Secretary or the loan holder makes a determination 
that a borrower no longer has a partial financial hardship for a 
subsequent year that the borrower remains on the IBR plan, the 
Secretary or the loan holder would send the borrower a written 
notification that includes the following information:
     The borrower's recalculated permanent standard payment 
amount;
     An explanation that unpaid interest will be capitalized; 
and
     Information about the borrower's option to request, at any 
time, that the Secretary or the loan holder make a new determination of 
whether the borrower has a partial financial hardship, if the 
borrower's financial circumstances have changed and the income amount 
used to determine that the borrower no longer has a partial financial 
hardship does not reflect the borrower's current income, and an 
explanation that the borrower will be notified annually of this option.
    If the Secretary or the loan holder determines that the borrower 
again has a partial financial hardship based on a borrower's request 
for redetermination, the Secretary or the loan holder would determine 
the borrower's new monthly PFH payment amount and send the borrower a 
written notification including the same information that is provided to 
a borrower when he or she is determined to have a partial financial 
hardship to initially qualify for the IBR plan and again for any 
subsequent year that a borrower who has a partial financial hardship 
remains on the plan.
    Under proposed Sec.  685.221(e)(5) and Sec.  682.215(e)(5), for 
each subsequent year that a borrower who does not have a partial 
financial hardship remains on the IBR plan, the Secretary or the loan 
holder would send a written notification to the borrower that includes 
information on the borrower's option to request, at any time, that the 
Secretary or the loan holder make a new determination of whether the 
borrower has a partial financial hardship, as described in the 
discussion of Sec.  685.221(e)(4) and Sec.  682.215(e)(4).
    Proposed Sec.  685.221(e)(6) and Sec.  682.215(e)(6) would clarify 
that if a borrower who is currently repaying under another repayment 
plan selects the IBR plan but does not provide the information required 
by the Secretary or the loan holder to determine the borrower's 
eligibility for the IBR plan, the borrower would remain on his or her 
current repayment plan.
    Under proposed Sec.  685.221(e)(7) and Sec.  682.215(e)(7), the 
Secretary or the loan holder would require a borrower to pay the 
permanent standard amount if a borrower currently repaying a monthly 
PFH payment amount remains on the plan for a subsequent year, but the 
Secretary or the loan holder does not receive the information required 
for the annual partial financial hardship assessment within 10 days of 
the annual deadline previously provided to the borrower, unless the 
Secretary or the loan holder is able to determine the borrower's new 
monthly PFH payment amount before the end of the annual payment period.
    Proposed Sec.  682.215(e)(8)(i) would require a loan holder to 
promptly determine a borrower's new monthly payment amount if the loan 
holder receives the information required for the annual partial 
financial hardship assessment within 10 days of the annual

[[Page 42106]]

deadline provided to the borrower. If the information is received 
within 10 days of the annual deadline, but the loan holder does not 
determine the borrower's new monthly payment amount by the end of the 
borrower's current annual payment period, the proposed regulations 
would prohibit the loan holder from converting the borrower's monthly 
payment to the permanent standard amount and would require the loan 
holder to maintain the borrower's current scheduled monthly PFH payment 
amount until the new monthly payment amount is calculated.
    Under proposed Sec.  682.215(e)(8)(ii), if the loan holder 
calculates a new monthly PFH payment that is less than the borrower's 
previously calculated monthly PFH payment amount, the loan holder would 
be required to make the appropriate adjustment to the borrower's 
account to reflect the additional amounts resulting from any payments 
at the previously calculated monthly PFH payment amount that the 
borrower made after the end of the most recent annual payment period. 
Unless the borrower requests otherwise, the loan holder would not apply 
the additional amounts to future monthly payments.
    The proposed regulations would require the loan holder to apply any 
excess payment amounts made after the end of the most recent annual 
payment period in accordance with the IBR payment application rules in 
Sec.  682.215(c)(1). The excess payment amounts would be applied in the 
following order: Accrued interest; collection costs; late charges; loan 
principal. Appropriate adjustments would also include, but are not 
limited to, adjustments to the lender's interest subsidy and special 
allowance billings based upon the new monthly PFH payment amount, and 
establishing a new annual payment period beginning on the day after the 
prior annual payment period ended to ensure that the annual date for 
determining whether a borrower continues to have a partial financial 
hardship remains the same.
    Under proposed Sec.  682.215(e)(8)(iii), if the new monthly payment 
amount is equal to or greater than the borrower's previously calculated 
monthly PFH payment amount, the loan holder would not make any 
adjustments to the borrower's account to make up the difference between 
a prior lower monthly PFH payment amount that the borrower continued to 
make after the end of the previous annual payment period and the 
borrower's new higher monthly payment. Proposed Sec.  685.221(e)(8) 
would establish requirements in the Direct Loan Program comparable to 
the FFEL Program requirements in proposed Sec.  682.215(e)(8)(i) 
through (iii).
    Proposed Sec.  682.215(e)(9) would provide that if a loan holder 
receives the information required for the annual partial financial 
hardship assessment more than 10 days after the specified annual 
deadline provided to the borrower and the borrower's monthly payment 
amount is converted to the permanent standard amount, the loan holder 
may grant forbearance with respect to any payments that are overdue or 
that would be due at the time the new calculated monthly PFH payment 
amount is determined, but only if the new calculated monthly PFH 
payment amount is zero or is less than the borrower's previously 
calculated monthly PFH payment amount.
    If forbearance is granted, capitalization of interest at the end of 
the forbearance period would be limited to the interest accrued during 
the portion of the forbearance covering past-due payments before the 
end of the prior annual payment period that was capitalized at the time 
of conversion of the borrower's payment to the permanent standard 
amount. Interest that accrues during the portion of the forbearance 
period that covers payments that are overdue after the end of the prior 
annual repayment period would not be capitalized.
    Proposed Sec.  685.221(e)(9)(i) would establish the same 
requirements in the Direct Loan Program. In addition, proposed Sec.  
685.221(e)(9)(ii) would specify that any payments a borrower continued 
to make at the previously calculated monthly PFH payment amount after 
the end of the prior annual payment period and before the new monthly 
PFH payment amount is calculated are considered to be qualifying 
payments for purposes of the public service loan forgiveness program 
under Sec.  685.219, provided that the payments otherwise meet the 
eligibility requirements of that program. These payments would also 
count for purposes of IBR loan forgiveness.
    With regard to documentation of income, proposed Sec.  
685.221(e)(1)(i) and Sec.  682.215(e)(1)(i) would amend current 
regulations by replacing the requirement that a borrower provide 
consent to the disclosure of AGI by the IRS with a general requirement 
for the borrower to provide documentation, acceptable to the Secretary 
or to the loan holder, of the borrower's AGI. Proposed Sec.  
685.221(e)(1)(ii) and Sec.  682.215(e)(1)(ii) would retain the current 
provision requiring a borrower to provide other documentation of income 
if the borrower's AGI is not available or if the borrower's AGI does 
not reasonably reflect the borrower's current income.
    Proposed Sec.  682.215(e)(1)(iii) would specify that if the spouse 
of a married borrower who files a joint Federal income tax return has 
eligible loans and the loan holder does not hold at least one of the 
spouse's eligible loans, either the borrower's spouse must provide 
consent for the loan holder to access information about the spouse's 
eligible loans in the National Student Loan Data System (NSLDS), or the 
borrower must provide other documentation, acceptable to the loan 
holder, of the spouse's eligible loan information.
    The proposed changes described in this section would also be 
incorporated, where applicable, in the proposed regulations for the 
ICR-A plan and the ICR-B plan.
    Reasons: The Department's current regulations do not require that 
borrowers be notified each year in advance of the annual requirement to 
provide income information and certify family size, nor do current 
regulations specify a deadline by which the borrower must provide this 
information before the borrower's current monthly PFH payment amount is 
converted to the permanent standard amount. During the public comment 
period prior to the beginning of the formal negotiated rulemaking 
sessions, the Department received numerous comments suggesting that not 
all loan holders currently notify borrowers in advance of the annual 
documentation requirement, and that there are inconsistencies among 
loan holders in the amount of time that borrowers are given to provide 
the required income information. As a result, some borrowers who 
continue to have a partial financial hardship have their payments 
converted to the permanent standard amount because they were not aware 
that it was time for their annual partial financial hardship 
assessment, or because they were not given sufficient time to provide 
the required income information.
    During the negotiated rulemaking sessions, some non-Federal 
negotiators recommended that the proposed regulations include an 
explicit requirement for loan holders to promptly determine whether a 
borrower continues to have a partial financial hardship upon receipt of 
the required income documentation from the borrower. The borrower 
notification requirements included in these proposed regulations are 
intended to address these concerns. They ensure that a borrower would 
be notified of the annual documentation requirement, and of the 
consequences if the borrower does not comply, at the time he or she

[[Page 42107]]

is initially determined eligible for the IBR plan. A borrower who 
remains on the IBR plan and currently has a partial financial hardship 
would be notified of the annual documentation requirement in advance of 
the annual deadline for providing the required information needed to 
determine whether he or she continues to have a partial financial 
hardship. The proposed regulations for the FFEL Program would also 
require loan holders to promptly determine a borrower's new monthly 
payment amount after receiving the required income information from the 
borrower. The Secretary would apply the same requirement in the Direct 
Loan program.
    The proposed regulations would also provide for more consistent 
treatment of borrowers by specifying the earliest date that may be 
established as the annual deadline for a borrower to provide the annual 
documentation and by specifying the latest and earliest dates prior to 
the annual deadline that a borrower may be notified of the requirement 
to provide the documentation.
    The Department initially proposed that the annual notification 
reminding borrowers of the upcoming deadline for submitting income 
documentation could be sent no later than 60 days before the annual 
deadline established by the Secretary or the loan holder. Some of the 
non-Federal negotiators, while supportive of this notification 
requirement, expressed concerns that this would allow for the 
notification to be sent too far in advance of the annual deadline for 
it to be effective. The Department agreed that it would be appropriate 
to place a limit on how early the notification may be sent and modified 
the proposed regulatory language to specify that the notification may 
be sent no later than 60 days and no earlier than 90 days before the 
annual deadline.
    During the first negotiated rulemaking session, some of the non-
Federal negotiators recommended that the proposed regulations provide a 
borrower with a three-month ``grace period'' following the end of the 
borrower's current annual repayment period during which the borrower 
could provide the required income documentation without being subject 
to conversion to the permanent standard payment amount and 
capitalization of unpaid interest. A borrower who submitted the 
required documentation during the grace period would continue making 
his or her existing monthly PFH payment amount until the loan holder 
calculated the new payment amount. Once the loan holder calculated the 
new payment amount, the borrower's account would be adjusted if the 
borrower was determined to continue to have a partial financial 
hardship. Specifically, the recommendation from the non-Federal 
negotiators provided for reimbursement to the borrower if, during the 
grace period, the borrower had continued to make payments at the 
previously scheduled amount that were greater than the new payment 
amount. The recommendation also provided that any underpayment during 
the grace period (if the borrower continued to make payments at the 
previously scheduled monthly PFH payment amount that were less than the 
new monthly PFH payment amount) would be distributed evenly across the 
borrower's payments for the current annual payment period.
    At the second negotiated rulemaking session, the Department 
presented proposed regulatory language that provided borrowers with a 
60-day grace period following the end of the borrower's current annual 
payment period to submit the required income documentation to the 
Secretary or the loan holder. Under this proposal, a borrower's 
previously scheduled monthly PFH payment amount would have been 
continued during the grace period, with no conversion to the permanent 
standard amount unless the borrower did not provide the required 
documentation until after the end of the 60-day grace period. The 
Department's proposal did not provide for any adjustments to the 
borrower's account once the borrower's new monthly payment had been 
calculated.
    Some non-Federal negotiators representing loan holders and 
servicers indicated that the proposed regulations providing for a grace 
period could be difficult to implement, since most loan holders' 
systems are set up to automatically convert a borrower's scheduled 
monthly PFH payment amount to the permanent standard payment amount at 
the end of the borrower's current 12-month annual payment period, if 
the borrower's new scheduled monthly PFH payment amount has not been 
calculated prior to that date. In addition, the same non-Federal 
negotiators noted that the proposed grace period approach would cause 
the ending date of the borrower's current annual payment period to 
shift every year if the previously scheduled monthly PFH payment amount 
had to be maintained for up to an additional 60 days after the end of 
original annual payment period, potentially causing confusion for 
borrowers and requiring loan holders to make significant systems 
changes.
    These non-Federal negotiators presented an alternative proposal 
that provided for loan holders to notify borrowers of the deadline by 
which the loan holder must receive the required information for the 
annual partial financial hardship assessment. If the loan holder 
received the required information by the deadline and the borrower was 
determined to continue to have a partial financial hardship, the loan 
holder would be required either to prevent the conversion of the 
borrower's monthly payment to the permanent standard amount or 
remediate the consequences of such a conversion for the borrower. The 
proposal did not specify what would constitute remediation of a 
conversion to the permanent standard payment amount.
    This proposal from the loan holders and servicers further provided 
that a loan holder could grant forbearance with respect to any payments 
that were overdue or would be due upon the loan holder's determination 
that a borrower continued to have a partial financial hardship, if the 
determination resulted in a new monthly PFH payment amount of zero. In 
addition, the proposal allowed for loan holders to grant forbearance to 
borrowers who were not more than 120 days delinquent, if the loan 
holder received the required income documentation after a borrower's 
monthly payment had been converted to the permanent standard amount and 
the loan holder determined that the borrower qualified for a new period 
of partial financial hardship with a monthly PFH payment amount greater 
than zero.
    The Department agreed with the proposal from the negotiators 
representing loan holders and servicers to require that borrowers be 
notified of the deadline by which the loan holder must receive the 
documentation required for the annual partial financial hardship 
assessment to avoid conversion to the permanent standard payment 
amount. We included a provision for such a deadline in revised 
regulatory language presented at the third negotiated rulemaking 
session. The language proposed by the Department at the beginning of 
the third session allowed for the annual deadline to be established by 
the Secretary or the loan holder, without any limitation on how far in 
advance of the end of the borrower's current annual repayment period 
the deadline could be set. However, some non-Federal negotiators 
representing borrowers expressed concerns that having the deadline date 
determined at the discretion of the loan holder would continue to allow 
for inconsistent treatment of borrowers,

[[Page 42108]]

since the date might differ significantly among loan holders.
    The same negotiators were also concerned that leaving the 
determination of the deadline date to the discretion of individual loan 
holders would allow for the date to be different each year and result 
in confusion for borrowers. In response to these concerns, the 
Department modified the proposed regulatory language to specify that 
the annual deadline may be no earlier than 35 days before the end of 
the borrower's current annual payment period. The 35-day period was 
discussed and agreed to by all of the non-Federal negotiators.
    Some non-Federal negotiators representing borrowers, noting the 
potentially serious consequences for borrowers who do not provide the 
required information by the deadline, urged the Department to provide 
some flexibility in the regulations so that borrowers would not be 
subject to conversion to permanent standard and interest capitalization 
for being as little as one day late. These negotiators also objected to 
the proposed requirement for the loan holder to receive the 
documentation by the specified deadline and stated that the regulations 
should simply require the borrower to submit the documentation by the 
deadline. They noted that the proposed regulations did not require loan 
holders to notify borrowers that their documentation had been received, 
with the result that borrowers would have no way of proving that the 
information they sent was received by the deadline.
    These negotiators also argued that requiring borrowers to submit 
the information by the deadline would allow for proof that the borrower 
was in compliance with the submission deadline by means of the postmark 
on documentation submitted by mail. Other non-Federal negotiators, 
however, noted that the United States Postal Service no longer 
routinely adds postmarks to mail and said that the only way for a 
borrower to prove that a document had been mailed and received would be 
for the borrower to request confirmation of receipt. The negotiators 
further noted that requiring loan holders to track postmark dates would 
be unduly burdensome. The negotiators for loan holders and servicers 
suggested that the Department retain the requirement for the income 
information to be ``received'' by the annual deadline provided to the 
borrower, but add a five-day ``grace period'' to the deadline. After 
further discussion, the Department and the non-Federal negotiators 
agreed that information submitted by a borrower should be considered to 
have been received by the deadline if it is received by the loan holder 
or the Secretary within 10 days after the deadline date.
    Some non-Federal negotiators for borrowers asked the Department to 
consider limiting the amount of interest that is capitalized if a 
borrower repaying under the IBR plan fails to provide required income 
information within 10 days after the annual deadline. The Department 
declined to consider this recommendation, noting that it may result in 
significant costs to the Federal government. However, the Department is 
continuing to examine these likely costs and invites further comments 
on this proposal.
    Some non-Federal negotiators representing borrowers also noted that 
under the statute and current regulations, if a borrower who is 
repaying under the IBR plan is determined to no longer have a partial 
financial hardship or chooses to stop making income-based payments, the 
``maximum'' monthly amount the borrower is required to pay is the 
monthly amount that would be required under a standard repayment plan 
with a 10-year payment period, calculated based on the amount of the 
borrower's eligible loans that were outstanding at the time the 
borrower selected the IBR plan (``permanent standard amount''). Because 
the law and regulations provide that the permanent standard amount is 
the maximum amount a borrower is required to pay, the non-Federal 
negotiators asked the Department to consider amending the regulations 
to allow for a smaller permanent standard payment amount, as the 
conversion to a 10-year standard plan monthly payment amount may 
present a hardship for some borrowers.
    The Department declined to consider this proposal, noting that the 
Department interprets the statutory reference to the ``maximum'' 
required payment amount, which is also reflected in current 
regulations, as a protection to ensure that a borrower's monthly 
payment amount under the IBR plan never exceeds the amount that would 
be required under a standard repayment plan with a 10-year repayment 
period. Accordingly, the permanent standard payment amount is the 
monthly payment amount that would be required under a 10-year standard 
repayment plan, calculated based on the amount of the borrower's 
eligible loan debt at the time the borrower selected the IBR plan. 
Without this provision, the formula used to calculate the required 
monthly payment during periods of partial financial hardship could 
result in a monthly payment that exceeds the amount that would be 
required under a 10-year standard repayment plan.
    The Department further noted that since a borrower loses partial 
financial hardship status at the point the partial financial hardship 
payment formula results in a monthly payment that equals or exceeds the 
payment amount that would be required under a standard repayment plan 
with a 10-year repayment period, providing a permanent standard payment 
amount lower than that amount would mean that some borrowers who no 
longer have a partial financial hardship could have a lower monthly 
payment amount than some borrowers in a partial financial hardship 
status. This result would be contrary to the intent of the IBR plan.
    The Department disagreed with the proposal from some non-Federal 
negotiators representing loan holders and servicers that would have 
required loan holders either to prevent the conversion of borrower's 
payment amount to the permanent standard amount or remediate the 
consequences of such a conversion if the loan holder received the 
required information by the deadline provided to the borrower and the 
borrower was determined to continue to have a partial financial 
hardship. Some of the other non-Federal negotiators also expressed 
concerns about this approach, noting in particular that the proposal 
did not explain what would constitute ``remediation.''
    The Department believes that if the information a borrower is 
required to provide is received within 10 days after the annual 
deadline, the loan holder must ensure that the borrower's monthly 
payment amount is not converted to the permanent standard amount and 
that unpaid interest is not capitalized. The proposed regulations 
reflect this approach. The proposed regulations also provide that if 
the new calculated monthly PFH payment amount is less than the 
borrower's previously calculated monthly PFH payment amount, the loan 
holder must apply any excess payment amount resulting from payments 
that the borrower continued to make at the higher monthly PFH payment 
amount in accordance with the normal IBR payment application rules, 
unless the borrower requests that the excess amount be applied to 
future payments. This requirement would ensure that any excess payment 
is not applied as a pre-payment to advance the next monthly payment due 
date (unless that is what the borrower requests), as that would 
lengthen the period before the borrower becomes eligible for public 
service loan forgiveness under Sec.  685.219.

[[Page 42109]]

    The Department believes that the proposal from the non-Federal 
negotiators to allow loan holders to grant forbearance to cover a 
borrower's past due payments under certain circumstances was more 
complex than necessary and overly broad. The proposal would have 
allowed for forbearance to be granted to any borrower who was 
delinquent in making payments at the time the loan holder made a 
determination that resulted in a monthly PFH payment amount of zero, 
regardless of whether the borrower's income information was received by 
the annual deadline.
    However, the Department believes it is appropriate to allow 
forbearance under limited circumstances for borrowers whose income 
information is not received until more than 10 days after the annual 
deadline and who are delinquent at the time the new monthly PFH payment 
amount is determined, if the new monthly PFH payment amount is zero or 
is less than the borrower's previously scheduled monthly PFH payment 
amount. This may indicate that the borrower's financial circumstances 
have worsened, which may have contributed to the borrower's delinquency 
and may have caused the borrower's failure to provide the required 
information in a timely manner.
    The Department also believes it is appropriate under these 
circumstances to limit capitalization of interest accrued during 
forbearance to the interest that had been previously capitalized at the 
end of the prior annual payment period. For example, if a forbearance 
is granted to cover a five-month period of delinquency that began three 
months before the end of the borrower's prior annual payment period and 
continued for two months after the end of that annual payment period, 
the interest that accrued during the first three months of the 
forbearance period (i.e., prior to the conversion of the borrower's 
payment to the permanent standard amount) would remain capitalized.
    The proposed regulations for the Direct Loan Program also clarify 
that if a borrower continues to make payments at the previously 
scheduled monthly PFH payment amount after the borrower's payment has 
been converted to the permanent standard amount as a result of the 
borrower's income information being received more than 10 days after 
the annual deadline date, those payments would continue to count as 
qualifying payments for purposes of the public service loan forgiveness 
program under Sec.  685.219, provided that the payments otherwise meet 
the public service loan forgiveness program eligibility requirements. 
Without this provision, payments that the borrower continued to make at 
the previously calculated monthly PFH payment amount might not qualify 
for public service loan forgiveness purposes because they were for less 
than the scheduled permanent standard payment amount.
    Some of the non-Federal negotiators suggested that many issues 
related to current processes for submission of income documentation 
could be addressed by allowing borrowers to submit documentation 
electronically, or by establishing an electronic process for loan 
holders to obtain the necessary income information directly from the 
IRS. The Department agreed to explore such options in the future but 
noted that privacy issues associated with the electronic submission of 
documents and restrictions on the release of information by the IRS to 
FFEL Program loan holders would have to be addressed.
    Some of the non-Federal negotiators requested that the Department 
modify the current IBR requirement for borrowers to provide written 
consent for the IRS to disclose the borrower's AGI to the loan holder 
by listing other options for providing income information and 
emphasizing those other options as preferable. The negotiators noted 
that although the Department previously provided guidance allowing loan 
holders to accept a signed copy of the borrower's most recently filed 
tax return as an alternative to the borrower's written consent, current 
regulations continue to require borrowers to submit written consent, 
and there are often lengthy delays in getting the borrower's income 
information from the IRS.
    The non-Federal negotiators also asked the Department to reconsider 
its policy guidance that a copy of the borrower's most recently filed 
Federal income tax return submitted to support the borrower's PHF 
determination must include the borrower' signature. The non-Federal 
negotiators noted that many borrowers file electronic tax returns that 
do not include a signature, and they said that failure to include a 
signature on the copy of the tax return that a borrower sends to his or 
her loan holder is a frequent reason for delays in processing a 
borrower's income information.
    Finally, the non-Federal negotiators recommended that the 
regulations related to documentation of income be revised to allow loan 
holders to require borrowers to provide alternative documentation of 
income (that is, documentation other than the borrower's AGI) at any 
time, rather than only in circumstances when the borrower's AGI is 
unavailable or does not reasonably reflect the borrower's current 
income.
    The Department agreed that the income documentation requirements 
could be simplified by amending the regulations to require borrowers to 
provide documentation, acceptable to the Secretary or the loan holder, 
of the borrower's AGI. Moreover, the Department noted that the IRS 
consent process is no longer used for Direct Loan borrowers repaying 
under the IBR or ICR plans, as discussed under the section ``Other 
Changes to the ICR-B Plan.'' Acceptable documentation of a borrower's 
AGI could include a copy of the borrower's most recently filed Federal 
income tax return or a tax transcript obtained from the IRS by the 
borrower.
    In addition, the Department agreed that a copy of the borrower's 
most recently filed tax return need not include the borrower's 
signature. The Department announced this change in an electronic 
announcement posted on the Department's Information for Financial Aid 
Professionals Web site on April 13, 2012.
    The Department disagreed with the recommendation that the 
regulations be amended to allow loan holders to disregard AGI and 
require borrowers to provide alternative documentation of income under 
any circumstances. Section 493C(a)(3) of the HEA specifically provides 
that the determination of a borrower's partial financial hardship 
status is based, in part, on the borrower's AGI. The Department 
believes that the greater flexibility in the proposed regulations 
related to income documentation would eliminate some of the issues loan 
holders are currently experiencing with documenting a borrower's AGI.
    Some non-Federal negotiators representing loan holders and 
servicers asked the Department to add a requirement for a married 
borrower, under certain circumstances, either to provide the FFEL 
Program loan holder with the spouse's authorization for the loan holder 
to access information in NSLDS concerning the eligible loans of the 
borrower's spouse or to provide other acceptable documentation of the 
spouse's eligible loans. Under the terms and conditions of the IBR 
plan, if a borrower is married and files a joint Federal income tax 
return, and if the borrower's spouse has loans that are eligible for 
repayment under the IBR plan, the combined eligible loan debt of the 
borrower and spouse is used to determine whether a borrower has a

[[Page 42110]]

partial financial hardship. However, this additional information would 
be required only from married borrowers who both have eligible loans 
and who file joint tax returns, and only if the loan holder does not 
hold at least one of the spouse's eligible loans. If a loan holder does 
not hold at least one of the spouse's eligible loans, the loan holder 
may not access NSLDS to obtain information about the spouse's loans 
without the spouse's authorization. The loan holders noted that this 
spousal authorization is included on the IBR request form that 
borrowers must complete to request the IBR plan but stated that the 
requirement for spousal loan information should be included in the 
regulations to make it clear that for certain married borrowers, 
eligibility for the IBR plan cannot be determined without information 
about the spouse's eligible loans. The Department agreed with the non-
Federal negotiators' recommendation and modified the proposed FFEL 
Program IBR regulations accordingly.
    Proposed regulations in Sec.  682.215 require written notification 
to a borrower regarding information for subsequent periods of a 
borrower's partial financial hardship and forgiveness eligibility. A 
non-Federal negotiator representing loan servicers requested that the 
language be revised to reflect that the notification may be provided 
either electronically or in writing to enable servicers to use 
electronic practices to communicate the notification requirements to 
borrowers. Some negotiators asked the Department to clarify the extent 
of the loan holder's flexibility to electronically provide 
notifications to borrowers to ensure that servicers were not limited 
solely to using electronic communication for borrowers that provide 
affirmative consent in accordance with the E-Sign Act, but may also use 
electronic communication for borrowers who have agreed to the use of 
email communication. The Federal negotiators responded that a revision 
of the proposed regulations was unnecessary because the Department has 
previously interpreted (including in previous regulatory preambles) the 
term ``in writing'' to include through electronic means. The Department 
acknowledged that servicers may use electronic methods to provide the 
notifications under Sec.  682.215. The Department follows the same 
practice in the Direct Loan Program.

IBR Loan Forgiveness Notifications

    Statute: Section 493C(b)(7) provides that the Secretary will cancel 
the outstanding remaining balance on a borrower's loan if the borrower 
has participated in the IBR plan and met other requirements during a 
repayment period not to exceed 25 years.
    Current Regulations: Current regulations in Sec.  685.221(f) and 
Sec.  682.215(f) reflect the IBR loan forgiveness provision in section 
493C(b)(7) of the HEA. Under current Sec.  682.215(g)(4), after a FFEL 
Program loan holder is notified by the guaranty agency that a borrower 
qualifies for IBR loan forgiveness, the loan holder must inform the 
borrower of that determination and provide the borrower with 
information on the required handling of the forgiveness amount. The 
current Direct Loan Program regulations do not include a provision in 
Sec.  685.221 comparable to the FFEL Program provision in Sec.  
682.215(g)(4).
    Proposed Regulations: The proposed regulations would make the 
following changes in Sec.  685.221(f) and Sec.  682.215(g):
     In both the Direct Loan and FFEL programs, the regulations 
would clarify that the Secretary or the loan holder determines when a 
borrower has met the requirements for loan forgiveness and that the 
borrower is not required to submit a request for loan forgiveness.
     The proposed regulations would provide for the Secretary 
or the loan holder to send the borrower a written notice no later than 
six months prior to the anticipated date that the borrower will meet 
the loan forgiveness requirements. This notice would explain that the 
borrower is approaching the date he or she is expected to qualify for 
loan forgiveness, would remind the borrower that he or she must 
continue to make scheduled monthly payments, and would provide general 
information on the current treatment of the forgiveness amount for tax 
purposes, including instructions to contact the IRS for more 
information.
     Current Sec.  682.215(g)(4) would be redesignated as 
(g)(5) and would be revised to clarify that when a loan holder notifies 
a borrower that the borrower has been determined eligible for loan 
forgiveness, the borrower must be provided with information on the 
current treatment of the forgiveness amount for tax purposes and 
directed to the IRS for more information.
     A provision comparable to the current FFEL provision in 
Sec.  682.215(g)(4), with the changes just described, would be added to 
the Direct Loan Program regulations in Sec.  685.221(f). A provision 
comparable to the current FFEL provision in Sec.  682.215(g)(7) would 
also be added. Proposed Sec.  685.221(f)(5)(iii)(C) would state that 
the Secretary returns to the sender any payment received on a loan 
after loan forgiveness has been granted.
    The changes just described would also be incorporated in the 
proposed regulations for the ICR-A and ICR-B repayment plans.
    Reasons: Some of the non-Federal negotiators asked the Department 
to clarify in the regulations that the loan holder or the Secretary 
determines when a borrower qualifies for loan forgiveness and that the 
borrower is not required to track his or her own progress toward 
meeting the loan forgiveness requirement or submit an application for 
forgiveness. The non-Federal negotiators also stated it would be 
helpful to borrowers to give them advance notice that they are 
approaching the date when they will qualify for loan forgiveness and 
that borrowers should be made aware in advance of the current treatment 
of the loan forgiveness amount for tax purposes. The Department agreed 
with the non-Federal negotiators and modified the proposed regulations 
accordingly.

Borrowers Who Leave the IBR Plan

    Statute: Section 493C(b)(8) of the HEA provides that a borrower who 
is repaying a Direct Loan or an FFEL program loan under the IBR plan 
may elect at any time to terminate repayment under the plan and repay 
the loan under the standard repayment plan.
    Current Regulations: Section 685.221(d)(2) of the Direct Loan 
program regulations and Sec.  682.215(d)(2) of the FFEL program 
regulations provide that if a borrower repaying under the IBR plan 
elects to leave the plan, the borrower must pay under the standard 
repayment plan. The regulations specify that the borrower's monthly 
repayment amount will be recalculated based on the time remaining under 
the maximum 10-year repayment period using the outstanding amount of 
the borrower's loans when the borrower discontinues paying under the 
IBR plan or, for Direct Consolidation and Federal Consolidation Loan 
borrowers, based on the time remaining under the applicable repayment 
period for the amount of the consolidation loan and the balance of 
other student loans that is outstanding at the time the borrower stops 
paying under the IBR plan.
    Proposed Regulations: Proposed Sec.  685.221(d)(2)(i)(A) would 
clarify that the time remaining under the maximum 10-year repayment 
plan applies to Direct Subsidized, Direct Unsubsidized, and Direct PLUS 
loans. Proposed Sec.  685.221(d)(2)(i)(B) and Sec.  682.215(d)(2)(ii) 
would also clarify that a Consolidation Loan borrower's

[[Page 42111]]

recalculated payment when the borrower elects to leave the IBR plan is 
based on the time remaining under the applicable repayment period that 
was initially determined when the Consolidation Loan was made.
    Sections 685.221(d)(2)(ii) and 682.215(d)(3) of the proposed 
regulations would provide that a borrower who leaves the IBR plan and 
is placed on the standard repayment plan may change to a different 
repayment plan after making one monthly payment under the standard 
repayment plan. Under the proposed regulations, the single payment made 
under the standard repayment plan could include a smaller payment 
amount paid under a reduced payment forbearance agreement with the loan 
holder or the Secretary.
    Reasons: The statutory maximum 10-year repayment period applies 
only to Direct Subsidized, Direct Unsubsidized and Direct PLUS Loans. 
The initial applicable repayment period for a Consolidation Loan is 
based on the total amount of the loans consolidated plus other student 
loans that were not consolidated but which the borrower asked be 
considered in establishing the consolidation loan repayment period. As 
a result, the reference in current regulations to ``the balance of 
other student loans'' being a factor in establishing the recalculated 
payment of an existing Consolidation Loan is incorrect and has been 
deleted. During the negotiated rulemaking sessions, the Department 
explained that this change is a technical correction that was submitted 
to the Department prior to the negotiated rulemaking process.
    With regard to borrower options for changing to a different 
repayment plan after leaving the IBR plan and being placed on the 
standard repayment plan, the Department initially proposed to 
incorporate into regulations its current policy that a borrower leaving 
the IBR plan must make one full monthly payment under the 10-year 
standard repayment plan or the standard consolidation repayment plan, 
as applicable, before the borrower would be permitted to select another 
repayment plan. Some non-Federal negotiators argued that the 
requirement for one full standard repayment amount could represent a 
hardship to a borrower that could precipitate a delinquency or impede 
the borrower's ability to enter another, more flexible repayment plan, 
such as the extended repayment plan. In response to these concerns, the 
Department has proposed regulations that would require the borrower to 
make one monthly payment while under a standard repayment plan, but 
allow for that payment to be for a lesser amount than the full 
scheduled monthly payment amount under a reduced payment forbearance 
agreement with the Secretary or the loan holder.

Regulatory Impact Analysis

    Under Executive Order 12866, the Secretary must determine whether 
this regulatory action is ``significant'' and, therefore, subject to 
the requirements of the Executive order and subject to review by the 
Office of Management and Budget (OMB). Section 3(f) of Executive Order 
12866 defines a ``significant regulatory action'' as an action likely 
to result in a rule that may--
    (1) Have an annual effect on the economy of $100 million or more, 
or adversely affect a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local or 
Tribal governments or communities in a material way (also referred to 
as an ``economically significant'' rule);
    (2) Create serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impacts of entitlement grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles stated in the 
Executive order.
    This proposed regulatory action would have an annual effect on the 
economy of more than $100 million because the availability of the ICR-A 
repayment plan is estimated to cost approximately $2.1 billion over 10 
years. Therefore, this proposed action is economically significant and 
subject to review by OMB under section 3(f) of Executive Order 12866. 
Notwithstanding this determination, we have assessed the potential 
costs and benefits--both quantitative and qualitative--of this 
regulatory action. The agency believes that the benefits justify the 
costs.
    We have also reviewed these regulations pursuant to Executive Order 
13563, which supplements and explicitly reaffirms the principles, 
structures, and definitions governing regulatory review established in 
Executive Order 12866. To the extent permitted by law, Executive Order 
13563 requires that an agency--
    (1) Propose or adopt regulations only upon a reasoned determination 
that their benefits justify their costs (recognizing that some benefits 
and costs are difficult to quantify);
    (2) Tailor their regulations to impose the least burden on society, 
consistent with obtaining regulatory objectives, taking into account, 
among other things, and to the extent practicable, the costs of 
cumulative regulations;
    (3) In choosing among alternative regulatory approaches, select 
those approaches that maximize net benefits (including potential 
economic, environmental, public health and safety, and other 
advantages; distributive impacts; and equity);
    (4) To the extent feasible, specify performance objectives, rather 
than specifying the behavior or manner of compliance that regulated 
entities must adopt; and
    (5) Identify and assess available alternatives to direct 
regulation, including providing economic incentives to encourage the 
desired behavior, such as user fees or marketable permits, or providing 
information upon which choices can be made by the public.
    We emphasize as well that Executive Order 13563 requires agencies 
``to use the best available techniques to quantify anticipated present 
and future benefits and costs as accurately as possible.'' In its 
February 2, 2011, memorandum (M-11-10) on Executive Order 13563, the 
Office of Information and Regulatory Affairs within the Office of 
Management and Budget emphasized that such techniques may include 
``identifying changing future compliance costs that might result from 
technological innovation or anticipated behavioral changes.''
    We are issuing these proposed regulations only upon a reasoned 
determination that their benefits justify their costs. In choosing 
among alternative regulatory approaches, we selected those approaches 
that maximize net benefits. Based on the analysis below, the Department 
believes that these proposed regulations are consistent with the 
principles in Executive Order 13563.
    We also have determined that this regulatory action would not 
unduly interfere with State, local, and Tribal governments in the 
exercise of their governmental functions.
    In this regulatory impact analysis we discuss the need for 
regulatory action, the potential costs and benefits, net budget 
impacts, assumptions, limitations, and data sources, as well as 
regulatory alternatives we considered. Elsewhere in this section under 
Paperwork Reduction Act of 1995, we identify and explain burdens 
specifically associated with information collection requirements.

[[Page 42112]]

The Need for Regulatory Action

    The Department is responsible for administration of the Federal 
student loan programs authorized by title IV of the HEA. Federal 
student loans are a crucial element in providing important 
opportunities for Americans seeking to expand their skills and earn 
postsecondary degrees and certificates. One of the Department's goals 
is to ensure that its regulations promote a transparent and consistent 
administration of title IV programs. Borrowers should be able to easily 
understand their rights, responsibilities, and options. Sometimes 
statutory revisions or Administration priorities require the Department 
to revise its policies and regulations. With these proposed 
regulations, the Department seeks to enhance the income-driven 
repayment options available to borrowers so student loan debt would be 
manageable and students would continue to pursue postsecondary 
education that makes sense for them. In addition, the Department hopes 
to improve the total and permanent disability process to increase 
efficiency and consistency in the treatment of borrowers.
    The passage of the SAFRA Act (Pub. L. 111-152) ended the 
origination of new FFEL program loans and amended the statutory 
provisions governing the IBR plan so that the discretionary income caps 
and loan forgiveness eligibility periods would be reduced effective 
July 1, 2014, for new borrowers who choose the IBR repayment plan.
    Student loan indebtedness and unrelenting increases in tuition 
costs have become major issues not only in the media but at the kitchen 
table in millions of American households. In light of recent economic 
conditions, many Americans remain worried that postsecondary education 
is becoming, or has become, unaffordable for themselves and their 
children. Recognizing that fear of unmanageable student loan 
indebtedness may discourage potential students from seeking 
postsecondary education, Congress enacted, as part of SAFRA, President 
Obama's proposal to lower IBR student loan payment caps and offer 
forgiveness after 20 years of qualifying payments for new borrowers in 
2014.
    Concerned about those students now graduating and entering the 
workforce, President Obama proposed the Pay As You Earn initiative. 
This proposal would revise the ICR repayment plan in the Direct Loan 
program to reflect the statutory changes made to IBR by SAFRA. Eligible 
borrowers (new borrowers on or after October 1, 2007, with new loans in 
2012) would be able to take advantage of the 10 percent income caps in 
the fall of 2012 instead of waiting until 2014 for the statutory 
changes to IBR.
    In order to achieve the goals of the President's Pay As You Earn 
initiative and provide maximum benefit to borrowers, the Secretary is 
proposing to make improvements to the ICR repayment plan while 
implementing the statutory IBR changes. The proposed revisions would 
offer eligible borrowers lower payments and loan forgiveness after 20 
years of qualifying payments. As discussed earlier in this section, 
income-based repayment options may encourage higher borrowing and 
potentially introduce an unintended moral hazard, especially for 
borrowers enrolled at schools with high tuitions and with low expected 
income streams, but the proposed changes should not substantially 
increase the potential moral hazard when compared to existing IBR or 
ICR plans. Table 2 summarizes the differences in eligibility between 
the existing and proposed IBR and ICR programs.

                           Table 2--Summary of Existing and Proposed IBR and ICR Plans
----------------------------------------------------------------------------------------------------------------
                                                Proposed revised IBR
                             Current IBR          (with 07/01/2014       Proposed ICR-A          Current ICR
                                                 statutory changes)                           (proposed ICR-B)
----------------------------------------------------------------------------------------------------------------
Loan Program and         Direct Loan    Direct Loan    Direct Loan   Direct Loan
 Eligible Borrowers      Program.               Program only.          Program only.         Program only.
                         FFEL Program   Only new       Only new      FFEL new
                                                borrowers as of July   borrowers in 2008     borrowers in 2008
                                                1, 2014:               who receive a         may qualify through
                                               [cir] Must have no      Direct Loan           consolidation into
                                                outstanding Direct     disbursement in       the Direct Loan
                                                Loan or FFEL balance   2012 or later:        Program.
                                                as of July 1, 2014    [cir] Must have no
                                                or on the date a new   outstanding Direct
                                                Direct Loan is         Loan or FFEL
                                                received after July    balance as of
                                                1, 2014.               October 1, 2007 or
                                                                       on the date a new
                                                                       Direct Loan or FFEL
                                                                       Program loan is
                                                                       received after
                                                                       October 1, 2007;
                                                                       and.
                                                                         [cir] Must
                                                                          receive a
                                                                          disbursement of
                                                                          a Direct Loan on/
                                                                          after October 1,
                                                                          2011, or receive
                                                                          a Direct
                                                                          Consolidation
                                                                          Loan based on an
                                                                          application
                                                                          received on/
                                                                          after October 1,
                                                                          2011.
                                                                       FFEL
                                                                       borrowers may
                                                                       qualify through
                                                                       consolidation into
                                                                       the Direct Loan
                                                                       Program.
Graduate/Professional   Yes..................  Yes..................  Yes.................  Yes.
 PLUS Loans eligible

[[Page 42113]]

 
Parent PLUS Loans       No...................  No...................  No..................  No.
 eligible?
Consolidation Loans     No...................  No...................  No..................  Yes.
 that repaid Parent
 PLUS Loans eligible
Partial Financial       Yes..................  Yes..................  Yes.................  No.
 Hardship Required
Partial Financial       10-year standard       10-year standard       10-year standard      N/A.
 Hardship Definition     payment amount on      payment amount on      payment amount on
                         eligible loans         eligible loans         eligible loans
                         (annual amount owed)   (annual amount owed)   (annual amount
                         exceeds 15% of         exceeds 10% of         owed) exceeds 10%
                         difference between     difference between     of difference
                         AGI and 150% of        AGI and 150% of        between AGI and
                         poverty line amount.   poverty line amount.   150% of poverty
                                                                       line amount.
Forgiveness Period      25 years of            20 years of            20 years of           25 years of
                         qualifying payments/   qualifying payments/   qualifying payments/  qualifying payments/
                         months of economic     months of economic     months of economic    months of economic
                         hardship deferment.    hardship deferment.    hardship deferment.   hardship deferment.
Estimated Borrowers     1.53.................  1.03.................  1.67................  0.39.
 Eligible for
 Participation (2012-
 2021 cohorts in
 millions) *
----------------------------------------------------------------------------------------------------------------
* Note: While the figures represent the 2012-2021 cohorts, the numbers only apply to those cohorts eligible for
  the particular program. For example, the 1.03 million for the Proposed Revised IBR only includes eligible new
  borrowers after July 1, 2014.

    The Department's current process for considering applications for 
total and permanent disability discharges on student loans has also 
been reviewed for efficiencies and improved consistency in response to 
concerns raised by the Department and external parties. Borrowers and 
advocates particularly have cited the application process and 
monitoring period requirements as problematic. The proposed revisions 
would address these problems by requiring borrowers to submit 
applications for disability discharges to the Secretary, ensuring 
rejected applicants receive a thorough explanation of the reasons for 
their rejection and adequate information about their options, and 
simplifying the income verification process during the three-year 
monitoring period. The proposed regulations would also eliminate the 
necessity for FFEL lenders and guaranty agencies to evaluate disability 
discharge applications and ensure that the disability discharge 
application process is expedited for veterans as well.
    Beyond those details, Executive Order 12866 emphasizes that 
``Federal agencies should promulgate only such regulations as are 
required by law, are necessary to interpret the law, or are made 
necessary by compelling public need, such as material failures of 
private markets to protect or improve the health and safety of the 
public, the environment, or the well-being of the American people.'' In 
this case, there is indeed a compelling public need for regulation. The 
Secretary recognizes the growth in the number of students enrolled in 
college, the ongoing rise in tuition, the resulting increased need for 
student loans, and the increased difficulty in repaying them. The 
Secretary's goal in regulating is to provide borrowers with maximum 
repayment options to support debt management and improve the process 
for considering applications for disability discharges on Federal 
student loans.
    The steep increase in the cost of tuition in America has been well 
documented. According to data collected by the Department's National 
Center for Education Statistics (NCES), the cost of tuition, room and 
board for full-time students at America's 4-year public and private 
non-profit institutions rose by over 500 percent between 1980 and 2010. 
Even if controlled for inflation, there was still a 140 percent 
increase.\1\ As chart 1A shows, this is a steep increase in a short 
amount of time. The average published tuition and fees at 4-year public 
universities increased by 8.3 percent between the 2010-2011 and 2011-
2012 academic years, according to College Board.\2\ The tuition pinch 
is not limited to undergraduate studies. Chart 1B shows that the 
average price of tuition and required fees at graduate and professional 
schools has doubled since 1988, even when adjusted for inflation.\3\


    (Note:  Disaggregated data for private, for-profit institutions 
was not available for any year prior to 2006 so it was not included 
in the charts).


    \1\ This percentage was calculated by the Department using data 
collected from Thomas D. Snyder and Sally A. Dillow, Digest of 
Education Statistics 2010, (pgs. 493-495) Education (U.S. Department 
of Education, April 2011), http://nces.ed.gov/pubs2011/2011015.pdf.
    \2\ Trends in College Pricing 2011, Table 4A: Average Tuition 
and Fees in Current Dollars, 1981-82 to 2011-12 (College Board 
Advocacy and Policy Center, nd.), http://trends.collegeboard.org/college_pricing/report_findings/indicator/Tuition_Fees_Over_Time.
    \3\ Snyder and Dillow, Digest of Education Statistics 2010, page 
498.
---------------------------------------------------------------------------

    Despite the increasing cost of tuition, enrollment at universities 
has continued to climb. A large and growing percentage of jobs in the 
U.S. economy now require a college degree. As a result, more students 
are enrolling in college each year with hopes of building a career, and 
there has been a large influx of non-traditional students as older 
workers return to school to learn new skills or change careers.
BILLING CODE 4000-01-P

[[Page 42114]]

[GRAPHIC] [TIFF OMITTED] TP17JY12.000


[[Page 42115]]


[GRAPHIC] [TIFF OMITTED] TP17JY12.001

BILLING CODE 4001-01-C
    The combination of increased enrollment and rising tuition has 
contributed to a significant increase of student loan debt in America. 
This outstanding debt has grown as more and more students seek the 
benefits of postsecondary education and as students increasingly rely 
on Federal student loans. According to data collected by NCES, 34.9 
percent of all undergraduates took out a Federal student loan in the 
2007-2008 academic year \4\ compared to 19.9 percent in the 1992-1993 
academic year.\5\
---------------------------------------------------------------------------

    \4\ Thomas D. Snyder and Sally A. Dillow, Digest of Education 
Statistics: 2010, (United States Department of Education, National 
Center for Education Statistics, April, 2011), http://nces.ed.gov/programs/digest/d10/tables/xls/tabn354.xls.
    \5\ Thomas D. Snyder, Digest of Education Statistics: 1995 
(United States Department of Education, National Center for 
Education Statistics, October, 1995), http://nces.ed.gov/programs/digest/d95/dtab309.asp.
---------------------------------------------------------------------------

    While higher levels of student loan debt are indicative of 
troubling trends with respect to the cost of college, these higher 
levels simultaneously reflect increased levels of investment in the 
nation's human capital. These investments yield significant and 
demonstrable benefits not only for individuals but for the nation as 
well. For example, bachelor degree holders earn over 80 percent more 
than do high school graduates over the course of a lifetime. This 
difference can amount to about $1 million for an individual worker.\6\ 
Moreover, college graduates also experience lower levels of 
unemployment, and shorter durations of unemployment, than those without 
a college degree. Additionally, students who complete college have 
substantially lower unemployment rates than high school graduates. 
According to May 2012 data from the Bureau of Labor Statistics, adult 
high school graduates have an unemployment rate of 8.1 percent compared 
to 3.9 percent for adults with a bachelor's degree. For the Nation, 
higher levels of educational attainment increase economic productivity 
and raise gross domestic product, among many other benefits.
---------------------------------------------------------------------------

    \6\ Anthony P. Carnevale, Stephen J. Rose and Ban Cheah, The 
College Payoff: Education, Occupations, Lifetime Earnings, pg. 3 
(Georgetown University, The Georgetown University Center on 
Education and the Workforce), http://www9.georgetown.edu/grad/gppi/hpi/cew/pdfs/collegepayoff-complete.pdf.
---------------------------------------------------------------------------

    For recent graduates with college degrees, their hard-earned 
diplomas will undoubtedly yield long-term benefits. However, even 
though the economy has begun to strengthen, many recent graduates are 
finding it challenging to obtain employment and garner wages at or near 
average levels. A March 2011 letter published by the Federal Reserve 
Bank of San Francisco, for example, highlighted that the unemployment 
rate of recent graduates has doubled over the past few years.\7\ Even 
for recent graduates who obtain employment, prior research has shown 
that it can take several years for those entering the workforce during 
a recession to reach normal wage levels.\8\ For these graduates and for 
borrowers who do not complete a degree, the need to begin repayment on 
their student loans can be especially daunting.
---------------------------------------------------------------------------

    \7\ Bart Hobijn, Colin Gardiner, and Theodor Wiles, Recent 
College Graduates and the Labor Market, March 21, 2011, http://www.frbsf.org/publications/economics/letter/2011/el2011-09.html.
    \8\ Philip Oreopoulos, Till von Wachter, and Andrew Heisz, The 
Short- and Long-Term Career Effects of Graduating in a Recession: 
Hysteresis and Heterogeneity in the Market for College Graduates, 
Economic (The National Bureau of Economic Research, April 2006), 
http://www.nber.org/papers/w12159.
---------------------------------------------------------------------------

    The proposed ICR and IBR plans would provide borrowers with 
improved income related payment management options. They would also 
encourage borrowers to honor their debt commitments by offering loan 
forgiveness after 20 years of qualifying payments in an income-related 
payment plan.

[[Page 42116]]

    In addition to implementing statutory changes in the IBR plan and 
revising the ICR plan, the proposed regulations would also seek to 
solve well-documented problems with the process for evaluating 
discharge applications. The current process by which borrowers apply 
for a discharge has led to inconsistencies in determining eligibility 
and created hardships for eligible borrowers who are unable to fulfill 
their monitoring period requirements. Currently, borrowers who have 
suffered a total and permanent disability that leaves them unable to 
fulfill their loan obligation contact the holders of their loans and 
apply for a discharge. Lenders have different processes and this has 
led to discrepancies in the way loan holders are processing and 
assessing borrowers' eligibility for total and permanent disability. 
Also, the current reporting requirements during the monitoring period 
have proved to be strenuous on borrowers with disabilities and many who 
may meet all other eligibility requirements are having their loans 
reinstated due to failure to meet the current reporting requirements.
    The Secretary is proposing to revise the regulations governing 
disability discharges in the different title IV student loan programs 
to standardize the process. Under the proposed regulations, all 
discharge applications would be submitted directly to the Secretary. 
The Department's proposal eliminates the requirement that each of a 
borrower's loan holders (and guaranty agencies, in the FFEL program) 
review the borrower's disability discharge application. Through this 
process, the Secretary would ensure consistency in the administration 
of the disability discharge process. A more detailed analysis of these 
changes is provided in the Significant Proposed Regulations section of 
this preamble.
    Executive Order 13563, Section 4, notes that ``Where relevant, 
feasible, and consistent with regulatory objectives, and to the extent 
permitted by law, each agency shall identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public. These approaches include warnings, appropriate 
default rules, and disclosure requirements as well as provision of 
information to the public in a form that is clear and intelligible.'' 
Consistent with this section of the Executive order, the Department is 
enhancing the information available to prospective and enrolled 
students, providing better guidance, and offering more feasible loan 
repayment options through these proposed regulations.

Discussion of Costs, Benefits, and Transfers

    Consistent with the principles of Executive Orders 12866 and 13563, 
the Department has analyzed the impact of these regulations on 
students, businesses, the Federal government, and State and local 
governments. The analysis rests on the projected impact of the 
regulations. The benefits and costs are discussed below.

Income Contingent Repayment

    The proposed revisions to the Income Contingent Repayment plan 
would cap payments for eligible borrowers at 10 percent of 
discretionary income divided by 12. This is a reduction from the 
current 15 percent cap and would be consistent with the statutory 
changes to IBR that become effective in 2014. Proposed ICR (ICR-A) 
would be available to eligible borrowers in the fall of 2012. A 
detailed breakdown of the proposed qualifications needed for 
participation in either plan is provided earlier in Table 2.
    Accurately predicting or forecasting transfers or costs from the 
proposed ICR changes is difficult because they will depend heavily on 
borrower trends and participation. Traditionally, there has been low 
participation in ICR, and many participants were forced into ICR in 
order to consolidate defaulted loans. ICR-A may see an enrollment push, 
however, as a result of the publicity it could receive as part of the 
President's Pay As You Earn repayment initiative. Economic recovery 
will also play a large role. If the economy shows significant 
improvement and wage levels begin to rise, then borrowers whose 
salaries have increased significantly may opt to leave ICR for another 
repayment plan, particularly if they no longer qualify for partial 
financial hardship. The following examples and discussion will analyze 
the difference in payments for borrowers under ICR-B and ICR-A. ICR-B 
payments are calculated using the lesser amount of the amount borrowers 
would pay if you they repaid their loan in 12 years multiplied by an 
income percentage factor that varies with their adjusted gross income 
(AGI), or the difference between AGI and the applicable HHS poverty 
guideline amount, divided by 12. Borrowers can calculate what their 
payments would be under ICR-B on the Federal Student Aid Web site at 
(http://studentaid.ed.gov/PORTALSWebApp/students/english/OtherFormsOfRepay.jsp). ICR-A payments are calculated using 10 percent 
of the difference between the subject's AGI and 150 percent of the 
applicable HHS poverty guidelines amount, divided by 12 (ICR-A would 
require PFH for initial qualification so first year calculations will 
assume PFH).
    Example 1: Susan is a single borrower living in Ohio with no 
dependents. She has an (AGI) of $28,000 and $25,000 in student loan 
debt. Susan currently has an interest rate of 6.8 percent. Under 
proposed ICR-B (the current ICR) calculations, Susan's monthly payment 
(first year) would be more than $190 a month. Under ICR-A, Susan's 
payments would be roughly $94 a month, almost $97 less. In total in the 
first year, Susan would pay $1,162 less, as illustrated in Chart 2A. 
Example 1 illustrates the change in monthly payments possible for a 
borrower with Susan's income and family size. If we assume that her 
discretionary income and family size remains the same over the life of 
the loan and she stays in ICR-A and makes twenty years of qualifying 
payments, she would pay $22,560 and would have a balance of $39,493 
forgiven. This simplified example demonstrates one possible outcome for 
a hypothetical borrower and actual outcomes would depend on the 
borrower's income growth, family size, and repayment plan decisions. 
Across the pool of ICR-A borrowers, some would receive forgiveness and 
others would pay in full, and the combined effect of these outcomes 
leads to the estimated $2.1 billion cost of the proposal as described 
in the Net Budget Impacts section of this RIA.
    Example 2: Jim also lives in Ohio but is married, the head of 
household and has two dependents. Jim has an AGI of $48,000, $25,000 in 
student loan debt and a 6.8 percent interest rate. Under ICR-A, Jim's 
first year payments would be almost $112 less per month than under 
proposed ICR-B (the current ICR), as displayed in Chart 2B below.

[[Page 42117]]



----------------------------------------------------------------------------------------------------------------
   Chart 2A. Susan's first year payments under  ICR-A and ICR-B  (All figures       Chart 2B. Jim's first year
                           rounded to nearest dollar)                             payments under ICR-A and  ICR-
---------------------------------------------------------------------------------   B  (All figures rounded to
                                                                                          nearest dollar)
                                                                    First year   -------------------------------
                      Plan                            Monthly          total                        First year
                                                                                      Monthly          total
----------------------------------------------------------------------------------------------------------------
Current ICR (ICR-B).............................            $191          $2,287            $251          $3,009
ICR-A...........................................              94           1,125             112           1,343
Difference......................................              97           1,162             139           1,666
----------------------------------------------------------------------------------------------------------------

    Example 3: In 2011, the average student finished undergraduate 
studies with around $23,000 in student loan debt. Chart 2C looks at how 
that borrower's first-year payments would measure under ICR-A and ICR-B 
if they started at different salary levels.

                                Chart 2C--First Year Payments Under ICR-A & ICR-B
                                [$23,000 Debt, 6.8 percent interest rate, single]
----------------------------------------------------------------------------------------------------------------
                      AGI                        $20,000    $25,000    $30,000    $35,000    $40,000    $45,000
----------------------------------------------------------------------------------------------------------------
Standard Repayment............................       $265       $265       $265       $265       $265       $265
ICR-B.........................................        147        164        183        197        210        223
ICR-A.........................................         27         69        110        152        194        235
Difference (ICR-B vs. ICR-A)..................        120         95         73         45         16       (12)
----------------------------------------------------------------------------------------------------------------

    Chart 2C shows that the difference between ICR-B and ICR-A payments 
in the first year is more drastic at lower salary levels. A borrower 
entering into repayment with $23,000 worth of loans and a 6.8 percent 
interest rate would have lower monthly payments under ICR-A up to the 
$45,000 salary level. A borrower who leaves school with $23,000 in 
student loans and takes a job making $25,000 would have monthly 
payments that are $95 cheaper under ICR-A than ICR-B.
    ICR-A would also offer loan forgiveness after 20 years of payments; 
the current ICR plan (proposed ICR-B) offers forgiveness after 25 
years. Consequently, eligible borrowers may have five fewer years of 
payments under proposed ICR-A. The effects of this change would also 
depend on borrower trends, enrollment, and possibly the economy.
    As mentioned earlier, the ability of recent graduates to find 
suitable employment may play a large role in determining the 
participation rate of ICR. The job struggles of new graduates have been 
well documented. However, 2011 graduates who were able to find 
employment saw an average starting salary of $51,171 according to the 
National Association of Colleges and Employers' fall 2011 Salary 
Survey.\9\ The average single borrower entering repayment with a 
$50,000 salary and 6.8 percent interest rate would not qualify for ICR-
A unless the borrower had around $24,500 or more in eligible debt. 
However, those borrowers who enter into lower paying jobs or struggle 
to find employment may benefit from participating in ICR-A.
---------------------------------------------------------------------------

    \9\ National Association of Colleges and Employers, Fall 2011 
Salary Survey, http://www.naceweb.org/Press/Releases/Average_Salary_Offer_Rises_6_Percent_for_the_Class_of_2011.aspx.
---------------------------------------------------------------------------

    Leaving ICR-B open to direct and eligible consolidation loan 
borrowers ensures that the majority of borrowers would have an income-
driven payment option. This may be particularly important for borrowers 
employed in jobs eligible for public sector loan forgiveness after 10 
years but who do not qualify for IBR or ICR-A. This would allow 
borrowers to choose which repayment plan is the best option for them. 
The formulas and calculators for the standard and fixed payment plans 
can be found at (http://studentaid.ed.gov/PORTALSWebApp/students/english/OtherFormsOfRepay.jsp).

         Chart 2D--First Year Monthly Payments Under ICR-B, Standard and Extended Fixed Repayment Plans
                                [$35,000 Debt, 6.8 percent interest rate, single]
----------------------------------------------------------------------------------------------------------------
                 AGI                    $35,000    $40,000    $45,000    $50,000    $55,000    $60,000   $65,000
----------------------------------------------------------------------------------------------------------------
Standard.............................       $403       $403       $403       $403       $403       $403  $403
Extended fixed (25 years)............        243        243        243        243        243        243   243
ICR-B................................        300        319        339        356        356        359   377
----------------------------------------------------------------------------------------------------------------

    For a single borrower with $35,000 in debt, a 6.8 percent interest 
rate, and an annual salary under $65,000, Chart 2D shows that ICR-B 
would provide for lower monthly payments during the first year of 
repayment than would the standard repayment plan but higher payments 
than the extended fixed repayment amounts. The annual recalculation of 
payments under current ICR (proposed ICR-B) takes current debt amounts 
into consideration and the payments would more than likely adjust.
    All of the examples used above are only estimates. While these 
examples are able to paint a relatively clear picture of how the 
proposed regulations would affect individual borrowers' payments in a 
given year, they lack the scalability required to show an exact link to 
the overall budget impact because of the uniqueness of any borrower's 
circumstances. Initial

[[Page 42118]]

payments and payments over time would vary based on borrower behavior. 
ICR Borrowers may see their payments fluctuate because of marriage, pay 
raises, or children. As in IBR, under ICR-A borrowers are re-evaluated 
annually and payments may rise based on family size and AGI to the 
point they trigger a 10-year standard payment amount that, depending on 
the amount of the debt, may result in the borrower either repaying the 
debt in full before 20 years and receiving no forgiveness or leaving 
the plan entirely and receiving no forgiveness. Those borrowers who end 
up with lower payments would have more disposable income and possibly 
have a net positive impact on the economy. However, some borrowers 
would pay more money overall in order to have smaller payments up 
front.
    There would also be other small costs and transfers associated with 
ICR-A. For those borrowers under partial financial hardship (PFH) with 
calculated payments less than $5 would not have to pay at all, while 
there is a $5 minimum payment under current ICR (proposed ICR-B).
    Borrowers qualified for PFH would have $10 monthly payments if 
their calculated payments are greater than $5 but less than $10. There 
is no PFH determination under current ICR (proposed ICR-B).
    Interest would be capped at 10 percent of the original principal 
balance at the time borrower enters proposed ICR-A compared to current 
ICR (proposed ICR-B) in which interest is capped at 10 percent of the 
original principal amount at the time the borrower entered repayment. 
This may or may not mean lower total loan debts. For married borrowers, 
joint AGI and eligible loan debt would be used only if the couple files 
a joint tax return under proposed ICR-A. Current ICR (proposed ICR-B) 
uses joint AGI and eligible loan debt regardless of filing status.

Income Based Repayment

    The statutory changes to the Income Based Repayment Plan reduce the 
discretionary income payment cap to 10 percent and loan forgiveness 
period to 20 years for eligible borrowers, effective July 1, 2014. IBR 
participants may have lower payments as a result and may be able to 
take advantage of loan forgiveness. The PFH definition changes from 
when the 10-year standard payment amount on eligible loans (annual 
amount owed) exceeds 15 percent of the difference between AGI and 150 
percent of the poverty line amount to 10 percent.
    Accurately predicting or forecasting the transfers from these 
changes is particularly difficult because most of them would heavily 
depend on borrower trends. Economic recovery would also play a large 
role. If the economy shows significant improvement and wage levels 
begin to rise, then borrowers whose salaries have increased 
significantly may opt to leave IBR for another one of the repayment 
plans, particularly if they no longer qualify for partial financial 
hardship.
    The following examples and discussion will analyze possible 
transfers for new borrowers under the 2014 implementation of the IBR 
revisions. Currently IBR payments are calculated by using 15 percent of 
the difference between 150 percent of the applicable HHS poverty 
guidelines and the borrower's AGI, divided by 12.\10\ The proposed IBR 
repayment plan would use 10 percent of the difference between 150 
percent of the applicable HHS poverty guidelines and the borrower's 
AGI, divided by 12.
---------------------------------------------------------------------------

    \10\ Repayment Plans and Calculators, Government, n.d., http://studentaid.ed.gov/PORTALSWebApp/students/english/OtherFormsOfRepay.jsp.
---------------------------------------------------------------------------

    Example 1: Susan is a single borrower living in Ohio with no 
dependents. She has an Adjusted Gross Income (AGI) of $28,000 and 
$25,000 in student loan debt. Susan currently has an interest rate of 
6.8 percent. Under the current IBR calculations, Susan's monthly 
payment would be $141 a month in her first year. Under the proposed IBR 
calculations, Susan's first-year payments would be $94 a month, $47 
less. Over the course of the year, Susan would pay $562 less, as 
displayed in Chart 3A.
    Example 2: Jim also lives in Ohio but is married, the head of a 
household, and he has two dependents. Jim has an AGI of $48,000, and 
$25,000 in student loan debt with a 6.8 percent interest rate. Under 
the proposed IBR, Jim's first year payments would be almost $56 less 
per month, as displayed in Chart 3B below.

----------------------------------------------------------------------------------------------------------------
 Chart 3A. Susan's payments under current and revised IBR  (All figures rounded   Chart 3B. Jim's payments under
                               to nearest dollar)                                  current and revised IBR  (All
---------------------------------------------------------------------------------   figures rounded to nearest
                                                                                              dollar)
                                                                    First year   -------------------------------
                      Plan                            Monthly          total                        First year
                                                                                      Monthly          total
----------------------------------------------------------------------------------------------------------------
IBR (current)...................................            $141          $1,687            $168          $2,014
IBR (revised)...................................              94           1,125             112           1,343
Difference......................................              47             562              56             671
----------------------------------------------------------------------------------------------------------------

    Proposed IBR would also offer loan forgiveness after 20 years of 
repayment. Currently, forgiveness is given after 25 years. Eligible 
borrowers may have five fewer years of payments. The effects of this 
change would also depend on borrower trends, enrollment, and possibly 
the economy. The following discussion will look at how this change may 
affect a borrower.
    Example 3: Jesse finishes college with $40,000 in student loan debt 
and a 6.8 percent interest rate. Jesse's loan would be repaid under an 
IBR plan based on partial financial hardship. Five years after entering 
repayment, Jesse gets married and has a daughter. He adds a second 
child after the seventh year in repayment. The charts and graph below 
demonstrates Jesse's payments under current and proposed IBR.

                            Chart 3C--Jesse's Payments Under Current and Revised IBR
----------------------------------------------------------------------------------------------------------------
       Year(s) of repayment              1            2            3            4            5            6
----------------------------------------------------------------------------------------------------------------
Salary............................      $22,000      $22,000      $23,000      $23,000      $30,000      $30,000
Current IBR.......................           66           66           78           78           17           17
Revised IBR.......................           44           44           52           52           11           11
Monthly Payment Reduction.........           22           22           26           26            6            6

[[Page 42119]]

 
Annual Payment Reduction..........          262          262          312          312           68           68
Family Size.......................            1            1            1            1            3            3
Married/HOH.......................           No           No           No           No          Yes          Yes
----------------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                     Year(s) of repayment                           7            8            9            10           11           12           13
--------------------------------------------------------------------------------------------------------------------------------------------------------
Salary.......................................................      $40,000      $41,000      $41,000      $41,000      $45,000      $45,000      $47,000
Current IBR..................................................           68           80           80           80          130          130          155
Revised IBR..................................................           45           54           54           54           87           87          104
Monthly Payment Reduction....................................           23           26           27           27           43           43           52
Annual Payment Reduction.....................................          271          321          321          321          521          521          621
Family Size..................................................            4            4            4            4            4            4            4
Married/HOH..................................................          Yes          Yes          Yes          Yes          Yes          Yes          Yes
--------------------------------------------------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
       Year(s) of repayment              14           15           16           17           18           19
----------------------------------------------------------------------------------------------------------------
Salary............................      $47,000      $50,000      $51,000      $55,000      $55,000      $55,000
Current IBR.......................          155          193          205          255          255          255
Revised IBR.......................          104          129          137          170          170          170
Monthly Payment Reduction.........           52           64           68           85           85           85
Annual Payment Reduction..........          621          771          821        1,021        1,021        1,021
Family Size.......................            4            4            4            4            4            4
Married/HOH.......................          Yes          Yes          Yes          Yes          Yes          Yes
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
       Year(s) of repayment              20           21           22           23           24           25
----------------------------------------------------------------------------------------------------------------
Salary............................      $57,000      $57,000      $57,000      $60,000      $60,000      $60,000
Current IBR.......................          280          280          280          318          318          318
Revised IBR.......................          187  ...........  ...........  ...........  ...........  ...........
Monthly Payment Reduction.........           93          280          280          318          318          318
Annual Payment Reduction..........        1,121        3,364        3,364        3,814        3,814        3,814
Family Size.......................            4            4            4            4            4            4
Married/HOH.......................          Yes          Yes          Yes          Yes          Yes          Yes
----------------------------------------------------------------------------------------------------------------


[[Page 42120]]

[GRAPHIC] [TIFF OMITTED] TP17JY12.003

    As demonstrated, Jesse would have substantially smaller payments 
under the proposed IBR plan, particularly as his income rises. The 
five-year difference in the forgiveness period alone would mean $18,000 
less in payments. Overall, Jesse would pay back $28,000 less under the 
proposed IBR plan than the current one. This example assumes that Jesse 
remains qualified for PFH. Jesse's example is based on assumptions 
about a particular borrower and cannot be used to make large scale 
projections. Monthly payments would vary over the life of a loan based 
on many factors. If Jesse did not get married or have children, his 
payments would have been different.
    Overall, the proposed IBR revisions would offer many benefits. 
Reduced income caps, PFH payment qualifications, and loan forgiveness 
periods may encourage more borrowers to acknowledge their loan debt and 
could possibly decrease the default rate. The savings that eligible 
borrowers could acquire via reduced payment amounts and loan 
forgiveness periods would allow borrowers to have more disposable 
income and would have a net positive impact on the economy. Some 
borrowers may initially pay more money overall however, in order to 
have lower payments up front.
    The examples used above are all based on certain assumptions about 
particular borrowers and cannot accurately be expanded to project 
market level transfers or costs. As mentioned earlier, borrowers who no 
longer qualify for PFH may very well opt to leave IBR for another 
payment plan. The proposed regulations would allow a borrower to use 
forbearance and pay less than the standard payment when leaving IBR.

Total and Permanent Disability Discharge

    The Department believes that the proposed streamlined total and 
permanent disability discharge process would provide many benefits to 
borrowers. The proposed regulations would--
     Simplify the process for the borrower;
     Establish a single point of contact for the borrower 
throughout the disability discharge process;
     Reduce the time needed to process applications;
     Provide more consistency in eligibility determinations;
     Provide more uniformity in the communications sent to 
borrowers throughout the process; and
     Ensure that all of a borrower's title IV loans that are 
eligible for a total and permanent disability discharge are discharged 
at the same time, reducing instances of ``straggler'' loans that the 
borrower may forget to include when applying for discharge of the 
borrower's other title IV loans.
    By ensuring that denied applicants have adequate information about 
the reasons for their denial and their future options, borrowers would 
be able to make better informed decisions and possibly correct their 
applications if denial is a result of applicant error. This may reduce 
the number of technically eligible borrowers who fail to have their 
loans discharged. Increasing the number of discharged loans could lead 
to an increased transfer of funds to borrowers as they would not be 
required to make loan payments.
    By developing an OMB approved form for income reporting purposes, 
the Secretary will simplify the post-discharge monitoring process and 
possibly reduce the number of otherwise eligible borrowers with 
disabilities who have their loans reinstated. Currently, a large 
proportion of discharged borrowers end up with their loans reinstated 
because of failure to submit adequate information during the post-
discharge monitoring period. By reducing the number of borrowers with 
disabilities who have their loans

[[Page 42121]]

reinstated for failure to provide income information, but who may be 
otherwise eligible, the Secretary would provide economic relief for 
many of the country's most vulnerable citizens.
    In 2011, approximately 78,000 borrowers applied for a total and 
permanent disability discharge of 179,454 loans across the Direct, 
FFEL, and Perkins loan programs. The proposed total and permanent 
disability process will offer many benefits to borrowers with 
disabilities and possibly reduce the number of reinstatements. The 
surplus in applications and discharges that could occur as an incentive 
of the simplified process, would lead to a transfer of funds from the 
Federal government to borrowers by the way of debt elimination. Also, 
by allowing direct application to the Secretary, all applications would 
be held to the same standard. The chances for inconsistency in the 
review process would be drastically reduced. The elimination of 
multiple medical evaluations would relieve administrative burden on 
title IV providers and reduce the application review time.
    Also, the Department believes that veterans would benefit if the 
changes proposed to the non-veterans total and permanent disability 
discharge also applied to the process for disability discharges based 
on VA documentation.
    Borrowers with disabilities would benefit from the elimination of 
the requirement that a physician provide a letter requesting more time 
for the borrower to submit a total and permanent disability discharge 
application.
    As noted, while the Department does believe that the proposed 
revisions would ultimately benefit truly eligible borrowers, it cannot 
accurately predict applicant behavior as a result.

Net Budget Impacts

    The proposed regulations are estimated to have a net budget impact 
of $2.1 billion in subsidy cost over the 2012 to 2021 loan cohorts. 
Consistent with the requirements of the Credit Reform Act of 1990 
(CRA), budget cost estimates for the student loan programs reflect the 
estimated net present value of all future non-administrative Federal 
costs associated with a cohort of loans. A cohort reflects all loans 
originated in a given fiscal year.
    These estimates were developed using the Office of Management and 
Budget's (OMB) Credit Subsidy Calculator. The OMB calculator takes 
projected future cash flows from the Department's student loan cost 
estimation model and produces discounted subsidy rates reflecting the 
net present value of all future Federal costs associated with awards 
made in a given fiscal year. Values are calculated using a ``basket of 
zeros'' methodology under which each cash flow is discounted using the 
interest rate of a zero-coupon Treasury bond with the same maturity as 
that cash flow. To ensure comparability across programs, this 
methodology is incorporated into the calculator and used Government-
wide to develop estimates of the Federal cost of credit programs. 
Accordingly, the Department believes it is the appropriate methodology 
to use in developing estimates for these regulations. That said, in 
developing the following Accounting Statement, the Department consulted 
with OMB on how to integrate our discounting methodology with the 
discounting methodology traditionally used in developing regulatory 
impact analyses.
    Absent evidence of the impact of these regulations on student 
behavior, budget cost estimates were based on behavior as reflected in 
various Department data sets and longitudinal surveys listed under 
Assumptions, Limitations, and Data Sources. Program cost estimates were 
generated by running projected cash flows related to each provision 
through the Department's student loan cost estimation model. Student 
loan cost estimates are developed across five risk categories: for-
profit institutions (less than 2-year), 2-year institutions, freshmen/
sophomores at 4-year institutions, juniors/seniors at 4-year 
institutions, and graduate students. Risk categories have separate 
assumptions based on the historical pattern of behavior of borrowers in 
each category--for example, the likelihood of default or the likelihood 
to use statutory deferment or discharge benefits.

Income Contingent Repayment

    The budget impact in this package of regulations is related to the 
changes in the ICR plan. These proposed regulations, based on the 
President's Pay As You Earn initiative, create ICR-A, a new income-
contingent option that mirrors the changes made to the IBR repayment 
plan by SAFRA. ICR-A allows new borrowers in FY 2008 or later with a 
new loan in FY 2012 or later who demonstrate a partial financial 
hardship to use an income contingent repayment plan based on 10 percent 
of their discretionary income and a 20-year forgiveness period. The 
terms and conditions of ICR-A are based on IBR, including the treatment 
of married borrowers and the timing of interest capitalization, except 
ICR-A maintains the cap on interest capitalization from existing ICR. 
The existing ICR plan which has a threshold based on the lesser of the 
12-year amortization of the loan multiplied by an income percentage 
factor or 20 percent of discretionary income and a 25-year forgiveness 
period would remain available for those borrowers who do not qualify or 
choose ICR-A or IBR option because of timing, not qualifying for 
partial financial hardship, or individual preference. The availability 
of ICR-A, with its reduced income percentage and shorter forgiveness 
period, is estimated to cost $2.1 billion over the 2012 to 2021 loan 
cohorts.
    To establish the baseline and to evaluate proposals related to the 
ICR and IBR plans, the Department uses a micro-simulation model 
consisting of borrower level data based on an extract of Direct Loan 
borrowers in ICR. Income and family size is projected for each borrower 
for 25 years using imputations developed by analyzing yearly changes in 
income and family size from the Current Population Survey. Interest and 
principal payments are calculated according to the regulations 
governing the ICR and IBR programs, and the payments are adjusted for 
the likelihood of deferment or forbearance; default and subsequent 
collection; prepayment through consolidation; death, disability, or 
bankruptcy; or Public Service Loan Forgiveness. The adjusted payment 
flows are aggregated by population and cohort and loaded into the 
Student Loan Model (SLM). The SLM combines the adjusted payment flows 
with the expected volume of loans in income-contingent repayment to 
generate estimates of Federal costs.
    In evaluating the proposed changes to the ICR and IBR programs, the 
Department assumes that, if possible, income-contingent borrowers would 
elect the ICR-A plan given its more generous income and forgiveness 
provisions. Based on this, the Department estimates that between 2012 
and 2021 approximately 1.67 million borrowers not already eligible for 
SAFRA IBR would be estimated to choose ICR-A. The availability of the 
ICR-A repayment plan results in an estimated average savings of $4,250 
per borrower. Assuming all those in ICR-A remained in the plan, the 
Department estimates that approximately 13 percent would receive public 
sector loan forgiveness, 39 percent would receive forgiveness after 
twenty years of qualifying payments, and 48 percent would pay-off their 
balances. (Note: the budget estimate of $2.1 billion takes into account 
prepayment through consolidation, defaults, and death/

[[Page 42122]]

disability/bankruptcy discharges that lead to borrowers exiting the ICR 
program early). The actual number of borrowers receiving forgiveness 
will be significantly less than would be obtained by multiplying the 
1.7 million borrowers estimate to take ICR by the above percentages 
since not all borrowers will remain in ICR. Currently, the Department 
estimates that approximately 400,000 borrowers from cohorts 2012 
through 2021 would ultimately receive forgiveness. In general, those 
borrowers receiving forgiveness have higher balances as payments based 
on income are more likely to cover lower balances. Those receiving 
forgiveness have an average original balance of approximately $39,500 
and receive forgiveness of approximately $41,000 as their payments tend 
to cover interest owed so they end up with balances forgiven close to 
the original debt.
    As discussed above, when the assumption for loan forgiveness is 
increased as a result of a policy the cash flow impact is a reduction 
in principal and interest payments. The subsidy cost is derived from 
comparing the baseline payments to the policy payments (on a Net 
Present Value basis) and comparing the two resulting subsidy rates. The 
outlays are calculated by subtracting the new subsidy rate with the 
policy cash flows from the baseline subsidy rate and multiplying by the 
volume for the cohort. As stated above, compared to the baseline, the 
availability of the ICR-A repayment plan is estimated to cost 
approximately $2.1 billion for the cohorts from 2012 to 2021 as shown 
in Table 3.

                                                    Table 3--Estimated Outlays for Cohorts 2012-2021
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Cohorts                           2012     2013     2014     2015     2016     2017     2018     2019     2020     2021    Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Budget Authority.....................................      134      199      208      255      235      253      239      249      224      177    2,173
Outlays..............................................      114      191      208      253      235      246      234      254      218      178    2,132
--------------------------------------------------------------------------------------------------------------------------------------------------------

Income Based Repayment

    The proposed changes to the IBR program that implement the 
statutory changes in SAFRA are not expected to have a budgetary impact 
because they were incorporated into the budget baseline by SAFRA. The 
Department estimates that approximately one million new borrowers from 
the 2014 to 2021 cohorts would benefit from the changes to IBR made by 
SAFRA. The proposed regulations also include process clarifications 
related to the ultimate loan forgiveness and the timing of notices and 
annual certification. These changes are expected to improve the 
servicing for IBR borrowers and provide guidance before the first set 
of eligible borrowers reach the forgiveness point, but are not expected 
to have a budgetary impact.

Total and Permanent Disability

    The proposed regulations would establish a single application 
process through the Department for borrowers seeking a total and 
permanent disability discharge of their Federal loans, specify 
requirements for more detailed information in total and permanent 
disability discharge denial letters, and modify the process and 
documentation requirements for the post-discharge monitoring period. 
This should simplify the point of contact for borrowers or the 
borrower's representative, eliminate straggler loans that do not 
receive a discharge along with the borrower's other loans because they 
are in a different program or with a different loan holder and the 
borrower does not apply for or receive a discharge, and improve 
consistency in eligibility determinations. Because the proposed 
regulations do not change the standard for determining disability or 
expand the pool of borrowers potentially eligible for discharge, there 
is no expected effect on the Federal student loan budget. The 
Department would continue to closely monitor the total and permanent 
disability discharge process and any significant changes in the 
frequency or magnitude of disability discharges would be reflected in 
future budget estimates.

Accounting Statement

    As required by OMB Circular A-4 (available at www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf), in the 
following table we have prepared an accounting statement showing the 
classification of the expenditures associated with the provisions of 
these proposed regulations. This table provides our best estimate of 
the costs, benefits, and changes in annual monetized transfers as a 
result of the revisions to the ICR repayment plan as reflected in these 
proposed regulations. As discussed in the Net Budget Impacts section of 
this preamble, costs for policies affecting Federal student loans are 
calculated under credit reform scoring and reflect the estimated net 
present value of all future non-administrative Federal costs associated 
with a cohort of loans. Under this approach, costs for a cohort are 
discounted at OMB provided rates to the cohort year of disbursement 
with the resulting outlays shown in Table 3. To generate the required 
single annualized cost, the Department then discounted those costs from 
the cohort years to 2012 at 7 percent and 3 percent, resulting in the 
$214 million and $216 million annualized figures presented in the 
following accounting statement. Expenditures are classified as 
transfers from the Federal Government to borrowers in the revised ICR 
repayment plan.

   Accounting Statement Classification of Estimated Expenditures at 3
                  Percent and 7 Percent Discount Rates
                              [In millions]
------------------------------------------------------------------------
                        Category                               Costs
------------------------------------------------------------------------
Costs of compliance with paperwork requirements.........      $1.40 (7%)
                                                               1.41 (3%)
------------------------------------------------------------------------
                        Category                             Transfers
------------------------------------------------------------------------
Annualized reduced payments to Federal Government from         $214 (7%)
 borrowers in ICR-A repayment plan......................
                                                                216 (3%)
------------------------------------------------------------------------

Clarity of the Regulations

    Executive Order 12866 and the Presidential memorandum ``Plain 
Language in Government Writing'' requires each agency to write 
regulations that are easy to understand.
    The Secretary invites comments on how to make these proposed 
regulations easier to understand, including answers to questions such 
as the following:
     Are the requirements in the proposed regulations clearly 
stated?
     Do the proposed regulations contain technical terms or 
other wording that interferes with their clarity?
     Does the format of the proposed regulations (grouping and 
order of sections, use of headings, paragraphing, etc.) aid or reduce 
their clarity?
     Would the proposed regulations be easier to understand if 
we divided them

[[Page 42123]]

into more (but shorter) sections? (A ``section'' is preceded by the 
symbol ``Sec.  '' and a numbered heading; for example, Sec.  682.209 
Repayment of a loan.)
     Could the description of the proposed regulations in the 
``Supplementary Information'' section of this preamble be more helpful 
in making the proposed regulations easier to understand? If so, how?
     What else could we do to make the proposed regulations 
easier to understand?
    To send any comments that concern how the Department could make 
these proposed regulations easier to understand, see the instructions 
in the ADDRESSES section of this preamble.

Alternatives Considered

    In the spirit of good governance, the Department carefully 
considers any regulatory action or revision to ensure that the final 
decision represents what the Department believes is the best feasible 
option. First and foremost, the Department considered whether or not 
negotiated rulemaking was necessary in this instance and concluded that 
the magnitude of the statutory and regulatory revisions to ICR, IBR, 
and the TPD process would require stakeholder input. Many of the 
regulatory alternatives proposed by non-federal negotiators and 
considered by the Department but ultimately rejected, were done so 
because of budgetary constraints. For example, non-Federal negotiators 
requested that the Department open ICR-A to all borrowers eligible for 
current ICR, but the Department declined because of the proposal's 
significant cost but did agree to retain full borrower access to the 
ICR-B plan so that all borrowers would have access to a ``income-
driven'' repayment plan. Nonetheless, the Department carefully worked 
with the non-federal negotiators on every issue to address all concerns 
possible and was able to gain consensus from the non-federal 
negotiators the proposed regulations. A more in-depth analysis of these 
discussions and decisions are documented preamble and a brief summary 
of the major discussions is listed below.
     The Department originally proposed requiring borrowers who 
choose to leave the ICR-A plan to make at least one payment under the 
standard repayment plan before selecting a different repayment plan, as 
IBR borrowers are required to do under Sec.  section 493C(b)(8) of the 
HEA but after further discussion and deliberation, the Department 
modified the proposed ICR-A regulations to reflect the same regulatory 
approach to changing repayment plans that applies to borrowers repaying 
under the existing ICR plan (the proposed ICR-B).
     The Department considered a proposal to cap the amount of 
interest and fees that may be charged to borrowers under both the ICR 
plans (including the proposed ICR-A plan) and IBR at 150 percent of the 
loan principal amount but determined that the Secretary does not have 
the authority under the HEA to stop charging interest to borrowers 
under the ICR or IBR plans after the amount of accrued interest has 
reached a certain percentage of the loan principal.
     Some of the non-Federal negotiators suggested that many 
issues related to the current processes for submission of income 
documentation could be addressed by allowing borrowers to submit 
documentation electronically, or by establishing an electronic process 
for loan holders to obtain the necessary income information directly 
from the IRS. The Department agreed to explore such options in the 
future but noted that privacy issues associated with electronic 
submission of documents and restrictions on the release of information 
by the IRS to FFEL Program loan holders would have to be addressed.
     After a lengthy discussion about AGI verification in 
regards to IBR, the Department agreed that the income documentation 
requirements could be simplified by amending the regulations to require 
borrowers to provide documentation, acceptable to the Secretary or the 
loan holder, of the borrower's AGI. Acceptable documentation of a 
borrower's AGI could include a copy of the borrower's most recently 
filed Federal income tax return or a tax transcript obtained from the 
IRS by the borrower. In addition, the Department agreed that a copy of 
the borrower's most recently filed tax return need not include the 
borrower's signature. The Department disagreed with the recommendation 
that the regulations be amended to allow loan holders to disregard AGI 
and require borrowers to provide alternative documentation of income 
under any circumstances. Section 493C(a)(3) of the HEA specifically 
provides that the determination of a borrower's partial financial 
hardship status is based, in part, on the borrower's AGI.
     The Department initially proposed to incorporate into 
regulations its current policy that a borrower leaving the IBR plan 
must make one full monthly payment under the 10-year standard repayment 
plan or the standard consolidation repayment plan, as applicable, 
before the borrower would be permitted to select another repayment 
plan. After a lengthy discussion with non-Federal negotiators and 
internal debate, the Department proposed regulations that require the 
borrower to make one monthly payment while under a standard repayment 
plan but allow for that payment to be for a lesser amount than the full 
scheduled monthly payment amount under a reduced payment forbearance 
agreement with the Secretary or the loan holder. The non-Federal 
negotiators agreed with this proposal.
     After non-Federal negotiators voiced their concerns about 
borrower's representatives not being included in the full TPD process, 
the Department added a paragraph to the proposed regulations for all of 
the Title IV student loan programs stating that the term ``borrower'' 
includes a borrower's representative, if applicable. Under the proposed 
regulations, any notice sent to a borrower must also be sent to the 
borrower's representative if the borrower has one. In addition, both 
the borrower and the borrower's representative may provide 
notifications and information in connection with the borrower's total 
and permanent disability discharge. The Department also added language 
to the Perkins Loan, FFEL, and Direct Loan program regulations 
providing that an attorney could be a borrower's representative.
     Some non-Federal negotiators recommended that the 
suspension of collection activity also include a suspension of payments 
collected from borrowers through administrative wage garnishment (AWG) 
and the Treasury Offset Program (TOP). The Department did not agree. 
Borrowers applying for total and permanent disability discharges are, 
by definition, unable to work and earn money. Therefore, AWG would not 
be an issue for these borrowers. With regard to TOP, the Department 
reiterated its current policy on stopping TOP offsets. The submission 
of a total and permanent disability discharge application does not, in 
and of itself, demonstrate that a borrower is eligible for a total and 
permanent disability discharge. The Department or guaranty agency may, 
however, stop or reduce TOP offsets during this period if it believes 
such action is warranted in the borrower's particular circumstances.
     The Department declined a proposal from non-Federal 
negotiators representing guaranty agencies that would require that 
guaranty agencies receive copies of the total and permanent disability 
discharge applications. Under the proposed regulations, guaranty 
agencies and

[[Page 42124]]

lenders would not conduct medical reviews of disability discharge 
applications. Therefore, there is no need for lenders or agencies to 
receive the applications.
     Initially, the Department proposed shifting the three-year 
period during which the borrower would have to provide income 
information to three calendar years (January 1st to December 31st) 
after the discharge was granted. The Department proposed this approach 
because it would allow borrowers to meet the income documentation 
requirement by submitting tax returns for each calendar year after the 
discharge but after non-federal negotiators objected to this proposal 
on the grounds that it would lengthen the post-discharge monitoring 
period, the Department abandoned this proposal.
     Non-Federal negotiators proposed that the Department tie 
the definition of ``permanent and total disability'' to the Social 
Security standard and accept a statement of Social Security disability 
or SSI payments as proof that borrowers meet the reinstatement period 
requirements. The Department rejected the request to tie the 
Department's total and permanent disability definition to the Social 
Security standard but amended the language to allow for the submission 
of documentation of eligibility for Social Security disability benefits 
as supporting documentation for the OMB approved form that the 
Department will be developing for earnings verification during the 
three year monitoring period.

Regulatory Flexibility Act Certification

Initial Regulatory Flexibility Analysis

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities. These proposed regulations are concerned with the 
relationship between certain Federal student loan borrowers and the 
Federal government, with some of the provisions modifying the servicing 
and collections activities of guaranty agencies and other parties. The 
Department believes that the entities affected by these proposed 
regulations do not fall within the definition of a small entity. The 
U.S. Small Business Administration Size Standards define ``for-profit 
institutions'' as ``small businesses'' if they are independently owned 
and operated and not dominant in their field of operation with total 
annual revenue below $7,000,000, and defines ``non-profit 
institutions'' as small organizations if they are independently owned 
and operated and not dominant in their field of operation, or as small 
entities if they are institutions controlled by governmental entities 
with populations below 50,000. The Secretary invites comments from 
small entities as to whether they believe the proposed changes would 
have a significant economic impact on them and, if so, requests 
evidence to support that belief.

Paperwork Reduction Act of 1995

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department conducts a preclearance consultation program to 
provide the general public and Federal agencies with an opportunity to 
comment on proposed and continuing collections of information in 
accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 
3506(c)(2)(A)). This helps ensure that: The public understands the 
Department's collection instructions, respondents can provide the 
requested data in the desired format, reporting burden (time and 
financial resources) is minimized, collection instruments are clearly 
understood, and the Department can properly assess the impact of 
collection requirements on respondents.
    Sections 674.61, 682.215, 682.402, and 685.213 contain information 
collection requirements. Under the PRA, the Department has submitted a 
copy of these sections to OMB for its review.
    A Federal agency may not conduct or sponsor a collection of 
information unless OMB approves the collection under the PRA and the 
corresponding information collection instrument displays a currently 
valid OMB control number. Notwithstanding any other provision of law, 
no person is required to comply with, or is subject to penalty for 
failure to comply with, a collection of information if the collection 
instrument does not display a currently valid OMB control number.
    In the final regulations, we will display the control numbers 
assigned by OMB to any information collection requirements proposed in 
this NPRM and adopted in the final regulations.
Discussion
    Proposed Sec. Sec.  674.61, 682.215, 682.402, and 685.213 contain 
information collection requirements. Under the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3507(d)), the Department of Education has submitted 
a copy of these sections to the Office of Management and Budget (OMB) 
for its review.

Total and Permanent Disability Discharge Application Process Based on a 
Physician's Certification (Sec. Sec.  674.61(b)(2), 682.402(c)(2) and 
685.213(b))

    The proposed regulations would revise Sec. Sec.  674.61(b)(2) and 
682.402(c)(2) of the Perkins Loan and FFEL program regulations to 
require Perkins Loan and FFEL borrowers to apply directly to the 
Department for total and permanent disability discharges. In the Direct 
Loan program, borrowers would continue to apply directly to the 
Department for total and permanent disability discharges, as they do 
under the current Direct Loan program regulations.
    Under the proposed total and permanent disability discharge 
process, if a Perkins Loan program school or FFEL lender is contacted 
by a borrower intending to apply for a total and permanent disability 
discharge, the school or lender would provide the borrower with the 
information needed to apply to the Department for the discharge. Under 
the current regulations, when a borrower has loans held by two or more 
loan holders, the borrower must complete and submit a separate total 
and permanent disability application for each holder. Under the 
proposed streamlined process, a borrower would submit one total and 
permanent disability discharge application to the Department, 
eliminating the need for borrowers to submit separate discharge 
applications to each of their loan holders. We determined that in 2011 
the number of total and permanent disability applications was as 
follows:

----------------------------------------------------------------------------------------------------------------
                                                                                         Number of    Number of
                     Year                                       Program                  borrowers      loans
----------------------------------------------------------------------------------------------------------------
2011..........................................  Direct Loans..........................       29,777       65,823
2011..........................................  FFEL Loans............................       48,518      114,040
2011..........................................  Perkins Loans.........................           95           95
                                                                                       -------------------------
                                                                                             78,390      179,958
----------------------------------------------------------------------------------------------------------------


[[Page 42125]]

    Under currently approved OMB 1845-0065--Discharge Application: 
Total and Permanent Disability, the average amount of time for the 
borrower to complete and submit an application is estimated to be 30 
minutes (0.5 hours) per application. The proposed regulations provide 
that a borrower with a single loan holder must still provide the 
Secretary with a single total and permanent disability discharge 
application for all the affected title IV, HEA program loans held by 
that holder. However, under the proposed regulations, borrowers with 
multiple loan holders would no longer have to complete and submit 
multiple total and permanent disability discharge applications to each 
separate loan holder, but instead will submit a single application to 
the Secretary. Under currently approved OMB 1845-0065, there are 30,000 
respondents annually with 30,000 responses (applications) annually 
times 0.5 hours to yield a total burden of 15,000 hours to borrowers. 
Information from the 2011 award year indicates that the number of 
borrowers applying for total and permanent disability discharges has 
increased to 78,390 borrowers on 179,958 title IV, HEA loans. Using the 
2011 number of loan applications, the burden would have expanded to 
89,979 hours (179,958 times 0.5 hours equal 89,979 hours).
    The burden analysis for these proposed regulations estimates the 
incremental increase from the previous annual rate of 30,000 borrowers 
and 30,000 affected loans to the 2011 basis of 78,390 borrowers and 
179,958 affected loans, or an incremental increase of 48,390 borrowers 
(78,390 borrowers in 2011 less 30,000 borrowers already accounted for 
in the annual estimate) and 149,958 loans (179,958 loans in 2011 less 
30,000 loans already accounted for in the annual estimate).
    We estimate that half or 24,195 of the borrowers (48,390 divided by 
2) have all of their 24,195 title IV, HEA loans held by single holders. 
Therefore, the burden associated with the group of borrowers with 
single holders is an increase of 12,098 burden hours (24,195 times 0.5 
hours per application). We estimate that the other half of the 
borrowers or 24,195 (48,390 divided by 2) have multiple holders for 
their 125,763 title IV, HEA loans (179,958 affected loans in 2011 less 
the 30,000 already accounted for in the annual estimate, less 24,195 
held by single holders). The proposed regulations require borrowers 
requesting a total and permanent disability discharge to submit a 
single TPD application to the Department even when the borrower has 
multiple loans from multiple loan holders. Therefore, the total 
remaining number of loans with multiple holders would be 24,195 (78,390 
borrowers less 30,000 borrowers (respondents) in the currently approved 
information collection (OMB 1845-0065.v.4, less 24,195 borrowers with 
single holders) times 0.5 hours per application equal 12,097 hours of 
burden associated with the loans held by multiple holders. As a result, 
the overall annual burden would increase from 15,000 hours to 39,195 
hours, a net increase of 24,195 burden hours, that is due primarily to 
the fact that over time the population of borrowers seeking total and 
permanent disability discharges has grown from 15,000 to 78,390 per 
year. This significant increase in application volume increases the 
total burden. The effect of the single application portion of the 
proposal kept the burden from increasing from 15,000 burden hours 
(currently approved amount) to 89,979 hours of burden, preventing an 
additional 50,784 hours of burden to individuals (179,958 applications 
times 0.5 hours equals 89,979 less 39,195 hours, the revised new amount 
of burden).
    Under the proposed regulations, lenders and guaranty agencies would 
no longer perform a number of functions in the total and permanent 
disability discharge process. Lenders and guaranty agencies would no 
longer: distribute the Discharge Application: Total and Permanent 
Disability application, receive the completed and submitted total and 
permanent disability applications, review the completed and submitted 
total and permanent disability application forms, evaluate the 
application forms, request additional information necessary to complete 
or resolve open issues regarding the applications, review and evaluate 
supplemental information provided by the applicants, as well as make a 
determination whether the application supports the conclusion that the 
borrower is totally and permanently disabled.
    Proposed Sec. Sec.  674.61(b)(2) and 682.402(c)(2) would require 
institutions that participate in the Perkins Loan program and FFEL 
program loan holders to provide borrowers seeking a total and permanent 
disability discharge with information needed for the borrower to notify 
the Secretary. Since this is likely to be a highly automated process, 
we estimate that the average amount of time to provide a borrower with 
the required referral information to take 0.03 hours (2 minutes) per 
request. Under the currently approved burden analysis in OMB 1845-0019 
for the Perkins Loan program, there are 31 hours of burden attributed 
to this regulation (62 respondents with 62 responses times 0.5 hours 
per response). Information from the 2011 award year indicates that the 
current annual number of Perkins Loan borrowers applying for total and 
permanent disability discharge has increased from an average of 62 to 
95 borrowers. Under the proposed regulations, we estimate that the 
required information to notify the Secretary would take 0.03 hours (2 
minutes) per borrower request. At the current burden rate that would 
have been 48 hours of burden, however, at the estimated notification 
rate of 0.03 hours per borrower the total burden is 3 hours (95 
borrowers times 0.03 hours). While the number of affected Perkins Loan 
borrowers increased, this is a reduction in burden of 28 hours under 
OMB Control Number 1845-0019.
    Section 682.402 does not contain any burden attributed to the 
regulation for the total and permanent disability discharge collection 
of information, nor is there burden attributable to the application 
process other than that which impacts the borrower completing the 
application. In the 2011 award year, our data indicate that there were 
48,518 FFEL borrowers who applied for total and permanent disability 
discharges on 114,040 loans. Of the total 48,518 borrowers, 18,078 
borrowers applied for discharge of 38,742 FFEL loans that were held by 
the Department, and 30,440 borrowers applied for discharge of 75,298 
FFEL loans that were not held by the Department.
    Under the current regulations, we estimate that providing the total 
permanent disability discharge application and all the other related 
review and determination processes would take 0.5 hours per 
application, thus creating 15,220 hours of burden.
    Under proposed Sec.  682.402(c)(2), the holder only provides 
information to the borrower telling the borrower how to notify the 
Secretary. Under the proposed regulations, we estimate that the 
required information to notify the Secretary would take 0.03 hours (2 
minutes) per borrower request. At the current burden rate that would 
have been 15,220 hours of burden, however, at the estimated 
notification rate of 0.03 hours per borrower the total burden is 913 
hours (30,440 borrowers times 0.03 hours). While the burden on non-
Federal holders was not previously estimated, we have established that 
the estimate would have been 15,220 hours (30,440 times 0.5 hours per 
total and permanent disability discharge application). Under the 
proposed process the burden is reduced to 913 burden hours, an 
abatement of 14,307

[[Page 42126]]

burden hours; however, this is not a burden reduction since the current 
burden had not been previously established. Instead, an increase of 913 
hours would be added to OMB Control Number 1845-0020.
    As noted earlier, the proposed regulations would revise Sec. Sec.  
674.61(b)(2) and 682.402(c)(2) of the Perkins Loan and FFEL regulations 
to require Perkins and FFEL borrowers to apply directly to the 
Department for total and permanent disability discharges. In the Direct 
Loan Program, borrowers would continue to apply directly to the 
Department for total and permanent disability discharges, as they do 
under the current Direct Loan regulations.
    Under proposed Sec. Sec.  674.61(b)(2)(v)-(viii), 
682.402(c)(2)(iv)-(viii), and 685.213(b)(3), a Perkins Loan, FFEL, or 
Direct Loan borrower must submit the total and permanent disability 
discharge application certified by a physician to the Department within 
90 days of the date of the physician's certification. After receiving 
the total and permanent disability discharge application, the 
Department notifies the borrower's title IV loan holders that the 
Department has received the application. This notification directs the 
borrower's loan holders to either suspend collection activity or to 
maintain the suspension of collection activity on the borrower's title 
IV loans. If the application is incomplete, the Department requests the 
missing information from the borrower or the physician who certified 
the application.
    The proposed changes would not constitute a change in burden for 
the borrowers because the application process remains virtually the 
same. However, since the borrower is directed to obtain the application 
form approved by the Secretary from the Department rather than from the 
institution in the case of a Perkins loan, or the lender in the case of 
a FFEL loan, the burden associated with the streamlined total and 
permanent disability discharge application process is transferred to 
the Department.
    Changes to the Total and Permanent Disability Discharge Application 
form would need to be made. The Total and Permanent Disability 
Discharge Application form currently in use would expire on February 
28, 2015. Final regulations implementing these provisions would be 
effective July 1, 2013. A revised Total and Permanent Disability 
Discharge Application form associated with OMB Control Number 1845-0065 
will be submitted for OMB review by November 1, 2012, thereby ensuring 
that the public has an opportunity to provide comment upon the newly 
revised form that will be available for use on or about the effective 
date of the final regulations.
    Under proposed Sec. Sec.  674.61(b)(7)(iii), 682.402(c)(7)(iii), 
and 685.213(b)(8)(iii), during the three-year period following a 
discharge of a title IV loan based on total and permanent disability, 
the borrower must provide the Secretary, upon request, with 
documentation of the borrower's annual earnings from employment on an 
OMB approved form that would be available by the time that these 
regulations become effective. The form would require a certification 
from the borrower, and would require the borrower to submit 
documentation to support the certification available to the borrower. 
The documentation may include income tax returns, documentation of 
eligibility for Social Security disability benefits, or other 
documentation that supports the borrower certification.
    The proposed regulations do not specify the content of the form 
but, as with all OMB-approved forms, the form would be made available 
for public comment as part of the OMB forms clearance process.
    Collectively, the proposed regulatory changes reflected in 
Sec. Sec.  674.61 and 682.402 would increase burden by 40,080 hours. 
The burden in OMB Control Number 1845-0065 would increase from 15,000 
to 39,195. The burden in OMB Control Number 1845-0019 would decrease by 
28 hours from 31 hours to 3 hours. The burden in OMB Control Number 
1845-0020 would increase by 913 hours.

Income-Based Repayment Plan

    Proposed Sec. Sec.  682.215(e)(2) and 685.221(e)(2)--Eligibility 
documentation, verification, and notifications.
    Under proposed Sec.  682.215(e)(2), a FFEL loan holder, after 
making a determination that a borrower has a partial financial hardship 
to qualify for the IBR plan for the year the borrower initially selects 
the plan and for any subsequent year that the borrower has a partial 
financial hardship, would send the borrower a written notification that 
would include the following information: the borrower's scheduled 
monthly payment amount, and the time period during which that monthly 
payment amount will apply (annual payment period); information about 
the requirement for the borrower to annually provide income information 
(and, in some cases for married FFEL program borrowers, information 
about the eligible loans of the borrower's spouse) and certify family 
size, if the borrower chooses to remain on the IBR plan after the 
initial year on the plan, an explanation that the borrower will be 
notified in advance of the date by which the loan holder must receive 
this information; an explanation of the consequences if the borrower 
does not annually provide the required information; and information 
about the borrower's option to request, at any time during the 
borrower's current annual payment period, that the loan holder 
recalculate the borrower's monthly payment amount if the borrower's 
financial circumstances have changed and the income amount that was 
used to calculate the borrower's current monthly payment no longer 
reflects the borrower's current income. If the monthly payment amount 
is recalculated based on the borrower's request, the loan holder would 
send the borrower a written notification that includes the borrower's 
new calculated monthly payment amount and the other information 
described above.
    Using the most recent monthly reports on IBR applications, we 
examined the number of loans being repaid under IBR that are serviced 
by the Title IV Additional Servicers (TIVAS). We determined that 71 
percent of all of the non-defaulted FFEL loans are held by the 
Department (and serviced by the TIVAS), with the remaining 29 percent 
being held by commercial for-profit and not-for-profit holders. 
Applying these same percentages to the IBR participation data we 
obtained from the Department's TIVAS, we estimated that the annualized 
estimated number of commercially held loans being repaid under IBR as 
290,268 for the basis of this burden assessment. However, our data does 
not allow us to further disaggregate this number into the affected 
entities grouped under Public entities, Private-Not for Profit 
entities, and Proprietary entities. We estimate that the required 
notifications above would be highly automated and thus projected an 
average of 0.08 hours (5 minutes) of burden per IBR applicant, thus 
23,221 hours of burden (290,268 times 0.08 hours) of increased burden 
are added as a new information collection under OMB Control Number 
1845-NEWA.
    Additional proposals under Sec.  682.215(e) place further 
notification requirements on loan holders for subsequent years which 
are outside the scope of this burden analysis and would require future 
burden analysis.

Loan Forgiveness Processing and Payment

    Proposed Sec.  682.215(g) under the FFEL program, would clarify 
that the loan holder determines when a borrower has

[[Page 42127]]

met the requirements for loan forgiveness and that the borrower is not 
required to submit a request for loan forgiveness.
    The proposed regulations provide for the loan holder to send the 
borrower a written notice no later than six months prior to the 
anticipated date that the borrower would meet the loan forgiveness 
requirements. This notice would explain that the borrower is 
approaching the date he or she is expected to qualify for loan 
forgiveness, would remind the borrower that he or she must continue to 
make scheduled monthly payments, and would provide general information 
on the current treatment of the forgiveness amount for tax purposes, 
including instructions to contact the IRS for more information.
    Current Sec.  682.215(g)(4) (redesignated as Sec.  682.215(g)(5)) 
would be revised to clarify that when a loan holder notifies a borrower 
that the borrower has been determined eligible for loan forgiveness, 
the borrower must be provided with information on the current treatment 
of the forgiveness amount for tax purposes and directed to the IRS for 
more information.
    The loan holder determines when a borrower qualifies for loan 
forgiveness and does not require the borrower to track his or her own 
progress toward meeting the loan forgiveness requirement and then 
submit an application for forgiveness. In this section, we are required 
to analyze and publish the estimated amount of burden that proposed 
regulations place on affected entities (other than the Federal 
government) as of the effective date of the implementation of the 
proposed regulation, (assuming that it would occur in the initial year 
that the final regulations are effective). However, since these 
additional proposed notification requirements occur 24.5 years after 
the first income-based repayment loans were placed into repayment (on 
or around 2031), they are outside the scope of this burden analysis.
    Consistent with the discussions above, the following chart 
describes the sections of the proposed regulations involving 
information collections, the information being collected, the 
collections the Department will submit to the OMB for approval and 
public comment under the Paperwork Reduction Act, and the estimated 
costs associated with the information collections. The monetized cost 
of the additional burden on loan holders, using wage data developed 
using BLS data, available at www.bls.gov/ncs/ect/sp/ecsuphst.pdf, is 
$593,249, as shown in Chart 4. This cost was based on an hourly rate of 
$24.61. The monetized cost of the additional burden on students is 
$700,807 based on an hourly rate of $17.88.

             Chart 4--Summary of Estimated Paperwork Burden
------------------------------------------------------------------------
                                              OMB control
                         Information          number and      Estimated
Regulatory section        collection       estimated change      cost
                                             in the burden
------------------------------------------------------------------------
674.61............  This proposed          OMB 1845-0019...        -$689
                     regulatory section    The burden would
                     would require          decrease by 28
                     Perkins borrowers to   hours to 3
                     apply directly to      hours.
                     the Department for
                     total and permanent
                     disability
                     discharges. Under
                     the proposed
                     regulations
                     institutions would
                     no longer distribute
                     the Total and
                     Permanent Disability
                     Discharge
                     Application, receive
                     the completed form,
                     review and evaluate
                     the request, request
                     supplemental
                     information where
                     indicated, evaluate
                     the supplemental
                     application, and
                     make a determination
                     whether the
                     application supports
                     the conclusion that
                     the borrower is
                     totally and
                     permanently disabled.
674.61, 682.102,    These proposed         OMB 1845-0065...      700,407
 and 685.213.        regulations would     A separate 60-
                     require borrowers      day Federal
                     who request an         Register notice
                     application for a      will be
                     total and permanent    published to
                     disability discharge   solicit public
                     of their title IV,     comment. The
                     HEA loans to request   burden would
                     the application from   increase by
                     the Department.        39,195 hours.
                     Borrowers with
                     multiple loans at
                     multiple loan
                     holders would only
                     complete and submit
                     a single TPD
                     application to the
                     Department.
682.215...........  This proposed          OMB 1845-NEWA...      571,469
                     regulation would      This would be a
                     require FFEL loan      new collection.
                     holders, after         A separate 60-
                     making a               day Federal
                     determination that a   Register notice
                     borrower has a         will be
                     partial financial      published to
                     hardship to qualify    solicit public
                     for the IBR plan, to   comment. The
                     send the borrower      burden would
                     for the initial year   increase by
                     or any subsequent      23,221 hours.
                     year, written
                     information to
                     include the
                     scheduled monthly
                     payment amount, the
                     time period during
                     which the monthly
                     payment will apply,
                     and other
                     information.
682.402...........  This proposed section  OMB 1845-0020...       22,469
                     would require FFEL    The burden would
                     loan holders to        increase by 913
                     provide information    hours.
                     to the borrower to
                     notify the Secretary
                     about their interest
                     in applying for a
                     total and permanent
                     disability discharge.
------------------------------------------------------------------------

    If you want to comment on the proposed information collection 
requirements, please send your comments to the Office of Information 
and Regulatory Affairs, OMB, Attention: Desk Officer for U.S. 
Department of Education. Send these comments by email to [email protected] or by fax to (202) 395-6974. You may also send a 
copy of these comments to the Department contact named in the ADDRESSES 
section of this preamble.
    We have prepared an Information Collection Request (ICR) for OMB 
1845-0019, OMB 1845-0020. In preparing your comments you may want to 
review the ICR, which we maintain in the Education Department 
Information Collection System (EDICS) at http://edicsweb.ed.gov. Click 
on ``Browse Pending Collections.'' We will prepare separate 60 day 
Federal Register notices for the proposed collection OMB 1845-0065 and 
a new information collection under OMB 1845-NEWA.
    We consider your comments on these proposed collections of 
information in--
     Deciding whether the proposed collections are necessary 
for the proper performance of our functions, including whether the 
information will have practical use;
     Evaluating the accuracy of our estimate of the burden of 
the proposed collections, including the validity of our methodology and 
assumptions;
     Enhancing the quality, usefulness, and clarity of the 
information we collect; and
     Minimizing the burden on those who must respond. This 
includes exploring the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques.
    Under 5 CFR 1320.13 we have requested OMB to conduct its review of 
these collections of information on an

[[Page 42128]]

emergency basis. We have asked OMB to approve the collections of 
information within 30 days after publication of these proposed 
regulations in the Federal Register. Therefore, to ensure that OMB 
gives your comments full consideration, it is important that OMB 
receives your comments by August 6, 2012. This does not affect the 
deadline for your comments to us on the proposed regulations.

Intergovernmental Review

    This program is subject to Executive Order 12372 and the 
regulations in 34 CFR part 79. One of the objectives of the Executive 
Order is to foster an intergovernmental partnership and a strengthened 
federalism. The Executive Order relies on processes developed by State 
and local governments for coordination and review of proposed Federal 
financial assistance.
    This document provides early notification of our specific plans and 
actions for this program.

Assessment of Educational Impact

    In accordance with section 411 of the General Education Provisions 
Act, 20 U.S.C. 1221e-4, the Secretary particularly requests comments on 
whether these proposed regulations would require transmission of 
information that any other agency or authority of the United States 
gathers or makes available.
    Accessible Format: Individuals with disabilities can obtain this 
document in an accessible format (e.g., braille, large print, 
audiotape, or compact disc) on request to the program contact person 
listed under FOR FURTHER INFORMATION CONTACT.
    Electronic Access to This Document: The official version of this 
document is the document published in the Federal Register. Free 
Internet access to the official edition of the Federal Register and the 
Code of Federal Regulations is available via the Federal Digital System 
at: www.gpo.gov/fdsys. At this site you can view this document, as well 
as all other documents of this Department published in the Federal 
Register, in text or Adobe Portable Document Format (PDF). To use PDF 
you must have Adobe Acrobat Reader, which is available free at the 
site.
    You may also access documents of the Department published in the 
Federal Register by using the article search feature at: 
www.federalregister.gov. Specifically, through the advanced search 
feature at this site, you can limit your search to documents published 
by the Department. (Catalog of Federal Domestic Assistance Numbers: 
84.032 Federal Family Education Loan Program; 84.038 Federal Perkins 
Loan Program; 84.268 William D. Ford Federal Direct Loan Program)

List of Subjects in 34 CFR Parts 674, 682, and 685

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

    Dated: June 25, 2012.
Arne Duncan,
Secretary of Education.
    For the reasons discussed in the preamble, the Secretary proposes 
to amend 34 of the Code of Federal Regulations chapter VI as follows:

PART 674--FEDERAL PERKINS LOAN PROGRAM

    1. The authority citation for part 674 continues to read as 
follows:

    Authority:  20 U.S.C. 1070g, 1087aa-1087hh, unless otherwise 
noted.

    2. Section 674.61 is amended by:
    A. Revising paragraph (b).
    B. Revising paragraph (c).
    C. Revising paragraph (d).
    The revisions read as follows:


Sec.  674.61  Discharge for death or disability.

* * * * *
    (b) Total and permanent disability as defined in Sec.  
674.51(aa)(1). (1) General. (i) A borrower's Defense, NDSL, or Perkins 
loan is discharged if the borrower becomes totally and permanently 
disabled, as defined in Sec.  674.51(aa)(1), and satisfies the 
additional eligibility requirements in this section.
    (ii) For purposes of Sec.  674.61(b), a borrower's representative 
or a veteran's representative is a member of the borrower's family, the 
borrower's attorney, or another individual authorized to act on behalf 
of the borrower in connection with the borrower's total and permanent 
disability discharge application. References to a ``borrower'' or a 
``veteran'' include, if applicable, the borrower's representative or 
the veteran's representative for purposes of applying for a total and 
permanent disability discharge, providing notifications or information 
to the Secretary, and receiving notifications from the Secretary.
    (2) Discharge application process for borrowers who have a total 
and permanent disability as defined in Sec.  674.51(aa)(1). (i) If the 
borrower notifies the institution that the borrower claims to be 
totally and permanently disabled as defined in Sec.  674.51(aa)(1), the 
institution must direct the borrower to notify the Secretary of the 
borrower's intent to submit an application for total and permanent 
disability discharge and provide the borrower with the information 
needed for the borrower to notify Secretary.
    (ii) If the borrower notifies the Secretary of the borrower's 
intent to apply for a total and permanent disability discharge, the 
Secretary--
    (A) Provides the borrower with the information needed for the 
borrower to apply for a total and permanent disability discharge;
    (B) Identifies all title IV loans owed by the borrower and notifies 
the lenders of the borrower's intent to apply for a total and permanent 
disability discharge;
    (C) Directs the lenders to suspend efforts to collect from the 
borrower for a period not to exceed 120 days; and
    (D) Informs the borrower that the suspension of collection activity 
described in paragraph (b)(2)(ii)(C) of this section will end after 120 
days and the collection will resume on the loans if the borrower does 
not submit a total and permanent disability discharge application to 
the Secretary within that time.
    (iii) If the borrower fails to submit an application for a total 
and permanent disability discharge to the Secretary within 120 days, 
collection resumes on the borrower's title IV loans.
    (iv) The borrower must submit to the Secretary an application for 
total and permanent disability discharge on a form approved by the 
Secretary. The application must contain a certification by a physician, 
who is a doctor of medicine or osteopathy legally authorized to 
practice in a State, that the borrower is totally and permanently 
disabled as defined in Sec.  674.51(aa)(1).
    (v) The borrower must submit the application described in paragraph 
(b)(2)(iv) of this section to the Secretary within 90 days of the date 
the physician certifies the application.
    (vi) After the Secretary receives the application described in 
paragraph (b)(2)(iv) of this section, the Secretary notifies the 
holders of the borrower's title IV loans that the Secretary has 
received a total and permanent disability discharge application from 
the borrower.
    (vii) If the application is incomplete, the Secretary notifies the 
borrower of the missing information and requests the missing 
information from the borrower, the borrower's representative, or the 
physician who provided the certification, as appropriate. The

[[Page 42129]]

Secretary does not make a determination of eligibility until the 
application is complete.
    (viii) The lender notification described in paragraph (b)(2)(vi) of 
this section directs the borrower's loan holders to suspend collection 
activity or maintain the suspension of collection activity on the 
borrower's title IV loans.
    (ix) After the Secretary receives a disability discharge 
application, the Secretary sends a notice to the borrower that--
    (A) States that the application will be reviewed by the Secretary;
    (B) Informs the borrower that the borrower's lenders will suspend 
collection activity or maintain the suspension of collection activity 
on the borrower's title IV loans while the Secretary reviews the 
borrower's application for discharge; and
    (C) Explains the process for the Secretary's review of total and 
permanent disability discharge applications.
    (3) Secretary's review of the total and permanent disability 
discharge application. (i) If, after reviewing the borrower's completed 
application, the Secretary determines that the physician's 
certification supports the conclusion that the borrower is totally and 
permanently disabled as defined in Sec.  674.51(aa)(1), the borrower is 
considered totally and permanently disabled as of the date the 
physician certified the borrower's application.
    (ii) The Secretary may require the borrower to submit additional 
medical evidence if the Secretary determines that the borrower's 
application does not conclusively prove that the borrower is totally 
and permanently disabled as defined in Sec.  674.51(aa)(1). As part of 
the Secretary's review of the borrower's discharge application, the 
Secretary may require and arrange for an additional review of the 
borrower's condition by an independent physician at no expense to the 
borrower.
    (iii) After determining that the borrower is totally and 
permanently disabled as defined in Sec.  674.51(aa)(1), the Secretary 
notifies the borrower and the borrower's lenders that the application 
for a disability discharge has been approved. With this notification, 
the Secretary provides the date the physician certified the borrower's 
loan discharge application and directs each institution holding a 
Defense, NDSL, or Perkins Loan made to the borrower to assign the loan 
to the Secretary.
    (iv) The institution must assign the loan to the Secretary within 
45 days of the date of the notice described in paragraph (b)(3)(iii) of 
this section.
    (v) After the loan is assigned, the Secretary discharges the 
borrower's obligation to make further payments on the loan and notifies 
the borrower and the institution that the loan has been discharged. The 
notification to the borrower explains the terms and conditions under 
which the borrower's obligation to repay the loan will be reinstated, 
as specified in paragraph (b)(6) of this section. Any payments received 
after the date the physician certified the borrower's loan discharge 
application are returned to the person who made the payments on the 
loan in accordance with paragraph (b)(8) of this section.
    (vi) If the Secretary determines that the certification provided by 
the borrower does not support the conclusion that the borrower is 
totally and permanently disabled as defined in Sec.  674.51(aa)(1), the 
Secretary notifies the borrower and the institution that the 
application for a disability discharge has been denied. The 
notification includes--
    (A) The reason or reasons for the denial;
    (B) A statement that the loan is due and payable to the institution 
under the terms of the promissory note and that the loan will return to 
the status that would have existed had the total and permanent 
disability discharge application not been received;
    (C) A statement that the institution will notify the borrower of 
the date the borrower must resume making payments on the loan;
    (D) An explanation that the borrower is not required to submit a 
new total and permanent disability discharge application if the 
borrower requests that the Secretary re-evaluate the application for 
discharge by providing, within 12 months of the date of the 
notification, additional information that supports the borrower's 
eligibility for discharge; and
    (E) An explanation that if the borrower does not request re-
evaluation of the borrower's prior discharge application within 12 
months of the date of the notification, the borrower must submit a new 
total and permanent disability discharge application to the Secretary 
if the borrower wishes the Secretary to re-evaluate the borrower's 
eligibility for a total and permanent disability discharge.
    (vii) If the borrower requests re-evaluation in accordance with 
paragraph (b)(3)(vi)(D) of this section or submits a new total and 
permanent disability discharge application in accordance with paragraph 
(b)(3)(vi)(E) of this section, the request must include new information 
regarding the borrower's disabling condition that was not available at 
the time the Secretary reviewed the borrower's initial application for 
a total and permanent disability discharge.
    (4) Treatment of disbursements made during the period from the date 
of the physician's certification until the date of discharge. If a 
borrower received a title IV loan or TEACH Grant before the date the 
physician certified the borrower's discharge application and a 
disbursement of that loan or grant is made during the period from the 
date of the physician's certification until the date the Secretary 
grants a discharge under this section, the processing of the borrower's 
loan discharge application will be suspended until the borrower ensures 
that the full amount of the disbursement has been returned to the loan 
holder or to the Secretary, as applicable.
    (5) Receipt of new title IV loans or TEACH Grants after the date of 
the physician's certification. If a borrower receives a disbursement of 
a new title IV loan or receives a new TEACH Grant made on or after the 
date the physician certified the borrower's discharge application and 
before the date the Secretary grants a discharge under this section, 
the Secretary denies the borrower's discharge request and collection 
resumes on the borrower's loans.
    (6) Conditions for reinstatement of a loan after a total and 
permanent disability discharge. (i) The Secretary reinstates the 
borrower's obligation to repay a loan that was discharged in accordance 
with paragraph (b)(3)(v) of this section if, within three years after 
the date the Secretary granted the discharge, the borrower--
    (A) Has annual earnings from employment that exceed 100 percent of 
the poverty guideline for a family of two, as published annually by the 
United States Department of Health and Human Services pursuant to 42 
U.S.C. 9902(2);
    (B) Receives a new TEACH Grant or a new loan under the Perkins or 
Direct Loan programs, except for a Direct Consolidation Loan that 
includes loans that were not discharged; or
    (C) Fails to ensure that the full amount of any disbursement of a 
title IV loan or TEACH Grant received prior to the discharge date that 
is made is returned to the loan holder or to the Secretary, as 
applicable, within 120 days of the disbursement date.
    (ii) If the borrower's obligation to repay a loan is reinstated, 
the Secretary--
    (A) Notifies the borrower that the borrower's obligation to repay 
the loan has been reinstated;

[[Page 42130]]

    (B) Returns the loan to the status that would have existed had the 
total and permanent disability discharge application not been received; 
and
    (C) Does not require the borrower to pay interest on the loan for 
the period from the date the loan was discharged until the date the 
borrower's obligation to repay the loan was reinstated.
    (iii) The Secretary's notification under paragraph (b)(6)(ii)(A) of 
this section will include--
    (A) The reason or reasons for the reinstatement;
    (B) An explanation that the first payment due date on the loan 
following reinstatement will be no earlier than 60 days after the date 
of the notification of reinstatement; and
    (C) Information on how the borrower may contact the Secretary if 
the borrower has questions about the reinstatement or believes that the 
obligation to repay the loan was reinstated based on incorrect 
information.
    (7) Borrower's responsibilities after a total and permanent 
disability discharge. During the three-year period described in 
paragraph (b)(6)(i) of this section, the borrower must--
    (i) Promptly notify the Secretary of any changes in the borrower's 
address or phone number;
    (ii) Promptly notify the Secretary if the borrower's annual 
earnings from employment exceed the amount specified in paragraph 
(b)(6)(i)(A) of this section; and
    (iii) Provide the Secretary, upon request, with documentation of 
the borrower's annual earnings from employment on a form approved by 
the Secretary.
    (8) Payments received after the physician's certification of total 
and permanent disability. (i) If the institution receives any payments 
from or on behalf of the borrower on or attributable to a loan that has 
been assigned to the Secretary based on the Secretary's determination 
of eligibility for a total and permanent disability discharge, the 
institution must return the payments to the sender.
    (ii) At the same time that the institution returns the payments, it 
must notify the borrower that there is no obligation to make payments 
on the loan after it has been discharged due to a total and permanent 
disability unless the loan is reinstated in accordance with Sec.  
674.61(b)(6), or the Secretary directs the borrower otherwise.
    (iii) When the Secretary discharges the loan, the Secretary returns 
to the sender any payments received on the loan after the date the 
borrower became totally and permanently disabled.
    (c) Total and permanent disability discharges for veterans. (1) 
General. A veteran's Defense, NDSL, or Perkins loan will be discharged 
if the veteran is totally and permanently disabled, as defined in Sec.  
674.51(aa)(2).
    (2) Discharge application process for veterans who have a total and 
permanent disability as defined in Sec.  674.51(aa)(2). (i) If a 
veteran notifies the institution that the veteran claims to be totally 
and permanently disabled as defined in Sec.  674.51(aa)(2), the 
institution must direct the veteran to notify the Secretary of the 
veteran's intent to submit an application for a total and permanent 
disability discharge to the Secretary; and provide the veteran with the 
information needed for the veteran to apply for a total and permanent 
disability discharge to the Secretary.
    (ii) If the veteran notifies the Secretary of the veteran's intent 
to apply for a total and permanent disability discharge, the 
Secretary--
    (A) Provides the veteran with the information needed for the 
veteran to apply for a total and permanent disability discharge;
    (B) Identifies all title IV loans owed by the veteran and notifies 
the lenders of the veteran's intent to apply for a total and permanent 
disability discharge;
    (C) Directs the lenders to suspend efforts to collect from the 
borrower for a period not to exceed 120 days; and
    (D) Informs the veteran that the suspension of collection activity 
described in paragraph (c)(2)(ii)(C) of this section will end after 120 
days and collection will resume on the veteran's title IV loans if the 
veteran does not submit a total and permanent disability discharge 
application to the Secretary within that time.
    (iii) If the veteran fails to submit an application for a total and 
permanent discharge to the Secretary within 120 days, collection 
resumes on the veteran's title IV loans.
    (iv) The veteran must submit to the Secretary an application for 
total and permanent disability discharge on a form approved by the 
Secretary.
    (v) The application must be accompanied by documentation from the 
Department of Veteran Affairs showing that the Department of Veteran 
Affairs has determined that the veteran is unemployable due to a 
service-connected disability. The veteran will not be required to 
provide any additional documentation related to the veteran's 
disability.
    (vi) After the Secretary receives the application and supporting 
documentation described in paragraphs (c)(2)(iv) and (c)(2)(v) of this 
section, the Secretary notifies the holders of the veteran's title IV 
loans that the Secretary has received a total and permanent disability 
discharge application from the veteran.
    (vii) If the application is incomplete, the Secretary notifies the 
veteran of the missing information and requests the missing information 
from the veteran or the veteran's representative. The Secretary does 
not make a determination of eligibility until the application is 
complete.
    (viii) The lender notification described in paragraph (c)(2)(vi) of 
this section directs the lenders to suspend collection activity or 
maintain the suspension of collection activity on the borrower's title 
IV loans.
    (ix) After the Secretary receives the disability discharge 
application, the Secretary sends a notice to the veteran that--
    (A) States that the application will be reviewed by the Secretary;
    (B) Informs the veteran that the veteran's lenders will suspend 
collection activity on the veteran's title IV loans while the Secretary 
reviews the borrower's application for a discharge; and
    (C) Explains the process for the Secretary's review of total and 
permanent disability discharge applications.
    (3) Secretary's review of the total and permanent disability 
discharge application. (i) If, after reviewing the veteran's completed 
application, the Secretary determines, based on a review of the 
documentation from the Department of Veterans Affairs, that the veteran 
is totally and permanently disabled as defined in Sec.  674.51(aa)(2), 
the Secretary notifies the veteran and the veteran's lenders that the 
application for disability discharge has been approved. With this 
notification, the Secretary provides the effective date of the 
determination and directs each institution holding a Direct, NDSL, or 
Perkins Loan made to the veteran to discharge the loan.
    (ii) The institution returns any payments received on or after the 
effective date of the determination by the Department of Veterans 
Affairs that the veteran is unemployable due to a service-connected 
disability to the person who made the payments.
    (iii) If the Secretary determines, based on a review of the 
documentation from the Department of Veterans Affairs, that the veteran 
is not totally and permanently disabled as defined in Sec.  
674.51(aa)(2), the Secretary notifies the veteran or the veteran's 
representative, and the institution that the application

[[Page 42131]]

for a disability discharge has been denied. The notification includes--
    (A) The reason or reasons for the denial;
    (B) An explanation that the loan is due and payable to the 
institution under the terms of the promissory note and that the loan 
will return to the status that would have existed had the total and 
permanent disability discharge application not been received;
    (C) An explanation that the institution will notify the veteran of 
the date the veteran must resume making payments on the loan;
    (D) An explanation that the veteran is not required to submit a new 
total and permanent disability discharge application if the veteran 
requests that the Secretary re-evaluate the veteran's application for 
discharge by providing, within 12 months of the date of the 
notification, additional documentation from the Department of Veterans 
Affairs that supports the veteran's eligibility for discharge; and
    (E) Information on how the veteran may reapply for a total and 
permanent disability discharge in accordance with the procedures 
described in paragraphs (b)(1) through (b)(8) of this section, if the 
documentation from the Department of Veterans Affairs does not indicate 
that the veteran is totally and permanently disabled as defined in 
Sec.  674.51(aa)(2), but indicates that the veteran may be totally and 
permanently disabled as defined in Sec.  674.51(aa)(1).
    (d) No Federal reimbursement. No Federal reimbursement is made to 
an institution for discharge of loans due to death or disability.
* * * * *

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

    3. The authority citation for part 682 continues to read as 
follows:

    Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.


Sec.  682.209  [Amended]

    4. Section 682.209 is amended in paragraph (a)(6)(v)(C), by adding 
the words ``through 682.215(e)(1)(iii)'' between the citation 
``682.215(e)(1)(i)'' and the word ``within''.
    5. Section 682.215 is amended by:
    A. In paragraph (b)(1)(i), adding the words ``the borrower's'' 
immediately after the words ``outstanding principal amount of''.
    B. In paragraph (b)(1)(ii)(C), adding the words ``the borrower's'' 
immediately after the words ``outstanding principal amount of''.
    C. In the first sentence of paragraph (b)(2), removing the words 
``an income-based repayment plan'' and adding, in their place, the 
words ``the income-based repayment plan''.
    D. Revising paragraph (b)(3).
    E. In paragraph (b)(7), removing the words ``an income-based 
repayment plan'' and adding, in their place, the words ``the income-
based repayment plan''.
    F. In paragraph (b)(8), removing the words ``an income-based 
repayment plan'' and adding, in their place, the words ``the income-
based repayment plan''.
    G. In the introductory text of paragraph (c)(1), removing the words 
``an income-based repayment plan'' and adding, in their place, the 
words ``the income-based repayment plan''.
    H. Revising paragraph (d).
    I. Revising paragraph (e).
    J. Revising paragraph (f)(1)(i).
    K. In paragraph (f)(1)(iii), adding the words ``for the amount of 
the borrower's loans that were outstanding at the time the loans 
initially entered repayment'' at the end of the paragraph, immediately 
before the punctuation ``;''.
    L. In paragraph (f)(1)(iv), removing the words ``for the amount of 
the borrower's loans that were outstanding at the time the borrower 
first selected the income-based repayment plan'' immediately before the 
punctuation and word ``; or''.
    M. In the first sentence of paragraph (f)(3)(i), removing the words 
``a FFEL Consolidation Loan,'' and adding, in their place, the words 
``an eligible FFEL Consolidation Loan,''.
    N. In paragraph (f)(3)(iv), removing the words ``(f)(1) after 
qualifying for the income-based repayment plan'' immediately before the 
punctuation ``.'' and adding, in their place, the words ``paragraph 
(f)(1) of this section''.
    O. Revising paragraph (f)(5).
    P. Revising paragraph (g).
    Q. Adding an OMB control number parenthetical following the 
section.
    The revisions and addition read as follows:


Sec.  682.215  Income-based repayment plan.

* * * * *
    (b) * * *
    (3) If a borrower elects the income-based repayment plan, the loan 
holder must, unless the borrower has some loans that are eligible for 
repayment under the income-based repayment plan and other loans that 
are not eligible for repayment under that plan, require that all 
eligible loans owed by the borrower to that holder be repaid under the 
income-based repayment plan.
* * * * *
    (d) Changes in the payment amount. (1) If a borrower no longer has 
a partial financial hardship, the borrower may continue to make 
payments under the income-based repayment plan but the loan holder must 
recalculate the borrower's monthly payment. The loan holder also 
recalculates the monthly payment for a borrower who chooses to stop 
making income-based payments. In either case, as a result of the 
recalculation--
    (i) The maximum monthly amount that the loan holder requires the 
borrower to repay is the amount the borrower would have paid under the 
FFEL standard repayment plan based on a 10-year repayment period using 
the amount of the borrower's eligible loans that was outstanding at the 
time the borrower began repayment on the loans with that holder under 
the income-based repayment plan; and
    (ii) The borrower's repayment period based on the recalculated 
payment amount may exceed 10 years.
    (2) If a borrower no longer wishes to pay under the income-based 
repayment plan, the borrower must pay under the FFEL standard repayment 
plan and the loan holder recalculates the borrower's monthly payment 
based on--
    (i) Except as provided in paragraph (d)(2)(ii) of this section, the 
time remaining under the maximum 10-year repayment period and the 
amount of the borrower's loans that was outstanding at the time the 
borrower discontinued paying under the income-based repayment plan; or
    (ii) For a Consolidation Loan, the time remaining under the 
applicable repayment period as initially determined under Sec.  
682.209(h)(2) and the total amount of that loan that was outstanding at 
the time the borrower discontinued paying under the income-based 
repayment plan.
    (3) A borrower who no longer wishes to repay under the income-based 
repayment plan and who is required to repay under the FFEL standard 
repayment plan in accordance with paragraph (d)(2) of this section may 
request a change to a different repayment plan after making one monthly 
payment under the FFEL standard repayment plan. For this purpose, a 
monthly payment may include one payment made under a forbearance that 
provides for temporarily accepting smaller payments than previously 
scheduled, in accordance with Sec.  682.211(a)(1).
    (e) Eligibility documentation, verification, and notifications. (1) 
The loan holder determines whether a borrower has a partial financial 
hardship to qualify for the income-based repayment plan for the year 
the borrower elects the plan and for each subsequent year that the 
borrower

[[Page 42132]]

remains on the plan. To make this determination, the loan holder 
requires the borrower to--
    (i) Provide documentation, acceptable to the loan holder, of the 
borrower's AGI;
    (ii) If the borrower's AGI is not available, or the loan holder 
believes that the borrower's reported AGI does not reasonably reflect 
the borrower's current income, provide other documentation to verify 
income;
    (iii) If the spouse of a married borrower who files a joint Federal 
tax return has eligible loans and the loan holder does not hold at 
least one of the spouse's eligible loans--
    (A) Provide consent for the loan holder to access the National 
Student Loan Data System to obtain information about the spouse's 
eligible loans; or
    (B) Provide other documentation, acceptable to the loan holder, of 
the spouse's eligible loan information; and
    (iv) Annually certify the borrower's family size. If the borrower 
fails to certify family size, the loan holder must assume a family size 
of one for that year.
    (2) After making a determination that a borrower has a partial 
financial hardship to qualify for the income-based repayment plan for 
the year the borrower initially elects the plan and for any subsequent 
year that the borrower has a partial financial hardship, the loan 
holder must send the borrower a written notification that provides the 
borrower with--
    (i) The borrower's scheduled monthly payment amount, as calculated 
under paragraph (b)(1) of this section, and the time period during 
which this scheduled monthly payment amount will apply (annual payment 
period);
    (ii) Information about the requirement for the borrower to annually 
provide the information described in paragraph (e)(1) of this section, 
if the borrower chooses to remain on the income-based repayment plan 
after the initial year on the plan, and an explanation that the 
borrower will be notified in advance of the date by which the loan 
holder must receive this information;
    (iii) An explanation of the consequences, as described in 
paragraphs (e)(1)(iv) and (e)(7) of this section, if the borrower does 
not provide the required information;
    (iv) An explanation of the consequences if the borrower no longer 
wishes to repay under the income-based repayment plan; and
    (v) Information about the borrower's option to request, at any time 
during the borrower's current annual payment period, that the loan 
holder recalculate the borrower's monthly payment amount if the 
borrower's financial circumstances have changed and the income amount 
that was used to calculate the borrower's current monthly payment no 
longer reflects the borrower's current income. If the loan holder 
recalculates the borrower's monthly payment amount based on the 
borrower's request, the loan holder must send the borrower a written 
notification that includes the information described in paragraphs 
(e)(2)(i) through (e)(2)(v) of this section.
    (3) For each subsequent year that a borrower who currently has a 
partial financial hardship remains on the income-based repayment plan, 
the loan holder must notify the borrower in writing of the requirements 
in paragraph (e)(1) of this section no later than 60 days and no 
earlier than 90 days prior to the date specified in paragraph (e)(3)(i) 
of this section. The notification must provide the borrower with--
    (i) The date, no earlier than 35 days before the end of the 
borrower's annual payment period, by which the loan holder must receive 
all of the information described in paragraph (e)(1) of this section 
(annual deadline); and
    (ii) The consequences if the loan holder does not receive the 
information within 10 days following the annual deadline specified in 
the notice, including the borrower's new monthly payment amount as 
determined under paragraph (d)(1) of this section, the effective date 
for the recalculated monthly payment amount, and the fact that unpaid 
accrued interest will be capitalized at the end of the borrower's 
current annual payment period in accordance with paragraph (b)(5) of 
this section.
    (4) Each time a loan holder makes a determination that a borrower 
no longer has a partial financial hardship for a subsequent year that 
the borrower wishes to remain on the plan, the loan holder must send 
the borrower a written notification that provides the borrower with--
    (i) The borrower's recalculated monthly payment amount, as 
determined in accordance with paragraph (d)(1) of this section;
    (ii) An explanation that unpaid accrued interest will be 
capitalized in accordance with paragraph (b)(5) of this section; and
    (iii) Information about the borrower's option to request, at any 
time, that the loan holder redetermine whether the borrower has a 
partial financial hardship, if the borrower's financial circumstances 
have changed and the income amount used to determine that the borrower 
no longer has a partial financial hardship does not reflect the 
borrower's current income, and an explanation that the borrower will be 
notified annually of this option. If the loan holder determines that 
the borrower again has a partial financial hardship, the loan holder 
must recalculate the borrower's monthly payment in accordance with 
paragraph (b)(1) of this section and send the borrower a written 
notification that includes the information described in paragraphs 
(e)(2)(i) through (e)(2)(v) of this section.
    (5) For each subsequent year that a borrower who does not currently 
have a partial financial hardship remains on the income-based repayment 
plan, the loan holder must send the borrower a written notification 
that includes the information described in paragraph (e)(4)(iii) of 
this section.
    (6) If a borrower who is currently repaying under another repayment 
plan selects the income-based repayment plan but does not provide the 
documentation described in paragraphs (e)(1)(i) through (e)(1)(iii) of 
this section, or if the loan holder determines that the borrower does 
not have a partial financial hardship, the borrower remains on his or 
her current repayment plan.
    (7) The loan holder designates the repayment option described in 
paragraph (d)(1) of this section if a borrower who is currently 
repaying under the income-based repayment plan remains on the plan for 
a subsequent year but the loan holder does not receive the information 
described in paragraphs (e)(1)(i) through (e)(1)(iii) of this section 
within 10 days of the specified annual deadline.
    (8)(i) If the loan holder receives the information described in 
paragraphs (e)(1)(i) through (e)(1)(iii) of this section within 10 days 
of the specified annual deadline, the loan holder must promptly 
determine the borrower's new monthly payment amount. If the loan holder 
does not determine the new monthly payment amount by the end of the 
borrower's current annual payment period, the loan holder must prevent 
the borrower's monthly payment amount from being recalculated in 
accordance with paragraph (d)(1) of this section and maintain the 
borrower's current scheduled monthly payment amount until the loan 
holder determines the new monthly payment amount.
    (ii) If the new monthly payment amount is less than the borrower's 
previously calculated income-based monthly payment amount, the loan 
holder must make the appropriate adjustment to the borrower's account 
to reflect any payments at the previously calculated amount that the 
borrower

[[Page 42133]]

made after the end of the most recent annual payment period. 
Notwithstanding the requirements of Sec.  682.209(b)(2)(ii), unless the 
borrower requests otherwise the loan holder applies the excess payment 
amounts made after the end of the most recent annual payment period in 
accordance with the requirements of Sec.  682.215(c)(1).
    (iii) If the new monthly payment amount is equal to or greater than 
the borrower's previously calculated income-based monthly payment 
amount, the loan holder does not make any adjustments to the borrower's 
account.
    (9) If the loan holder receives the documentation described in 
paragraphs (e)(1)(i) through (e)(1)(iii) of this section more than 10 
days after the specified annual deadline and the borrower's monthly 
payment amount is recalculated in accordance with paragraph (d)(1) of 
this section, the loan holder may grant forbearance with respect to 
payments that are overdue or would be due at the time the new 
calculated income-based monthly payment amount is determined, if the 
new monthly payment amount is $0.00 or is less than the borrower's 
previously calculated income-based monthly payment amount. Interest 
that accrues during the portion of this forbearance period that covers 
payments that are overdue after the end of the prior annual payment 
period is not capitalized.
    (f) * * *
    (1) * * *
    (i) Made reduced monthly payments under a partial financial 
hardship as provided in paragraph (b)(1) of this section, including a 
monthly payment amount of $0.00, as provided in paragraph (b)(1)(ii) of 
this section;
* * * * *
    (5) Any payments made on a defaulted loan are not made under a 
qualifying repayment plan and are not counted toward the 25-year 
forgiveness period.
    (g) Loan forgiveness processing and payment. (1) The loan holder 
determines when a borrower has met the loan forgiveness requirements 
under paragraph (f) of this section and does not require the borrower 
to submit a request for loan forgiveness. No later than 6 months prior 
to the anticipated date that the borrower will meet the loan 
forgiveness requirements, the loan holder must send the borrower a 
written notice that includes--
    (i) An explanation that the borrower is approaching the date that 
he or she is expected to meet the requirements to receive loan 
forgiveness;
    (ii) A reminder that the borrower must continue to make the 
borrower's scheduled monthly payments; and
    (iii) General information on the current treatment of the 
forgiveness amount for tax purposes, and instructions for the borrower 
to contact the Internal Revenue Service for more information.
    (2) No later than 60 days after the loan holder determines that a 
borrower qualifies for loan forgiveness, the loan holder must request 
payment from the guaranty agency.
    (3) If the loan holder requests payment from the guaranty agency 
later than the period specified in paragraph (g)(2) of this section, 
interest that accrues on the discharged amount after the expiration of 
the 60-day filing period is ineligible for reimbursement by the 
Secretary, and the holder must repay all interest and special allowance 
received on the discharged amount for periods after the expiration of 
the 60-day filing period. The holder cannot collect from the borrower 
any interest that is not paid by the Secretary under this paragraph.
    (4)(i) Within 45 days of receiving the holder's request for 
payment, the guaranty agency must determine if the borrower meets the 
eligibility requirements for loan forgiveness under this section and 
must notify the holder of its determination.
    (ii) If the guaranty agency approves the loan forgiveness, it must, 
within the same 45-day period required under paragraph (g)(4)(i) of 
this section, pay the holder the amount of the forgiveness.
    (5) After being notified by the guaranty agency of its 
determination of the eligibility of the borrower for loan forgiveness, 
the holder must, within 30 days--
    (i) Inform the borrower of the determination and, if appropriate, 
that the borrower's repayment obligation on the loans is satisfied; and
    (ii) Provide the borrower with the information described in 
paragraph (g)(1)(iii) of this section.
    (6)(i) The holder must apply the payment from the guaranty agency 
under paragraph (g)(4)(ii) of this section to satisfy the outstanding 
balance on those loans subject to income-based forgiveness; or
    (ii) If the forgiveness amount exceeds the outstanding balance on 
the eligible loans subject to forgiveness, the loan holder must refund 
the excess amount to the guaranty agency.
    (7) If the guaranty agency does not pay the forgiveness claim, the 
lender will continue the borrower in repayment on the loan. The lender 
is deemed to have exercised forbearance of both principal and interest 
from the date the borrower's repayment obligation was suspended until a 
new payment due date is established. Unless the denial of the 
forgiveness claim was due to an error by the lender, the lender may 
capitalize any interest accrued and not paid during this period, in 
accordance with Sec.  682.202(b).
    (8) The loan holder must promptly return to the sender any payment 
received on a loan after the guaranty agency pays the loan holder the 
amount of loan forgiveness. (Approved by the Office of Management and 
Budget under control number 1845-NEWA.)
* * * * *
    6. Section 682.402 is amended by:
    A. Revising paragraph (c).
    B. In paragraph (g)(1)(iv), removing the words ``certification of 
disability described in paragraph (c)(2) of this section'' and adding, 
in their place, the words ``notification described in paragraph 
(c)(3)(iii) or (c)(9)(ix) of this section in which the Secretary 
notifies the lender that the borrower is totally and permanently 
disabled''.
    C. In paragraph (g)(2)(i), removing the punctuation and words ``, 
or the lender determines that the borrower is totally and permanently 
disabled''.
    D. Redesignating paragraphs (g)(2)(ii), (g)(2)(iii), and (g)(2)(iv) 
as paragraphs (g)(2)(iii), (g)(2)(iv), and (g)(2)(v), respectively.
    E. Adding a new paragraph (g)(2)(ii).
    F. In paragraph (h)(1)(i)(A), adding the punctuation and word ``, 
disability,'' after the word ``death''.
    G. In paragraph (h)(1)(i)(B), removing the words and punctuation 
``disability, closed school,'' and adding, in their place, the words 
``closed school''.
    H. Revising paragraph (h)(1)(v).
    I. In paragraph (h)(3)(iii)(A), adding the punctuation and word ``, 
disability,'' after the word ``death''.
    J. In paragraph (h)(3)(iii)(B), removing the words and punctuation 
``disability, closed school,'' and adding, in their place, the words 
``closed school''.
    K. Revising paragraph (k)(2)(i).
    L. Revising paragraph (k)(2)(ii).
    M. In paragraph (k)(2)(iii), adding the words ``by the Secretary'' 
after the words ``is determined''.
    N. In paragraph (k)(5)(ii), removing the words ``the guaranty 
agency makes a preliminary determination'' and adding, in their place, 
the words ``the Secretary makes a determination''.
    O. Revising paragraph (r)(2).
    P.. Revising paragraph (r)(3).
    The revisions and additions read as follows:

[[Page 42134]]

Sec.  682.402  Death, disability, closed school, false certification, 
unpaid refunds, and bankruptcy payments.

* * * * *
    (c)(1) Total and permanent disability. (i) A borrower's loan is 
discharged if the borrower becomes totally and permanently disabled, as 
defined in Sec.  682.200(b), and satisfies the eligibility requirements 
in this section.
    (ii) For a borrower who becomes totally and permanently disabled as 
described in paragraph (1) of the definition of that term in Sec.  
682.200(b), the borrower's loan discharge application is processed in 
accordance with paragraphs (c)(2) through (8) of this section.
    (iii) For a veteran who is totally and permanently disabled as 
described in paragraph (2) of the definition of that term in Sec.  
682.200(b), the veteran's loan discharge application is processed in 
accordance with paragraph (c)(9) of this section.
    (iv) For purposes of Sec.  682.402(c)--
    (A) A borrower's representative or a veteran's representative is a 
member of the borrower's family, the borrower's attorney, or another 
individual authorized to act on behalf of the borrower in connection 
with the borrower's total and permanent disability discharge 
application. References to a ``borrower'' or a ``veteran'' include, if 
applicable, the borrower's representative or the veteran's 
representative for purposes of applying for a total and permanent 
disability discharge, providing notifications or information to the 
Secretary, and receiving notifications from the Secretary;
    (B) References to ``the lender'' mean the guaranty agency if the 
guaranty agency is the holder of the loan at the time the borrower 
applies for a total and permanent disability discharge, except that the 
total and permanent disability discharge claim filing requirements 
applicable to a lender do not apply to the guaranty agency; and
    (C) References to ``the applicable guaranty agency'' mean the 
guaranty agency that guaranteed the loan.
    (2) Discharge application process for a borrower who is totally and 
permanently disabled as described in paragraph (1) of the definition of 
that term in Sec.  682.200(b). (i) If the borrower notifies the lender 
that the borrower claims to be totally and permanently disabled as 
described in paragraph (1) of the definition of that term in Sec.  
682.200(b), the lender must direct the borrower to notify the Secretary 
of the borrower's intent to submit an application for total and 
permanent disability discharge and provide the borrower with the 
information needed for the borrower to notify the Secretary.
    (ii) If the borrower notifies the Secretary of the borrower's 
intent to apply for a total and permanent disability discharge, the 
Secretary--
    (A) Provides the borrower with the information needed for the 
borrower to apply for a total and permanent disability discharge;
    (B) Identifies all title IV loans owed by the borrower and notifies 
the lenders of the borrower's intent to apply for a total and permanent 
disability discharge;
    (C) Directs the lenders to suspend efforts to collect from the 
borrower for a period not to exceed 120 days; and
    (D) Informs the borrower that the suspension of collection activity 
described in paragraph (c)(2)(ii)(C) of this section will end after 120 
days and collection will resume on the loans if the borrower does not 
submit a total and permanent disability discharge application to the 
Secretary within that time;
    (iii) If the borrower fails to submit an application for a total 
and permanent disability discharge to the Secretary within 120 days, 
collection resumes on the borrower's title IV loans, and the lender 
shall be deemed to have exercised forbearance of principal and interest 
from the date it suspended collection activity. The lender may 
capitalize, in accordance with Sec.  682.202(b), any interest accrued 
and not paid during that period, except that if the lender is a 
guaranty agency it may not capitalize accrued interest.
    (iv) The borrower must submit to the Secretary an application for a 
total and permanent disability discharge on a form approved by the 
Secretary. The application must contain a certification by a physician, 
who is a doctor of medicine or osteopathy legally authorized to 
practice in a State, that the borrower is totally and permanently 
disabled as described in paragraph (1) of the definition of that term 
in Sec.  682.200(b).
    (v) The borrower must submit the application described in paragraph 
(c)(2)(iv) of this section to the Secretary within 90 days of the date 
the physician certifies the application.
    (vi) After the Secretary receives the application described in 
paragraph (c)(2)(iv) of this section, the Secretary notifies the 
holders of the borrower's title IV loans, that the Secretary has 
received a total and permanent disability discharge application from 
the borrower. The holders of the loans must notify the applicable 
guaranty agencies that the total and permanent disability discharge 
application has been received.
    (vii) If the application is incomplete, the Secretary notifies the 
borrower of the missing information and requests the missing 
information from the borrower or the physician who provided the 
certification, as appropriate. The Secretary does not make a 
determination of eligibility until the application is complete.
    (viii) The lender notification described in paragraph (c)(2)(vi) of 
this section directs the borrower's loan holders to suspend collection 
activity or maintain the suspension of collection activity on the 
borrower's title IV loans.
    (ix) After the Secretary receives the disability discharge 
application, the Secretary sends a notice to the borrower that--
    (A) States that the application will be reviewed by the Secretary;
    (B) Informs the borrower that the borrower's lenders will suspend 
collection activity or maintain the suspension of collection activity 
on the borrower's title IV loans while the Secretary reviews the 
borrower's application for a discharge; and
    (C) Explains the process for the Secretary's review of total and 
permanent disability discharge applications.
    (3) Secretary's review of total and permanent disability discharge 
application. (i) If, after reviewing the borrower's completed 
application, the Secretary determines that the physician's 
certification supports the conclusion that the borrower is totally and 
permanently disabled, as described in paragraph (1) of the definition 
of that term in Sec.  682.200(b), the borrower is considered totally 
and permanently disabled as of the date the physician certified the 
borrower's application.
    (ii) The Secretary may require the borrower to submit additional 
medical evidence if the Secretary determines that the borrower's 
application does not conclusively prove that the borrower is totally 
and permanently disabled as described in paragraph (1) of the 
definition of that term in Sec.  682.200(b). As part of the Secretary's 
review of the borrower's discharge application, the Secretary may 
require and arrange for an additional review of the borrower's 
condition by an independent physician at no expense to the borrower.
    (iii) After determining that the borrower is totally and 
permanently disabled as described in paragraph (1) of the definition of 
that term in Sec.  682.200(b), the Secretary notifies the borrower and 
the borrower's lenders that the application for a disability discharge 
has been approved. With this notification, the Secretary provides the 
date the physician certified the

[[Page 42135]]

borrower's loan discharge application and directs each lender to submit 
a disability claim to the guaranty agency so the loan can be assigned 
to the Secretary. The Secretary returns any payment received by the 
Secretary after the date the physician certified the borrower's loan 
discharge application to the person who made the payments.
    (iv) After the loan is assigned, the Secretary discharges the 
borrower's obligation to make further payments on the loan and notifies 
the borrower and the lender that the loan has been discharged. The 
notification to the borrower explains the terms and conditions under 
which the borrower's obligation to repay the loan will be reinstated, 
as specified in paragraph (c)(6)(i) of this section.
    (v) If the Secretary determines that the certification provided by 
the borrower does not support the conclusion that the borrower is 
totally and permanently disabled as described in paragraph (1) of the 
definition of that term in Sec.  682.200(b), the Secretary notifies the 
borrower and the lender that the application for a disability discharge 
has been denied. The notification includes--
    (A) The reason or reasons for the denial;
    (B) A statement that the loan is due and payable to the lender 
under the terms of the promissory note and that the loan will return to 
the status that would have existed had the total and permanent 
disability discharge application not been received;
    (C) A statement that the lender will notify the borrower of the 
date the borrower must resume making payments on the loan;
    (D) An explanation that the borrower is not required to submit a 
new total and permanent disability discharge application if the 
borrower requests that the Secretary re-evaluate the application for 
discharge by providing, within 12 months of the date of the 
notification, additional information that supports the borrower's 
eligibility for discharge; and
    (E) An explanation that if the borrower does not request re-
evaluation of the borrower's prior discharge application within 12 
months of the date of the notification, the borrower must submit a new 
total and permanent disability discharge application to the Secretary 
if the borrower wishes the Secretary to re-evaluate the borrower's 
eligibility for a total and permanent disability discharge.
    (vi) If the borrower requests re-evaluation in accordance with 
paragraph (c)(3)(v)(D) of this section or submits a new total and 
permanent disability discharge application in accordance with paragraph 
(c)(3)(v)(E) of this section, the request must include new information 
regarding the borrower's disabling condition that was not available at 
the time the Secretary reviewed the borrower's initial application for 
a total and permanent disability discharge.
    (4) Treatment of disbursements made during the period from the date 
of the physician's certification until the date of discharge. If a 
borrower received a title IV loan or TEACH Grant before the date the 
physician certified the borrower's discharge application and a 
disbursement of that loan or grant is made during the period from the 
date of the physician's certification until the date the Secretary 
grants a discharge under this section, the processing of the borrower's 
loan discharge request will be suspended until the borrower ensures 
that the full amount of the disbursement has been returned to the loan 
holder or to the Secretary, as applicable.
    (5) Receipt of new title IV loans or TEACH Grants after the date of 
the physician's certification. If a borrower receives a disbursement of 
a new title IV loan or receives a new TEACH Grant made on or after the 
date the physician certified the borrower's discharge application and 
before the date the Secretary grants a discharge under this section, 
the Secretary denies the borrower's discharge request and collection 
resumes on the borrower's loans.
    (6) Conditions for reinstatement of a loan after a total and 
permanent disability discharge. (i) The Secretary reinstates the 
borrower's obligation to repay a loan that was discharged in accordance 
with paragraph (c)(3)(iii) of this section if, within three years after 
the date the Secretary granted the discharge, the borrower--
    (A) Has annual earnings from employment that exceed 100 percent of 
the poverty guideline for a family of two, as published annually by the 
United States Department of Health and Human Services pursuant to 42 
U.S.C. 9902(2);
    (B) Receives a new TEACH Grant or a new loan under the Perkins or 
Direct Loan programs, except for a Direct Consolidation Loan that 
includes loans that were not discharged; or
    (C) Fails to ensure that the full amount of any disbursement of a 
title IV loan or TEACH Grant received prior to the discharge date that 
is made is returned to the loan holder or to the Secretary, as 
applicable, within 120 days of the disbursement date.
    (ii) If the borrower's obligation to repay a loan is reinstated, 
the Secretary--
    (A) Notifies the borrower that the borrower's obligation to repay 
the loan has been reinstated;
    (B) Returns the loan to the status that would have existed if the 
total and permanent disability discharge application had not been 
received; and
    (C) Does not require the borrower to pay interest on the loan for 
the period from the date the loan was discharged until the date the 
borrower's obligation to repay the loan was reinstated.
    (iii) The Secretary's notification under paragraph (c)(6)(ii)(A) of 
this section will include--
    (A) The reason or reasons for the reinstatement;
    (B) An explanation that the first payment due date on the loan 
following reinstatement will be no earlier than 60 days after the date 
of the notification of reinstatement; and
    (C) Information on how the borrower may contact the Secretary if 
the borrower has questions about the reinstatement or believes that the 
obligation to repay the loan was reinstated based on incorrect 
information.
    (7) Borrower's responsibilities after a total and permanent 
disability discharge. During the three-year period described in 
paragraph (c)(6)(i) of this section, the borrower must--
    (i) Promptly notify the Secretary of any changes in the borrower's 
address or phone number;
    (ii) Promptly notify the Secretary if the borrower's annual 
earnings from employment exceed the amount specified in paragraph 
(c)(6)(i)(A) of this section; and
    (iii) Provide the Secretary, upon request, with documentation of 
the borrower's annual earnings from employment, on a form approved by 
the Secretary.
    (8) Lender and guaranty agency actions. (i) If the Secretary 
approves the borrower's total and permanent disability discharge 
application--
    (A) The lender must submit a disability claim to the guaranty 
agency, in accordance with paragraph (g)(1) of this section;
    (B) If the claim satisfies the requirements of Sec.  682.402(g)(1), 
the guaranty agency must pay the claim submitted by the lender;
    (C) After receiving a claim payment from the guaranty agency, the 
lender must return to the sender any payments received by the lender 
after the date the physician certified the borrower's loan discharge 
application as well as any

[[Page 42136]]

payments received after claim payment from or on behalf of the 
borrower;
    (D) The Secretary reimburses the guaranty agency for a disability 
claim paid to the lender after the agency pays the claim to the lender; 
and
    (E) The guaranty agency must assign the loan to the Secretary 
within 45 days of the date the guaranty agency pays the disability 
claim and receives the reimbursement payment, or within 45 days of the 
date the guaranty agency receives the notice described in paragraph 
(c)(3)(iii) of this section if a guaranty agency is the lender.
    (ii) If the Secretary does not approve the borrower's total and 
permanent disability discharge request, the lender must resume 
collection of the loan and is deemed to have exercised forbearance of 
payment of both principal and interest from the date collection 
activity was suspended. The lender may capitalize, in accordance with 
Sec.  682.202(b), any interest accrued and not paid during that period, 
except if the lender is a guaranty agency it may not capitalize accrued 
interest.
    (9) Discharge application process for veterans who are totally and 
permanently disabled as described in paragraph (2) of the definition of 
that term in Sec.  682.200(b). (i) General. If a veteran notifies the 
lender that the veteran claims to be totally and permanently disabled 
as described in paragraph (2) of the definition of that term in Sec.  
682.200(b), the lender must direct the veteran to notify the Secretary 
of the veteran's intent to submit an application for a total and 
permanent disability discharge and provide the veteran with the 
information needed for the veteran to apply for a total and permanent 
disability discharge to the Secretary.
    (ii) If the veteran notifies the Secretary of the veteran's intent 
to apply for a total and permanent disability discharge, the 
Secretary--
    (A) Provides the veteran with the information needed for the 
veteran to apply for a total and permanent disability discharge;
    (B) Identifies all title IV loans owed by the veteran and notifies 
the lenders of the veteran's intent to apply for a total and permanent 
disability discharge;
    (C) Directs the lenders to suspend efforts to collect from the 
veteran for a period not to exceed 120 days; and
    (D) Informs the veteran that the suspension of collection activity 
described in paragraph (c)(9)(ii)(C) of this section will end after 120 
days and the lender will resume collection on the loans if the veteran 
does not submit a total and permanent disability discharge application 
to the Secretary within that time.
    (iii) If the veteran fails to submit an application for a total and 
permanent disability discharge to the Secretary within 120 days, 
collection resumes on the veteran's title IV loans and the lender is 
deemed to have exercised forbearance of principal and interest from the 
date it suspended collection activity. The lender may capitalize, in 
accordance with Sec.  682.202(b), any interest accrued and not paid 
during that period, except that if the lender is a guaranty agency it 
may not capitalize accrued interest.
    (iv) The veteran must submit to the Secretary an application for a 
total and permanent disability discharge on a form approved by the 
Secretary.
    (v) The application must be accompanied by documentation from the 
Department of Veterans Affairs showing that the Department of Veterans 
Affairs has determined that the veteran is unemployable due to a 
service-connected disability. The veteran will not be required to 
provide any additional documentation related to the veteran's 
disability.
    (vi) After the Secretary receives the application and supporting 
documentation described in paragraphs (c)(9)(iv) and (c)(9)(v) of this 
section, the Secretary notifies the holders of the veteran's title IV 
loans, that Secretary has received a total and permanent disability 
discharge application from the veteran. The holders of the loans must 
notify the applicable guaranty agencies that the total and permanent 
disability discharge application has been received.
    (vii) If the application is incomplete, the Secretary notifies the 
veteran of the missing information and requests the missing information 
from the veteran or the veteran's representative. The Secretary does 
not make a determination of eligibility until the application is 
complete.
    (viii) The lender notification described in paragraph (c)(9)(vi) of 
this section directs the lenders to suspend collection activity or 
maintain the suspension of collection activity on the veteran's title 
IV loans.
    (ix) After the Secretary receives the disability discharge 
application, the Secretary sends a notice to the veteran that--
    (A) States that the application will be reviewed by the Secretary;
    (B) Informs the veteran that the veteran's lenders will suspend 
collection activity on the veteran's title IV loans while the Secretary 
reviews the veteran's application for a discharge; and
    (C) Explains the process for the Secretary's review of total and 
permanent disability discharge applications.
    (x) After making a determination that the veteran is totally and 
permanently disabled as described in paragraph (2) of the definition of 
that term in Sec.  682.200(b), the Secretary notifies the veteran and 
the veteran's lenders that the application for a disability discharge 
has been approved. With this notification, the Secretary provides the 
effective date of the determination and directs each lender to submit a 
disability claim to the guaranty agency.
    (xi) If the Secretary determines, based on a review of the 
documentation from the Department of Veterans Affairs, that the veteran 
is not totally and permanently disabled as described in paragraph (2) 
of the definition of that term in Sec.  682.200(b), the Secretary 
notifies the veteran and the lender that the application for a 
disability discharge has been denied. The notification includes--
    (A) The reason or reasons for the denial;
    (B) An explanation that the loan is due and payable to the lender 
under the terms of the promissory note and that the loan will return to 
the status it was in at the time the veteran applied for a total and 
permanent disability discharge;
    (C) An explanation that the lender will notify the veteran of the 
date the veteran must resume making payments on the loan;
    (D) An explanation that the veteran is not required to submit a new 
total and permanent disability discharge application if the veteran 
requests that the Secretary re-evaluate the application for discharge 
by providing, within 12 months of the date of the notification, 
additional documentation from the Department of Veterans Affairs that 
supports the veteran's eligibility for discharge; and
    (E) Information on how the veteran may reapply for a total and 
permanent disability discharge in accordance with procedures described 
in paragraphs (c)(2) through (c)(8) of this section, if the 
documentation from the Department of Veterans Affairs does not indicate 
that the veteran is totally and permanently disabled as described in 
paragraph (2) of the definition of that term in Sec.  682.200(b), but 
indicates that the veteran may be totally and permanently disabled as 
described in paragraph (1) of the definition of that term.
    (xii)(A) If the Secretary approves the veteran's total and 
permanent disability discharge application based on documentation from 
the Department of

[[Page 42137]]

Veterans Affairs the lender must submit a disability claim to the 
guaranty agency, in accordance with paragraph (g)(1) of this section.
    (B) If the claim meets the requirements of paragraph (g)(1) of this 
section, the guaranty agency must pay the claim and discharge the loan.
    (C) The Secretary reimburses the guaranty agency for a disability 
claim after the agency pays the claim to the lender.
    (D) Upon receipt of the claim payment from the guaranty agency, the 
lender returns any payments received by the lender on or after the 
effective date of the determination by the Department of Veterans 
Affairs to the person who made the payments.
    (E) If the Secretary does not approve the veteran's total and 
permanent disability discharge based on documentation from the 
Department of Veterans Affairs, the lender must resume collection and 
is deemed to have exercised forbearance of payment of both principal 
and interest from the date collection activity was suspended. The 
lender may capitalize, in accordance with Sec.  682.202(b), any 
interest accrued and not paid during that period, except that if the 
lender is a guaranty agency it may not capitalize accrued interest.
* * * * *
    (g) * * *
    (2) * * *
    (ii) Within 60 days of the date the lender received notification 
from the Secretary that the borrower is totally and permanently 
disabled, in accordance with Sec.  682.402(c)(3)(iii) or 
682.402(c)(9)(ix).
* * * * *
    (h) * * *
    (1) * * *
    (v) In the case of a disability claim based on a veteran's 
discharge request processed in accordance with Sec.  682.402(c)(9), the 
guaranty agency must review the claim promptly and not later than 45 
days after the claim was filed by the lender pay the claim or return 
the claim to the lender in accordance with Sec.  682.402(c)(9)(xi)(B).
* * * * *
    (k) * * *
    (2) * * *
    (i) The Secretary determines that the borrower (or each of the co-
makers of a PLUS loan) has become totally and permanently disabled 
since applying for the loan, or the guaranty agency determines that the 
borrower (or the student for whom a parent obtained a PLUS loan or each 
of the co-makers of a PLUS loan) has died, or has filed for relief in 
bankruptcy, in accordance with the procedures in paragraph (b), (c), or 
(f) of this section, or the student was unable to complete an 
educational program because the school closed, or the borrower's 
eligibility to borrow (or the student's eligibility in the case of a 
PLUS loan) was falsely certified by an eligible school. For purposes of 
this paragraph, references to the ``lender'' and ``guaranty agency'' in 
paragraphs (b) through (f) of this section mean the guaranty agency and 
the Secretary respectively;
    (ii) In the case of a Stafford, SLS, or PLUS loan, the Secretary 
determines that the borrower (or each of the co-makers of a PLUS loan) 
has become totally and permanently disabled since applying for the 
loan, the guaranty agency determines that the borrower (or the student 
for whom a parent obtained a PLUS loan, or each of the co-makers of a 
PLUS loan) has died, or has filed the petition for relief in bankruptcy 
within 10 years of the date the borrower entered repayment, exclusive 
of periods of deferment or periods of forbearance granted by the lender 
that extended the 10-year maximum repayment period, or the borrower (or 
the student for whom a parent received a PLUS loan) was unable to 
complete an educational program because the school closed, or the 
borrower's eligibility to borrow (or the student's eligibility in the 
case of a PLUS loan) was falsely certified by an eligible school;
* * * * *
    (r) * * *
    (2) If the guaranty agency receives any payments from or on behalf 
of the borrower on or attributable to a loan that has been assigned to 
the Secretary based on the determination that the borrower is eligible 
for a total and permanent disability discharge, the guaranty agency 
must promptly return these payments to the sender. At the same time 
that the agency returns the payments, it must notify the borrower that 
there is no obligation to make payments on the loan after it has been 
discharged due to a total and permanent disability, unless the loan is 
reinstated in accordance with Sec.  682.402(c), or the Secretary 
directs the borrower otherwise.
    (3) When the Secretary discharges the loan, the Secretary returns 
to the sender any payments received by the Secretary on the loan after 
the date the borrower became totally and permanently disabled.
* * * * *

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

    7. The authority citation for part 685 continues to read as 
follows:

    Authority:  20 U.S.C. 1070g, 1087a, et seq., unless otherwise 
noted.

    8. Section 685.200 is amended by revising paragraph 
(a)(1)(iv)(A)(3) to read as follows:


Sec.  685.200  Borrower eligibility.

    (a) * * *
    (1) * * *
    (iv) * * *
    (A) * * *
    (3) If the borrower receives a new Direct Loan, other than a Direct 
Consolidation Loan, within three years of the date that any previous 
title IV loan or TEACH Grant service obligation was discharged due to a 
total and permanent disability in accordance with Sec.  
685.213(b)(4)(iii), 34 CFR 674.61(b)(3)(v), 34 CFR 682.402(c)(3)(iv), 
or 34 CFR 686.42(b) based on a discharge request received on or after 
July 1, 2010, the borrower resumes repayment on the previously 
discharged loan in accordance with Sec.  685.213(b)(7), 34 CFR 
674.61(b)(6), or 34 CFR 682.402(c)(6), or acknowledges that he or she 
is once again subject to the terms of the TEACH Grant agreement to 
serve before receiving the new loan.
* * * * *
    9. Section 685.202 is amended by:
    A. In paragraph (b)(3), removing the citation ``Sec.  
685.209(d)(3)'' and adding, in its place, the citation ``Sec.  
685.209(b)(3)(iv)''.
    B. Revising paragraph (b)(4).
    The revision reads as follows:


Sec.  685.202  Charges for which Direct Loan borrowers are responsible.

* * * * *
    (b) * * *
    (4) Except as provided in paragraph (b)(3) of this section and in 
Sec. Sec.  685.208(l)(5) and 685.209(b)(3)(iv), the Secretary annually 
capitalizes unpaid interest when the borrower is paying under the 
alternative repayment plan or the income-contingent repayment plan 
described in Sec.  685.209(b) and the borrower's scheduled payments do 
not cover the interest that has accrued on the loan.
* * * * *
    10. Section 685.208 is amended by:
    A. Revising paragraph (a)(1).
    B. Revising paragraph (a)(2)
    C. Revising paragraph (k).
    The revisions read as follows:


Sec.  685.208  Repayment plans.

    (a) * * *

[[Page 42138]]

    (1) Borrowers who entered repayment before July 1, 2006. (i) A 
Direct Subsidized Loan, a Direct Unsubsidized Loan, a Direct Subsidized 
Consolidation Loan, or a Direct Unsubsidized Consolidation Loan may be 
repaid under --
    (A) The standard repayment plan in accordance with paragraph (b) of 
this section;
    (B) The extended repayment plan in accordance with paragraph (d) of 
this section;
    (C) The graduated repayment plan in accordance with paragraph (f) 
of this section;
    (D) The income-contingent repayment plan in accordance with 
paragraph (k)(2) of this section; or
    (E) The income-based repayment plan in accordance with paragraph 
(m) of this section.
    (ii) A Direct PLUS Loan or a Direct PLUS Consolidation Loan may be 
repaid under--
    (A) The standard repayment plan in accordance with paragraph (b) of 
this section;
    (B) The extended repayment plan in accordance with paragraph (d) of 
this section; or
    (C) The graduated repayment plan in accordance with paragraph (f) 
of this section.
    (2) Borrowers entering repayment on or after July 1, 2006. (i) A 
Direct Subsidized Loan, a Direct Unsubsidized Loan, or a Direct PLUS 
Loan that was made to a graduate or professional student borrower may 
be repaid under--
    (A) The standard repayment plan in accordance with paragraph (b) of 
this section;
    (B) The extended repayment plan in accordance with paragraph (e) of 
this section;
    (C) The graduated repayment plan in accordance with paragraph (g) 
of this section;
    (D) The income-contingent repayment plans in accordance with 
paragraph (k) of this section; or
    (E) The income-based repayment plan, in accordance with paragraph 
(m) of this section.
    (ii) A Direct PLUS Loan that was made to a parent borrower may be 
repaid under--
    (A) The standard repayment plan in accordance with paragraph (b) of 
this section;
    (B) The extended repayment plan in accordance with paragraph (e) of 
this section; or
    (C) The graduated repayment plan in accordance with paragraph (g) 
of this section.
    (iii) A Direct Consolidation Loan that did not repay a parent 
Direct PLUS Loan or a parent Federal PLUS Loan may be repaid under--
    (A) The standard repayment plan in accordance with paragraph (c) of 
this section;
    (B) The extended repayment plan in accordance with paragraph (e) of 
this section;
    (C) The graduated repayment plan in accordance with paragraph (h) 
of this section;
    (D) The income-contingent repayment plans in accordance with 
paragraph (k) of this section; or
    (E) The income-based repayment plan in accordance with paragraph 
(m) of this section.
    (iv) A Direct Consolidation Loan that repaid a parent Direct PLUS 
Loan or a parent Federal PLUS Loan may be repaid under--
    (A) The standard repayment plan in accordance with paragraph (c) of 
this section;
    (B) The extended repayment plan in accordance with paragraph (e) of 
this section;
    (C) The graduated repayment plan in accordance with paragraph (h) 
of this section; or
    (D) The income-contingent plan in accordance with paragraph (k)(2) 
of this section.
    (v) No scheduled payment may be less than the amount of interest 
accrued on the loan between monthly payments, except under the income-
contingent repayment plan, the income-based repayment plan, or an 
alternative repayment plan.
* * * * *
    (k) Income-contingent repayment plans. (1) Under the income-
contingent repayment plan described in Sec.  685.209(a), the required 
monthly payment for a borrower who has a partial financial hardship is 
limited to no more than 10 percent of the amount by which the 
borrower's Adjusted Gross Income (AGI) exceeds 150 percent of the 
poverty guideline applicable to the borrower's family size, divided by 
12. The Secretary determines annually whether the borrower continues to 
qualify for this reduced monthly payment based on the amount of the 
borrower's eligible loans, AGI, and poverty guideline.
    (2) Under the income-contingent repayment plan described in Sec.  
685.209(b), a borrower's monthly repayment amount is generally based on 
the total amount of the borrower's Direct Loans, family size, and AGI 
reported by the borrower for the most recent year for which the 
Secretary has obtained income information.
    (3) For the income-contingent repayment plan described in Sec.  
685.209(b), the regulations in effect at the time a borrower enters 
repayment and selects the income-contingent repayment plan or changes 
into the income-contingent repayment plan from another plan govern the 
method for determining the borrower's monthly repayment amount for all 
of the borrower's Direct Loans, unless--
    (i) The Secretary amends the regulations relating to a borrower's 
monthly repayment amount under the income-contingent repayment plan; 
and
    (ii) The borrower submits a written request that the amended 
regulations apply to the repayment of the borrower's Direct Loans.
    (4) Provisions governing the income-contingent repayment plans are 
in Sec.  685.209.
* * * * *
    11. Section 685.209 is revised to read as follows:


Sec.  685.209  Income-contingent repayment plans.

    (a) ICR-A plan: The ICR-A plan is an income-contingent repayment 
plan for eligible new borrowers.
    (1) Definitions. As used in this section--
    (i) Adjusted gross income (AGI) means the borrower's adjusted gross 
income as reported to the Internal Revenue Service. For a married 
borrower filing jointly, AGI includes both the borrower's and spouse's 
income. For a married borrower filing separately, AGI includes only the 
borrower's income;
    (ii) Eligible loan means any outstanding loan made to a borrower 
under the Direct Loan Program or the FFEL Program except for a 
defaulted loan, a Direct PLUS Loan or Federal PLUS Loan made to a 
parent borrower, or a Direct Consolidation Loan or Federal 
Consolidation Loan that repaid a Direct PLUS Loan or Federal PLUS Loan 
made to a parent borrower;
    (iii) Eligible new borrower means an individual who--
    (A) Has no outstanding balance on a Direct Loan Program Loan or a 
FFEL Program loan as of October 1, 2007, or who has no outstanding 
balance on such a loan on the date he or she receives a new loan after 
October 1, 2007; and
    (B)(1) Receives a disbursement of a Direct Subsidized Loan, Direct 
Unsubsidized Loan, or student Direct PLUS Loan on or after October 1, 
2011; or
    (2) Receives a Direct Consolidation Loan based on an application 
received on or after October 1, 2011, except that a borrower is not 
considered an eligible new borrower if the Direct Consolidation Loan 
repays a loan that would otherwise make the borrower

[[Page 42139]]

ineligible under paragraph (a)(1)(iii)(A) of this section;
    (iv) Family size means the number that is determined by counting 
the borrower, the borrower's spouse, and the borrower's children, 
including unborn children who will be born during the year the borrower 
certifies family size, if the children receive more than half their 
support from the borrower. A borrower's family size includes other 
individuals if, at the time the borrower certifies family size, the 
other individuals--
    (A) Live with the borrower; and
    (B) Receive more than half their support from the borrower and will 
continue to receive this support from the borrower for the year the 
borrower certifies family size. Support includes money, gifts, loans, 
housing, food, clothes, car, medical and dental care, and payment of 
college costs;
    (v) Partial financial hardship means a circumstance in which--
    (A) For an unmarried borrower or a married borrower who files an 
individual Federal tax return, the annual amount due on all of the 
borrower's eligible loans, as calculated under a standard repayment 
plan based on a 10-year repayment period, using the greater of the 
amount due at the time the borrower initially entered repayment or at 
the time the borrower elects the ICR-A plan, exceeds 10 percent of the 
difference between the borrower's AGI and 150 percent of the poverty 
guideline for the borrower's family size; or
    (B) For a married borrower who files a joint Federal tax return 
with his or her spouse, the annual amount due on all of the borrower's 
eligible loans and, if applicable, the spouse's eligible loans, as 
calculated under a standard repayment plan based on a 10-year repayment 
period, using the greater of the amount due at the time the loans 
initially entered repayment or at the time the borrower or spouse 
elects the ICR-A plan, exceeds 10 percent of the difference between the 
borrower's and spouse's AGI, and 150 percent of the poverty guideline 
for the borrower's family size; and
    (vi) Poverty guideline refers to the income categorized by State 
and family size in the poverty guidelines published annually by the 
United States Department of Health and Human Services pursuant to 42 
U.S.C. 9902(2). If a borrower is not a resident of a State identified 
in the poverty guidelines, the poverty guideline to be used for the 
borrower is the poverty guideline (for the relevant family size) used 
for the 48 contiguous States.
    (2) Terms of the ICR-A repayment plan. (i) A borrower may select 
the ICR-A plan only if the borrower has a partial financial hardship. 
The borrower's aggregate monthly loan payments are limited to no more 
than 10 percent of the amount by which the borrower's AGI exceeds 150 
percent of the poverty guideline applicable to the borrower's family 
size, divided by 12.
    (ii) The Secretary adjusts the calculated monthly payment if--
    (A) Except for borrowers provided for in paragraph (a)(2)(ii)(B) of 
this section, the total amount of the borrower's eligible loans are not 
Direct Loans, in which case the Secretary determines the borrower's 
adjusted monthly payment by multiplying the calculated payment by the 
percentage of the total outstanding principal amount of the borrower's 
eligible loans that are Direct Loans;
    (B) Both the borrower and borrower's spouse have eligible loans and 
filed a joint Federal tax return, in which case the Secretary 
determines--
    (1) Each borrower's percentage of the couple's total eligible loan 
debt;
    (2) The adjusted monthly payment for each borrower by multiplying 
the calculated payment by the percentage determined in paragraph 
(a)(2)(ii)(B)(1) of this section; and
    (3) If the borrower's loans are held by multiple holders, the 
borrower's adjusted monthly Direct Loan payment by multiplying the 
payment determined in paragraph (a)(2)(ii)(B)(2) of this section by the 
percentage of the total outstanding principal amount of the borrower's 
eligible loans that are Direct Loans;
    (C) The calculated amount under paragraph (a)(2)(i), (a)(2)(ii)(A), 
or (a)(2)(ii)(B) of this section is less than $5.00, in which case the 
borrower's monthly payment is $0.00; or
    (D) The calculated amount under paragraph (a)(2)(i), (a)(2)(ii)(A), 
or (a)(2)(ii)(B) of this section is equal to or greater than $5.00 but 
less than $10.00, in which case the borrower's monthly payment is 
$10.00.
    (iii) If the borrower's monthly payment amount is not sufficient to 
pay the accrued interest on the borrower's Direct Subsidized loan or 
the subsidized portion of a Direct Consolidation Loan, the Secretary 
does not charge the borrower the remaining accrued interest for a 
period not to exceed three consecutive years from the established 
repayment period start date on that loan under the ICR-A plan. On a 
Direct Consolidation Loan that repays loans on which the Secretary has 
not charged the borrower accrued interest, the three-year period 
includes the period for which the Secretary did not charge the borrower 
accrued interest on the underlying loans. This three-year period does 
not include any period during which the borrower receives an economic 
hardship deferment.
    (iv)(A) Except as provided in paragraph (a)(2)(iii) of this 
section, accrued interest is capitalized--
    (1) When a borrower is determined to no longer have a partial 
financial hardship; or
    (2) At the time a borrower chooses to leave the ICR-A plan.
    (B)(1) The amount of accrued interest capitalized under paragraph 
(a)(2)(iv)(A)(1) of this section is limited to 10 percent of the 
original principal balance at the time the borrower entered repayment 
under the ICR-A plan.
    (2) After the amount of accrued interest reaches the limit 
described in paragraph (a)(2)(iv)(B)(1) of this section, interest 
continues to accrue, but is not capitalized while the borrower remains 
on the ICR-A plan.
    (v) If the borrower's monthly payment amount is not sufficient to 
pay any of the principal due, the payment of that principal is 
postponed until the borrower chooses to leave the ICR-A plan or no 
longer has a partial financial hardship.
    (vi) The repayment period for a borrower under the ICR-A plan may 
be greater than 10 years.
    (3) Payment application and prepayment. (i) The Secretary applies 
any payment made under the ICR-A plan in the following order:
    (A) Accrued interest.
    (B) Collection costs.
    (C) Late charges.
    (D) Loan principal.
    (ii) The borrower may prepay all or part of a loan at any time 
without penalty, as provided under Sec.  685.211(a)(2).
    (iii) If the prepayment amount equals or exceeds a monthly payment 
amount of $10.00 or more under the repayment schedule established for 
the loan, the Secretary applies the prepayment consistent with the 
requirements of Sec.  685.211(a)(3).
    (iv) If the prepayment amount exceeds a monthly payment amount of 
$0.00 under the repayment schedule established for the loan, the 
Secretary applies the prepayment consistent with the requirements of 
paragraph (a)(3)(i) of this section.
    (4) Changes in the payment amount. (i) If a borrower no longer has 
a partial financial hardship, the borrower may continue to make 
payments under the ICR-A plan, but the Secretary recalculates the 
borrower's monthly payment. The Secretary also

[[Page 42140]]

recalculates the monthly payment for a borrower who chooses to stop 
making income contingent payments. In either case, as a result of the 
recalculation--
    (A) The maximum monthly amount that the Secretary requires the 
borrower to repay is the amount the borrower would have paid under the 
standard repayment plan based on a 10-year repayment period using the 
amount of the borrower's eligible loans that was outstanding at the 
time the borrower began repayment on the loans under the ICR-A plan; 
and
    (B) The borrower's repayment period based on the recalculated 
payment amount may exceed 10 years.
    (ii) A borrower who no longer wishes to repay under the ICR-A plan 
may change to a different repayment plan in accordance with Sec.  
685.210(b).
    (5) Eligibility documentation, verification, and notifications. 
(i)(A) The Secretary determines whether a borrower has a partial 
financial hardship to qualify for the ICR-A plan for the year the 
borrower selects the plan and for each subsequent year that the 
borrower remains on the plan. To make this determination, the Secretary 
requires the borrower to provide documentation, acceptable to the 
Secretary, of the borrower's AGI.
    (B) If the borrower's AGI is not available, or if the Secretary 
believes that the borrower's reported AGI does not reasonably reflect 
the borrower's current income, the borrower must provide other 
documentation to verify income.
    (C) The borrower must annually certify the borrower's family size. 
If the borrower fails to certify family size, the Secretary assumes a 
family size of one for that year.
    (ii) After making a determination that a borrower has a partial 
financial hardship to qualify for the ICR-A plan for the year the 
borrower initially elects the plan and for each subsequent year that 
the borrower has a partial financial hardship, the Secretary sends the 
borrower a written notification that provides the borrower with --
    (A) The borrower's scheduled monthly payment amount, as calculated 
under paragraph (a)(2) of this section, and the time period during 
which this scheduled monthly payment amount will apply (annual payment 
period);
    (B) Information about the requirement for the borrower to annually 
provide the information described in paragraph (a)(5)(i) of this 
section, if the borrower chooses to remain on the ICR-A plan after the 
initial year on the plan, and an explanation that the borrower will be 
notified in advance of the date by which the Secretary must receive 
this information;
    (C) An explanation of the consequences, as described in paragraphs 
(a)(5)(i)(C) and (a)(5)(v) of this section, if the borrower does not 
provide the required information; and
    (D) Information about the borrower's option to request, at any time 
during the borrower's current annual payment period, that the Secretary 
recalculate the borrower's monthly payment amount if the borrower's 
financial circumstances have changed and the income amount that was 
used to calculate the borrower's current monthly payment no longer 
reflects the borrower's current income. If the Secretary recalculates 
the borrower's monthly payment amount based on the borrower's request, 
the Secretary sends the borrower a written notification that includes 
the information described in paragraphs (a)(5)(ii)(A) through (D) of 
this section.
    (iii) For each subsequent year that a borrower who currently has a 
partial financial hardship remains on the ICR-A plan, the Secretary 
notifies the borrower in writing of the requirements in paragraph 
(a)(5)(i) of this section no later than 60 days and no earlier than 90 
days prior to the date specified in paragraph (a)(5)(iii)(A) of this 
section. The notification provides the borrower with --
    (A) The date, no earlier than 35 days before the end of the 
borrower's annual payment period, by which the Secretary must receive 
all of the documentation described in paragraph (a)(5)(i) of this 
section (annual deadline); and
    (B) The consequences if the Secretary does not receive the 
information within 10 days following the annual deadline specified in 
the notice, including the borrower's new monthly payment amount as 
determined under paragraph (a)(4)(i) of this section, the effective 
date for the recalculated monthly payment amount, and the fact that 
unpaid accrued interest will be capitalized in accordance with 
paragraph (a)(2)(iv) of this section.
    (iv) Each time the Secretary makes a determination that a borrower 
no longer has a partial financial hardship for a subsequent year that 
the borrower wishes to remain on the plan, the Secretary sends the 
borrower a written notification that provides the borrower with--
    (A) The borrower's recalculated monthly payment amount, as 
determined in accordance with paragraph (a)(4)(i) of this section;
    (B) An explanation that unpaid interest will be capitalized in 
accordance with paragraph (a)(2)(iv) of this section; and
    (C) Information about the borrower's option to request, at any 
time, that the Secretary redetermine whether the borrower has a partial 
financial hardship, if the borrower's financial circumstances have 
changed and the income amount used to determine that the borrower no 
longer has a partial financial hardship does not reflect the borrower's 
current income, and an explanation that the borrower will be notified 
annually of this option. If the Secretary determines that the borrower 
again has a partial financial hardship, the Secretary recalculates the 
borrower's monthly payment in accordance with paragraph (a)(2)(i) of 
this section and sends the borrower a written notification that 
includes the information described in paragraphs (a)(5)(ii)(A) through 
(D) of this section.
    (v) For each subsequent year that a borrower who does not currently 
have a partial financial hardship remains on the ICR-A plan, the 
Secretary sends the borrower a written notification that includes the 
information described in paragraph (a)(5)(iv)(C) of this section.
    (vi) If a borrower who is currently repaying under another 
repayment plan selects the ICR-A plan but does not provide the 
documentation described in paragraphs (a)(5)(i)(A) or (B) of this 
section, or if the Secretary determines that the borrower does not have 
a partial financial hardship, the borrower remains on his or her 
current repayment plan.
    (vii) The Secretary designates the repayment option described in 
paragraph (a)(4)(i) of this section if a borrower who is currently 
repaying under the ICR-A repayment plan remains on the plan for a 
subsequent year but the Secretary does not receive the documentation 
described in paragraphs (a)(5)(i)(A) and (a)(5)(i)(B) of this section 
within 10 days of the specified annual deadline.
    (viii) If the Secretary receives the documentation described in 
paragraphs (a)(5)(i)(A) and (a)(5)(i)(B) of this section within 10 days 
of the specified annual deadline, the Secretary maintains the 
borrower's current scheduled monthly payment amount until the new 
scheduled monthly payment amount is determined. If the new monthly 
payment amount is less than the borrower's previously calculated ICR-A 
monthly payment amount, and the borrower made payments at the 
previously calculated amount after the end of the most recent annual 
payment period, the Secretary makes the appropriate adjustment to the 
borrower's account. Notwithstanding the requirements of Sec.  
685.211(b)(3), unless the borrower requests otherwise,

[[Page 42141]]

the Secretary applies the excess payment amounts made after the end of 
the most recent annual payment period in accordance with the 
requirements of Sec.  685.209(a)(3)(i).
    (ix)(A) If the Secretary receives the documentation described in 
paragraphs (a)(5)(i)(A) and (a)(5)(i)(B) of this section more than 10 
days after the specified annual deadline and the borrower's monthly 
payment amount is recalculated in accordance with paragraph (a)(4)(i) 
of this section, the Secretary grants forbearance with respect to 
payments that are overdue or would be due at the time the new 
calculated ICR-A monthly payment amount is determined, if the new 
monthly payment amount is $0.00 or is less than the borrower's 
previously calculated income-based monthly payment amount. Interest 
that accrues during the portion of this forbearance period that covers 
payments that are overdue after the end of the prior annual payment 
period is not capitalized.
    (B) Any payments that the borrower continued to make at the 
previously calculated payment amount after the end of the prior annual 
payment period and before the new monthly payment amount is calculated 
are considered to be qualifying payments for purposes of Sec.  685.219, 
provided that the payments otherwise meet the requirements described in 
Sec.  685.219(c)(1).
    (6) Loan forgiveness. (i) To qualify for loan forgiveness after 20 
years, a borrower must have participated in the ICR-A plan and 
satisfied at least one of the following conditions during that period:
    (A) Made reduced monthly payments under a partial financial 
hardship as provided in paragraph (a)(2)(i) or (a)(2)(ii) of this 
section, including a monthly payment amount of $0.00, as provided under 
paragraph (a)(2)(ii)(C) of this section.
    (B) Made reduced monthly payments after the borrower no longer had 
a partial financial hardship or stopped making income-contingent 
payments as provided in paragraph (a)(4)(i) of this section.
    (C) Made monthly payments under any repayment plan, that were not 
less than the amount required under the Direct Loan standard repayment 
plan described in Sec.  685.208(b) for the amount of the borrower's 
loans that were outstanding at the time the loans initially entered 
repayment.
    (D) Made monthly payments under the Direct Loan standard repayment 
plan described in Sec.  685.208(b).
    (E) Made monthly payments under the ICR-B plan described in 
paragraph (b) of this section or the income-based repayment plan 
described in Sec.  685.221, including a calculated monthly payment 
amount of $0.00.
    (F) Received an economic hardship deferment on eligible Direct 
Loans.
    (ii) As provided under paragraph (a)(6)(v) of this section, the 
Secretary cancels any outstanding balance of principal and accrued 
interest on Direct loans for which the borrower qualifies for 
forgiveness if the Secretary determines that--
    (A) The borrower made monthly payments under one or more of the 
repayment plans described in paragraph (a)(6)(i) of this section, 
including a monthly payment amount of $0.00, as provided under 
paragraph (a)(2)(ii)(C) of this section; and
    (B)(1) The borrower made those monthly payments each year for a 20-
year period; or
    (2) Through a combination of monthly payments and economic hardship 
deferments, the borrower has made the equivalent of 20 years of 
payments.
    (iii) For a borrower who qualifies for the ICR-A plan, the 
beginning date for the 20-year period is--
    (A) If the borrower made payments under the ICR-B plan described in 
paragraph (b) of this section or the income-based repayment plan 
described in Sec.  685.221, the earliest date the borrower made a 
payment on the loan under one of those plans at any time after October 
1, 2007; or
    (B) If the borrower did not make payments under the ICR-B plan 
described in paragraph (b) of this section or the income-based 
repayment plan described in Sec.  685.221--
    (1) For a borrower who has an eligible Direct Consolidation Loan, 
the date the borrower made a payment or received an economic hardship 
deferment on that loan, before the date the borrower qualified for the 
ICR-A plan. The beginning date is the date the borrower made the 
payment or received the deferment after October 1, 2007;
    (2) For a borrower who has one or more other eligible Direct Loans, 
the date the borrower made a payment or received an economic hardship 
deferment on that loan. The beginning date is the date the borrower 
made that payment or received the deferment on that loan after October 
1, 2007;
    (3) For a borrower who did not make a payment or receive an 
economic hardship deferment on the loan under paragraph 
(a)(6)(iii)(B)(1) or (a)(6)(iii)(B)(2) of this section, the date the 
borrower made a payment on the loan under the ICR-A plan;
    (4) If the borrower consolidates his or her eligible loans, the 
date the borrower made a payment on the Direct Consolidation Loan that 
met the requirements of paragraph (a)(6)(i) of this section; or
    (5) If the borrower did not make a payment or receive an economic 
hardship deferment on the loan under paragraph (a)(6)(iii)(A) or 
(a)(6)(iii)(B) of this section, the date the borrower made a payment on 
the loan under the ICR-A plan.
    (iv) Any payments made on a defaulted loan are not made under a 
qualifying repayment plan and are not counted toward the 20-year 
forgiveness period.
    (v)(A) When the Secretary determines that a borrower has satisfied 
the loan forgiveness requirements under paragraph (a)(6) of this 
section on an eligible loan, the Secretary cancels the outstanding 
balance and accrued interest on that loan. No later than 6 months prior 
to the anticipated date that the borrower will meet the forgiveness 
requirements, the Secretary sends the borrower a written notice that 
includes--
    (1) An explanation that the borrower is approaching the date that 
he or she is expected to meet the requirements to receive loan 
forgiveness;
    (2) A reminder that the borrower must continue to make the 
borrower's scheduled monthly payments; and
    (3) General information on the current treatment of the forgiveness 
amount for tax purposes, and instructions for the borrower to contact 
the Internal Revenue Service for more information.
    (B) The Secretary determines when a borrower has met the loan 
forgiveness requirements in paragraph (a)(6) of this section and does 
not require the borrower to submit a request for loan forgiveness.
    (C) After determining that a borrower has satisfied the loan 
forgiveness requirements, the Secretary--
    (1) Notifies the borrower that the borrower's obligation on the 
loans is satisfied;
    (2) Provides the borrower with the information described in 
paragraph (a)(6)(v)(A)(3) of this section; and
    (3) Returns to the sender any payment received on a loan after loan 
forgiveness has been granted.
    (b) ICR-B plan: The ICR-B plan is an income-contingent repayment 
plan under which a borrower's monthly payment amount is generally based 
on the total amount of the borrower's Direct Loans, family size, and 
AGI.
    (1) Repayment amount calculation. (i) 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

[[Page 42142]]

borrower obtains another Direct Loan or the borrower and the borrower's 
spouse obtain approval to repay their loans jointly under paragraph 
(b)(2)(ii) 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 debts 
at the time they enter joint repayment.
    (ii) The annual amount payable by a borrower under the ICR-B plan 
is the lesser of--
    (A) 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 AGI as shown in the income 
percentage factor table in a notice published annually by the Secretary 
in the Federal Register; or
    (B) 20 percent of discretionary income.
    (iii)(A) For purposes of paragraph (b) of this section, 
discretionary income is defined as a borrower's AGI minus the amount of 
the poverty guideline as defined in paragraph (b)(1)(iii)(B) of this 
section. 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.
    (B) For purposes of paragraph (b) of this section, the term 
``poverty guideline'' refers to the income categorized by State and 
family size in the poverty guidelines published annually by the United 
States Department of Health and Human Services pursuant to 42 U.S.C. 
9902(2). If a borrower is not a resident of a State identified in the 
poverty guidelines, the poverty line to be used for the borrower is the 
poverty guideline (for the relevant family size) used for the 48 
contiguous States.
    (iv) For exact incomes not shown in the income percentage factor 
table in the annual notice published by the Secretary, an income 
percentage factor is calculated, based upon the intervals between the 
incomes and income percentage factors shown on the table.
    (v) 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 the annual 
notice published by the Secretary, and updated HHS Poverty Guidelines 
(if applicable).
    (vi) If a borrower's monthly payment is calculated to be greater 
than $0 but less than or equal to $5.00, the amount payable by the 
borrower is $5.00.
    (vii) For purposes of the annual recalculation described in 
paragraph (b)(1)(v) 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 ICR-B 
plan.
    (viii) For each calendar year, 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.
    (ix) 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 the annual notice published by 
the Secretary.
    (x) At the beginning of the repayment period under the ICR-B plan, 
the borrower must make monthly payments of the amount of interest that 
accrues on the borrower's Direct Loan until the Secretary calculates 
the borrower's monthly payment amount on the basis of the borrower's 
income.
    (2) Treatment of married borrowers. (i)(A) For a married borrower 
who files a joint Federal tax return with his or her spouse, the AGI 
for both spouses is used to calculate the monthly payment amount under 
the ICR-B plan.
    (B) For a married borrower who files a Federal income tax return 
separately from his or her spouse, only the borrower's AGI is used to 
determine the monthly payment amount under the ICR-B plan.
    (ii) 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 paragraph (b)(1) of this 
section.
    (iii) 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.
    (3) Other features of the ICR-B plan. (i) 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.
    (ii) 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.
    (iii) Repayment period. (A) The maximum repayment period under the 
ICR-B plan is 25 years.
    (B) The repayment period includes--
    (1) Periods in which the borrower makes payments under the ICR-B 
plan on loans that are not in default;
    (2) Periods in which the borrower makes reduced monthly payments 
under the income-based repayment plan or a recalculated reduced monthly 
payment after the borrower no longer has a partial financial hardship 
or stops making income-based payments, as provided in Sec.  
685.221(d)(1)(i);
    (3) Periods in which the borrower made monthly payments under the 
standard repayment plan after leaving the income-based repayment plan 
as provided in Sec.  685.221(d)(2);
    (4) Periods in which the borrower makes payments under the standard 
repayment plan described in Sec.  685.208(b);
    (5) For borrowers who entered repayment before October 1, 2007, and 
if the repayment period is not more than 12 years, periods in which the 
borrower makes monthly payments under the extended repayment plans 
described in Sec.  685.208(d) and (e), or the standard repayment plan 
described in Sec.  685.208(c);
    (6) Periods after October 1, 2007, in which the borrower makes 
monthly payments under any other repayment plan that are not less than 
the amount required under the standard repayment plan described in 
Sec.  685.208(b); or
    (7) Periods of economic hardship deferment after October 1, 2007.
    (C) If a borrower repays more than one loan under the ICR-B plan, a 
separate repayment period for each loan begins when that loan enters 
repayment.
    (D) If a borrower has not repaid a loan in full at the end of the 
25-year repayment period under the ICR-B plan, the Secretary cancels 
the outstanding

[[Page 42143]]

balance and accrued interest on that loan. No later than 6 months prior 
to the anticipated date that the borrower will meet the forgiveness 
requirements, the Secretary sends the borrower a written notification 
that includes--
    (1) An explanation that the borrower is approaching the date that 
he or she is expected to meet the requirements to receive loan 
forgiveness;
    (2) A reminder that the borrower must continue to make the 
borrower's scheduled monthly payments; and
    (3) General information on the current treatment of the forgiveness 
amount, and instructions for the borrower to contact the Internal 
Revenue Service for more information.
    (E) The Secretary determines when a borrower has met the loan 
forgiveness requirements under paragraph (b)(3)(iii)(D) of this section 
and does not require the borrower to submit a request for loan 
forgiveness. After determining that a borrower has satisfied the loan 
forgiveness requirements, the Secretary--
    (1) Notifies the borrower that the borrower's obligation on the 
loans is satisfied;
    (2) Provides the information described in paragraph 
(b)(3)(iii)(D)(3) of this section; and
    (3) Returns to the sender any payment received on a loan after loan 
forgiveness has been granted.
    (iv) 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 10 percent greater than the original principal amount. After the 
outstanding principal amount is 10 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.
    (v) Notification of terms and conditions. When a borrower elects or 
is required by the Secretary to repay a loan under the ICR-B plan, and 
for each subsequent year that the borrower remains on the plan, the 
Secretary sends the borrower a written notification that provides the 
terms and conditions of the plan, including--
    (A) The borrower's scheduled monthly payment amount as calculated 
under paragraph (b)(1) or (b)(3)(vi)(D) of this section, as applicable, 
and the time period during which this scheduled monthly payment will 
apply (``annual payment period'');
    (B) Information about the requirement for the borrower to annually 
provide the information described in paragraph (b)(3)(vi)(A) of this 
section, if the borrower chooses to remain on the ICR-B plan after the 
initial year on the plan, and an explanation that the borrower will be 
notified in advance of the date by which the Secretary must receive the 
information;
    (C) That if the borrower believes that special circumstances 
warrant an adjustment to the borrower's repayment obligations, as 
described in paragraph (b)(3)(iii) of this section, the borrower may 
contact the Secretary and obtain the Secretary's determination as to 
whether an adjustment is appropriate; and
    (D) An explanation of the consequences, as described in paragraph 
(b)(3)(vi)(D) of this section, if the borrower does not provide the 
required information.
    (vi) Documentation of income. (A) For the initial year that a 
borrower selects the ICR-B plan and for each subsequent year that the 
borrower remains on the plan, the borrower must provide acceptable 
documentation, as determined by the Secretary, of the borrower's AGI to 
the Secretary for purposes of calculating a monthly repayment amount 
and servicing and collecting a loan under the plan.
    (B) For each subsequent year that a borrower remains on the ICR-B 
plan, the Secretary notifies the borrower in writing of the requirement 
described in paragraph (b)(3)(vi)(A) of this section no later than 60 
days and no earlier than 90 days prior to the date specified in 
paragraph (b)(3)(vi)(B)(1) of this section. The notification provides 
the borrower with--
    (1) The date, no earlier than 35 days before the end of the 
borrower's annual payment period, by which the Secretary must receive 
the documentation described in paragraph (b)(3)(vi)(A) of this section 
(annual deadline); and
    (2) The consequences if the Secretary does not receive the 
information within 10 days following the annual deadline specified in 
the notice, including the borrower's new monthly payment amount as 
determined under paragraph (b)(3)(vi)(D) of this section, and the 
effective date for the recalculated monthly payment amount.
    (C) The Secretary designates the standard repayment plan for a 
borrower who initially selects the ICR-B plan but does not comply with 
the requirement in paragraph (b)(3)(vi)(A) of this section.
    (D) If, during a subsequent year that a borrower remains on the 
ICR-B plan, the Secretary does not receive the documentation described 
in paragraph (b)(3)(vi)(A) of this section within 10 days of the 
specified annual deadline, the Secretary recalculates the borrower's 
required monthly payment amount. The maximum recalculated monthly 
amount the Secretary requires the borrower to repay is the amount the 
borrower would have paid under the standard repayment plan based on a 
10-year repayment period using the amount of the borrower's loans that 
was outstanding at the time the borrower began repayment under the ICR-
B plan. The repayment period based on the recalculated payment may 
exceed 10 years.
    (E) If the Secretary receives the documentation described in 
paragraph (b)(3)(vi)(A) of this section within 10 days of the specified 
annual deadline, the Secretary maintains the borrower's current 
scheduled monthly payment amount until the new scheduled monthly 
payment amount is determined. If the new calculated monthly payment 
amount is less than the borrower's previously calculated monthly 
payment amount, and the borrower made payments at the previously 
calculated amount after the end of the most recent annual payment 
period, the Secretary makes the appropriate adjustment to the 
borrower's account. The Secretary applies the excess payment amounts 
made after the end of the most recent annual payment period in 
accordance with the requirements of Sec.  685.211(a)(1), unless the 
borrower requests otherwise.
    (F)(1) If the Secretary receives the documentation described in 
paragraph (b)(3)(vi)(A) of this section more than 10 days after the 
specified annual deadline and the borrower's monthly payment amount is 
recalculated in accordance with paragraph (b)(3)(vi)(D) of this 
section, the Secretary grants forbearance with respect to payments that 
are overdue or would be due at the time the new calculated monthly 
payment amount is determined, if the new monthly payment amount is 
$0.00 or is less than the borrower's previously calculated monthly 
payment amount. Interest that accrues during the portion of this 
forbearance period that covers payments that are overdue after the end 
of the prior annual payment period is not capitalized.
    (2) Any payments that the borrower continued to make at the 
previously calculated payment amount after the end of the prior annual 
payment period and before the new monthly payment amount is calculated 
are considered to be qualifying payments for purposes of Sec.  685.219, 
provided that the payments otherwise meet the requirements described in 
Sec.  685.219(c)(1).
    (G) If a borrower defaults and the Secretary designates the ICR-B 
plan for the borrower but the borrower fails to comply with the 
requirement in

[[Page 42144]]

paragraph (b)(3)(vi)(A) of this section, 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 
1845-0021)

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


    12. Section 685.210 is amended by revising paragraph (b)(2)(ii) to 
read as follows:


Sec.  685.210  Choice of repayment plan.

* * * * *
    (b) * * *
    (2) * * *
    (ii) If a borrower changes plans, the repayment period is the 
period provided under the borrower's new repayment plan, calculated 
from the date the loan initially entered repayment. However, if a 
borrower changes to the income-contingent repayment plan under Sec.  
685.209(a), the income-contingent repayment plan under Sec.  
685.209(b), or the income-based repayment plan under Sec.  685.221, the 
repayment period is calculated as described in Sec.  
685.209(a)(6)(iii), Sec.  685.209(b)(3)(iii), or Sec.  685.221(f)(3), 
respectively.
* * * * *


Sec.  685.211  [Amended]

    13. Section 685.211(a)(1) is amended by adding the words ``income-
contingent repayment plan under Sec.  685.209(a)(3) or the'' 
immediately before the words ``income-based repayment''.


Sec.  685.212  [Amended]

    14. Section 685.212(g)(2) is amended by removing the words ``the 
borrower became totally and permanently disabled, as certified under 
Sec.  685.213(b)'' and adding, in their place, the words ``specified in 
Sec.  685.213(b)(4)(iii) or 685.213(c)(2)(i), as applicable''.
    15. Section 685.213 is revised to read as follows:


Sec.  685.213  Total and permanent disability discharge.

    (a) General. (1) A borrower's Direct Loan is discharged if the 
borrower becomes totally and permanently disabled, as defined in Sec.  
685.102(b), and satisfies the eligibility requirements in this section.
    (2) For a borrower who becomes totally and permanently disabled as 
described in paragraph (1) of the definition of that term in Sec.  
685.102(b), the borrower's loan discharge application is processed in 
accordance with paragraph (b) of this section.
    (3) For veterans who are totally and permanently disabled as 
described in paragraph (2) of the definition of that term in Sec.  
685.102(b), the veteran's loan discharge application is processed in 
accordance with paragraph (c) of this section.
    (4) For purposes of Sec.  685.213, a borrower's representative or a 
veteran's representative is a member of the borrower's family, the 
borrower's attorney, or another individual authorized to act on behalf 
of the borrower in connection with the borrower's total and permanent 
disability discharge application. References to a ``borrower'' or a 
``veteran'' include, if applicable, the borrower's representative or 
the veteran's representative for purposes of applying for a total and 
permanent disability discharge, providing notifications or information 
to the Secretary, and receiving notifications from the Secretary.
    (b) Discharge application process for a borrower who is totally and 
permanently disabled as described in paragraph (1) of the definition of 
that term in Sec.  685.102(b). (1) Borrower application for discharge. 
To qualify for a discharge of a Direct Loan based on a total and 
permanent disability, a borrower must submit a discharge application to 
the Secretary on a form approved by the Secretary. If the borrower 
notifies the Secretary that the borrower claims to be totally and 
permanently disabled prior to submitting a total and permanent 
disability discharge application, the Secretary suspends collection 
activity on any of the borrower's title IV loans held by the Secretary, 
and notifies the borrower's other title IV loan holders to suspend 
collection activity on the borrower's title IV loans for a period not 
to exceed 120 days.
    (2) Physician Certification. The application must contain a 
certification by a physician, who is a doctor of medicine or osteopathy 
legally authorized to practice in a State, that the borrower is totally 
and permanently disabled as described in paragraph (1) of the 
definition of that term in Sec.  685.102(b).
    (3) Deadline for Application Submission. The borrower must submit 
the application described in paragraph (b)(1) of this section to the 
Secretary within 90 days of the date the physician certifies the 
application. Upon receipt of the borrower's application, the 
Secretary--
    (i) Identifies all title IV loans owed by the borrower, notifies 
the lenders that the Secretary has received a total and permanent 
disability discharge application from the borrower and directs the 
lenders to suspend collection activity or maintain the suspension of 
collection activity on the borrower's title IV loans;
    (ii) If the application is incomplete, notifies the borrower of the 
missing information and requests the missing information from the 
borrower or the physician who certified the application, as 
appropriate, and does not make a determination of eligibility for 
discharge until the application is complete;
    (iii) Notifies the borrower that no payments are due on the loan 
while the Secretary determines the borrower's eligibility for 
discharge; and
    (iv) Explains the process for the Secretary's review of total and 
permanent disability discharge applications.
    (4) Determination of eligibility. (i) If, after reviewing the 
borrower's completed application, the Secretary determines that the 
physician's certification supports the conclusion that the borrower 
meets the criteria for a total and permanent disability discharge, as 
described in paragraph (1) of the definition of that term in Sec.  
685.102(b), the borrower is considered totally and permanently disabled 
as of the date the physician certified the borrower's application.
    (ii) The Secretary may require the borrower to submit additional 
medical evidence if the Secretary determines that the borrower's 
application does not conclusively prove that the borrower is totally 
and permanently disabled as described in paragraph (1) of the 
definition of that term in Sec.  685.102(b). As part of the Secretary's 
review of the borrower's discharge application, the Secretary may 
require and arrange for an additional review of the borrower's 
condition by an independent physician at no expense to the borrower.
    (iii) After determining that the borrower is totally and 
permanently disabled, as described in paragraph (1) of the definition 
of that term in Sec.  685.102(b), the Secretary discharges the 
borrower's obligation to make any further payments on the loan, 
notifies the borrower that the loan has been discharged, and returns to 
the person who made the payments on the loan any payments received 
after the date the physician certified the borrower's loan discharge 
application. The notification to the borrower explains the terms and 
conditions under which the borrower's obligation to repay the loan will 
be reinstated, as specified in paragraph (b)(7)(i) of this section.
    (iv) If the Secretary determines that the certification provided by 
the borrower does not support the conclusion that the borrower is 
totally and permanently disabled, as described

[[Page 42145]]

in paragraph (1) of the definition of that term in Sec.  685.102(b), 
the Secretary notifies the borrower that the application for a 
disability discharge has been denied. The notification to the borrower 
includes--
    (A) The reason or reasons for the denial;
    (B) A statement that the loan is due and payable to the Secretary 
under the terms of the promissory note and that the loan will return to 
the status that would have existed if the total and permanent 
disability discharge application had not been received;
    (C) The date that the borrower must resume making payments;
    (D) An explanation that the borrower is not required to submit a 
new total and permanent disability discharge application if the 
borrower requests that the Secretary re-evaluate the borrower's 
application for discharge by providing, within 12 months of the date of 
the notification, additional information that supports the borrower's 
eligibility for discharge; and
    (E) An explanation that if the borrower does not request re-
evaluation of the borrower's prior discharge application within 12 
months of the date of the notification, the borrower must submit a new 
total and permanent disability discharge application to the Secretary 
if the borrower wishes the Secretary to re-evaluate the borrower's 
eligibility for a total and permanent disability discharge.
    (v) If the borrower requests re-evaluation in accordance with 
paragraph (b)(4)(iv)(D) of this section or submits a new total and 
permanent disability discharge application in accordance with paragraph 
(b)(4)(iv)(E) of this section, the request must include new information 
regarding the borrower's disabling condition that was not available at 
the time the Secretary reviewed the borrower's initial application for 
total and permanent disability discharge.
    (5) Treatment of disbursements made during the period from the date 
of the physician's certification until the date of discharge. If a 
borrower received a title IV loan or TEACH Grant before the date the 
physician certified the borrower's discharge application and a 
disbursement of that loan or grant is made during the period from the 
date of the physician's certification until the date the Secretary 
grants a discharge under this section, the processing of the borrower's 
loan discharge request will be suspended until the borrower ensures 
that the full amount of the disbursement has been returned to the loan 
holder or to the Secretary, as applicable.
    (6) Receipt of new title IV loans or TEACH Grants after the date of 
the physician's certification. If a borrower receives a disbursement of 
a new title IV loan or receives a new Teach Grant made on or after the 
date the physician certified the borrower's discharge application and 
before the date the Secretary grants a discharge under this section, 
the Secretary denies the borrower's discharge request and resumes 
collection on the borrower's loan.
    (7) Conditions for reinstatement of a loan after a total and 
permanent disability discharge. (i) The Secretary reinstates a 
borrower's obligation to repay a loan that was discharged in accordance 
with paragraph (b)(4)(iii) of this section if, within three years after 
the date the Secretary granted the discharge, the borrower--
    (A) Has annual earnings from employment that exceed 100 percent of 
the poverty guideline for a family of two, as published annually by the 
United States Department of Health and Human Services pursuant to 42 
U.S.C. 9902(2);
    (B) Receives a new TEACH Grant or a new loan under the Perkins or 
Direct Loan programs, except for a Direct Consolidation Loan that 
includes loans that were not discharged; or
    (C) Fails to ensure that the full amount of any disbursement of a 
title IV loan or TEACH Grant received prior to the discharge date that 
is made is returned to the loan holder or to the Secretary, as 
applicable, within 120 days of the disbursement date.
    (ii) If the borrower's obligation to repay the loan is reinstated, 
the Secretary--
    (A) Notifies the borrower that the borrower's obligation to repay 
the loan has been reinstated;
    (B) Returns the loan to the status that would have existed if the 
total and permanent disability discharge application had not been 
received; and
    (C) Does not require the borrower to pay interest on the loan for 
the period from the date the loan was discharged until the date the 
borrower's obligation to repay the loan was reinstated.
    (iii) The Secretary's notification under paragraph (b)(7)(ii)(A) of 
this section will include--
    (A) The reason or reasons for the reinstatement;
    (B) An explanation that the first payment due date on the loan 
following reinstatement will be no earlier than 60 days after the date 
of the notification of reinstatement; and
    (C) Information on how the borrower may contact the Secretary if 
the borrower has questions about the reinstatement or believes that the 
obligation to repay the loan was reinstated based on incorrect 
information.
    (8) Borrower's responsibilities after a total and permanent 
disability discharge. During the three-year period described in 
paragraph (b)(7)(i) of this section, the borrower must--
    (i) Promptly notify the Secretary of any changes in the borrower's 
address or phone number;
    (ii) Promptly notify the Secretary if the borrower's annual 
earnings from employment exceed the amount specified in paragraph 
(b)(7)(i)(A) of this section; and
    (iii) Provide the Secretary, upon request, with documentation of 
the borrower's annual earnings from employment on a form provided by 
the Secretary.
    (c) Discharge application process for veterans who are totally and 
permanently disabled as described in paragraph (2) of the definition of 
that term in Sec.  685.102(b). (1) Veteran's application for discharge. 
To qualify for a discharge of a Direct Loan based on a total and 
permanent disability as described in paragraph (2) of the definition of 
that term in Sec.  685.102(b), a veteran must submit a discharge 
application to the Secretary on a form approved by the Secretary. The 
application must be accompanied by documentation from the Department of 
Veterans Affairs showing that the Department of Veterans Affairs has 
determined that the veteran is unemployable due to a service-connected 
disability. The Secretary does not require the veteran to provide any 
additional documentation related to the veteran's disability. Upon 
receipt of the veteran's application, the Secretary--
    (i) Identifies all title IV loans owed by the veteran and notifies 
the lenders that Secretary has received a total and permanent 
disability discharge application from the borrower;
    (ii) If the application is incomplete, requests the missing 
information from the veteran and does not make a determination of 
eligibility for discharge until the application is complete;
    (iii) Notifies the veteran that no payments are due on the loan 
while the Secretary determines the veteran's eligibility for discharge; 
and
    (iv) Explains the Secretary's process for reviewing total and 
permanent disability discharge applications.
    (2) Determination of eligibility. (i) If the Secretary determines, 
based on a review of the documentation from the Department of Veterans 
Affairs, that the veteran is totally and permanently disabled as 
described in paragraph (2) of

[[Page 42146]]

the definition of that term in Sec.  685.102(b), the Secretary 
discharges the veteran's obligation to make any further payments on the 
loan and returns to the person who made the payments on the loan any 
payments received on or after the effective date of the determination 
by the Department of Veterans Affairs that the veteran is unemployable 
due to a service-connected disability.
    (ii) If the Secretary determines, based on a review of the 
documentation from the Department of Veterans Affairs, that the veteran 
is not totally and permanently disabled as described in paragraph (2) 
of the definition of that term in Sec.  685.102(b), the Secretary 
notifies the veteran that the application for a disability discharge 
has been denied. The notification to the veteran includes--
    (A) The reason or reasons for the denial;
    (B) An explanation that the loan is due and payable to the 
Secretary under the terms of the promissory note and that the loan will 
return to the status it was in at the time the veteran applied for a 
total and permanent disability discharge;
    (C) The date that the veteran must resume making payments;
    (D) An explanation that the veteran is not required to submit a new 
total and permanent disability discharge application if the veteran 
requests that the Secretary re-evaluate the veteran's application for 
discharge by providing, within 12 months of the date of the 
notification, additional documentation from the Department of Veterans 
Affairs that supports the veteran's eligibility for discharge; and
    (E) Information on how the veteran may reapply for a total and 
permanent disability discharge in accordance with the procedures 
described in paragraph (b) of this section if the documentation from 
the Department of Veterans Affairs does not indicate that the veteran 
is totally and permanently disabled as described in paragraph (2) of 
the definition of that term in Sec.  685.102(b), but indicates that the 
veteran may be totally and permanently disabled as described in 
paragraph (1) of the definition of that term.


(Approved by the Office of Management and Budget under control number 
1845-0065.)

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


    16. Section 685.220 is amended by revising paragraph (d)(1)(ii)(D) 
to read as follows:


Sec.  685.220  Consolidation.

* * * * *
    (d) * * *
    (1) * * *
    (ii) * * *
    (D) In default but agrees to repay the consolidation loan under one 
of the income-contingent repayment plans described in Sec.  685.208(k) 
or the income-based repayment plan described in Sec.  685.208(m).
* * * * *
    17. Section 685.221 is amended by:
    A. Redesignating paragraphs (a)(4) and (a)(5) as paragraphs (a)(5) 
and (a)(6), respectively.
    B. Adding a new paragraph (a)(4).
    C. In redesignated paragraph (a)(5)(i), removing the words 
``exceeds 15 percent'' and adding, in their place, the words ``exceeds 
15 percent or, for a new borrower, 10 percent''.
    D. In redesignated paragraph (a)(5)(ii), removing the words 
``exceeds 15 percent'' and adding, in their place, the words ``exceeds 
15 percent or, for a new borrower, 10 percent''.
    E. In paragraph (b)(1), removing the words ``no more than 15 
percent'' and adding, in their place, the words ``no more than 15 
percent or, for a new borrower, 10 percent''.
    F. In paragraph (b)(2)(i), removing the words ``the total amount of 
eligible loans'' and adding, in their place, the words ``the total 
outstanding principal amount of the borrower's eligible loans''.
    G. In paragraph (b)(2)(ii)(C), removing the words ``the outstanding 
principal amount of eligible loans'' and adding, in their place, the 
words ``the total outstanding principal amount of the borrower's 
eligible loans''.
    H. Revising paragraph (c).
    I. Revising paragraph (d).
    J. Revising paragraph (e).
    K. Revising paragraph (f).
    The addition and revisions read as follows:


Sec.  685.221  Income-based repayment plan.

    (a) * * *
    (4) New borrower means an individual who has no outstanding balance 
on a Direct Loan Program or FFEL Program loan on July 1, 2014, or who 
has no outstanding balance on such a loan on the date he or she obtains 
a loan after July 1, 2014.
* * * * *
    (c) Payment application and prepayment. (1) The Secretary applies 
any payment made under the income-based repayment plan in the following 
order:
    (i) Accrued interest.
    (ii) Collection costs.
    (iii) Late charges.
    (iv) Loan principal.
    (2) The borrower may prepay all or part of a loan at any time 
without penalty, as provided under Sec.  685.211(a)(2).
    (3) If the prepayment amount equals or exceeds a monthly payment 
amount of $10.00 or more under the repayment schedule established for 
the loan, the Secretary applies the prepayment consistent with the 
requirements of Sec.  685.211(a)(3).
    (4) If the prepayment amount exceeds a monthly payment amount of 
$0.00 under the repayment schedule established for the loan, the 
Secretary applies the prepayment consistent with the requirements of 
paragraph (c)(1) of this section.
    (d) Changes in the payment amount. (1) If a borrower no longer has 
a partial financial hardship, the borrower may continue to make 
payments under the income-based repayment plan, but the Secretary 
recalculates the borrower's monthly payment. The Secretary also 
recalculates the monthly payment for a borrower who chooses to stop 
making income-based payments. In either case, as result of the 
recalculation--
    (i) The maximum monthly amount that the Secretary requires the 
borrower to repay is the amount the borrower would have paid under the 
standard repayment plan based on a 10-year repayment period using the 
amount of the borrower's eligible loans that was outstanding at the 
time the borrower began repayment on the loans under the income-based 
repayment plan; and
    (ii) The borrower's repayment period based on the recalculated 
payment amount may exceed 10 years.
    (2)(i) If a borrower no longer wishes to pay under the income-based 
payment plan, the borrower must pay under the standard repayment plan 
and the Secretary recalculates the borrower's monthly payment based 
on--
    (A) For a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a 
Direct PLUS Loan, the time remaining under the maximum ten-year 
repayment period for the amount of the borrower's loans that were 
outstanding at the time the borrower discontinued paying under the 
income-based repayment plan; or
    (B) For a Direct Consolidation Loan, the time remaining under the 
applicable repayment period as initially determined under Sec.  
685.208(j) and the amount of that loan that was outstanding at the time 
the borrower discontinued paying under the income-based repayment plan.
    (ii) A borrower who no longer wishes to repay under the income-
based repayment plan and who is required to repay under the Direct Loan 
standard repayment plan in accordance with

[[Page 42147]]

paragraph (d)(2)(i) of this section may request a change to a different 
repayment plan after making one monthly payment under the Direct Loan 
standard repayment plan. For this purpose, a monthly payment may 
include one payment made under a forbearance that provides for 
accepting smaller payments than previously scheduled, in accordance 
with Sec.  685.205(a).
    (e) Eligibility documentation, verification, and notifications. (1) 
The Secretary determines whether a borrower has a partial financial 
hardship to qualify for the income-based repayment plan for the year 
the borrower selects the plan and for each subsequent year that the 
borrower remains on the plan. To make this determination, the Secretary 
requires the borrower to--
    (i) Provide documentation, acceptable to the Secretary, of the 
borrower's AGI;
    (ii) If the borrower's AGI is not available, or the Secretary 
believes that the borrower's reported AGI does not reasonably reflect 
the borrower's current income, provide other documentation to verify 
income; and
    (iii) Annually certify the borrower's family size. If the borrower 
fails to certify family size, the Secretary assumes a family size of 
one for that year.
    (2) After making a determination that a borrower has a partial 
financial hardship to qualify for the income-based repayment plan for 
the year the borrower initially elects the plan and for any subsequent 
year that the borrower has a partial financial hardship, the Secretary 
sends the borrower a written notification that provides the borrower 
with--
    (i) The borrower's scheduled monthly payment amount, as calculated 
under paragraph (b)(1) of this section, and the time period during 
which this scheduled monthly payment amount will apply (annual payment 
period);
    (ii) Information about the requirement for the borrower to annually 
provide the information described in paragraph (e)(1) of this section, 
if the borrower chooses to remain on the income-based repayment plan 
after the initial year on the plan, and an explanation that the 
borrower will be notified in advance of the date by which the Secretary 
must receive this information;
    (iii) An explanation of the consequences, as described in 
paragraphs (e)(1)(iii) and (e)(5) of this section, if the borrower does 
not provide the required information;
    (iv) An explanation of the consequences if the borrower no longer 
wishes to repay under the income-based repayment plan; and
    (v) Information about the borrower's option to request, at any time 
during the borrower's current annual repayment period, that the 
Secretary recalculate the borrower's monthly payment amount if the 
borrower's financial circumstances have changed and the income amount 
that was used to calculate the borrower's current monthly payment no 
longer reflects the borrower's current income. If the Secretary 
recalculates the borrower's monthly payment amount based on the 
borrower's request, the Secretary sends the borrower a written 
notification that includes the information described in paragraphs 
(e)(2)(i) through (v) of this section.
    (3) For each subsequent year that a borrower who currently has a 
partial financial hardship remains on the income-based repayment plan, 
the Secretary notifies the borrower in writing of the requirements in 
paragraph (e)(1) of this section no later than 60 days and no earlier 
than 90 days prior to the date specified in paragraph (e)(3)(i) of this 
section. The notification provides the borrower with--
    (i) The date, no earlier than 35 days before the end of the 
borrower's annual payment period, by which the Secretary must receive 
all of the information described in paragraph (e)(1) of this section 
(``annual deadline''); and
    (ii) The consequences if the Secretary does not receive the 
information within 10 days following the annual deadline specified in 
the notice, including the borrower's new monthly payment amount as 
determined under paragraph (d)(1) of this section, the effective date 
for the recalculated monthly payment amount, and the fact that unpaid 
accrued interest will be capitalized at the end of the borrower's 
current annual payment period in accordance with paragraph (b)(4) of 
this section.
    (4) Each time the Secretary makes a determination that a borrower 
no longer has a partial financial hardship for a subsequent year that 
the borrower wishes to remain on the plan, the Secretary sends the 
borrower a written notification that provides the borrower with--
    (i) The borrower's recalculated monthly payment amount, as 
determined in accordance with paragraph (d)(1) of this section;
    (ii) An explanation that unpaid interest will be capitalized in 
accordance with paragraph (b)(4) of this section; and
    (iii) Information about the borrower's option to request, at any 
time, that the Secretary redetermine whether the borrower has a partial 
financial hardship, if the borrower's financial circumstances have 
changed and the income amount used to determine that the borrower no 
longer has a partial financial hardship does not reflect the borrower's 
current income, and an explanation that the borrower will be notified 
annually of this option. If the Secretary determines that the borrower 
again has a partial financial hardship, the Secretary recalculates the 
borrower's monthly payment in accordance with paragraph (b)(1) of this 
section and sends the borrower a written notification that includes the 
information described in paragraphs (e)(2)(i) through (e)(2)(v) of this 
section.
    (5) For each subsequent year that a borrower who does not currently 
have a partial financial hardship remains on the income-based repayment 
plan, the Secretary sends the borrower a written notification that 
includes the information described in paragraph (e)(4)(iii) of this 
section.
    (6) If a borrower who is currently repaying under another repayment 
plan selects the income-based repayment plan but does not provide the 
information described in paragraphs (e)(1)(i) and (e)(1)(ii) of this 
section, or if the Secretary determines that the borrower does not have 
a partial financial hardship, the borrower remains on his or her 
current repayment plan.
    (7) The Secretary designates the repayment option described in 
paragraph (d)(1) of this section if a borrower who is currently 
repaying under the income-based repayment plan remains on the plan for 
a subsequent year but the Secretary does not receive the information 
described in paragraphs (e)(1)(i) through (e)(1)(ii) of this section 
within 10 days of the specified annual deadline.
    (8) If the Secretary receives the information described in 
paragraphs (e)(1)(i) and (e)(1)(ii) of this section within 10 days of 
the specified annual deadline, the Secretary maintains the borrower's 
current scheduled monthly payment amount until the new scheduled 
monthly payment amount is determined. If the new monthly payment amount 
is less than the borrower's previously calculated income-based monthly 
payment amount, and the borrower made payments at the previously 
calculated amount after the end of the most recent annual payment 
period, the Secretary makes the appropriate adjustment to the 
borrower's account. Notwithstanding the requirements of Sec.  
685.211(b)(3), unless the borrower requests otherwise, the Secretary 
applies the excess payment amounts made after the end of

[[Page 42148]]

the most recent annual payment period in accordance with the 
requirements of Sec.  685.221(c)(1).
    (9)(i) If the Secretary receives the documentation described in 
paragraphs (e)(1)(i) and (e)(1)(ii) of this section more than 10 days 
after the specified annual deadline and the borrower's monthly payment 
amount is recalculated in accordance with paragraph (d)(1) of this 
section, the Secretary grants forbearance with respect to payments that 
are overdue or would be due at the time the new calculated income-based 
monthly payment amount is determined, if the new monthly payment amount 
is $0.00 or is less than the borrower's previously calculated income-
based monthly payment amount. Interest that accrues during the portion 
of this forbearance period that covers payments that are overdue after 
the end of the prior annual payment period is not capitalized.
    (ii) Any payments that the borrower continued to make at the 
previously calculated payment amount after the end of the prior annual 
payment period and before the new monthly payment amount is calculated 
are considered to be qualifying payments for purposes of Sec.  685.219, 
provided that the payments were made within 15 days of the scheduled 
due date for the full previously calculated payment amount.
    (f) Loan forgiveness. (1) To qualify for loan forgiveness after 25 
years or, for a new borrower, after 20 years, a borrower must have 
participated in the income-based repayment plan and satisfied at least 
one of the following conditions during the applicable loan forgiveness 
period:
    (i) Made reduced monthly payments under a partial financial 
hardship as provided in paragraph (b)(1) or (b)(2) of this section, 
including a monthly payment amount of $0.00, as provided under 
paragraph (b)(2)(ii) of this section.
    (ii) Made reduced monthly payments after the borrower no longer had 
a partial financial hardship or stopped making income-based payments as 
provided in paragraph (d) of this section.
    (iii) Made monthly payments under any repayment plan, that were not 
less than the amount required under the Direct Loan standard repayment 
plan described in Sec.  685.208(b) for the amount of the borrower's 
loans that were outstanding at the time the loans initially entered 
repayment.
    (iv) Made monthly payments under the Direct Loan standard repayment 
plan described in Sec.  685.208(b).
    (v) Made monthly payments under a Direct Loan income-contingent 
repayment plan, including a calculated monthly payment amount of $0.00.
    (vi) Received an economic hardship deferment on eligible Direct 
Loans.
    (2) As provided under paragraph (f)(4) of this section, the 
Secretary cancels any outstanding balance of principal and accrued 
interest on Direct loans for which the borrower qualifies for 
forgiveness if the Secretary determines that--
    (i) The borrower made monthly payments under one or more of the 
repayment plans described in paragraph (f)(1) of this section, 
including a monthly payment amount of $0.00, as provided under 
paragraph (b)(2)(iii) of this section; and
    (ii)(A) The borrower made those monthly payments each year for the 
applicable loan forgiveness period, or
    (B) Through a combination of monthly payments and economic hardship 
deferments, the borrower has made the equivalent of 25 years of 
payments or, for a new borrower, the equivalent of 20 years of 
payments.
    (3) For a borrower who qualifies for the income-based repayment 
plan, the beginning date for the applicable loan forgiveness period 
is--
    (i) If the borrower made payments under the income contingent 
repayment plan, the date the borrower made a payment on the loan under 
that plan at any time after July 1, 1994; or
    (ii) If the borrower did not make payments under the income 
contingent repayment plan--
    (A) For a borrower who has an eligible Direct Consolidation Loan, 
the date the borrower made a payment or received an economic hardship 
deferment on that loan, before the date the borrower qualified for 
income-based repayment. The beginning date is the date the borrower 
made the payment or received the deferment, but no earlier than July 1, 
2009;
    (B) For a borrower who has one or more other eligible Direct Loans, 
the date the borrower made a payment or received an economic hardship 
deferment on that loan. The beginning date is the date the borrower 
made that payment or received the deferment on that loan, but no 
earlier than July 1, 2009;
    (C) For a borrower who did not make a payment or receive an 
economic hardship deferment on the loan under paragraph (f)(3)(ii)(A) 
or (f)(3)(ii)(B) of this section, the date the borrower made a payment 
under the income-based repayment plan on the loan;
    (D) If the borrower consolidates his or her eligible loans, the 
date the borrower made a payment on the Direct Consolidation Loan that 
met the requirements in paragraph (f)(1) of this section; or
    (E) If the borrower did not make a payment or receive an economic 
hardship deferment on the loan under paragraph (f)(3)(i) or (f)(3)(ii) 
of this section, determining the date the borrower made a payment under 
the income-based repayment plan on the loan.
    (4) Any payments made on a defaulted loan are not made under a 
qualifying repayment plan and are not counted toward the applicable 
loan forgiveness period.
    (5)(i) When the Secretary determines that a borrower has satisfied 
the loan forgiveness requirements under paragraph (f) of this section 
on an eligible loan, the Secretary cancels the outstanding balance and 
accrued interest on that loan. No later than 6 months prior to the 
anticipated date that the borrower will meet the forgiveness 
requirements, the Secretary sends the borrower a written notice that 
includes--
    (A) An explanation that the borrower is approaching the date that 
he or she is expected to meet the requirements to receive loan 
forgiveness;
    (B) A reminder that the borrower must continue to make the 
borrower's scheduled monthly payments; and
    (C) General information on the current treatment of the forgiveness 
amount for tax purposes, and instructions for the borrower to contact 
the Internal Revenue Service for more information.
    (ii) The Secretary determines when a borrower has met the loan 
forgiveness requirements under paragraph (f) of this section and does 
not require the borrower to submit a request for loan forgiveness.
    (iii) After determining that a borrower has satisfied the loan 
forgiveness requirements, the Secretary--
    (A) Notifies the borrower that the borrower's obligation on the 
loans is satisfied;
    (B) Provides the borrower with the information described in 
paragraph (f)(5)(i)(C) of this section; and
    (C) Returns to the sender any payment received on a loan after loan 
forgiveness has been granted in accordance with paragraph (f)(5)(i) of 
this section.
* * * * *
[FR Doc. 2012-15888 Filed 7-16-12; 8:45 am]
BILLING CODE 4000-01-P