Posted Date:June 12, 2009
Author: Jeff Baker, Director Policy Liaison and Implementation, Federal Student Aid
Subject: Income Documentation for the Income Based Repayment Plan
Background
Income Based Repayment (IBR) is a new (available July 1, 2009) repayment plan for borrowers in the Direct Loan and FFEL programs where the borrower's monthly repayment amount is based on the borrower's income and family size. Borrowers who choose IBR will have monthly payments that are lower than the amount they would be required to pay under a standard 10-year repayment plan. Generally, a borrower is eligible for IBR if their calculated monthly repayment amount under IBR is less than the amount calculated under a standard 10-year repayment plan.
Regulatory Requirements
The final regulations for IBR repayment at 34 CFR 682.215 for the FFEL Program and 34 CFR 682.221 for the Direct Loan Program, were published on October 23, 2008 and are effective July 1, 2009. The regulations establishing the documentation that must be provided to the lender to determine a borrower's eligibility for IBR are at 34 CFR 682.214(e) for the FFEL Program and 34 CFR 685.221(e) for the Direct Loan Program.
In general, those regulations require the borrower to provide consent for the lender to receive the borrower's income information from the Internal Revenue Service (IRS). However, the regulations also provide that, "If the borrower's AGI is not available (presumably directly from the IRS) . . . the loan holder may use other documentation provided by the borrower to verify income."
IRS Consent Process
The IRS has expressed concern that the implementation of a paper based IBR consent requirement could overwhelm the IRS's current paper process and result in significant delays in responding to those requests and the consent requests they receive for other reasons. To address this concern the IRS has begun development of a web-based tax return disclosure consent submission process. Generally, that process will allow certain tax filers, including those who are applying for IBR, to submit their requests electronically directly to the IRS. The requested information will then be sent electronically to the lender designated by the tax filer. The IRS has indicated that it hopes to have this process implemented within the next 12 months.
Interim Guidance:
Until the new IRS electronic consent submission process is implemented, or other guidance is issued by the Department, FFEL lenders may, at their option, use the following procedures for calculating the IBR repayment amount for a borrower instead of collecting the borrower's consent for disclosure by the IRS:
The borrower must submit to the lender a copy (including both sides) of the borrower's most recent federal tax return (Form 1040, 1040A, or 1040EZ), with an original "pen and ink" signature on the copy. The borrower is not required to provide copies of any other tax return forms, schedules, attachments, or worksheets, including W-2 Forms. Unless the lender has reason to believe that the tax return submitted, or the information on the return, is not accurate, it may rely upon the Adjusted Gross Income amount reported on the return for IBR calculation purposes.
If the loan lender has questions about the accuracy of the copy of the tax return submitted by the borrower, it must require the borrower to provide the lender with the paper IRS consent form. The lender must then submit the consent form to the IRS and wait for the tax information to be returned from the IRS.
This guidance implements 34 CFR 682.215(e)(1)(B) regulations that allows the lender to use "other documentation" if the borrower's AGI is not available from the IRS.
As noted, this interim guidance is provided as an option for lenders. The lender may continue to require the borrower to provide it with written consent to the disclosure of tax return information by the IRS. However, using the paper based consent process may result in delays in the determination of a borrower's eligibility for IBR.
This interim guidance does not negate any other provision of the regulations, including the provision that the lender may use documentation other than a tax return when it believes that the information on the tax return does not, or would not, reasonably reflect the borrower's current income.
Finally, we want to clarify that the lender may accept a borrower's written certification that no tax return was or will be filed. However, if the lender has reason to question such a claim, it must require the borrower to obtain IRS documentation that no tax return was filed. If a borrower reports income to the lender that exceeds the amount that meets the requirement that a tax return be filed (see IRS Publication 17) the lender must question the borrower's assertion that no tax return was or will be filed.
Questions regarding the information provided in this communication can be directed to Pam Moran by phone at (202) 502-7732 or by email at pamela.moran@ed.gov.