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Summary: NPRM; Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

FR part
IV
Publication Date: July 1, 2008
FRPart: IV

Page Numbers: 37693-37725

Summary: NPRM; Federal Perkins Loan Program, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program

Posted on 07-01-2008


[Federal Register: July 1, 2008 (Volume 73, Number 127)]
[Proposed Rules]               
[Page 37693-37725]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jy08-15]                         

[[Page 37693]]

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Part IV


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


[[Page 37694]]


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DEPARTMENT OF EDUCATION

34 CFR Parts 674, 682, and 685

[Docket ID ED-2008-OPE-0009]
RIN 1840-AC94

 
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. These proposed regulations are needed to implement 
provisions of the Higher Education Act of 1965 (HEA), as amended by the 
College Cost Reduction and Access Act of 2007 (CCRAA).

DATES: We must receive your comments on or before August 15, 2008.

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 e-mail. Please submit your comments only 
one time, in order to ensure that we do not receive duplicate copies. 
In addition, please include the Docket ID at the top of your comments.
      Federal eRulemaking Portal: Go to: http://
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 Nikki Harris, U.S. Department of Education, 1990 K Street, NW., 
room 8033, Washington, DC 20006-8502.

    Privacy Note: The Department's policy for comments received from 
members of the public (including those comments submitted by mail, 
commercial delivery, or hand delivery) is to make these submissions 
available for public viewing on the Federal eRulemaking Portal at 
http://www.regulations.gov. All submissions will be posted to the 
Federal eRulemaking Portal without change, including personal 
identifiers and contact information.

FOR FURTHER INFORMATION CONTACT: Nikki Harris, U.S. Department of 
Education, 1990 K Street, NW., room 8033, Washington, DC 20006-8502. 
Telephone: (202) 219-7050 or via the Internet at: Nikki.Harris@ed.gov.
    If you use a telecommunications device for the deaf, call the 
Federal Relay Service (FRS), toll free, at 1-800-877-8339.
    Individuals with disabilities can obtain this document in an 
alternative format (e.g., Braille, large print, audiotape, or computer 
diskette) on request to the contact person listed under FOR FURTHER 
INFORMATION CONTACT.

SUPPLEMENTARY INFORMATION:

Invitation To Comment

    As outlined in the section of this notice entitled ``Negotiated 
Rulemaking,'' significant public participation, through three public 
hearings and four negotiated rulemaking sessions, has occurred in 
developing this notice of proposed rulemaking (NPRM). Therefore, in 
accordance with the requirements of the Administrative Procedure Act, 
the Department invites you to submit comments regarding these proposed 
regulations on or before August 15, 2008. 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, including its overall 
requirements to assess both the costs and the benefits of the intended 
regulation and feasible alternatives, and to make a reasoned 
determination that the benefits of this intended regulation justify its 
costs. Please let us know of any further opportunities we should take 
to reduce potential costs or increase potential benefits while 
preserving the effective and efficient administration of the programs.
    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 8033, 1990 K 
Street, NW., Washington, DC between the hours of 8:30 a.m. and 4 p.m. 
Eastern Time, Monday through Friday of each week except Federal 
holidays.

Assistance to Individuals With Disabilities in Reviewing the Rulemaking 
Record

    On request, we will supply an appropriate aid, such as a reader or 
print magnifier, 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 aid, please contact the person 
listed under FOR FURTHER INFORMATION CONTACT.

Negotiated Rulemaking

    Section 492 of the HEA 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 
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 http:/
/www.ed.gov/policy/highered/reg/hearulemaking/2008/index2008.html. 
    On October 22, 2007,the Department published a notice in the 
Federal Register (72 FR 59494) announcing our intent to establish up to 
two negotiated rulemaking committees to prepare proposed regulations. 
One committee would focus on issues related to the new TEACH Grant 
Program (TEACH Grant Committee). A second committee would address 
Federal student loans (Loans Committee). The notice requested 
nominations of individuals for membership on the committees who could 
represent the interests of key stakeholder constituencies on each 
committee. The Loans Committee met to develop proposed regulations 
during the months of January 2008, February 2008, March 2008, and April 
2008. This NPRM resulted from the work of the Loans Committee and 
proposes regulations relating to the administration of the Federal 
student loan programs.
    The Department developed a list of proposed regulatory provisions 
from advice and recommendations submitted by individuals and 
organizations as testimony to the Department in a series of three 
public hearings held on:

[[Page 37695]]

      November 2, 2007, at the Sheraton New Orleans, New 
Orleans, Louisiana.
      November 16, 2007, at the U.S. Department of Education in 
Washington, DC.
      November 29, 2007, at the Manchester Grand Hyatt San 
Diego, San Diego, California.
    In addition, the Department accepted written comments on possible 
regulatory provisions submitted directly to the Department by 
interested parties and organizations. A summary of all comments 
received orally and in writing is posted as background material in the 
docket. Transcripts of the regional meetings can be accessed at http://
www.ed.gov/policy/highered/reg/hearulemaking/2008/index2008.html. 
    Staff within the Department also identified issues for discussion 
and negotiation.
    At its first meeting, the Loans Committee reached agreement on its 
protocols and proposed agenda. These protocols provided that the non-
Federal negotiators would participate in the negotiated rulemaking 
process based on each Committee member's experience and expertise and 
would not represent specific constituencies.
    The Loans Committee included the following members:
      Luke Swarthout, U.S. Public Interest Research Group, and 
Rebecca Thompson (alternate), United States Student Association.
      Carrie Steere-Salazar, Association of American Medical 
Colleges, and Radhika Miller (alternate), National Lawyers Guild 
Partnership for Civil Justice.
      Deanne Loonin, National Consumer Law Center, and Lauren 
Saunders (alternate), National Consumer Law Center.
      Allison Jones, California State University, and Anna 
Griswold (alternate), Pennsylvania State University.
      Eileen O'Leary, National Direct Student Loan Coalition, 
and Kathleen Koch (alternate), Seattle University School of Law.
      George Chin, University Director of Student Financial 
Assistance, The City University of New York, and John Curtice 
(alternate), The State University of New York System Administration.
      Mark Pelesh, Corinthian Colleges, and Tammy Halligan, 
(alternate), Career College Association.
      Tom Levandowski, Wachovia Corporation, and Walter Balmas 
(alternate), MyRichUncle Student Loans.
      Scott Giles, Vermont Student Assistance Corporation, and 
Phil Van Horn (alternate), Wyoming Student Loan Corporation.
      Gene Hutchins, New Jersey Higher Education Student 
Assistance Authority, and Dick George (alternate), Great Lakes Higher 
Education Guaranty Corporation.
      Wanda Hall, Edfinancial Services, and Robert Sommer 
(alternate), Sallie Mae.
      Martin Damian, Windham Professionals, and Carl Perry 
(alternate), Progressive Financial Services, Inc.
      Anne Gross, National Association of College and University 
Business Officers, and Larry Zaglaniczny (alternate), National 
Association of Student Financial Aid Administrators.
      Dan Madzelan, U.S. Department of Education.
    These protocols also provided that, unless agreed to otherwise, 
consensus on all of the amendments in the proposed regulations had to 
be achieved for consensus to be reached on the entire NPRM. Consensus 
means that there must be no dissent by any member.
    During its meetings, the Loans Committee reviewed and discussed 
drafts of proposed regulations. At the final meeting in April 2008, the 
Loans Committee reached consensus on all of the proposed regulations in 
this document. More information on the work of the Loans Committee can 
be found at http://www.ed.gov/policy/highered/reg/hearulemaking/2008/
loans.html.
    Following the Loans Committee's final meeting the proposed 
regulations were reviewed by the Department of Defense (DOD) and the 
Department of Health and Human Services (HHS). Based on the comments we 
received from DOD and HHS, we made technical changes to the proposed 
regulations.
    HHS pointed out that the correct technical term for the specific 
set of dollar figures published annually by HHS for use in determining 
eligibility for certain programs is ``the poverty guidelines'' rather 
than ``the poverty line guidelines.'' The poverty guidelines are used 
to determine whether a title IV borrower is eligible for an economic 
hardship deferment or has a partial financial hardship under the IBR 
plan. HHS recommended that we replace all references to ``the poverty 
line guidelines'' in the proposed regulations with the term ``poverty 
guidelines.'' We agreed and made this change.
    DOD questioned one provision in the proposed definition of ``active 
duty'' for purposes of determining a borrower's eligibility for the 
post-active duty student deferment in the Federal Perkins, FFEL, and 
Direct Loan programs. DOD indicated that the reference to ``section 
101(19) of title 32'' in proposed 34 CFR 674.34(i)(2)(iv), 
682.210(u)(2)(iv), and 685.204(f)(2)(iv) was incorrect because State 
active duty, which is not Federally funded, would not be covered under 
section 101(19) of title 32, but under State law and regulations. To 
correct the reference and to accomplish the goal of the proposed 
provision, which was to exclude from deferment eligibility those 
individuals who are employed in permanent full-time positions with the 
National Guard unless they are subject to a further call-up to active 
State duty, DOD recommended language that we have substantively 
incorporated in the relevant sections of the proposed regulations.
    These proposed regulations would implement a new loan repayment 
plan and a new loan forgiveness program created by the CCRAA. In 
addition, these proposed regulations would implement several other 
provisions enacted by the CCRAA that relate to the title IV HEA loan 
programs.
    The CCRAA added a new income-based repayment (IBR) plan to the FFEL 
and Direct Loan Programs. Under the IBR plan, effective July 1, 2009, a 
borrower who has a partial financial hardship is eligible to make 
reduced monthly payments on his or her loan for a period of up to 25 
years, after which the Secretary cancels any remaining principal and 
accrued interest on the loan, provided the borrower meets certain 
requirements.
    The CCRAA also added the new Public Service Loan Forgiveness 
program to the Direct Loan Program. Under this loan forgiveness 
program, the Secretary forgives any remaining principal and accrued 
interest on a borrower's eligible Direct Loan if, after October 1, 
2007, the borrower makes 120 monthly payments on the loan while the 
borrower is employed full-time in a public service job. The CCRAA 
provides that a FFEL borrower may obtain a Direct Consolidation Loan if 
the borrower wants to participate in the Public Service Loan 
Forgiveness Program, but this provision does not take effect until July 
1, 2008.
    This NPRM also addresses changes made by the CCRAA to military and 
economic hardship deferments, special allowance payments, and not-for-
profit holders under the FFEL Program.

Significant Proposed Regulations

    We group major issues according to subject, with appropriate 
sections of the proposed regulations referenced in parentheses. We 
discuss substantive issues under the sections of the

[[Page 37696]]

proposed regulations to which they pertain. Generally, we do not 
address proposed regulatory provisions that are technical or otherwise 
minor in effect.

Economic Hardship Deferment (Sec. Sec.  674.34 and 682.210)

    Statute: Section 435(o) of the HEA defines economic hardship as 
when a borrower is working full-time and is earning an amount that does 
not exceed either an amount equal to 150 percent of the poverty 
guideline applicable to the borrower's family size or the Federal 
minimum wage rate. The poverty guidelines are issued annually by the 
Department of Health and Human Services (HHS). The statute also 
authorizes the Secretary to establish other criteria by regulation. Any 
regulatory criteria added by the Secretary would have to consider a 
borrower's income and debt-to-income ratio as primary factors.
    Current Regulations: The regulations governing the economic 
hardship deferment in the FFEL, Direct Loan, and Federal Perkins Loan 
programs were amended on November 1, 2007 (72 FR 61960) to incorporate 
the change in the eligibility standard enacted as part of the CCRAA. 
The CCRAA changed the applicable standard used to determine eligibility 
for the deferment from ``an amount equal to 100 percent of the poverty 
line for a family of two, as determined in accordance with section 
673(2) of the Community Service Block Grant Act'' to ``an amount equal 
to 150 percent of the poverty line applicable to the borrower's family 
size, as determined in accordance with section 673(2) of the Community 
Service Block Grant Act.'' The current regulations also include 
criteria under which a borrower could qualify for the deferment if the 
borrower is: (1) Working full-time and has a Federal educational debt 
burden that equals or exceeds 20 percent of the borrower's monthly 
income, and that income, minus the borrower's Federal education debt 
burden, is less than 220 percent of either the Federal minimum wage 
rate or the poverty guideline, or (2) working less than full-time and 
has a monthly income that does not exceed twice the Federal minimum 
wage rate or poverty guideline and, after deducting the borrower's 
Federal education debt burden, the remaining amount of that income does 
not exceed the Federal minimum wage rate or the poverty guideline.
    Proposed Regulations: The Secretary proposes to amend the 
regulations governing eligibility for an economic hardship deferment to 
include a definition of family size. The proposed definition of family 
size would be the number that is determined by counting the borrower, 
the borrower's spouse, and the borrower's children, if the children 
receive more than half their support from the borrower. A borrower's 
family size could include other individuals if, at the time the 
borrower requests the economic hardship deferment, the other 
individuals reside with the borrower and receive more than half of 
their support from the borrower, and if they will continue to receive 
that support from the borrower. The kinds of support provided by the 
borrower to the individual could include money, gifts, loans, housing, 
food, clothes, car, medical and dental care, and payment of college 
costs.
    The proposed regulations also would remove the reference to 
``section 673(2) of the Community Service Block Grant Act'' and 
substitute, in its place, a reference to ``the Department of Health and 
Human Services guidelines pursuant to 42 U.S.C. 9902(2).'' The 
regulations also would specify that 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.
    Finally, the proposed regulations would eliminate both the economic 
hardship criterion for a borrower who is working full-time and has a 
20/220 debt-to-income ratio, and the corresponding debt-to-income ratio 
criterion for a borrower who is working part-time.
    Reasons: A definition of family size is not currently part of the 
poverty guidelines. A definition is now necessary because the 
applicable poverty guideline used to determine whether a borrower has 
an economic hardship is based on the borrower's family size at the time 
the borrower requests, or applies for renewed eligibility for, the 
deferment. A standard definition is needed to ensure that borrowers are 
treated equitably in determining economic hardship. Because they share 
the same statutory basis in section 435(o) of the HEA, the proposed 
definition of family size for the purpose of determining eligibility 
for an economic hardship deferment is also the definition proposed for 
use to determine a borrower's partial economic hardship under the new 
IBR plan.
    The proposed regulations would clarify that HHS is the source of 
the poverty guidelines and provide guidance on the treatment of a 
borrower who is not residing in a ``State'' identified in the poverty 
guidelines. In particular, the proposed regulations address situations 
in which a borrower resides in a foreign country when the borrower 
applies for the deferment. Some non-Federal negotiators indicated that 
they believed that the Department's prior operational guidance on 
economic hardship deferments directed them to use the poverty guideline 
for the State in which the borrower last resided. However, the 
borrower's last residence in that State might be many years in the past 
and irrelevant to the borrower's current circumstances. Moreover, such 
an approach could result in using a more favorable poverty guideline 
for borrowers who formerly resided in either Alaska or Hawaii than 
borrowers who formerly lived in one of the 48 contiguous States. In 
light of these factors, the negotiators decided that using the 
contiguous 48-State poverty guideline for borrowers living outside the 
United States would be more equitable for similarly situated borrowers.
    The CCRAA eliminated the provision in section 435(o) of the HEA 
under which a borrower could be considered to have an economic hardship 
if the borrower was working full-time and had a Federal educational 
debt burden that equaled or exceeded 20 percent of the borrower's 
adjusted gross income (AGI). Previously, borrowers were eligible for an 
economic hardship deferment if they could demonstrate that they were 
working full-time and had a Federal education debt burden that equaled 
or exceeded 20 percent of the borrower's income, and that the 
borrower's income minus the borrower's Federal education debt burden 
would leave the borrower with an available income that was less than 
220 percent of the Federal minimum wage rate or an amount equal to 150 
percent of the poverty guideline based on the borrower's family size. A 
comparable debt-to-income ratio provision applied to borrowers working 
less than full-time. This has been referred to as ``the 20/220 rule.''
    The Department retained the 20/220 rule in regulations published on 
November 1, 2007, so that borrowers could continue to qualify for an 
economic hardship deferment on this basis until the newly created IBR 
plan became operational on July 1, 2009. Consequently, a borrower who 
is in an economic hardship deferment under either one of the debt-to-
income provisions (applicable to borrowers working full-time or on a 
less than full-time basis), with a deferment period that starts prior 
to July 1, 2009, will continue in that status for one year after the 
start date of that deferment period. However, no subsequent economic 
hardship deferment will be available under that

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criterion for any deferment request made on or after July 1, 2009.
    Some non-Federal negotiators asked the Department to retain the 20/
220 rule. They argued that the elimination of the rule would have an 
adverse impact on borrowers (i.e., some borrowers who would not have to 
make payments under the 20/220 rule would now be required to make 
payments), particularly on medical and other health professionals who 
have a large amount of student loan debt and will spend a number of 
years in low paying medical internships and residencies as part of 
their training. The Department believes, however, that Congress 
intended to eliminate the 20/220 rule and replace it with the new IBR 
plan that is meant to provide assistance to this kind of borrower 
during periods of limited earnings. Both the definition of partial 
financial hardship for purposes of the IBR plan and the criteria for 
economic hardship deferment are based on the definition of economic 
hardship in section 435(o) of the HEA. The Congress expanded the 
potential applicability of a partial financial hardship, which supports 
IBR eligibility, by changing the applicable poverty guideline for 
eligibility in section 435(o)(1)(A)(ii), while at the same time 
deleting section 435(o)(1)(B), which specifically supported the 20/220 
criteria for the economic hardship deferment. The Department's action 
to retain the 20/220 rule in the November 1, 2007, regulations was 
designed to ease the transition for affected borrowers until the IBR 
plan is implemented.
    Although the IBR plan, unlike a deferment, does not permit a 
borrower to postpone payments, it does provide for reduced payments 
because borrowers who initially select the IBR plan must have a partial 
financial hardship. A borrower has a partial financial hardship if the 
annual amount due on all eligible loans, as calculated under a standard 
repayment plan based on a 10-year repayment period, is more than 15 
percent of the difference between the borrower's most recent, 
documented AGI and 150 percent of the poverty guideline for the 
borrower's family size. Some borrowers in the IBR plan will not be 
required to make monthly loan payments. Other borrowers will have 
monthly payment amounts that are much less than those normally 
calculated under a standard repayment plan.

Military Service Deferment and Post-Active Duty Student Deferment 
(Sec. Sec.  674.34, 682.210, 682.211, and 685.204)

    Statute: The Higher Education Reconciliation Act of 2005 (HERA) 
established a new military service deferment in the FFEL, Direct Loan, 
and Federal Perkins Loan programs for military personnel and members of 
the National Guard who are called to active duty military service 
during a war or other military operation or national emergency. The 
CCRAA expanded the military service deferment to allow all eligible 
borrowers to receive the deferment on all their outstanding title IV 
loans, rather than just on loans that were first disbursed on or after 
July 1, 2001, and eliminated the maximum three-year limit on the 
deferment. The CCRAA also extended the military service deferment for 
an additional 180 days following the date the borrower is demobilized 
from the qualifying active duty service. The expansion of the military 
deferment is for all periods of active duty service that include 
October 1, 2007, or begin on or after that date.
    The CCRAA also created a new post-active duty student deferment in 
the FFEL, Direct Loan, and Federal Perkins Loan programs for members of 
the National Guard or Armed Forces Reserve, and members of the Armed 
Forces who are in a retired status who are called or ordered to active 
duty service. The deferment is available for up to 13 months following 
the borrower's demobilization from active duty service. To be eligible, 
the borrower must have been called to active duty service while the 
borrower was enrolled in a program of instruction at an eligible 
institution or within six months of having been enrolled. The deferment 
expires if the borrower reenrolls in school. Active duty for the 
purpose of this deferment is defined in the CCRAA as active duty as the 
term is used in 10 U.S.C. section 101(d)(1); however, it does not 
include active duty for attendance at a service school or for training 
duty, and it does include active duty of members of the National Guard 
(``active State duty''). Consistent with the date of enactment of the 
CCRAA, the deferment is available to an eligible borrower who was 
serving on active duty on October 1, 2007, or was called to active duty 
service on or after that date.
    Current Regulations: The FFEL, Direct Loan, and Federal Perkins 
Loan program regulations governing the military service deferment were 
amended on November 1, 2007, to reflect the expansion of deferment 
benefits resulting from the CCRAA. The references in prior regulations 
to a three-year time limit and its applicability only to loans first 
disbursed on or after July 1, 2001 were removed from the regulations, 
and the new 180-day post-active duty deferment was added. A provision 
for the new 13-month post-active duty student deferment and the 
statutory definition of the term ``active duty'' for purposes of this 
deferment were also added to the regulations.
    Proposed Regulations: The proposed regulations would clarify the 
current regulations, incorporate guidance on the deferments that was 
provided to program participants in Dear Colleague Letter GEN-08-01 
(issued January 8, 2008), and would provide relief to borrowers who may 
qualify for a post-active duty student deferment after demobilization, 
but do not qualify for the military service deferment during their 
active State duty service.
    The proposed regulations would clarify that the expansion of the 
military service deferment to include a 180-day post demobilization 
period, and the post-active duty student deferment would be available 
to borrowers who were serving on active duty on October 1, 2007, or who 
are called to active duty on or after that date. The proposed 
regulations in Sec. Sec.  674.34(i)(3), 682.210(u)(3), and 
685.204(f)(1)(ii) would also clarify that a borrower's eligibility for 
the post-active duty student deferment terminates only if the borrower 
returns to enrolled student status on at least a half-time basis, and 
that a borrower returning from active duty who is in the grace period 
on a loan is not required to waive the grace period to use the 13-month 
post-active duty student deferment. The proposed regulations in 
Sec. Sec.  674.34(i)(2)(i) and (ii), 682.210(u)(2)(i) and (ii), and 
685.204(f)(2)(i) and (ii) would also clarify that active State duty for 
members of the National Guard includes, for purposes of the post-active 
duty student deferment, both active duty under which a Governor 
activates members of the National Guard under State statute or policy 
and the activities are paid for with State funds, and active duty under 
which a Governor is authorized, with the approval of the President or 
U.S. Secretary of Defense to activate members of the National Guard and 
the activities are paid for with Federal funds. The proposed 
regulations in Sec. Sec.  674.34(i)(2)(iv), 682.210(u)(2)(iv), and 
685.204(f)(2)(iv) would also specify that active duty for this purpose 
does not include a borrower who is serving in a full-time, permanent 
position of employment with the National Guard,

[[Page 37698]]

unless the borrower is reassigned as part of a call-up to active duty 
service. At the recommendation of DOD, the incorrect reference to 
section 101(19) of title 32, U.S.C. has been removed, as discussed 
elsewhere in this preamble.
    The proposed regulations also incorporate the Department's earlier 
guidance (Dear Colleague Letter GEN-08-01) on implementation of the 
CCRAA military-related deferment provisions. As provided in that 
guidance, the proposed regulations in Sec. Sec.  674.34(h)(7), 
682.210(t)(9), and 685.204(e)(7) would authorize loan holders to grant 
a military service deferment to an otherwise eligible borrower for an 
initial deferment period not to exceed 12 months from the date the 
borrower's qualifying active duty service begins based on a request 
from either the borrower or the borrower's representative. Consistent 
with that earlier guidance, although supporting documentation is not 
required for this initial 12-month deferment period, it is required for 
any subsequent deferment period. Additionally, Sec. Sec.  674.34(i)(4), 
682.210(u)(4), and 685.214(f)(4) of the proposed regulations would 
specify that if a borrower is eligible for both the 180-day military 
service deferment following the borrower's demobilization, and the 13-
month post-active duty student deferment, the borrower's eligibility 
for those separate deferments runs concurrently.
    Finally, a change has been proposed in the FFEL program regulations 
in Sec.  682.211(h) governing mandatory forbearance that would require 
the loan holder to grant forbearance to a borrower who is called to 
active State duty for more than a 30-day period and who does not 
qualify for a military service deferment during the active State duty 
service period, but who qualifies for the post-active duty student 
deferment.
    Reasons: The negotiators agreed that the regulations governing the 
two military service-related deferments required clarifying amendments, 
and that the Department's earlier guidance should be included in the 
proposed regulations to ease program administration. That guidance 
addressed the October 1, 2007, effective date for the new benefits, and 
clarified that a borrower who received a military service deferment 
that began prior to October 1, 2007, would qualify for the extra 180 
days of deferment if the borrower's period of military service included 
the October 1, 2007, date.
    Non-federal negotiators noted that the post-active duty student 
deferment does not relieve a borrower of the obligation to make 
payments on a student loan during the borrower's period of active duty 
military service. A borrower in an in-school status would be required 
to make payments after the initial grace period elapses. A borrower 
receiving an in-school deferment would be required to make payments on 
a student loan after the borrower drops below half-time status at the 
school and reports for active duty service.
    The non-federal negotiators recommended that the Department provide 
for a mandatory forbearance to cover this gap, so that borrowers who 
will qualify for a post-active duty student deferment, but are no 
longer in an in-school status or qualify for an in-school deferment, 
will not be obligated to make loan payments during the period of active 
duty service.
    The Department agreed with the non-federal negotiators. The 
proposed revisions to Sec.  682.211(h) provide for the mandatory 
forbearance to begin after the initial grace period elapses, for 
borrowers in an in-school status, and to begin after the borrower 
ceases enrollment, for borrowers who are in an in-school deferment at 
the time of the call to active duty.
    Some of the non-Federal negotiators expressed concern over the 
confusion that may result for borrowers and those assisting them with 
respect to the different eligibility requirements for the two different 
military service-related deferments. The negotiators discussed 
different approaches to providing information on the various forms of 
relief available to title IV student loan borrowers called to active 
duty military service, such as charts and brochures, but determined 
that these efforts were operational in nature and would not affect the 
regulations.

Income-Based Repayment Plan

Definitions (Sec. Sec.  682.215(a) and 685.221(a))

Partial Financial Hardship

    Statute: 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 FFEL and Direct Loans (as calculated under a 
standard repayment plan based on a 10-year repayment period) exceeds 15 
percent of the difference between the borrower's AGI and 150 percent of 
the poverty guideline for the borrower's family size. If a married 
borrower files a separate Federal income tax return, section 493C(d) of 
the HEA provides that only the borrower's income and student debt are 
used in determining the amount of the borrower's payment under the IBR 
plan.
    Proposed Regulations: Proposed Sec. Sec.  682.215(a)(4) and 
685.221(a)(4) would incorporate the statutory definition of the term 
partial financial hardship. The proposed regulations would also 
incorporate the terms and definitions of ``AGI,'' ``family size,'' and 
``poverty guideline'' from existing Sec.  682.210, which addresses how 
to determine whether a borrower qualifies for an economic hardship 
deferment.
    Under the proposed regulations, AGI would mean the income reported 
by the borrower to the Internal Revenue Service (IRS). For a married 
borrower filing jointly, AGI would include both the borrower's and 
spouse's income. If a married borrower files separately, AGI would 
include only the borrower's income.
    Under the proposed regulations, family size would include the 
borrower, the borrower's spouse, and the borrower's children if the 
children receive more than half their support from the borrower. Other 
individuals could be included in family size if, at the time the 
borrower certifies family size, those other individuals live with the 
borrower and receive more than half their support from the borrower and 
will continue to receive this support for the year the borrower 
certifies family size. Support would include money, gifts and payment 
of other expenses, including college costs.
    Under the proposed regulations, poverty income would be the income 
categorized by State and family size in the poverty guidelines.
    Finally, under the proposed regulations, the term ``eligible loan'' 
would refer to any outstanding FFEL or Direct Loan made to a borrower, 
except for a FFEL or Direct PLUS Loan made to a parent borrower or a 
FFEL or Direct Consolidation Loan that repaid a FFEL or Direct PLUS 
Loan made to a parent borrower.
    Reasons: For consistency and ease of administering the title IV 
loan programs, the definitions of AGI, family size, and poverty 
guidelines would be the same in all sections of the regulations to 
which they apply. While supporting this approach, some non-Federal 
negotiators suggested that AGI or the total amount of eligible loans 
should be adjusted in cases when a married borrower and his or her 
spouse both have outstanding loans, file a joint Federal tax return, 
and both qualify for IBR. In these cases, the combined monthly student 
loan payments of the borrower and the spouse could exceed the 15 
percent payment threshold under the IBR plan. The Department 
acknowledged this possibility but noted that the negotiators' suggested 
change would be

[[Page 37699]]

inconsistent with the HEA. First, section 493C(d) of the HEA, as 
amended by Public Law 110-153, specifically provides for considering 
the individual AGI of one married borrower only when the borrower and 
the borrower's spouse file separate Federal tax returns. Second, 
section 493C(a)(3)(A) of the HEA requires that only the borrower's 
eligible loans, not the spouse's, are considered in determining whether 
the borrower has a partial financial hardship.

Income-Based Payment Amount (Sec. Sec.  682.215(b) and 685.221(b))

    Statute: Under section 493C(b)(1) of the HEA, the monthly payment 
amount of a borrower who qualifies for a partial financial hardship is 
determined by calculating 15 percent of the amount obtained by 
subtracting 150 percent of the borrower's poverty guideline from the 
borrower's AGI, and then dividing this amount by 12 (an example of this 
calculation is provided in Appendix A of this preamble).
    Proposed Regulations: If a borrower's eligible loans are held by 
more than one loan holder, proposed Sec. Sec.  682.215(b)(1) and 
685.221(b)(2) would require each loan holder to adjust the amount of a 
borrower's calculated monthly payment. The borrower's adjusted monthly 
payment would be determined by multiplying the calculated monthly 
payment amount by the percentage of the total outstanding principal 
amount of eligible loans held by that holder (see the example in 
Appendix A of this preamble).
    If the borrower's calculated monthly payment is less than $5.00, 
the borrower would not be required to make a payment. If the borrower's 
calculated monthly payment is between $5.00 and $10.00, the borrower 
would be required to make a $10.00 payment.
    Reasons: Without the proposed adjustment by each loan holder of the 
borrower's eligible loans, a borrower who selects the IBR plan with two 
or more loan holders would have to make total monthly payments in 
excess of the statutory maximum.
    With regard to minimum monthly payment amounts, the Department 
initially proposed to adopt the $5.00 minimum monthly payment provision 
used in the Direct Loan Program income contingent repayment (ICR) plan. 
Under the ICR plan, a minimum payment of $5.00 is required whenever the 
borrower's calculated monthly payment is greater than zero but equal to 
or less than $5.00. The non-Federal negotiators argued that, because a 
borrower's calculated monthly payment amount under the IBR plan could 
be zero, a minimum $5.00 payment (or any payment amount over zero) 
would violate the 15 percent payment threshold. As a result, the 
Department agreed to allow zero payment amounts, which will require no 
collection action on the part of the loan holder. However, as an 
administrative matter, taking into consideration the cost of processing 
payments, the non-Federal negotiators agreed to the Department's 
proposal to establish a minimum payment of $10.00 whenever the 
borrower's calculated monthly payment is between $5.00 and $10.00. This 
represents a compromise approach for dealing with de minimis payment 
amounts for borrowers with low income and high debt. On one hand, it 
satisfies the concern of the non-Federal negotiators that a borrower 
with a calculated payment at or near zero should not have to make any 
payments. On the other hand, setting the minimum payment at $10 (an 
amount agreed to by the Loans Committee as part of the negotiations) 
mitigates the financial risk to FFEL loan holders, servicers, and the 
Department that the marginal cost of processing the payment is not more 
than the payment amount.

Borrower Payments (Sec. Sec.  682.215(b), 682.215(c), 685.221(b), 
685.221(c), and 682.300(b))

    Statute: Section 493C(b)(2) of the HEA specifies that monthly loan 
payments made under the IBR plan are applied first toward interest due 
on the loan, next toward any fees, and then to the principal balance of 
the loan. In addition, section 493C(b)(3) provides that if the 
borrower's monthly payment does not cover the accrued interest on a 
subsidized loan, the Secretary will pay the interest for up to three 
years after the date the borrower elects IBR. The three-year period 
does not include any period during which a borrower receives an 
economic hardship deferment.
    Proposed Regulations: Proposed Sec. Sec.  682.215(c) and 685.221(c) 
would incorporate the provisions from the HEA regarding the order in 
which IBR payments are to be applied by a loan holder.
    Proposed Sec. Sec.  682.215(b)(4) and 682.300(b)(1)(iv) and 
(b)(2)(x) would provide that, if the borrower's payment is insufficient 
to pay the accrued interest on a loan, the Secretary pays the accrued 
interest on a subsidized Stafford Loan, or on the subsidized portion of 
a Consolidation Loan, to the FFEL loan holder for up to three 
consecutive years from the date that the borrower initially began 
repayment on each loan under the IBR plan. In the Direct Loan Program, 
proposed Sec.  685.221(b)(3) would provide that the Secretary will not 
charge interest to borrowers during this three-year period. In the 
proposed regulations for both the FFEL and Direct Loan Programs, the 
three-year period would not include any period during which a borrower 
receives an economic hardship deferment.
    Reasons: Some of the non-Federal negotiators believed that the 
statutory provisions regarding the three-year interest subsidy period 
were ambiguous in three respects. First, these negotiators believed 
that the date that a borrower elects the IBR plan could be interpreted 
to mean the date the borrower notified the holder, or any other date up 
to the date the borrower makes a payment under the IBR plan. Second, 
they believed it was unclear whether the three-year period was 
applicable to each of the borrower's loans or was the cumulative period 
of the borrower's eligibility for the subsidy payments. The proposed 
regulations would address both of these issues by providing that the 
three-year period starts on the date the borrower initially begins 
repayment on each loan under the IBR plan.
    Third, some of the non-Federal negotiators did not agree with the 
Department's determination that the three-year period is a consecutive 
period. The Department notes that section 493C(b)(3)(A) of the HEA 
specifically states that the subsidy period starts on the date the 
borrower selects the IBR plan and provides for only one type of 
interruption or break in the three-year period--economic hardship 
deferments. Therefore, once the subsidy period begins, it runs 
continuously for three years as long as the borrower's monthly payment 
under the IBR plan is not sufficient to pay the accrued interest on the 
borrower's loan.

Changes in Payment Amount (Sec. Sec.  682.215(d) and 685.221(d))

    Statute: For a borrower who no longer has a partial financial 
hardship, or who no longer wants to continue making income-based 
payments under the IBR plan, section 493C(b)(6) of the HEA provides 
that the maximum monthly payment the borrower may be required to make 
must not exceed the monthly amount calculated for the borrower under a 
10-year repayment period when the borrower first entered IBR. Under 
either of these circumstances, the repayment period may exceed 10 
years. Section 493C(b)(8) of the HEA also provides that a borrower who 
is paying under the IBR plan may elect, at any time, to terminate 
payment under the IBR plan and repay under the standard repayment plan.

[[Page 37700]]

    Proposed Regulations: Proposed Sec. Sec.  682.215(d) and 685.221(d) 
would provide for the recalculation of the borrower's monthly payment 
if the borrower no longer has a partial financial hardship, chooses to 
stop making income-based payments, or elects to leave the IBR plan 
entirely.
    The proposed regulations provide that if a borrower no longer has a 
partial financial hardship or wishes to stop making income-based 
payments, but remains within the IBR plan, the maximum monthly amount 
that the borrower would be required to repay must be recalculated. The 
recalculated amount the borrower would be required to repay is the 
amount the borrower would have paid under the standard repayment plan 
with a 10-year repayment period based on the eligible loans that were 
outstanding at the time the borrower began repayment under the IBR 
plan. The proposed regulations would also provide that the borrower's 
total repayment period based on the recalculated payment amount may 
exceed 10 years.
    If a borrower no longer wishes to pay under the IBR plan, the 
proposed regulations would require the borrower to pay under the 
standard repayment plan for the remaining term available based on the 
borrower's initial standard repayment disclosure. The loan holder would 
recalculate the borrower's monthly payment based on the time remaining 
under the maximum 10-year repayment period for the amount of the 
borrower's loans that were outstanding at the time the borrower 
discontinued paying under the IBR plan. For a Consolidation Loan 
borrower who elects to leave the IBR plan, the applicable repayment 
period would be the repayment period remaining based on the total 
amount of that loan and the balance on other student loans that were 
outstanding at the time the borrower discontinued paying under the IBR 
plan.
    Reasons: The proposed regulations would reflect the statutory 
provisions in section 493C(b)(6) of the HEA, which require a loan 
holder to recalculate the borrower's monthly payment if the borrower no 
longer has a partial financial hardship, chooses to stop making income-
based payments, or leaves the IBR plan entirely. The proposed 
regulations would also provide for a different calculation of monthly 
payment amounts for Consolidation Loans when a borrower elects to leave 
the IBR plan and must repay under a standard repayment plan. The 
Department is proposing this distinction because a Consolidation Loan 
can have a repayment period of up to 30 years. The negotiators agreed 
with this approach.

Eligibility Documentation and Verification (Sec. Sec.  682.215(e) and 
685.221(e))

    Statute: Section 493C(c) of the HEA requires the Department to 
establish procedures for annually determining whether a borrower 
qualifies for IBR. These procedures include verifying the borrower's 
annual income and the annual amount due on the borrower's loans, and 
other procedures necessary to effectively implement the IBR plan.
    Proposed Regulations: Under proposed Sec. Sec.  682.215(e) and 
685.221(e), the loan holder would determine whether a borrower has a 
partial financial hardship to qualify for the IBR plan for the year the 
borrower initially selects the plan and for each subsequent year that 
the borrower remains in the plan.
    To make this determination, the loan holder would require the 
borrower to (1) provide written consent to the disclosure of AGI and 
other tax return information by the IRS to the loan holder, and (2) 
annually certify family size. The borrower would provide consent by 
signing a consent form and returning it to the loan holder. 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, the proposed regulations would allow the loan holder to 
use other documentation provided by the borrower (for example, a 
current pay stub or unemployment benefits letter) to verify income. If 
the borrower fails to respond to a loan holder's request to certify 
family size for a particular year, the loan holder must assume a family 
size of one for that year.
    The proposed regulations would require the loan holder to place the 
borrower in a standard repayment plan if the borrower selects the IBR 
plan, but fails to provide the required written consent necessary for 
the loan holder to determine whether the borrower initially qualifies 
for the IBR plan. The proposed regulations also designate the 
recalculated monthly payment option as discussed under the ``Changes in 
Payment Amount'' for a borrower who no longer has a partial financial 
hardship or a borrower who fails to renew the required written consent 
for income verification (or withdraws that consent) but does not select 
another repayment plan.
    Reasons: If a borrower initially selects the IBR plan but fails to 
provide the necessary consent for securing income information, the loan 
holder would place the borrower into the standard repayment plan. This 
approach is consistent with the current FFEL and Direct Loan 
regulations that provide for a borrower to be placed on the standard 
repayment plan if the borrower selects the income-sensitive repayment 
plan in the FFEL Program or the ICR plan in the Direct Loan Program, 
but then fails to provide the information or authorization that is 
necessary for the borrower to enter that repayment plan.
    The non-Federal negotiators proposed that borrowers should be 
allowed to provide consent for the disclosure of income information for 
multiple years, rather than annually. Although the Department does not 
object to this proposal, the forms used to provide consent are IRS-
produced forms. The Department has no authority to specify the period 
of time an IRS consent form may cover, so the proposed regulations do 
not specify the duration of the consent form.
    The Department initially proposed that a loan holder would 
automatically change the borrower's repayment option if the borrower 
fails to provide annual information on family size. The non-Federal 
negotiators recommended that the Department instead allow the 
borrower's family size to default to one in these cases to allow the 
loan holder to recalculate the borrower's eligibility for a partial 
financial hardship. If the borrower no longer qualifies for a partial 
financial hardship based on a family size of one, the loan holder would 
recalculate the borrower's monthly payment as discussed under ``Changes 
in Payment Amount.'' The Department agreed with this proposal.

Loan Forgiveness (Sec. Sec.  682.215(f) and 685.221(f))

    Statute: Section 493C(b)(7) of the HEA provides that the Department 
will repay or cancel the outstanding balance and accrued interest on an 
eligible loan for a borrower who participates in the IBR plan for a 
period not to exceed 25 years and meets certain requirements or makes 
qualifying payments during the maximum 25-year period.
    Proposed Regulations: Sections 682.215(f) and 685.221(f) of the 
proposed regulations would: (1) Establish the conditions that a 
borrower must satisfy to qualify for loan forgiveness under the IBR 
plan; (2) identify the beginning date of the 25-year period for 
determining whether a borrower made qualifying payments or received 
economic hardship deferments during that period; and (3) provide that 
the Department will repay or cancel the outstanding balance and accrued 
interest on an eligible loan at the end of the 25-year period.

[[Page 37701]]

    Under the proposed regulations, a borrower would qualify for loan 
forgiveness after 25 years as long as the borrower participated in the 
IBR plan at any time during that period and satisfied at least one of 
the following conditions:
      Made reduced monthly payments on the loan under a partial 
financial hardship, including a payment of zero dollars.
      Made reduced monthly payments on the loan after the 
borrower no longer had a partial financial hardship or stopped making 
income-based payments.
      Made monthly payments under any repayment plan that were 
not less than the amount required under a FFEL or Direct Loan standard 
repayment plan with a 10-year repayment period based on when the 
borrower initially entered repayment.
      Made monthly payments under the FFEL standard repayment 
plan based on a 10-year repayment period for the amount of the 
borrower's loans that were outstanding at the time the borrower first 
selected the IBR plan.
      Paid a Direct Loan under the income contingent repayment 
(ICR) plan.
      Received an economic hardship deferment on an eligible 
loan.
    Except for borrowers who repaid Direct Loans under the ICR plan, 
under proposed Sec.  685.221(f)(3)(ii) the beginning date of the 25-
year period would be no earlier than July 1, 2009, which is the 
effective date for the implementation of the IBR plan. In general, 
after the borrower selects the IBR plan, the loan holder would 
establish the beginning date by determining when the borrower made a 
qualifying payment or received an economic hardship deferment on the 
loan on or after July 1, 2009. However, under Sec.  685.221(f)(3)(i) of 
the proposed regulations, for a borrower who made payments under the 
Direct Loan Program ICR plan, the beginning date would be the date the 
borrower made a payment on the loan under that plan any time after July 
1, 1994. For borrowers who consolidate their eligible loans, the 25-
year period would restart from the date of the consolidation.
    Under proposed Sec. Sec.  682.215(f)(4) and 685.221(f)(4), the 
Secretary would pay (for a FFEL loan) or forgive (for a Direct Loan) 
the outstanding balance and accrued interest on the eligible loan after 
the guaranty agency or the Department determines that the borrower 
satisfies the loan forgiveness requirements.
    Reasons: With regard to establishing the beginning date of the 25-
year period, some of the non-Federal negotiators suggested that 
qualifying payments made by an otherwise eligible borrower at any time 
before July 1, 2009 (i.e., retroactive payments), should count toward 
the 25-year forgiveness period. The Department considered, but did not 
adopt this suggestion, for three reasons. First, the statute does not 
support a general rule that payments made before the effective date of 
the IBR plan (July 1, 2009) should count toward the forgiveness period. 
Second, allowing retroactive payments would substantially increase 
costs to the Federal government and the taxpayers (for more detail see 
the discussion under the Regulatory Impact Analysis section of the 
preamble). Third, it would be administratively difficult, if not 
impossible in some cases, for a loan holder to determine the beginning 
date of the 25-year period before July 1, 2009, because there was no 
expectation of loan forgiveness, and therefore, no basis to require 
loan holders to track and maintain data on individual loan payments in 
the manner needed to readily identify qualifying payments under the IBR 
plan.
    The Department was able, however, to reach a compromise on this 
issue with the non-Federal negotiators for a group of borrowers that 
the negotiators acknowledged as the most vulnerable and needy. The 
Department agreed to count retroactive payments made by borrowers in 
the Direct Loan Program ICR plan for two reasons. First, there are no 
material administrative costs because the Department has readily 
available payment data for ICR borrowers. Second, we do not believe 
there would be any additional program costs because borrowers repaying 
their loans under the Direct Loan Program ICR plan are already on a 
path to loan forgiveness.
    The proposed conditions and qualifying payments that a borrower 
must satisfy for loan forgiveness would parallel the statutory 
requirements. Some non-Federal negotiators encouraged the Department to 
consider establishing a loan forgiveness period of less than 25 years. 
The negotiators suggested a 20-year period, stating that the 25-year 
period is only a statutory maximum. The Department could not adopt this 
suggestion for two reasons. First, reducing the forgiveness period to 
20 years would increase Federal costs (for more detail see the 
discussion under the Regulatory Impact Analysis section of the 
preamble). Second, as a policy matter, the Department believes that the 
loan forgiveness periods for IBR and ICR should be the same for these 
borrowers because they are in similar circumstances.

Loan Forgiveness Processing and Payment (Sec.  682.215(g))

    Statute: The HEA does not address procedures for IBR loan 
forgiveness processing and payment with respect to FFEL loan holders 
and guaranty agencies.
    Proposed Regulations: Proposed Sec.  682.215(g) would establish 
deadlines for FFEL loan holders and guaranty agencies for processing 
loan forgiveness claims. A loan holder would be required to request 
payment from a guaranty agency no later than 60 days from the date the 
holder determines that a borrower qualifies for loan forgiveness. 
Within 45 days of receiving the lender's request, the guaranty agency 
would need to determine if the borrower satisfies the forgiveness 
requirements and notify the lender of that determination. Finally, the 
proposed regulations would require the loan holder to notify the 
borrower of the guaranty agency's determination within 30 days.
    In addition, the proposed regulations would address how the loan 
holder and guaranty agency resolve any differences between the 
outstanding balance of the borrower's eligible loans and the 
forgiveness amount, and how a borrower is treated if it is determined 
that the borrower is not eligible for loan forgiveness. Although the 
Department has not included comparable processes in the Direct Loan 
Program regulations, the Department intends to follow the same deadline 
and notification provisions specified in these proposed FFEL 
regulations.
    Reasons: The non-Federal negotiators supported including these 
processing requirements in the proposed regulations to provide for the 
timely processing of IBR forgiveness claims. The deadlines for lenders 
and guaranty agencies to process IBR loan forgiveness claims are 
consistent with the deadlines used for other loan discharges.

Special Allowance Payments for Income-based Loans (Sec.  682.302(a))

    Statute: For loans in repayment under the IBR plan, section 
493C(b)(9) of the HEA requires that the special allowance payment to a 
lender be calculated separately on the principal balance of the loan 
and on any unpaid accrued interest. In addition, section 493C(b)(3)(B) 
provides that accrued interest may be capitalized only when the 
borrower: (1) Elects to leave the IBR plan; or (2) begins making 
payments of not less than the amount the borrower would have made under 
a standard 10-year repayment plan based on the outstanding amount of 
the borrower's

[[Page 37702]]

loan at the time the borrower began repayment under the IBR plan.
    Current Regulations: Current Sec.  682.302(a) provides for special 
allowance payments by the Secretary to loan holders in the FFEL 
Program. A special allowance payment is generally described as a 
subsidy payment made to a FFEL lender under a formula provided in the 
HEA that ensures that the lender will receive a market-based rate on a 
FFEL loan regardless of what the student or parent borrower pays.
    Proposed Regulations: Proposed Sec.  682.302(a) would add to the 
current regulations a separate calculation of the special allowance 
rate for the unpaid accrued interest on a loan in repayment under the 
IBR plan. The current provisions for calculating the special allowance 
payment rate on the unpaid principal balance of a loan (including 
capitalized interest) would remain unchanged. However, the proposed 
regulations would require that, when computing the special allowance 
rate on the unpaid accrued interest for a borrower in IBR, the 
applicable interest rate used in the calculation would be zero.
    Reasons: The Department initially proposed calculating the special 
allowance payment to be paid on the unpaid accrued interest for a 
borrower in the IBR plan in the same way that the special allowance 
payment would be calculated for other loans. Some of the non-Federal 
negotiators argued, however, that since accrued unpaid interest on an 
income-based loan can only be capitalized under limited circumstances, 
or may never be capitalized, the yield on the principal balance of an 
income-based loan would be less than the yield that would otherwise be 
obtained on the same type of loan when accrued unpaid interest is 
capitalized and becomes part of the loan principal. Moreover, the yield 
on the income-based loan would have been further reduced under the 
Department's initial approach (the special allowance rate for the 
unpaid accrued interest would be reduced by the applicable interest 
rate of the loan). The Department agreed.

Income Contingent Repayment Plan--Maximum Repayment Period (Sec.  
685.209(c))

    Statute: Section 455(e) of the HEA specifies the periods that count 
toward the maximum 25-year repayment period under the ICR plan in the 
Direct Loan Program.
    Current Regulations: Current Sec.  685.209(c) establishes the 
repayment period for Direct Loans under the ICR plan.
    Proposed Regulations: Proposed Sec.  685.209(c)(4) would parallel 
the provisions in the HEA by counting the following periods toward the 
maximum 25-year repayment requirement:
      Periods in which the borrower makes payments under the ICR 
plan on loans that are not in default.
      Periods in which the borrower makes reduced monthly 
payments under the IBR plan or a recalculated reduced monthly payment 
after the borrower no longer has a partial financial hardship or stops 
making income-based payments.
      Periods in which the borrower made monthly payments under 
the standard repayment plan after leaving the IBR plan.
      Periods in which the borrower makes payments under the 
standard repayment plan.
      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.
      Periods of economic hardship deferment after October 1, 
2007.
    In addition to the provisions reflecting the statutory 
requirements, the Department proposes to maintain the current provision 
in Sec.  685.209(c)(4)(ii)(A)(2). This current provision applies to 
borrowers who entered repayment before October 1, 2007, with repayment 
periods of not more than 12 years and who made payments under either of 
the extended repayment plans, or, for Direct Consolidation Loan 
borrowers, made payments under the standard repayment plan. October 1, 
2007, is the effective date of the maximum ICR repayment period 
provisions in the CCRAA.
    Reasons: The proposed changes are necessary to reflect the 
statutory requirements. The Department proposes to maintain the current 
provisions to allow the periods that now count toward the 25-year 
repayment timeframe to continue to be counted for these borrowers.

Eligible Not-For-Profit Holder Definition (Sec.  682.302)

    Statute: Section 435(p) of the HEA, added by the CCRAA, included 
the new term ``eligible not-for-profit holder'' to describe a State or 
non-profit entity that may receive a higher special allowance payment 
(SAP) rate on loans it holds than other lenders. Regulations issued by 
the Department on November 1, 2007 (72 FR 61960), incorporated the 
statutory definition of ``eligible not-for-profit holder'' from the 
CCRAA into the regulations. However, Congress made further changes to 
that definition in Public Law 110-109, the Third Higher Education 
Extension Act of 2007, enacted October 31, 2007. Public Law 110-109 
made a significant change to the definition by removing the requirement 
that only an entity that is an eligible lender in its own right under 
section 435(d) of the HEA could qualify as an eligible not-for-profit 
holder. Public Law 110-109 made conforming changes to other parts of 
section 435(p) of the HEA that excluded from eligible not-for-profit 
holder status any State or non-profit entity that was not the sole 
owner of the beneficial interest in the loan or that was itself owned 
or controlled by a for-profit entity.
    Current Regulations: Current Sec.  682.302(f) does not reflect the 
changes made by Public Law 110-109. In addition, the regulations do not 
address how an entity that claims to qualify as an eligible not-for-
profit holder demonstrates eligibility to the Department or the 
standards the Department will use to determine whether the entity 
qualifies for that status.
    Proposed Regulations: The proposed regulations would amend Sec.  
682.302(f)(3) to incorporate the changes made by Public Law 110-109 
that removed the requirement that an entity qualified for not-for-
profit holder status, either directly or through an eligible lender 
trustee (ELT), only if the entity was an eligible lender under section 
435(d) of the HEA.
    The Secretary also proposes to describe, in Sec.  682.302(f)(3)(v), 
the circumstances in which a State or non-profit entity is deemed to be 
owned or controlled by a for-profit entity. These circumstances 
generally are those described in the Department's Dear Colleague Letter 
FP-07-12, issued December 28, 2007, and which were used by the 
Department in its initial determination of whether entities qualified 
for eligible not-for-profit holder status. These circumstances include 
those in which a for-profit entity either has a sufficient ownership 
interest, as a member or shareholder of an entity, to control the State 
or non-profit entity, or employs or appoints a majority of the 
individuals who serve as trustees of the State or non-profit entity, or 
who serve on the audit, executive, or compensation committees of the 
board of the entity. The proposed regulations would deem a trustee or 
director to be employed or appointed by a for-profit entity if the for-
profit entity employs a family member of an individual, unless the 
Secretary determines that the nature of a family member's employment by 
the for-profit entity is not the kind that

[[Page 37703]]

would likely subject the trustee, director, or the board on which the 
family member serves to pressures that would affect the integrity of 
their decisions. The proposed regulations thus would distinguish 
between family members employed as lower level employees from those 
employed in more responsible positions.
    To identify whether a for-profit entity has the power to control a 
State or non-profit entity, the proposed regulations would provide for 
review of whether the for-profit entity controls, by any of various 
agreements, a sufficient voting percentage of the membership or equity 
interests of the State or non-profit entity to direct or cause the 
direction of the management and policies of the State or non-profit 
entity.
    Section 435(p)(2)(C) of the HEA provides that the State or non-
profit entity must be the exclusive owner of at least the beneficial 
interest in a loan and its income. The proposed regulations would 
define ``beneficial owner'' (including ``beneficial ownership'' and 
``owner of a beneficial interest'') in the conventional sense, as the 
right to receive, possess, use, and sell or otherwise exercise control 
over a loan and income from the loan. The proposed regulations would 
recognize and disregard those instances in which this power might be 
significantly restricted by a security interest granted by the entity 
in the course of issuing a debt obligation or where the entity has used 
an ELT to retain ownership of its loans in order to qualify those loans 
for FFEL Program benefits.
    The HEA provides that a trustee that holds loans on behalf of a 
State or non-profit entity may not be compensated for that function in 
excess of reasonable and customary fees. The proposed regulations would 
provide that fees are reasonable and customary if the rate paid by the 
entity to the trustee does not exceed the rate paid for similar 
services on similar portfolios of loans of that State or non-profit 
entity that did not qualify for the higher SAP, or did not exceed an 
amount determined by using another method requested by the State or 
non-profit entity that the Secretary considers reliable.
    The Secretary also proposes, in Sec.  682.302(f)(3)(x), the list of 
documents that must be provided to the Secretary by a State or non-
profit entity that seeks to demonstrate that it qualifies as an 
eligible not-for-profit holder. These documents generally are those 
described in Dear Colleague Letter FP-07-12, and which were used by the 
Department in its initial determination of whether entities qualified 
for eligible not-for-profit holder status. The requirements would 
include submission of a certification signed by the State or non-profit 
entity's Chief Executive Officer (CEO), as well as a certification or 
opinion signed by the State or non-profit entity's external legal 
counsel or the attorney general of the State. Both submissions would be 
required to include copies of documents that provide the basis for the 
certification or opinion.
    The certification or opinion of the external legal counsel or State 
attorney general, with supporting documentation, would be required to 
show that the State or non-profit entity meets one of the four 
criteria: (1) Is a constituted entity by operation of State law; (2) 
has been designated by the State or one or more political subdivisions 
of the State to serve as a qualified scholarship funding corporation 
under section 150(d)(2) of the Internal Revenue Code of 1986 (IRC), has 
not made the election described under section 150(d)(3) of the IRC, and 
is incorporated under State law as a not-for-profit organization; (3) 
is incorporated under State law as a not-for-profit organization or 
entity described in 150(d)(3) of the IRC; or (4) has in effect a 
relationship with an eligible lender under which the lender is acting 
as trustee on behalf of the State or non-profit entity. The 
certification of the State or non-profit entity's CEO would be required 
to state the basis upon which the entity believes it qualifies as an 
eligible not-for-profit holder for purposes of SAP as a State entity, a 
150(d) entity, a 501(c)(3) entity, or a trustee on behalf of a State 
entity, and that the entity, on September 27, 2007, acted as an 
eligible lender under section 435(d) of the HEA, other than as a school 
lender, or was on that date the sole beneficial owner of a loan 
eligible for SAP under the HEA; is not owned or controlled, in whole or 
in part, by a for-profit entity; and is the sole beneficial owner of 
the loan and income from the loan. The HEA expressly requires the 
entity's status to be determined as of the effective date of the CCRAA, 
which was September 27, 2007.
    Proposed Sec.  682.302(f)(3)(xi) would provide that, to retain 
continued eligibility as a not-for-profit holder, the State or the not-
for-profit entity must submit an annual certification signed by the 
State or not-for-profit entity's CEO that states that the State or 
entity has not altered its status since its prior certification or that 
describes any alterations that have taken place since its prior 
certification, and, if a non-profit entity, provide copies of its most 
recent IRS Form 990.
    Reasons: The proposed changes are required to conform current 
regulations to changes in the HEA, and to establish procedures for 
demonstrating whether an entity qualifies as an eligible not-for-profit 
holder. In addition, changes were needed to clarify the standards that 
would be used to determine whether a for-profit entity had ownership or 
control of the entity or its loans or whether excessive fees were paid 
to a trustee engaged by the entity.
    The changes to the HEA indicated strong Congressional concern that 
only those entities not controlled by for-profit entities could receive 
the higher SAP. Control can be exercised directly or indirectly by a 
for-profit entity. The Department initially proposed to identify 
specific kinds of conduct by a State or non-profit entity that would 
indicate that the entity was indirectly controlled by a for-profit 
entity. One proposed provision would have required the not-for-profit 
holder to use a survey to determine the market rate for fee-paid 
services used by the not-for-profit holder to determine whether the 
particular not-for-profit holder's fee payments were excessive. The 
Department proposed to view excessive fee payments for services as a 
possible indication that a for-profit entity receiving fee payments 
from the not-for-profit entity effectively controlled the not-for-
profit holder and was diverting SAP-related benefits through the 
excessive fee payments. Additionally, the Department proposed that a 
not-for-profit holder be subject to an ongoing transaction-based 
analysis of its student loan financing arrangements, again to determine 
whether payments made by the not-for-profit holder to acquire loans or 
received by that entity for the sale of its loans exceed the sale price 
paid or received by other entities in the purchase or sale of similar 
loans.
    The Department determined, after extensive discussions with non-
Federal negotiators familiar with not-for-profit loan holders, that a 
survey of fees would be impractical for a not-for-profit holder to 
conduct on an ongoing basis, and that market fluctuations affected the 
cost of services to such an extent that it would be an unreliable 
indicator of any indirect control by another entity. The Department 
instead agreed to measure whether fees are excessive by simply 
comparing the fees a not-for-profit entity pays on its eligible loans 
to what it pays on its ineligible loans.
    Similarly, the same non-Federal negotiators argued that each 
student loan financing transaction was subject to marketplace 
volatility and that the nature of the student loan paper subject to 
sale or acquisition (e.g., default risk,

[[Page 37704]]

loan amount, or loan maturity) dictated the associated costs and was 
therefore an equally unreliable indicator of indirect control of a not-
for-profit holder. The Department also consulted with individuals who 
had knowledge of capital financing and with Department of Treasury 
staff responsible for oversight of tax-exempt organizations and IRS 
Form 990, which is filed annually by tax-exempt organizations and 
reflects the activities and supports the tax-exempt status of the 
organization. As a result of these discussions, the Department 
determined that a not-for-profit entity had little incentive to 
undertake questionable activities related to the receipt of increased 
special allowance payments that would threaten the tax-exempt status of 
the organization.
    The Department agreed to determine ``control'' of the not-for-
profit entity based on a measurement of any for-profit entity's control 
over the voting rights of the members or shareholders sufficient to 
dictate the policies and management of the not-for-profit holder, or 
any for-profit entity's ability to place employees with the not-for-
profit holder or secure appointments to the majority of its boards or 
committees. The Department also believes that the annual 
recertification process adopted in the proposed regulations, the 
receipt of the not-for-profit entity's Form 990, and the not-for-profit 
entity's quarterly lender financial reports to the Department will 
provide a sufficient baseline against which future activities of a not-
for-profit holder can be monitored.

Public Service Loan Forgiveness

Borrower Eligibility for Loan Forgiveness (Sec.  685.219(c))

    Statute: Section 455(m) of the HEA, which governs the William D. 
Ford Direct Loan Program, was amended to create a new loan forgiveness 
program for public service employees. Under section 455(m)(1) of the 
HEA, the Secretary will forgive the outstanding principal balance and 
accrued interest on a borrower's eligible Direct Loan if the borrower 
satisfies the following conditions:
      The borrower is not in default on the loan.
      The borrower makes 120 monthly payments on the loan after 
October 1, 2007, under one or more specified repayment plans.
      The borrower is employed in a public service job at the 
time that loan forgiveness is requested and granted, and during the 
period the borrower makes the required 120 monthly payments.
    Proposed Regulations: Proposed Sec.  685.219(c)(1) would parallel 
the statutory requirements and would require the borrower to make 120 
separate, full, qualifying monthly payments within 15 days of the 
scheduled payment due date while the borrower is employed full-time in 
a public service job to be eligible for this program. The qualifying 
120 payments would not have to be consecutive.
    To be considered a qualifying payment for loan forgiveness, each 
payment would have to be made under one or more of the following 
repayment plans:
      The IBR plan.
      The ICR plan.
      The Direct Loan standard repayment plan.
      Any other repayment plan if the monthly payment amount is 
not less than the amount the borrower would have paid under the Direct 
Loan standard repayment plan.
    For a payment to count towards the forgiveness period, the borrower 
would have to have been employed full-time by a public service 
organization when the payment was made. For borrowers with a 
contractual or employment period of less than 12 months, qualifying 
payments would have to have been made each month for all 12 months. 
This requirement is primarily intended to address teachers who work on 
an academic year basis. Although teachers on this type of schedule 
typically work for only 9 months out of the year, they would still be 
required to make payments on their loans during the summer vacation 
period. This provision would also apply to other individuals who might 
work on a similar type of schedule.
    The proposed regulations would acknowledge full-time service in an 
AmeriCorps position as equivalent to employment in a public service 
job. The proposed regulations also would treat an AmeriCorps education 
award used for loan repayment of a Direct Loan as qualifying payments 
to meet the 120-payment requirement. The number of qualifying monthly 
payments would be calculated for this purpose by dividing the lump sum 
AmeriCorps education award used for Direct Loan repayment by the amount 
of the borrower's scheduled monthly payment on the loan.
    Reasons: The proposed regulations implement the basic statutory 
framework for the public service loan forgiveness program.
    After much discussion concerning the many types of public service 
jobs that might qualify a borrower for public service loan forgiveness, 
the negotiators decided not to define specific job types that might 
qualify. Instead, they decided it would be clearer and more efficient 
to define the types of organizations that would qualify as eligible 
employers for purposes of public service loan forgiveness, and base 
eligibility for the forgiveness on the type of organization that 
employs the borrower. Accordingly, the proposed regulations define the 
term ``public service organization.''
    AmeriCorps members receive an award for service performed annually 
(the Segal Education Award) that can be used to make a lump sum payment 
on a Federal student loan. The negotiators determined that it would be 
appropriate and consistent with considering AmeriCorps service as 
qualifying service for this purpose to allow use of the education award 
received for that service as a basis for deriving qualifying payments 
on a Direct Loan that would count towards the 120 monthly payments 
required for loan forgiveness.

Definitions (Sec.  685.219(b))

    Statute: For purposes of the public service loan forgiveness 
program, section 455(m)(3)(A) of the HEA defines ``eligible Federal 
Direct Loan'' as a Direct Stafford Loan, a Direct PLUS Loan, a Direct 
Unsubsidized Stafford Loan, or a Direct Consolidation Loan.
    Section 455(m)(3)(B) of the HEA defines ``public service job'' as: 
(1) A full-time job in a number of public service occupations and 
fields; (2) a full-time job at a non-profit organization that satisfies 
the requirements of section 501(c)(3) of the IRC; or (3) a full-time 
faculty member at a Tribal college or university as provided in section 
316(b) of the HEA, or other faculty teaching in high-needs areas as 
determined by the Secretary. The statute does not define any other term 
for the purposes of this program.
    Proposed Regulations: Proposed Sec.  685.219(b) would define 
several terms for purposes of implementing the public service loan 
forgiveness program. The defined terms would include ``Employee or 
employed,'' ``Full-time,'' ``Public Interest Law,'' and ``Public 
Service organization''.
    Under the proposed regulations:
      ``Employee or employed'' would mean an individual who is 
hired and paid by a public service organization.
      ``Full-time'' would mean working in qualifying employment 
in one or more jobs for the greater of--
    (1)(i) An annual average of at least 30 hours per week; or

[[Page 37705]]

    (ii) For a contractual or employment period of at least 8 months, 
an average of 30 hours per week; or
    (2) The number of hours the employer considers full-time.
    Vacation or leave time provided by the employer would not be 
considered in determining the average hours worked on an annual or 
contract basis.
      ``Public interest law'' would refer to legal services 
provided by a public service organization that are funded in whole or 
in part by a local, State, Federal, or Tribal government.
      ``Public service organization'' would mean:
    (1) A Federal, State, local, or Tribal government organization, 
agency, or entity;
    (2) A public child or family service agency;
    (3) A non-profit organization that qualifies under section 
501(c)(3) of the IRC that is exempt from taxation under section 501(a) 
of the IRC;
    (4) A Tribal college or university; or
    (5) A private organization that--
    (i) Provides the following public services: Emergency management, 
military service, public safety, law enforcement, public interest law 
services, public child care, public service for individuals with 
disabilities and the elderly, public health, public education, public 
library services, school library, or other school-based services; and
    (ii) Is not a business organized for profit, a labor union, a 
partisan political organization, or an organization engaged in 
religious activities, unless the qualifying activities are unrelated to 
religious instruction, worship services, or any form of proselytizing.
    Reasons: The proposed definitions are needed to clarify program 
eligibility and public service work requirements for borrowers who wish 
to seek public service loan forgiveness.
    Some of the non-Federal negotiators proposed definitions that would 
extend eligibility to individuals in certain jobs (e.g., public 
defenders) by specifically identifying them in the definition of public 
interest law, regardless of the nature of their employer or the funding 
source of their salaries. The negotiators determined that this would be 
inconsistent with the statutory intent of the definition of the term 
``public service job'' and the fact that the legislative history 
surrounding this section of the CCRAA spoke to recognizing individuals 
in ``public sector jobs.'' Some of the non-Federal negotiators also 
argued that the definitions should not limit the eligibility of 
individuals. In particular, negotiators were concerned that the 
definition of the term ``full-time'' could make it difficult for 
teachers to qualify for loan forgiveness.
    The term ``Employee or employed'' includes only those individuals 
who are hired and paid by a public service organization. The term would 
not include individuals who are contracted to work for the organization 
or individuals who are hired by a for-profit company that has a 
contract with the public service organization.
    The term ``full-time'' would be defined to recognize the varied 
full-time work schedules that can exist and the fact that there are no 
Federal or generally applicable State standards for what constitutes 
full-time employment. Under the proposed regulations, a borrower would 
be considered to be employed full-time if the borrower works an annual 
average of 30 hours per week, an average of 30 hours per week during a 
contractual or employment period of at least 8 months, or for the 
number of hours the employer considers full-time. The 30-hour standard 
is the same full-time standard used for purposes of title IV student 
loan unemployment deferment eligibility, which requires a borrower to 
be seeking but unable to find full-time employment of at least 30 hours 
per week. The definition is broad enough to include individuals who 
might not work 30 hours each week, but who meet that standard using an 
annual average of their weekly hours. Consequently, teachers and others 
with contractual or employment periods that include an acknowledged 
break period during which they could still be considered employed would 
meet the definition for full-time.
    The term ``Public Interest Law'' limits such services to services 
that are supported in whole or in part by a government.
    The term ``public service organization'' would be derived largely 
from the statutory definition of ``public service job,'' but is 
clarified to include certain non-profit organizations that are not 
qualified under 501(c)(3) of the IRC, but that meet the other statutory 
requirements and qualify as public service employers under the HEA.

Loan Forgiveness (Sec.  685.219(d) and (e))

    Statute: Section 455(m)(2) of the HEA provides that at the 
conclusion of the borrower's employment period in a public service job 
during which the borrower has made 120 qualifying payments under one or 
more qualifying repayment plans, the Secretary will cancel the 
outstanding loan principal and accrued interest on the borrower's loan.
    Proposed Regulations: Proposed Sec.  685.219(d) and (e) would 
provide that, after making the qualifying 120 monthly payments, a 
borrower could request loan forgiveness on a form provided by the 
Secretary. If the Secretary determines that the borrower qualifies for 
loan forgiveness, the Secretary would cancel the outstanding principal 
balance and accrued interest on the borrower's loan and notify the 
borrower of those actions. If the Secretary determines that the 
borrower is ineligible for the loan forgiveness, the Secretary would 
notify the borrower of that determination.
    Reasons: Although the proposed regulations implement the statutory 
requirements, some of the non-Federal negotiators recommended that the 
Department provide more assistance to a borrower seeking public service 
loan forgiveness by providing for annual borrower submission and 
Departmental review and retention of the form provided by the Secretary 
that would be certified by the borrower's employer. The negotiators 
believed that this approach would provide timely confirmation to the 
borrower that all requirements for loan forgiveness (provided the 
borrower made the qualified monthly payments) were satisfied for that 
year. The Department considered the negotiators' suggestion, but 
decided not to adopt this approach for several reasons. First, this 
suggestion would be operational rather than a regulatory issue. Second, 
tracking and reviewing documents on an annual basis for potentially 
thousands of borrowers, many of whom might not remain in public service 
employment or who may never meet the eligibility requirements for final 
loan forgiveness, would be a complex and costly administrative process. 
Finally, as a policy matter, the Department believes it is the 
borrower's responsibility to gather and maintain the documents to 
support his or her eligibility for this Federal benefit.

Loan Consolidation (Sec. Sec.  682.201 and 685.220(d))

    Statute: Section 428C(a)(3)(B) and (b)(5) of the HEA provide that a 
borrower who has a FFEL loan or a FFEL Consolidation Loan, but who 
wishes to use the public service loan forgiveness program, can obtain a 
Direct Consolidation Loan. These provisions are effective July 1, 2008.
    Current Regulations: Sections 682.201(e) and 685.220(d)(1) provide 
that a FFEL borrower can obtain a Direct Consolidation Loan only if: 
(1) The borrower is unable to obtain a FFEL consolidation loan; (2) the 
borrower is

[[Page 37706]]

unable to obtain a FFEL consolidation loan with income sensitive 
repayment terms acceptable to the borrower; or (3) the borrower's FFEL 
consolidation loan is submitted to the guaranty agency for default 
aversion and the borrower wants to obtain a Direct Consolidation Loan 
to make payments under the ICR plan.
    Proposed Regulations: The proposed regulations would amend Sec.  
685.220(d) to provide that a FFEL borrower can obtain a Direct 
Consolidation loan for the purpose of using the public service loan 
forgiveness program. The Department is proposing a conforming change to 
Sec.  682.201(e)(5).
    Reasons: The proposed regulations implement statutory requirements.

Conforming and Technical Amendments (34 CFR Parts 682, 685)

    Statute: The CCRAA made conforming amendments to sections 428C and 
455(d) of the HEA to include in these sections certain provisions of 
the IBR plan, the public service loan forgiveness program, and the ICR 
plan. The HEA does not specifically address conforming or technical 
amendments to the Department's regulations that are needed to implement 
statutory provisions.
    Proposed Regulations: The proposed regulations in 34 CFR parts 682 
and 685 contain statutory and regulatory conforming and technical 
amendments.
    Reasons: The proposed conforming and technical amendments are 
needed to reflect and implement statutory provisions or are otherwise 
needed to harmonize program regulations. These conforming and technical 
amendments were discussed with the negotiating committee and consensus 
was reached on the amendments.

Appendix

    The following Appendix will not appear in the Code of Federal 
Regulations:

Appendix A to the Preamble--Partial Financial Hardship

    Example: Borrower's AGI = $50,000, Family Size = 5, Borrower's 
Total Loans = $25,000, Borrower is a resident of Virginia.
    Step 1: Determine the poverty guideline associated with the 
borrower's family size and State of residence. Using the 2008 HHS 
poverty guidelines, which are available at http://aspe.hhs.gov/
poverty/08poverty.shtml, the borrower's poverty guideline is 
$24,800.
    Step 2: Multiply the poverty guideline by 150%

$24,800 x 150% = $37,200

    Step 3: Subtract the result in Step 2 from AGI.
$50,000 - $37,200 = $12,800

    Step 4: Calculate 15% of the amount obtained in Step 3. This is 
the annual amount of the borrower's income-based payment.

15% x $12,800 = $1,920

    Step 5: Determine the annual payment on the total amount of the 
borrower's loans based on a standard 10-year repayment schedule and 
the applicable interest rate. In this example, the total amount of 
the borrower's loans is $25,000, and the interest rate is 6.8%. The 
annual payment is $3,452.40.
    Step 6: Since the annual payment amount in Step 5 ($3,452.40) is 
greater than the annual income-based payment amount in Step 4 
($1,920), the borrower has a partial financial hardship.
    Step 7: To calculate the borrower's monthly income-based 
payment, divide the result in Step 4 by 12.

$1,920 / 12 = $160

    Step 8: If a borrower's loans are held by more than one loan 
holder, each loan holder needs to adjust the amount of the 
borrower's monthly income-based payment by multiplying the payment 
by the percentage of the total amount of loans owed to the holder. 
In this case, assume the borrower owes $20,000 to Bank A and the 
remaining $5,000 to Bank B. Bank A's percentage of the borrower's 
total loan amount is 80% ($20,000 / $25,000). The borrower's monthly 
income-based payment for Bank A would be 80% x $160, or $128.

Executive Order 12866

Regulatory Impact Analysis

    Under Executive Order 12866, the Secretary must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the 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 set forth in the Executive order.
    Pursuant to the terms of the Executive order, it has been 
determined this proposed regulatory action will have an annual effect 
on the economy of more than $100 million. Therefore, this action is 
``economically significant'' and subject to OMB review under section 
3(f)(1) of Executive Order 12866. In accordance with the Executive 
order, the Secretary has assessed the potential costs and benefits of 
this regulatory action and has determined that the benefits justify the 
costs.

Need for Federal Regulatory Action

    These proposed regulations are needed to implement provisions of 
the HEA, as amended by the CCRAA, that established a new IBR plan for 
FFEL and Direct Loan borrowers, revised the conditions under which a 
FFEL or Direct Loan borrower could qualify for a loan deferment due to 
economic hardship, changed the terms of a number of military service 
deferments, created a loan forgiveness program in the Direct Loan 
Program for borrowers who perform public service, and established a 
separate special allowance rate formula for not-for-profit loan 
holders.

Proposed Regulation's Discretionary Provisions

    The Secretary has limited discretion in implementing the provisions 
of the CCRAA; in most cases these proposed regulations directly reflect 
specific statutory requirements. Policy choices were made in a small 
number of areas. Those areas are listed below, followed by a discussion 
of the alternatives considered and final policy choices made.
    Minimum payment under IBR: The CCRAA does not establish a minimum 
payment that must be made by a borrower under the IBR plan.
    Procedures for Establishing IBR Eligibility: The CCRAA requires the 
Department to establish procedures for annually determining whether a 
borrower qualifies for IBR; these procedures must include verifying the 
borrower's annual income and the annual amount due on the borrower's 
loans.
    Loan Forgiveness Processing and Payment: The CCRAA does not address 
procedures for IBR loan forgiveness processing and payment with respect 
to FFEL loan holders and guaranty agencies.
    Loan Forgiveness: The CCRAA provides that the Department repays or 
cancels the outstanding balance and accrued interest on an eligible 
loan for a borrower who has participated in IBR for a period not to 
exceed 25 years and

[[Page 37707]]

met certain requirements. The statute does not set a minimum for the 
period of years a borrower can be in IBR and have their loan forgiven.
    SAP for Income-Based Loans: For loans being repaid under IBR, the 
CCRAA requires the special allowance payment to be calculated 
separately on the principal balance of the loan and on any unpaid 
accrued interest. The statute does not specify the precise elements 
that must be included in this calculation.
    Economic Hardship Deferment: The CCRAA changed the eligibility 
criteria under which a borrower may qualify for an economic hardship 
deferment. In implementing this provision, the Secretary has the 
discretion to implement additional criteria through regulations.
    Definition of Full-Time Employment: The CCRAA requires borrowers to 
have worked full-time in a qualifying occupation to be eligible for the 
public service loan forgiveness program; however, the statute does not 
include a definition of full-time employment.
    The following section addresses the alternatives that the Secretary 
considered in implementing these discretionary portions of the CCRAA 
provisions. These alternatives are also discussed in the Reasons 
sections of this preamble related to the specific regulatory 
provisions.

Regulatory Alternatives Considered

    Minimum payment under IBR: As noted above, the CCRAA does not set 
minimum payment levels under the IBR plan. As discussed in the Reasons 
section of the preamble related to this provision, the Department 
initially proposed to the non-Federal negotiators a provision requiring 
a $5.00 minimum monthly payment, which is the minimum monthly payment 
used in the Direct Loan Program ICR plan. Under that plan, a minimum 
payment of $5.00 is required whenever the borrower's calculated monthly 
payment is greater than zero but equal to or less than $5.00. Non-
Federal negotiators argued that a $5.00 minimum monthly payment (or any 
payment amount over zero) would violate the statute's 15 percent 
payment cap. Department negotiators agreed that allowing zero payment 
amounts would avoid this problem. (The Department determined that this 
approach had no budgetary impact.) Recognizing that requiring a small 
payment may be inefficient given the administrative costs, the 
negotiators agreed, and the Department is therefore proposing to 
establish a minimum monthly payment of $10.00 whenever the calculated 
monthly payment is between $5.00 and $10.00.
    Procedures for Establishing IBR Eligibility: As discussed in more 
detail earlier in this preamble, the establishment of IBR eligibility 
is largely dependent on a borrower providing consent for a loan holder 
to obtain tax information from the IRS. Non-Federal negotiators 
recommended that the Department allow borrowers to provide consent to 
disclose income information for multiple years. The Department agreed 
to this conceptually, but noted that the forms used for this purpose 
are IRS forms and that the Department could not regulate the period of 
time that these consent forms would cover. The Direct Loan ICR form 
allows consent to be granted for 5 years. The burden associated with 
completing this form was estimated at 12 minutes. Should IRS adopt a 
similar form for IBR, loan holders' administrative costs would be 
significantly reduced. The Department is interested in obtaining any 
data that could be used to quantify this assessment.
    Under the Department's initial proposal at the beginning of the 
negotiating process, borrowers who failed to provide annual information 
on family size when they provide their consent would automatically be 
deemed ineligible to participate in IBR and would be placed in another 
repayment plan. The non-Federal negotiators recommended, and the 
Department agreed, that under these circumstances a borrower's family 
size should be set at one, allowing loan holders to recalculate IBR 
eligibility for the upcoming year. The approach adopted is consistent 
with Department practice in administering the ICR plan. However, the 
Department specifically seeks comment on whether family size should 
instead default to the number previously certified by the borrower. The 
Department's initial baseline budget estimates in this area were based 
on ICR procedures, so the adopted alternative would result in no cost 
beyond this baseline. The Department did not attempt to calculate the 
budget impact of the initial proposal; however, we believe the overall 
impact to the budget would not have been substantially different than 
this proposed policy, since borrowers would have been assigned to 
another repayment plan.
    Loan Forgiveness Processing and Payment: While the CCRAA did not 
establish procedures for FFEL loan holders and guaranty agencies to 
follow in processing loan forgiveness claims and payments for IBR 
borrowers, the non-Federal negotiators supported including such 
requirements in the proposed regulations to provide clear guidelines 
for FFEL loan holders and guaranty agencies administering the IBR plan. 
Accordingly, the proposed regulations would establish deadlines related 
to processing of loan forgiveness claims, notifying borrowers of their 
eligibility for loan forgiveness, and the handling of loan forgiveness 
payments. These proposed regulations are consistent with current FFEL 
regulations for other claim payment transactions between loan holders 
and guaranty agencies and, as such, should not represent a significant 
additional administrative burden for lenders and guaranty agencies. 
This new benefit represents a new collection under the Paperwork 
Reduction Act. A separate 60-day Federal Register notice, including 
burden estimates, will be published to solicit comment on this form 
once it is developed.
    Loan Forgiveness: In the CCRAA, Congress gave the Secretary 
discretion to set a period not to exceed 25 years during which a 
borrower must meet certain requirements to qualify for loan forgiveness 
at the end of such period. The CCRAA did not provide that qualifying 
payments made prior to July 1, 2009, the date this statutory amendment 
becomes effective, would count when determining whether a borrower met 
the relevant requirements during this time period. Some non-Federal 
negotiators suggested that qualifying payments made by a borrower at 
any time before July 1, 2009, should count, and that the forgiveness 
period should be shortened to 20 years. In assessing these suggested 
alternatives, the Department determined that both would result in 
substantially increased Federal costs. Reducing the forgiveness period 
to 20 years, for example, would increase Federal costs by nearly $600 
million over 10 years when compared to the baseline established by 
initial estimates of CCRAA costs, which assumed a forgiveness period of 
25 years. Under OMB memorandum M-05-13, any regulatory action that 
increases the costs to the Federal government must be offset by 
corresponding cost savings; as no corresponding offsets to these 
proposals were available, it was not possible to include them in the 
proposed regulations. In addition, if retroactive payments counted for 
purposes of meeting the loan forgiveness requirements, loans holders 
would find it difficult, if not impossible, to determine a beginning 
date before July 1, 2009, since there was no expectation of loan 
forgiveness and, therefore, no need to track and maintain

[[Page 37708]]

data on individual loan payments in the manner required for IBR 
purposes. A compromise was ultimately agreed to under which retroactive 
payments made by borrowers in the ICR plan would be counted when 
calculating the IBR forgiveness period. This approach avoids both 
additional Federal costs (since ICR borrowers are already on a path to 
loan forgiveness) and administrative hurdles, since ICR is available 
only in the Direct Loan Program, for which the Department has readily 
available payment data.
    SAP for Income-Based Loans: Initially, the Department recommended 
calculating SAP rates related to accrued interest on loans repaid under 
the IBR plan in the same manner that is used to calculate rates for a 
loan's principal balance. Some non-Federal negotiators noted that 
accrued interest on an IBR loan is only capitalized under limited 
circumstances. They stated that the lender's yield on the principal 
balance of these loans would be less than that obtained on a similar 
loan where accrued interest is capitalized. These negotiators also 
noted that, under the Department's approach, the lender's yield on a 
loan in repayment under IBR would be reduced further because the 
special allowance rate for the unpaid accrued interest would be reduced 
by the applicable interest rate of the loan. The Department agreed.
    Economic Hardship Deferment: Under the CCRAA, economic hardship for 
the purpose of qualifying for a student loan deferment is defined 
through an income threshold of 150 percent of the poverty guideline 
applicable to the borrower's family size. This approach replaced 
previous criteria under which borrowers were eligible if they earned 
100 percent of the poverty guideline for a family of two or if their 
Federal educational debt burden exceeded 20 percent of their adjusted 
gross income when adjusted gross income minus debt burden is less than 
220 percent of the poverty guideline for a family of two.
    Under the HEA, the Secretary has discretion to establish additional 
eligibility criteria for economic hardship deferments through 
regulation. The Department is proposing to exercise this discretion to 
retain the ``20/220'' rule described above for a limited time. First 
established in regulations published on November 1, 2007, retaining 
this provision would allow borrowers to continue to qualify for an 
economic hardship deferment until July 1, 2009, when the newly created 
IBR plan becomes effective. Borrowers in an economic hardship deferment 
under the 20/220 provision that began prior to July 1, 2009, would 
continue in that status for one year from the start of the deferment 
period. Some of the non-Federal negotiators were concerned that 
eliminating the rule after July 1, 2009, would adversely affect medical 
students with large student loans. Data from the National Postsecondary 
Student Aid Survey indicate 91.2 percent of students beyond their third 
year of medical school have Federal student loans, with an average 
outstanding balance of $109,572. Nearly three-quarters of these 
students have Federal student loan debt of at least $75,000. Under the 
20/220 provision, a significant number of these borrowers qualify for 
an economic hardship deferment during their internship and residency; 
under this deferment they would make no payments for up to 3 years, 
with interest paid by the government on Stafford Loans during that 
period. In the absence of the 20/220 provision, many of these borrowers 
would not qualify for a deferment and would therefore have to begin 
repaying their loans while completing their training in relatively low-
paying positions. In light of these concerns, negotiators asked the 
Department to extend the 20/220 provision indefinitely. Such an 
extension would be prohibitively expensive, with estimated 10-year 
costs of over $1.1 billion. This estimate, based on a review of 
Department data on borrower incomes and debt burdens, reflects an 
estimated 30 percent increase in loan volume qualifying for economic 
hardship deferment over the amount assumed under baseline estimates. In 
addition, the Department noted that many high-debt, low-income 
borrowers under the IBR plan will not be required to make monthly loan 
payments; others will have monthly payment amounts well below those 
normally calculated under a standard repayment plan. All borrowers have 
access to either the IBR or the ICR plan in the Direct Loan Program. 
The Department does not have borrower-level income data by profession 
and so cannot estimate aggregate payment amounts under these plans for 
medical students affected by these regulations. After considering all 
these factors, the Department declined to use its authority to extend 
the 20/220 provision beyond July 1, 2009.
    Definition of Full-Time Employment: The CCRAA did not include a 
definition of the term ``full-time,'' when describing the type of 
employment that would qualify a borrower for the public service loan 
forgiveness program. Accordingly, we are proposing a definition in this 
NPRM.
    After consulting with the Department of Labor, the Department 
determined that there is no Federal or generally applicable State 
standard for what constitutes full-time employment. Subsequent 
discussions considered the wide variety of full-time work schedules 
available. Negotiators agreed to a definition under which an individual 
who works an annual average of 30 hours per week, an average of 30 
hours per week during a contractual or employment period of at least 8 
months, or for the number of hours the employer considers full-time, 
would be considered a full-time employee. This proposed definition is 
consistent with the standard used to determine a borrower's eligibility 
for a student loan unemployment deferment, which requires a borrower to 
be seeking but unable to find full-time employment of at least 30 hours 
per week. The proposed definition also could include employment that is 
less than 30 hours each week, but which averages 30 hours a week over 
the course of a year. Under the proposed definition, teachers and other 
individuals engaged in public service employment who have a contractual 
or employment period that includes an acknowledged break period during 
which they remain employed could be considered to be employed full-
time.

Benefits

    Benefits provided in these regulations include: The provision of 
more flexible repayment options for student loan borrowers, expanded 
eligibility for economic hardship deferments for borrowers with large 
families, additional deferment benefits for military personnel, and the 
provision of loan forgiveness for public service employees. The Federal 
taxpayer also benefits from reduced costs related to the reduction of 
SAP paid to not-for-profit loan holders in the FFEL Program. These 
benefits all flow directly from statutory changes included in the 
CCRAA; the Department does not believe these benefits are materially 
affected by discretionary choices exercised by the Department in 
developing these regulations. As discussed in greater detail under Net 
Budget Impacts, these proposed provisions result in net costs to the 
government of $3.3 billion over 2008-2012.

Costs

    Because entities affected by these proposed regulations already 
participate in the title IV, HEA programs, these lenders, guaranty 
agencies, and schools must already have systems and procedures in place 
to meet program eligibility requirements. These proposed regulations 
generally would require

[[Page 37709]]

discrete changes in specific parameters associated with existing 
guidance--such as the use of new criteria to calculate eligibility for 
deferments or determine SAP--rather than wholly new requirements. 
Accordingly, entities wishing to continue to participate in the student 
aid programs have already incurred most of the administrative costs 
related to implementing these proposed regulations. Marginal costs over 
this baseline are primarily related to one-time system changes that, 
while possibly significant in some cases, are an unavoidable cost of 
continued program participation. In assessing the potential impact of 
these proposed regulations, the Department recognizes that certain 
provisions--primarily the provision of an IBR plan--are likely to 
increase workload for some program participants. (This additional 
workload is discussed in more detail under the Paperwork Reduction Act 
of 1995 section of this preamble. These workload analyses indicate an 
overall increase of 217,297 hours as a result of this NPRM.) Additional 
workload would normally be expected to result in estimated costs 
associated with either the hiring of additional employees or 
opportunity costs related to the reassignment of existing staff from 
other activities. In this case, however, these costs are not expected 
to be significant because the Department estimates that participation 
by FFEL borrowers in the IBR plan will be extremely limited.
    The Department is particularly interested in comments on possible 
administrative burdens related to the proposed regulations. In a number 
of areas, such as the administrative activities required for FFEL 
lenders in establishing an IBR option, non-Federal negotiators raised 
concerns about possible administrative burden associated with 
provisions included in these proposed regulations. Given the limited 
data available, however, the Department is particularly interested in 
comments and supporting information related to possible burden stemming 
from the proposed regulations. Estimates included in this notice will 
be reevaluated based on any information received during the public 
comment period.
    IBR and Economic Hardship Deferment Changes. The Department 
estimates that the proposed regulatory changes related to IBR and 
economic hardship deferments would result in $4.5 billion in additional 
Federal costs over fiscal years 2008-2012. ($3.0 billion of these costs 
are associated with loans made prior to 2008.) These costs are almost 
entirely related to IBR, as the proposed changes in the economic 
hardship deferment--liberalizing the family-size criteria while 
eliminating the debt burden test--largely cancelled one another out. 
With respect to the IBR plan, the Department reviewed Direct Loan 
servicing system data on participation in the ICR plan and assumed 
borrowers participating or estimated to participate in ICR who meet the 
IBR eligibility criteria would stop participating in the ICR plan and 
choose to participate in the more generous IBR plan. Assumptions were 
derived by applying percentages based on historical participation in 
the ICR plan to loan volume forecasts for future years. Using this 
approach, we estimate that 126,000 borrowers in the FY 2009 loan cohort 
would select the IBR plan, and that of these borrowers, 44,000 would 
eventually have at least a portion of their loan forgiven after 25 
years. By the 2012 cohort, projected growth in loan volume increase 
these figures to 146,000 and 52,000, respectively.
    Public Service Loan Forgiveness. The Department estimates the 
public service loan forgiveness provisions in these proposed 
regulations would increase Federal costs by $1.5 billion over FY 2008-
2012. (Of these costs, $1.2 billion is associated with loans made prior 
to 2008.) This estimate was based on an analysis of public sector job 
participation by student loan borrowers using information from 
Department Direct Loan systems and data compiled by the Census Bureau 
through its Current Population Surveys. These data indicated 32.6 
percent of individuals between the ages of 21 and 28 were employed in 
public service positions that meet the statutory eligibility percent 
criteria. This age range was chosen to best capture the population of 
borrowers most likely to take advantage of this benefit. The Department 
was unable to obtain data on how long individuals remain employed in 
qualifying positions. In the absence of data to the contrary, and to 
estimate the maximum government exposure under this provision, the 
Department assumed all individuals would work the full 10 years needed 
to receive the benefit. Given the requirement that borrowers be making 
payments throughout the qualifying employment period, it was assumed 
that only borrowers choosing the IBR or ICR plan would have balances 
eligible for forgiveness after 10 years. The Department assumed the 
distribution of borrowers choosing these repayment plans was consistent 
with the population as a whole as indicated by the Census data. 
Accordingly, the Department's cost estimation model was run assuming 
remaining balances would be forgiven after 10 years for 32.6 percent of 
ICR and IBR borrowers.
    SAP for Not-for-Profit Entities. The Department estimates the not-
for-profit holder SAP provisions will reduce Federal costs by $2.9 
billion over FY 2008-2012. These estimates are based on forecasts of 
commercial paper rates prepared by OMB and loan volume assumptions 
developed by the Department using data from the FFEL lender payment 
system and publicly available information on lender characteristics. 
Initial estimates prepared following the passage of the CCRAA assumed 
12.4 percent of new FFEL loan volume will be held by not-for-profit 
loan holders; this percentage increased to 16.2 percent when adjusted 
for Public Law 110-109, as implemented by this NPRM, which removed the 
requirement that eligible not-for-profit holders be eligible lenders 
under section 435(d) of the HEA. To determine the cost of this change, 
the Department's loan cost model was run applying the not-for-profit 
SAP rates to the revised percentage of loan volume.

Net Budget Impacts

    The CCRAA provisions implemented by these proposed regulations are 
estimated to have a net budget impact of $650 million in 2008 and $9.2 
billion over FY 2008-2012. Consistent with the requirements of the 
Credit Reform Act of 1990, 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 OMB's Credit Subsidy 
Calculator. (This calculator will also be used for re-estimates of 
prior-year costs, which will be performed each year beginning in FY 
2009). 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

[[Page 37710]]

regulations. That said, however, in developing the Accounting Statement 
included below, 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 on 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: 
Proprietary schools, two-year schools, freshmen/sophomores at four-year 
schools, juniors/seniors at four-year schools, and graduate students. 
Risk categories have separate assumptions based on the historical 
pattern of behavior--for example, the likelihood of default or the 
likelihood to use statutory deferment or discharge benefits--of 
borrowers in each category.

Assumptions, Limitations, and Data Sources

    Because these proposed regulations would largely restate statutory 
requirements that would be self-implementing in the absence of 
regulatory action, impact estimates provided in the preceding section 
reflect a pre-statutory baseline in which the CCRAA changes implemented 
in these proposed regulations do not exist. Costs have been quantified 
for five years. In general, these estimates should be considered 
preliminary; they will be reevaluated in light of any comments or 
information received by the Department prior to the publication of the 
final regulations. The final regulations will incorporate this 
information in a more robust analysis.
    In developing these estimates, a wide range of data sources were 
used, including data from the National Student Loan Data System, 
operational and financial data from Department of Education systems, 
and data from a range of surveys conducted by the National Center for 
Education Statistics such as the 2004 National Postsecondary Student 
Aid Survey, the 1994 National Education Longitudinal Study, and the 
1996 Beginning Postsecondary Student Survey. Data from other sources, 
such as the Census Bureau, were also used. Data on administrative 
burden at participating schools, lenders, guaranty agencies, and third-
party servicers are extremely limited; accordingly, as noted above, the 
Department is particularly interested in comments in this area.
    Elsewhere in this SUPPLEMENTARY INFORMATION section we identify and 
explain burdens specifically associated with information collection 
requirements. See the heading Paperwork Reduction Act of 1995.

Accounting Statement

    As required by OMB Circular A-4 (available at http://
www.Whitehouse.gov/omb/Circulars/a004/a-4.pdf), in Table 2 below, 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 changes in 
Federal student aid payments as a result of these proposed regulations. 
Expenditures are classified as transfers from the Federal government to 
student loan borrowers (for the IBR, loan deferment, and loan 
forgiveness provisions) and from student loan holders to the Federal 
government (for the SAP provisions).

NOTE: CHART OMITTED SEE PDF FILE FOR Table 2.--Accounting Statement:
Classification of Estimated Expenditures 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 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. Regulatory Flexibility Act Certification The Secretary certifies that these proposed regulations would not have a significant economic impact on a substantial number of small entities. These proposed regulations would affect institutions of higher education, lenders, and guaranty agencies that participate in title IV, HEA programs and individual students and loan borrowers. The U.S. Small Business Administration Size Standards define these institutions as ``small entities'' if they are for-profit or nonprofit institutions with total annual revenue below $5,000,000 or if they are institutions controlled by governmental entities with populations below 50,000. Guaranty agencies are State and private nonprofit entities that act as agents of the Federal government, and as such are not considered ``small entities'' under the Regulatory Flexibility Act. Individuals are also not defined as ``small entities'' under the Regulatory Flexibility Act. A significant percentage of the lenders and schools participating in the Federal student loan programs meet the [[Page 37711]] definition of ``small entities.'' While these lenders and schools fall within the SBA size guidelines, the proposed regulations do not impose significant new costs on these entities. The Secretary invites comments from small institutions and lenders 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 Proposed Sec. Sec. 674.34, 682.205, 682.209, 682.210, 682.211, 682.215, 682.302, 685.204, 685.205, 685.219, 685.220, and 685.221 contain information collection requirements. Under the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department has submitted a copy of these sections to OMB for its review. Sections 674.34(h)-(i), 682.210(t)-(u), and 685.204(e)-(f)--Deferment of Repayment--Federal Perkins Loan, NDSLs, Defense Loans, FFEL, and Direct Loans The proposed regulations amend the provisions related to the military service deferment and the post-active duty student deferment in the Federal Perkins, FFEL, and Direct Loan Programs. The proposed changes regarding the post-active duty student deferment would result in an increase in the burden hours associated with the current Federal Perkins/FFEL/Direct Loan military deferment request form cleared under OMB Control Number 1845-0080. The current military deferment request form covers only the military service deferment. The form will be revised to cover both the military service deferment and the post-active duty student deferment. The Department expects to submit a revised deferment request form for OMB clearance by October 2008. Section 682.205(h)--Disclosure Requirements for Lenders These proposed regulations provide that, at the time of offering a borrower a loan and at the time of offering a borrower repayment options, the lender must provide the borrower with a notice that informs the borrower of the availability of income-sensitive and IBR plans, except for parent PLUS borrowers and Consolidation Loan borrowers whose Consolidation Loan paid off one or more parent PLUS Loans. This information may be provided in a separate notice or as part of the other disclosures required by this section. The Department has determined that this modification to the current notification requirements would not increase the burden associated with Sec. 682.205 and the associated collection, OMB Control No. 1845-0020. Section 682.209(a)--Repayment of a Loan The proposed regulations would add the IBR plan as a repayment option for FFEL borrowers and require lenders to take certain actions when a borrower fails to select a repayment plan within 45 days of the lender notification. The Department has determined that this modification to the current notification requirements would not increase the burden associated with Sec. 682.209 and the associated collection, OMB Control No. 1845-0020. Section 682.211(f)--Forbearance The proposed regulations would provide for a period of forbearance, not to exceed 60 days, necessary for the lender to collect and process documentation supporting the borrower's eligibility for loan forgiveness under the IBR program. The lender must notify the borrower that the requirement to make payments on the loans for which forgiveness was requested has been suspended pending approval of the forgiveness by the guaranty agency. The proposed addition of this new type of forbearance under the IBR plan is estimated to increase the burden hours for lenders and guaranty agencies by 31,414 hours under OMB Control Number 1845-0020. (Note: This is an administrative forbearance and does not require an OMB- approved form.) Section 682.215--Income-Based Repayment Plan The proposed regulations provide that a borrower may elect the IBR plan only if the borrower has a partial financial hardship. Under this plan, the borrower's aggregate monthly loan payments would be limited to no more than 15 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. If a borrower no longer has a partial financial hardship, the borrower may continue to make payments under the IBR plan, but the loan holder must recalculate the borrower's monthly repayment. If the borrower no longer wishes to pay under the IBR plan, the borrower must pay under a standard repayment plan as calculated by the loan holder. The proposed regulations provide that a loan holder would require the borrower, in order to establish his or her eligibility for the IBR plan, to provide written consent to the disclosure of AGI and other tax return information by the IRS to the loan holder. The borrower also would be required to annually certify his or her family size; otherwise the loan holder would assume a family size of one. To determine whether a borrower qualifies for loan forgiveness after 25 years, the loan holder must make a determination that the borrower has established eligibility for loan forgiveness by making payments for 25 years, or, that through a combination of monthly payments and economic hardship deferments, the borrower has made the equivalent of 25 years of payments. The loan holder is required, no later than 60 days after it makes the determination that the borrower is eligible for loan forgiveness, to request payment from the guaranty agency. Within 45 days of receiving the loan holder's request for payment, the guaranty agency must determine if the borrower meets the eligibility requirements for loan forgiveness and must notify the loan holder. If the guaranty agency determines that the borrower is eligible for loan forgiveness, it must pay the loan holder within the same 45-day period. The holder must notify the borrower within 30 days of being notified by the guaranty agency. We estimate that the proposed regulation will increase burden for borrowers, lenders and guaranty agencies by 185,778 hours, under new OMB Control Number 1845-XXXX. Section 682.302(x)--Eligible Not-For-Profit Holder The proposed regulations would require a State, non-profit entity, or eligible lender trustee to provide to the Secretary a certification on the State or non-profit entity's letterhead signed by the State or non-profit entity's CEO which states the basis upon which the entity qualifies as a State or non-profit entity. The submission must include documentation establishing the entity's State or non-profit status. In addition, the submission must include the name and lender identification number for which the eligible not-for-profit designation is being certified. For an entity establishing non-profit status under section 150(d) of the IRC, the submission must include copies of the requests of the State or political subdivision or subdivisions thereof, or requirements described in section 150(d) of the IRC, and the CEO's additional certification that the entity has not elected to cease its status as a qualified scholarship funding corporation. A separately submitted certification or opinion by the State or non-profit entity's external legal counsel [[Page 37712]] or the office of the attorney general of the State, must be submitted with supporting documentation that shows that the State or non-profit entity is a constituted State entity by operation of specific State law, has been designated by the State or one or more political subdivisions of the State to serve as a qualified scholarship funding corporation, and is incorporated under State law as a not-for-profit organization, or is an entity described in section 501(c)(3) of the IRC, or has in effect a relationship with an eligible lender under which the lender is acting as trustee on behalf of the State or non- profit entity. Under the proposed regulations, once an entity has been approved as an eligible not-for-profit holder, the entity must provide to the Secretary an annual certification on the State or non-profit entity's letterhead signed by the CEO, which includes the name and lender identification number(s) of the entities for which designation is being recertified. The annual certification must state that the State or non- profit entity has not altered its status as a State or non-profit entity since its prior certification to the Secretary and that it continues to satisfy the requirements of an eligible not-for-profit holder either in its own right or through a trust agreement with an eligible lender trustee. A copy of its IRS Form 990--Return of Organization Exempt From Income Tax, if applicable, must be submitted at the same time the entity files that return with the IRS as a part of the annual certification. Within 10 days of becoming aware of the occurrence of a change that may result in a State or non-profit entity that has been designated an eligible not-for-profit holder, either directly or through an eligible lender trustee, losing that eligibility, the State or non-profit entity must submit details of the change to the Secretary. We estimate that the proposed regulation will increase burden for States, non-profit entities and eligible lender trustees by 105 hours in the new OMB Control Number 1845-XXXX. Section 685.205(a)--Forbearance The proposed regulations would provide for loan forbearance for a borrower who qualifies for a post-active duty student deferment, but does not qualify for a military service or other deferment, and is engaged in active State duty for a period of more than 30 consecutive days. The proposed addition of a new type of forbearance will increase the burden hours associated with OMB Control Number 1845-0031, the Direct Loan Program General Forbearance Request form. The current form will be revised to cover the new forbearance condition. The Department expects to submit the revised form for clearance by October 2008. Section 685.219--Public Service Loan Forgiveness The Public Service Loan Forgiveness Program created by the CCRAA is intended to encourage individuals to enter and continue in full-time public service employment by forgiving the remaining balance of their eligible Direct loans after they satisfy the public service and loan payment requirements of this section. The burden associated with the proposed regulations for this program will be reported in the paperwork clearance package for a new public service loan forgiveness application form under the new OMB Control Number 1845-XXX3 that the Department will develop. Because no borrowers will be eligible to apply for loan forgiveness under this program until 2017, the Department has not yet established a timeline for developing a loan forgiveness application. Section 685.220--Consolidation The proposed regulation permits a borrower to consolidate a FFEL Consolidation Loan into the Federal Direct Loan Program for the purpose of participating in the Public Service Loan Forgiveness Program. We estimate that the expected increase in the number of FFEL Program borrowers who wish to consolidate into the Federal Direct Loan Program for the purpose of using the public loan forgiveness program will increase the burden hours associated with OMB Control Number 1845- 0053 (Direct Consolidation Loan Application and Promissory Note). The Department will submit an OMB 83-C indicating the increased burden associated with this collection by October 2008. Section 685.221--Income-Based Repayment Plan The proposed regulations would provide that a borrower may elect the IBR plan only if the borrower has a partial financial hardship. Under this plan, the borrower's aggregate monthly loan payments would be limited to no more than 15 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. If a borrower no longer has a partial financial hardship, the borrower may continue to make payments under the IBR plan, but the Secretary must recalculate the borrower's monthly repayment. If the borrower no longer wishes to pay under the IBR plan, the borrower must pay under the standard repayment plan as calculated by the Secretary. The proposed regulations provide that the Secretary would require a borrower, in order to establish his or her eligibility for the IBR plan, to provide written consent to the disclosure of AGI and other tax return information by the IRS to the Secretary. The borrower annually certifies his or her family size; otherwise the Secretary assumes a family size of one. To qualify for loan forgiveness after 25 years, a determination must be made that the borrower has established eligibility for loan forgiveness by making payments for 25 years, or that through a combination of monthly payments and economic hardship deferments, the borrower has made the equivalent of 25 years of payments. The Department plans to revise the current collection approved under OMB Control Number 1845-0017, the Direct Loan Program Income Contingent Repayment Plan Consent to Disclosure of Tax Information, so that it may also be used to collect the income information needed for the Income-Based Repayment Plan. The resulting increased burden associated with OMB Control Number 1845-0017 will be reported in the paperwork clearance package for the revised form. The Department expects to submit the revised form for clearance by October 2008. NOTE: CHART OMITTED: SEE PDF FILE FOR - Collection of Information Intergovernmental Review These programs are not subject to Executive Order 12372 and the regulations in 34 CFR part 79. Assessment of Educational Impact In accordance with section 441 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. Electronic Access to This Document You may view this document, as well as all other Department of Education documents published in the Federal Register, in text or Adobe Portable Document Format (PDF) on the Internet at the following site: http://www.ed.gov/news/fedregister. To use PDF you must have Adobe Acrobat Reader, which is available free at this site. If you have questions about using PDF, call the U.S. Government Printing Office (GPO), toll free, at 1-888-293-6498; or in the Washington, DC, area at (202) 512-1530. Note: 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 on GPO Access at: http://www.gpoaccess.gov/ nara/index.html. (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 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 18, 2008. Margaret Spellings, Secretary of Education. For the reasons discussed in the preamble, the Secretary proposes to amend 34 CFR chapter IV 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. 1087aa-1087hh and 20 U.S.C. 421-429 unless otherwise noted. 2. Section 674.34 is amended by: A. In the introductory text of paragraph (e), removing the reference ``(e)(6)'' from the cross-reference in the parenthetical phrase that appears after the word ``time'' and adding, in its place, the reference ``(e)(5)'', and removing the words ``through (e)(6)'' and adding, in their place, the words ``through (e)(5)''. B. In paragraph (e)(1), removing the word ``FDSL'' and adding, in its place, ``Federal Direct Loan Program'', and adding the word ``the'' before the words ``FFEL programs''. C. In paragraph (e)(3)(ii), removing the words ``poverty line applicable to the borrower's family size, as determined in accordance with section 673(2) of the Community Service Block Grant Act'' and adding, in its place, the words ``poverty guideline applicable to the borrower's family size as published annually by the Department of Health [[Page 37714]] 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''. D. Removing paragraph (e)(5). E. Redesignating paragraphs (e)(6), (e)(7), (e)(8), (e)(9), and (e)(10) as paragraphs (e)(5), (e)(6), (e)(7), (e)(8), and (e)(9) respectively. F. In newly redesignated paragraph (e)(6), removing the words ``or (e)(5)''. G. In newly redesignated paragraph (e)(7), removing the words ``, or (e)(5)'', removing the punctuation ``,'' after the reference ``(e)(3)'', and adding the word ``and'' after the reference ``(e)(3)''. H. In newly redesignated paragraph (e)(8), adding ``(i)'' after the number ``(8)'' and removing the words ``and (e)(5)''. I. Adding new paragraph (e)(8)(ii). J. In newly redesignated paragraph (e)(9), removing the words ``and (e)(5)''. K. In paragraph (h)(1), adding the heading ``Military service deferment'' before the paragraph designation ``(1)'' and adding the punctuation ``,'' after the word ``principal'' and after the word ``accrue''. L. In paragraph (h)(4), removing the word ``section'' and adding, in its place, the word ``paragraph''. M. Revising paragraph (h)(6). N. Adding new paragraph (h)(7). O. Adding a heading to paragraph (i). P. In paragraph (i)(1), revising the introductory text. Q. In paragraph (i)(1)(ii), adding the words ``, on at least a half-time basis,'' after the word ``enrolled''. R. Revising paragraph (i)(2). S. In paragraph (i)(3), adding the words ``, on at least a half- time basis,'' after the word ``status'' each time it appears. T. Adding new paragraph (i)(4). U. In paragraph (j), removing the words ``paragraph (j)'' and adding, in their place, the words ``paragraph (k)''. The revisions and additions read as follows: Sec. 674.34 Deferment of repayment--Federal Perkins loans, NDSLs and Defense loans. * * * * * (e) * * * (8)(i) For purposes of paragraphs (e)(3) of this section, a borrower is considered to be working full-time if the borrower is expected to be employed for at least three consecutive months at 30 hours per week. (ii) For purposes of paragraph (e)(3)(ii) of this section, family size means the number that is determined by counting the borrower, the borrower's spouse, and the borrower's children 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 requests the economic hardship deferment, 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. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. * * * * * (h) * * * (6) For a borrower whose active duty service includes October 1, 2007, or begins on or after that date, the deferment period ends 180 days after the demobilization date for each period of service described in paragraphs (h)(1)(i) and (h)(1)(ii) of this section. (7) Without supporting documentation, a military service deferment may be granted to an otherwise eligible borrower for a period not to exceed 12 months from the date of the qualifying eligible service based on a request from the borrower or the borrower's representative. * * * * * (i) Post-active duty student deferment. (1) Effective October 1, 2007, a borrower of a Federal Perkins loan, an NDSL, or a Defense loan serving on active duty military service on that date, or who begins serving on or after that date need not pay principal, and interest does not accrue for up to 13 months following the conclusion of the borrower's active duty military service and initial grace period if-- * * * (2) As used in paragraph (i)(1) of this section ``Active duty'' means active duty as defined in section 101(d)(1) of title 10, United States Code, for at least a 30-day period, except that-- (i) Active duty includes active State duty for members of the National Guard under which the Governor activates National Guard personnel based on State statute or policy and the activities of the National Guard are paid for with State funds; (ii) Active duty includes full-time National Guard duty under which the Governor is authorized, with the approval of the President or the U.S. Secretary of Defense, to order a member to State active duty and the activities of the National Guard are paid for with Federal funds; (iii) Active duty does not include active duty for training or attendance at a service school; and (iv) Active duty does not include employment in a full-time, permanent position in the National Guard unless the borrower employed in such a position is reassigned to active duty under paragraph (i)(2)(i) of this section or full-time National Guard duty under paragraph (i)(2)(ii) of this section. * * * * * (4) If a borrower qualifies for both a military service deferment and a post-active duty student deferment under both paragraphs (h) and (i) of this section, the 180-day post-mobilization military service deferment period and the 13-month post-active duty student deferment period apply concurrently. * * * * * 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. 4. Section 682.201 is amended by: A. In paragraph (e)(3), removing the word ``and'' at the end of the paragraph. B. In paragraph (e)(4), removing the punctuation ``.'' at the end of the paragraph and adding, in its place, the words, ``; and''. C. Adding a new paragraph (e)(5) to read as follows: Sec. 682.201 Eligible borrowers. * * * * * (e) * * * (5) A FFEL borrower may consolidate his or her loans (including a FFEL Consolidation Loan) into the Federal Direct Consolidation Loan Program for the purpose of using the Public Service Loan Forgiveness Program. 5. Section 682.205 is amended by revising paragraph (h)(1) to read as follows: Sec. 682.205 Disclosure requirements for lenders. * * * * * (h) * * * (1) At the time of offering a borrower a loan and at the time of offering a borrower repayment options, the lender must provide the borrower with a notice that informs the borrower of the availability of income-sensitive and, except for parent PLUS borrowers and Consolidation Loan borrowers whose Consolidation Loan paid off one or more parent PLUS Loans, income-based repayment plans. This information may be provided in a separate notice or as part of the other disclosures required by this section. The notice must inform the borrower-- [[Page 37715]] (i) That the borrower is eligible for income-sensitive repayment and may be eligible for income-based repayment, including through loan consolidation; (ii) Of the procedures by which the borrower can elect income- sensitive or income-based repayment; and (iii) Of where and how the borrower may obtain more information concerning income-sensitive and income-based repayment plans. * * * * * 6. Section 682.209 is amended by: A. Revising paragraph (a)(6)(iii). B. Revising paragraph (a)(6)(iv). C. Revising paragraph (a)(6)(v). D. Redesignating paragraphs (a)(6)(x) and (a)(6)(xi) as (a)(6)(xi) and (a)(6)(xii), respectively. E. Adding a new paragraph (a)(6)(x). F. In newly redesignated paragraph (a)(6)(xi), adding the words ``, or at any time in the case of a borrower in an income-based repayment plan'' immediately after the word ``annually''. G. In paragraph (a)(8), adding the words ``, except in the case of payments made under an income-based repayment plan.'' immediately after the words ``five dollars'' the first time those words appear. H. In paragraph (b)(1), removing the word ``The'' at the beginning of the sentence and adding, in its place, the words ``Except in the case of payments made under an income-based repayment plan, the''. I. In paragraph (b)(2)(ii), in the second sentence, removing the words ``borrower coupon book'' and adding, in their place, ``borrower's coupon book''. J. In paragraph (c)(1)(i), removing the word ``or'' the first time it appears and adding the words ``, or income-based'' immediately after the word ``extended''. The revisions and additions read as follows: Sec. 682.209 Repayment of a loan. * * * * * (a) * * * (6) * * * (iii) Not more than six months prior to the date that the borrower's first payment is due, the lender must offer the borrower a choice of a standard, income-sensitive, income-based, graduated, or, if applicable, an extended repayment schedule. (iv) Except in the case of an income-based repayment schedule, the repayment schedule must require that each payment equal at least the interest that accrues during the interval between scheduled payments. (v) The lender shall require the borrower to repay the loan under a standard repayment schedule described in paragraph (a)(6)(vi) of this section if the borrower-- (A) Does not select an income-sensitive, income-based, graduated, or, if applicable, an extended repayment schedule within 45 days after being notified by the lender to choose a repayment schedule; (B) Chooses an income-sensitive repayment schedule, but does not provide the documentation requested by the lender under paragraph (a)(6)(viii)(C) of this section within the time period specified by the lender; or (C) Chooses an income-based repayment schedule, but does not provide the income documentation requested by the lender under Sec. 682.215(e)(1)(i) within the time period specified by the lender. * * * * * (x) Under an income-based repayment schedule, the borrower repays the loan in accordance with Sec. 682.215. * * * * * 7. Section 682.210 is amended by: A. Revising paragraph (s)(6)(iii)(B). B. Removing paragraphs (s)(6)(iv), (s)(6)(v), and (s)(6)(vii). C. Redesignating paragraphs (s)(6)(vi), (s)(6)(viii), (s)(6)(ix), (s)(6)(x) and (s)(6)(xi) as paragraphs (s)(6)(iv), (s)(6)(v), (s)(6)(vi), (s)(6)(vii), (s)(6)(viii) respectively. D. In newly redesignated (s)(6)(v), removing the words ``through (v)''. E. In newly redesignated (s)(6)(vi), removing the words ``through (v)''. F. Adding a new paragraph (s)(6)(ix). G. In paragraph (t)(1), removing the word ``an'' and adding, in its place, the word ``a'' and by removing the word ``loans'' and adding, in its place, the word ``loan''. H. In paragraph (t)(2), removing the word ``The'' at the beginning of the sentence, and adding, in its place, the words ``For a borrower whose active duty service includes October 1, 2007, or begins on or after that date, the'' and by removing the words ``for the service'' and adding, in their place, the words ``for each period of service''. I. In paragraph (t)(6), removing the word ``section'' and adding, in its place, the word ``paragraph''. J. Adding new paragraph (t)(9). K. Revising the heading of paragraph (u) and the introductory text to paragraph (u)(1). L. In paragraph (u)(1)(ii), adding the words ``, on at least a half-time basis,'' after the word ``enrolled''. M. Revising paragraph (u)(2). N. In paragraph (u)(3), adding the words ``, on at least a half- time basis,'' after the word ``status'' each time it appears. O. Redesignating paragraph (u)(4) as (u)(5). P. Adding new paragraph (u)(4). The revisions and additions read as follows: Sec. 682.210 Deferment. * * * * * (s)(6) * * * (iii) * * * (B) An amount equal to 150 percent of the poverty guideline applicable to the borrower's family size as published annually by the 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. * * * * * (ix) For purposes of paragraph (s)(6)(iii)(B) of this section, family size means the number that is determined by counting the borrower, the borrower's spouse, and the borrower's children 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 requests the economic hardship deferment, 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. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. * * * * * (t) * * * (9) Without supporting documentation, a military service deferment may be granted to an otherwise eligible borrower for a period not to exceed the initial 12 months from the date the qualifying eligible service began based on a request from the borrower or the borrower's representative. (u) Post-active duty student deferment. (1) Effective October 1, 2007, a borrower who receives a FFEL Program loan and is serving on active duty on that date, or begins serving on or after that date, is entitled to receive a post-active duty student deferment for 13 months following the conclusion of the borrower's active duty military service and any applicable grace period if--* * * (2) As used in paragraph (u)(1) of this section, ``active duty'' means active duty as defined in section 101 (d)(1) of title 10, United States Code for at least a 30-day period, except that-- (i) Active duty includes active State duty for members of the National Guard [[Page 37716]] under which a Governor activates National Guard personnel based on State statute or policy and the activities of the National Guard are paid for with State funds; (ii) Active duty includes full-time National Guard duty under which a Governor is authorized, with the approval of the President or the U.S. Secretary of Defense, to order a member to State active duty and the activities of the National Guard are paid for with Federal funds; (iii) Active duty does not include active duty for training or attendance at a service school; and (iv) Active duty does not include employment in a full-time, permanent position in the National Guard unless the borrower employed in such a position is reassigned to active duty under paragraph (u)(2)(i) of this section or full-time National Guard duty under paragraph (u)(2)(ii) of this section. * * * * * (4) If a borrower qualifies for both a military service deferment and a post-active duty student deferment, the 180-day post-mobilization military service deferment period and the 13-month post-active duty student deferment period apply concurrently. * * * * * 8. Section 682.211 is amended by: A. Adding a new paragraph (f)(13). B. Adding a new paragraph (f)(14). C. In paragraph (h)(2)(ii)(C), removing the punctuation at the end and adding, in its place, ``; and''. D. Adding new paragraph (h)(2)(iii). The additions read as follows: Sec. 682.211 Forbearance. * * * * * (f) * * * (13) For a period not to exceed 60 days necessary for the lender to collect and process documentation supporting the borrower's eligibility for loan forgiveness under the income-based repayment program. The lender must notify the borrower that the requirement to make payments on the loans for which forgiveness was requested has been suspended pending approval of the forgiveness by the guaranty agency. (14) For a period of delinquency at the time a borrower makes a change to the repayment plan. * * * * * (h) * * * (2) * * * (iii) In yearly increments (or a lesser period equal to the actual period for which the borrower is eligible) when a member of the National Guard who qualifies for a post-active duty student deferment, but does not qualify for a military service deferment or other deferment, is engaged in active State duty as defined in Sec. 682.210(u)(2)(i) and (ii) for a period of more than 30 consecutive days, beginning-- (A) On the day after the grace period expires for a Stafford loan that has not entered repayment; or (B) On the day after the borrower ceases enrollment, for a FFEL loan in repayment. 9. Redesignate Sec. 682.215 as Sec. 682.216. 10. Add a new Sec. 682.215 to read as follows: Sec. 682.215 Income-based repayment plan. (a) Definitions. As used in this section--(1) 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. (2) Eligible loan means any outstanding loan made to a borrower under the FFEL and Direct Loan programs except for a FFEL or Direct PLUS Loan made to a parent borrower or a FFEL or Direct Consolidation Loan that repaid a FFEL or Direct PLUS Loan made to a parent borrower. (3) Family size means the number that is determined by counting the borrower, the borrower's spouse, and the borrower's children 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-- (i) Live with the borrower; and (ii) 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. (4) Partial financial hardship means a circumstance in which the annual amount due on all of a borrower's eligible loans, as calculated under a standard repayment plan based on a 10-year repayment period, exceeds 15 percent of the difference between the borrower's AGI and 150 percent of the poverty guideline for the borrower's family size. (5) 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. (b) Repayment plan. (1) A borrower may elect the income-based repayment plan only if the borrower has a partial financial hardship. Except as provided under paragraph (b)(1)(i), (b)(1)(ii), and (b)(1)(iii) of this section, the borrower's aggregate monthly loan payments are limited to no more than 15 percent of the amount by which the borrower's AGI exceeds 150 percent of the poverty line income applicable to the borrower's family size, divided by 12. The loan holder adjusts the calculated monthly payment if-- (i) The total amount of the borrower's eligible loans includes loans not held by the loan holder, in which case the loan holder determines the borrower's adjusted monthly payment by multiplying the calculated payment by the percentage of the total outstanding principal amount of eligible loans that are held by the loan holder; (ii) The calculated amount is less than $5.00, in which case the borrower's monthly payment is $0.00; or (iii) The calculated amount is equal to or greater than $5.00 but less than $10.00, in which case the borrower's monthly payment is $10.00. (2) A borrower with eligible loans held by two or more loan holders must request income-based repayment from each loan holder if the borrower wants to repay all of his or her eligible loans under an income-based repayment plan. (3) If a borrower elects an income-based repayment plan, the loan holder must, unless the borrower requests otherwise, require that all eligible loans owed by the borrower to that holder be repaid under the income-based repayment plan. (4) If the borrower's monthly payment amount is not sufficient to pay the accrued interest on the borrower's subsidized Stafford Loans or the subsidized portion of the borrower's Federal Consolidation loan, the Secretary pays to the holder the remaining accrued interest for a period not to exceed three consecutive years from the date the borrower initially began repayment on each loan under the income-based repayment plan. On a Consolidation Loan that repays loans on which the Secretary has paid accrued interest under this section, the three-year period includes the period for which the Secretary paid accrued interest on the underlying loans. The three-year period does not include any period during which the borrower [[Page 37717]] receives an economic hardship deferment. (5) Except as provided in paragraph (b)(4) of this section, accrued interest is capitalized at the time the borrower chooses to leave the income-based repayment plan or no longer has a partial financial hardship. (6) If the borrower's monthly payment amount is not sufficient to pay any principal due, the payment of that principal is postponed until the borrower chooses to leave the income-based repayment plan or no longer has a partial financial hardship. (7) The special allowance payment to a lender during the period in which the borrower has a partial financial hardship under an income- based repayment plan is calculated on the principal balance of the loan and any accrued interest unpaid by the borrower. (8) The repayment period for a borrower under an income-based repayment plan may be greater than 10 years. (c) Payment application and prepayment. (1) The loan holder shall apply any payment made under an 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 the whole or any part of a loan at any time without penalty. (3) If the prepayment amount equals or exceeds the monthly payment amount under the repayment schedule established for the loan, the loan holder shall apply the prepayment consistent with the requirements of Sec. 682.209(b)(2)(ii). (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 borrower may be required to repay is the amount the borrower would have paid under the FFEL standard repayment plan based on a 10-year repayment period on the borrower's eligible loans that were 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) 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 (ii) For a Consolidation Loan, the applicable repayment period remaining specified in Sec. 682.209(h)(2) for the total amount of that loan and the balance of other student loans that was outstanding at the time the borrower discontinued paying under the income-based repayment plan. (e) Eligibility documentation and verification. (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 remains on the plan. To make this determination, the loan holder requires the borrower to-- (i)(A) Provide written consent to the disclosure of AGI and other tax return information by the Internal Revenue Service to the loan holder. The borrower provides consent by signing a consent form and returning it to the loan holder; (B) 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, the loan holder may use other documentation provided by the borrower to verify income; and (ii) 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) The loan holder designates the repayment option described in paragraph (d)(1) of this section for any borrower who selects the income-based repayment plan but-- (i) Fails to provide or renew the required written consent for income verification; or (ii) Withdraws consent and does not select another repayment plan. (f) Loan forgiveness. (1) To qualify for loan forgiveness after 25 years, the borrower must have participated in the income-based repayment plan and satisfied at least one of the following conditions during that period-- (i) Made reduced monthly payments under a partial financial hardship as provided under paragraph (b)(1) of this section. Monthly payments of $0.00 qualify as reduced monthly payments as provided in paragraph (b)(1)(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)(1) of this section; (iii) Made monthly payments under any repayment plan, that were not less than the amount required under the FFEL standard repayment plan described in Sec. 682.209(a)(6)(vi) with a 10-year repayment period; (iv) Made monthly payments under the FFEL standard repayment plan described in Sec. 682.209(a)(6)(vi) based on a 10-year repayment period for the amount of the borrower's loans that were outstanding at the time the borrower first selected the income-based repayment plan; or (v) Received an economic hardship deferment on eligible FFEL loans. (2) As provided under paragraph (f)(4) of this section, the Secretary repays any outstanding balance of principal and accrued interest on FFEL loans for which the borrower qualifies for forgiveness if the guaranty agency 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 amount of $0.00 as provided in paragraph (b)(1)(ii) of this section; and (ii)(A) The borrower made those monthly payments each year for a 25-year period; or (B) Through a combination of monthly payments and economic hardship deferments, the borrower made the equivalent of 25 years of payments. (3) For a borrower who qualifies for the income-based repayment plan, the beginning date for the 25-year period is-- (i) For a borrower who has a FFEL 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; (ii) For a borrower who has one or more other eligible FFEL 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 [[Page 37718]] that loan, but no earlier than July 1, 2009; (iii) For a borrower who did not make a payment or receive an economic hardship deferment on the loan under paragraph (f)(3)(i) or (ii) of this section, the date the borrower made a payment under the income-based repayment plan on the loan; or (iv) If the borrower consolidates his or her eligible loans, the date the borrower made a payment on the FFEL Consolidation Loan that met the conditions in (f)(1) after qualifying for the income-based repayment plan. (4) If a borrower satisfies the loan forgiveness requirements, the Secretary repays the outstanding balance and accrued interest on the FFEL Consolidation Loan described in paragraph (f)(3)(i), (iii), or (iv) of this section or other eligible FFEL loans described in paragraph (f)(3)(ii) or (iv) of this section. (g) Loan forgiveness processing and payment. (1) No later than 60 days after the loan holder determines that a borrower qualifies for loan forgiveness under paragraph (f) of this section, the loan holder must request payment from the guaranty agency. (2) If the loan holder requests payment from the guaranty agency later than 60 days after the 25-year repayment period required for forgiveness, 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. (3)(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)(3)(i) of this section, pay the holder the amount of the forgiveness. (4) 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, inform the borrower of the determination and, if appropriate, that the borrower's repayment obligation on the loans for which income-based forgiveness was requested is satisfied. The lender must also provide the borrower with information on the required handling of the forgiveness amount. (5)(i) The holder must apply the proceeds of the income-based repayment loan forgiveness amount to satisfy the outstanding balance on those loans for which income-based forgiveness was requested; 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. (6) 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. (7) In the case of a forgiveness applied to a defaulted loan held by the guaranty agency, the Secretary pays the guaranty agency a percentage of the amount forgiven that is equal to the complement of the reinsurance percentage paid on the loan. The payment may also include interest that accrues on the forgiven amount from the date on which the guaranty agency received payment from the Secretary on the default claim to the date on which the guaranty agency determines that the borrower is eligible for the income-based repayment plan loan forgiveness discharge. (Authority: 20 U.S.C. 1098e) 11. Section 682.300 is amended by: A. In paragraph (b)(1)(ii), removing the word ``and'' at the end of the sentence. B. In paragraph (b)(1)(iii), removing the punctuation ``.'' and adding, in its place ``; and'' at the end of the sentence. C. Adding a new paragraph (b)(1)(iv). D. In paragraph (b)(2)(vii), removing the word ``or'' at the end of the sentence. E. In paragraph (b)(2)(viii), removing the word `` or'' at the end of the sentence. F. In paragraph (b)(2)(ix), removing the punctuation ``.'' and adding in its place ``; or'' at the end of the sentence. G. Adding a new paragraph (b)(2)(x). The additions read as follows: Sec. 682.300 Payment of interest benefits on Stafford and Consolidation loans. * * * * * (b) * * * (1) * * * (iv) During a period that does not exceed three consecutive years from the date a borrower initially began repayment under an income- based repayment plan, if the borrower's monthly payment amount under the plan is not sufficient to pay the accrued interest on the borrower's loan or on the qualifying portion of the borrower's Consolidation Loan. * * * * * (2) * * * (x) The date the borrower's payment under the income-based repayment plan is sufficient to pay the accrued interest on the borrower's loan or the qualifying portion of the borrower's Consolidation Loan. * * * * * 12. Section 682.302 is amended by: A. Revising paragraph (a). B. Adding a heading to paragraph (f)(3). C. Revising the introductory text of paragraph (f)(3)(i). D. Revising paragraph (f)(3)(i)(D). E. Redesignating paragraphs (f)(3)(ii), (f)(3)(iii), (f)(3)(iv), (f)(3)(v), and (f)(3)(vi) as paragraphs (f)(3)(iii), (f)(3)(v), (f)(3)(vii), (f)(3)(viii), and (f)(3)(ix), respectively. F. Adding new paragraph (f)(3)(ii). G. Revising redesignated paragraph (f)(3)(iii). H. Adding new paragraph (f)(3)(iv). I. Revising redesignated paragraph (f)(3)(v). J. Adding new paragraph (f)(3)(vi). K. Revising redesignated paragraph (f)(3)(vii). L. Revising redesignated paragraph (f)(3)(viii). M. Revising redesignated paragraph (f)(3)(ix). N. Adding new paragraphs (f)(3)(x), (f)(3)(xi), and (f)(3)(xii). O. Redesignating paragraph (f)(4) as (f)(3)(xiii). P. Revising redesignated paragraph (f)(3)(xiii). The revisions and additions read as follows: Sec. 682.302 Payment of special allowance on FFEL loans. (a) General. The Secretary pays a special allowance to a lender on an eligible FFEL loan. The special allowance is a percentage of the average unpaid principal balance of a loan, including capitalized interest computed in accordance with paragraphs (c) and (f) of this section. Special allowance is also paid on the unpaid accrued interest of a loan covered by Sec. 682.215(b)(7) computed in the same manner as in paragraphs (c) and (f), as applicable, except for this purpose the applicable interest rate shall be deemed to be zero. * * * * * (f) * * * (3) Eligible not-for-profit holder. (i) For purposes of this section, the term [[Page 37719]] ``eligible not-for-profit holder'' means an eligible lender under section 435(d) of the Act (except for a school) that requests special allowance payments from the Secretary and that is-- * * * (D) A trustee acting as an eligible lender on behalf of a State, political subdivision, authority, agency, instrumentality, or other entity described in paragraph (f)(3)(i)(A), (f)(3)(i)(B), or (f)(3)(i)(C) of this section, other than a school that is a lender under Sec. 682.200 (``Lender''), regardless of whether that State, political subdivision, authority, agency, instrumentality, or other entity is an eligible lender under section 435(d) of the Act. * * * * * (ii) For purposes of paragraph (f)(3) of this section, the term ``State or non-profit entity'' means an entity that is not a school and that is described in paragraph (f)(3)(i)(A), (f)(3)(i)(B), or (f)(3)(i)(C) of this section, regardless of whether such entity is an eligible lender under section 435(d) of the Act. (iii) An entity that otherwise qualifies under paragraph (f)(3)(i) of this section shall not be considered an eligible not-for-profit holder unless such lender-- (A) Was a State or non-profit entity and an eligible lender under section 435(d) of the Act, other than a school lender, and had made or acquired on or before September 27, 2007, a FFELP Loan, unless the State waives this requirement under paragraph (f)(3)(iv) of this section; or (B) Is acting as an eligible lender trustee on behalf of a State or non-profit entity that was the sole beneficial owner of a loan eligible for a special allowance payment on September 27, 2007. (iv) Subject to the provisions of section 435(d)(1)(D) of the Act, a State may waive the requirement of paragraph (f)(3)(iii)(A) of this section to identify a new eligible not-for-profit holder pursuant to a written application filed in accordance with paragraph (f)(3)(x) of this section, for the purposes of carrying out a public purpose of the State, except that a State may not designate a trustee for this purpose. (v) A State or non-profit entity, and a trustee to the extent acting on behalf of such an entity, shall not be an eligible not-for- profit holder if the State or non-profit entity is owned or controlled, in whole or in part, by a for-profit entity. A for-profit entity has ownership and control of a State or non-profit entity, for purposes of this paragraph if-- (A) The for-profit entity is a member or shareholder of a State or non-profit entity that is a membership or stock corporation, and the for-profit entity has sufficient power to control the State or non- profit entity; (B) The for-profit entity employs or appoints individuals that together constitute a majority of the State or non-profit entity's board of trustees or directors, or a majority of such board's audit committee, executive committee, or compensation committee; or (C) For a State or non-profit entity that has no board of trustees or directors and associated committees of such, the for-profit entity is authorized by law, agreement, or otherwise to approve decisions by the entity regarding its audits, investments, hiring, retention, or compensation of officials, unless the Secretary determines that the particular authority to approve such decisions is not likely to affect the integrity of those decisions. (vi) For purposes of paragraph (f)(3) of this section-- (A) A for-profit entity has sufficient power to control a State or non-profit entity if it possesses directly, or represents, either alone or together with other persons, under a voting trust, power of attorney, proxy, or similar agreement, one or more persons who hold, individually or in combination with the other person represented or the persons representing them, a sufficient voting percentage of the membership interests or voting securities to direct or cause the direction of the management and policies of the State or non-profit entity. (B) An individual is deemed to be employed or appointed by a for- profit entity if the for-profit entity employs a family member, as defined in Sec. 600.21(f), of that individual, unless the Secretary determines that the particular nature of the family member's employment is not likely to affect the integrity of decisions made by the board or committee member. (C) ``Beneficial owner'' (including ``beneficial ownership'' and ``owner of a beneficial interest'') means the entity that has those rights with respect to the loan or income from the loan that are the normal incidents of ownership, including the right to receive, possess, use, and sell or otherwise exercise control over the loan and the income from the loan, subject to any rights granted and limitations imposed in connection with or related to the granting of a security interest described in paragraph (f)(3)(ix) of this section, and subject to any limitations on such rights under the Act as a result of such entity not qualifying as an eligible lender or holder under the Act. (D) ``Sole owner'' means the entity that has all the rights described in paragraph (f)(3)(vi)(C) of this section, which may be subject to the rights and limitations described in paragraph (f)(3)(vi)(C), to the exclusion of any other entity, with respect both to a loan and the income from a loan. (vii) No State or non-profit entity, and no trustee to the extent acting on behalf of such a State or non-profit entity, shall be an eligible not-for-profit holder with respect to any loan, or income from any loan on which payment is claimed at the rate established under paragraph (f)(2) of this section, unless such State or non-profit entity is the sole owner of the beneficial interest in such loan and the income from such loan. (viii) (A) A trustee described in paragraph (f)(3)(i)(D) of this section shall not receive compensation as consideration for acting as an eligible lender on behalf of a State or non-profit entity in excess of reasonable and customary fees paid for providing the particular service or services which the trustee undertakes to provide to such entity. (B) Fees are reasonable and customary, for purposes of this paragraph, if they do not exceed the amounts received by the trustee for similar services with regard to similar portfolios of loans of that State or non-profit entity that are not eligible to receive special allowance payments at the rate established under paragraph (f)(2) of this section, or if they do not exceed an amount as determined by such other method requested by the State or non-profit entity that the Secretary considers reliable. (C) Loans owned by the State or non-profit entity for which the trustee receives fees in excess of the amount permitted by paragraph (f)(3)(viii) of this section cease to qualify for a special allowance payment at the rate prescribed under paragraph (f)(2) of this section. (ix) For purposes of paragraph (f)(3) of this section, if a State or non-profit entity, or a trustee acting on its behalf, grants a security interest in, or otherwise pledges as collateral, a loan, or the income from a loan, to secure a debt obligation for which such State or non-profit entity is the issuer of that debt obligation, the State or non-profit entity shall not, by such action-- (A) Be deemed to be owned or controlled, in whole or in part, by a for-profit entity; or (B) Lose its status as the sole owner of a beneficial interest in a loan and the income from a loan. (x) Not-for-profit holder eligibility determination. A State or non-profit entity that seeks to qualify as an eligible not-for-profit holder, either in its own right or through a trust agreement with [[Page 37720]] an eligible lender trustee, must provide to the Secretary-- (A) A certification on the State or non-profit entity's letterhead signed by the State or non-profit entity's Chief Executive Officer (CEO) which-- (1) States the basis upon which the entity qualifies as a State or non-profit entity; (2) Includes documentation establishing its status as a State or non-profit entity; (3) Includes the name and lender identification number(s) of the entities for which designation is being certified; and (4) For an entity establishing status under section 150(d) of the Internal Revenue Code of 1986, includes copies of the requests of the State or political subdivision or subdivisions thereof or requirements described in section 150(d)(2) of the Code and the CEO's additional certification that the entity has not elected under section 150(d)(3) of the Code to cease its status as a qualified scholarship funding corporation. (B) A separately submitted certification or opinion by the State or non-profit entity's external legal counsel or the office of the attorney general of the State, with supporting documentation that shows that the State or non-profit entity-- (1) Is a constituted State entity by operation of specific State law; (2) Has been designated by the State or one or more political subdivisions of the State to serve as a qualified scholarship funding corporation under section 150(d)(2) of the Code, has not made the election described under section 150(d)(3) of the Code, and is incorporated under State law as a not-for-profit organization; (3) Is incorporated under State law as a not-for-profit organization or is an entity described in section 501(c)(3) of the Code; or (4) Has in effect a relationship with an eligible lender under which the lender is acting as trustee on behalf of the State or non- profit entity. (xi) Annual certification by eligible not-for-profit holder. A State or non-profit entity that seeks to retain its eligibility as an eligible not-for-profit holder, either in its own right or through a trust agreement with an eligible lender trustee, must annually provide to the Secretary-- (A) A certification on the State or non-profit entity's letterhead signed by the State or non-profit entity's Chief Executive Officer (CEO) which-- (1) Includes the name and lender identification number(s) of the entities for which designation is being recertified; (2) States that the State or non-profit entity has not altered its status as a State or non-profit entity since its prior certification to the Secretary, or, if it has altered its status, describes any such alterations; and (3) States that the State or non-profit entity continues to satisfy the requirements of an eligible not-for-profit holder, as defined in this section, either in its own right or through a trust agreement with an eligible lender trustee; and (B) A copy of its IRS Form 990, if applicable, at the same time it files that return with the Internal Revenue Service. (xii) Not-for-profit holder change of status. Within 10 business days of becoming aware of the occurrence of a change that may result in a State or non-profit entity that has been designated an eligible not- for-profit holder, either directly or through an eligible lender trustee, losing that eligibility, the State or non-profit entity must-- (A) Submit details of the change to the Secretary; and (B) Cease billing for special allowance at the rate established under paragraph (f)(2) of this section for the period from the date of the change that may result in it no longer being eligible for the rate established under paragraph (f)(2) of this section to the date of the Secretary's determination that such entity has not lost its eligibility as a result of such change; provided, however, that in the quarter following the Secretary's determination that such eligible not-for- profit holder has not lost its eligibility, the eligible not-for-profit holder may submit a billing for special allowance during the period from the date of the change to the date of the Secretary's determination equal to the difference between special allowance at the rate established under paragraph (f)(2) of this section and the amount it actually billed at the rate established under paragraph (f)(1) of this section. (xiii) In the case of a loan for which the special allowance payment is calculated under paragraph (f)(2) of this section and that is sold by the eligible not-for-profit holder holding the loan to an entity that is not an eligible not-for-profit holder, the special allowance payment for such loan shall, beginning on the date of the sale, no longer be calculated under paragraph (f)(2) and shall be calculated under paragraph (f)(1) of this section instead. 13. Section 682.304 is amended by: A. Redesignating paragraph (d)(2) as paragraph (d)(3). B. Adding a new paragraph (d)(2). C. In newly designated paragraph (d)(3), removing the words ``paragraph (d)(1)'' and adding, in their place, the words ``paragraphs (d)(1) and (2)''. The addition reads as follows: Sec. 682.304 Method of computing interest benefits and special allowance. * * * * * (d) * * * (2) To compute the average daily balance of unpaid accrued interest for purposes of special allowance on loans covered by Sec. 682.215(b)(7), the lender adds the unpaid accrued interest on such loans for each eligible day of the quarter, divides this sum by the number of days in the quarter, and rounds the result to the nearest whole dollar. The resulting figure is the average daily balance for the quarter for qualifying loans at the applicable interest rate. * * * * * 14. Section 682.405 is amended by: A. Revising paragraph (b)(4) to read as follows: Sec. 682.405 Loan rehabilitation agreement. * * * * * (b) * * * (4) An eligible lender purchasing a rehabilitated loan must establish a repayment schedule that meets the same requirements that are applicable to other FFEL Program loans of the same loan type as the rehabilitated loan and must permit the borrower to choose any statutorily available repayment plan for that loan type. The lender must treat the first payment made under the nine payments as the first payment under the applicable maximum repayment term, as defined under Sec. 682.209(a) or (h). For Consolidation loans, the maximum repayment term is based on the balance outstanding at the time of loan rehabilitation. * * * * * Sec. 682.410 [Amended] 15. Section 682.410 is amended by: A. In paragraph (b)(5)(vi)(G), adding the words ``, which must include consideration of the borrower's eligibility for income-based repayment,'' immediately after the words ``satisfactory to the agency''. B. In paragraph (b)(9)(i)(D), adding the words ``, which must include consideration of the borrower's eligibility for income-based repayment'' immediately after the words ``to the agency''. Sec. 682.411 [Amended] 16. Section 682.411 is amended, in paragraph (d)(1), by adding the words ``, income-based repayment'' immediately after the words ``income-sensitive repayment''. [[Page 37721]] Sec. 682.604 [Amended] 17. Section 682.604 is amended by: A. In paragraph (g)(2)(ii), removing the words ``and income- sensitive'' and adding, in their place, the words ``income sensitive, and income-based''. B. In paragraph (g)(2)(v), adding the words ``forgiveness or'' immediately after the words ``full or partial'', and adding the words ``, including forgiveness or discharge benefits available to a FFEL borrower who consolidates his or her loan into the Direct Loan program'' immediately after the words ``of a loan''. * * * * * PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM 18. The authority citation for part 685 continues to read as follows: Authority: 20 U.S.C. 1087a et seq., unless otherwise noted. 19. Section 685.204 is amended by: A. Adding a heading to paragraph (e). B. In paragraph (e)(2), removing the word ``The'' and adding, in its place, the words ``For a borrower whose active duty service includes October 1, 2007, or begins on or after that date, the'' before the word ``deferment'' and by adding the words ``each period of'' before the words ``service described''. C. In paragraph (e)(6), removing the word ``section'' and adding in its place the word ``paragraph''. D. Adding a new paragraph (e)(7). E. In paragraph (f), adding the heading ``Post-Active Duty Student Deferment'' before the paragraph designation ``(1)''. F. In paragraph (f)(1)(ii), adding the words ``on at least a half- time basis'' after the word ``enrolled''. G. Revising paragraph (f)(2). H. In paragraph (f)(3), adding the words ``on at least a half-time basis'' after the word ``status'' each time it appears and the words ``grace period or the'' before the words ``13-month''. I. Adding new paragraph (f)(4). J. In paragraph (h)(1), removing the word ``granted''. The revision reads as follows: Sec. 685.204 Deferment. * * * * * (e) Military service deferment. * * * * * (7) Without supporting documentation, the military service deferment will be granted to an otherwise eligible borrower for a period not to exceed 12 months from the date of the qualifying eligible service based on a request from the borrower or the borrower's representative. (f) Post-Active Duty Deferment. * * * * * (2) As used in paragraph (f)(1) of this section, ``Active Duty'' means active duty as defined in section 101(d)(1) of title 10, United States Code, except that-- (i) Active duty includes active State duty for members of the National Guard under which a Governor activates National Guard personnel based on State statute or policy and the activities of the National Guard are paid for with State funds; (ii) Active duty includes full-time National Guard duty under which a Governor is authorized, with the approval of the President or the U.S. Secretary of Defense, to order a member to State active duty and the activities of the National Guard are paid for with Federal funds; (iii) Active duty does not include active duty training or attendance at a service school; and (iv) Active duty does not include employment in a full-time, permanent position in the National Guard unless the borrower employed in such a position is reassigned to active duty under paragraph (f)(2)(i) of this section or full-time National Guard duty under paragraph (f)(2)(ii) of this section. * * * * * (4) If a borrower qualifies for both a military service deferment and a post-active duty student deferment, the 180-day post-mobilization deferment period and the 13-month post-active duty student deferment period apply concurrently. * * * * * 20. Section 685.205 is amended by: A. Adding a new paragraph (a)(7) to read as follows: Sec. 685.205 Forbearance. * * * * * (a) * * * (7) The borrower is a member of the National Guard who qualifies for a post-active duty student deferment, but does not qualify for a military service or other deferment, and is engaged in active State duty for a period of more than 30 consecutive days, beginning-- (i) On the day after the grace period expires for a Direct Subsidized Loan or Direct Unsubsidized Loan that has not entered repayment; or (ii) On the day after the borrower ceases enrollment on at least a half-time basis, for a Direct Loan in repayment. * * * * * 21. Section 685.208 is amended by: A. Revising paragraph (a). B. Adding a new paragraph (m). The revisions and addition read as follows: Sec. 685.208 Repayment plans. (a) General. (1) Borrowers who entered repayment before July 1, 2006. (i) A borrower may repay a Direct Subsidized Loan, a Direct Unsubsidized Loan, a Direct Subsidized Consolidation Loan, or a Direct Unsubsidized Consolidation Loan under the standard repayment plan, the extended repayment plan, the graduated repayment plan, the income contingent repayment plan, or the income-based repayment plan, in accordance with paragraphs (b), (d), (f), (k), and (m) of this section, respectively. (ii) A borrower may repay a Direct PLUS Loan or a Direct PLUS Consolidation Loan under the standard repayment plan, the extended repayment plan, or the graduated repayment plan, in accordance with paragraphs (b), (d), and (f) of this section, respectively. (2) Borrowers entering repayment on or after July 1, 2006. (i) A borrower may repay a Direct Subsidized Loan or a Direct Unsubsidized Loan under the standard repayment plan, the extended repayment plan, the graduated repayment plan, the income contingent repayment plan, or the income-based repayment plan, in accordance with paragraphs (b), (e), (g), (k), and (m) of this section, respectively. (ii)(A) A Direct PLUS Loan that was made to a graduate or professional student borrower may be repaid under the standard repayment plan, the extended repayment plan, the graduated repayment plan, the income contingent repayment plan, or the income-based repayment plan in accordance with paragraphs (b), (e), (g), (k), and (m) of this section, respectively. (B) A Direct PLUS Loan that was made to a parent borrower may be repaid under the standard repayment plan, the extended repayment plan, or the graduated repayment plan, in accordance with paragraphs (b), (e), and (g) of this section, respectively. (iii) A borrower may repay a Direct Consolidation Loan under the standard repayment plan, the extended repayment plan, the graduated repayment plan, the income contingent repayment plan, or, unless the Direct Consolidation Loan repaid a parent Direct PLUS Loan or a parent Federal PLUS Loan, the income-based repayment plan, in accordance with paragraphs (c), (e), (h), (k), and (m) of this section, respectively. A Direct Consolidation Loan that repaid a parent Direct PLUS Loan or a parent Federal PLUS Loan may not be repaid under the income-based repayment plan. (iv) No scheduled payment may be less than the amount of interest accrued on the loan between monthly payments, [[Page 37722]] except under the income contingent repayment plan, the income-based repayment plan, or an alternative repayment plan. (3) The Secretary may provide an alternative repayment plan in accordance with paragraph (l) of this section. (4) All Direct Loans obtained by one borrower must be repaid together under the same repayment plan, except that-- (i) A borrower of a Direct PLUS Loan or a Direct Consolidation Loan that is not eligible for repayment under the income-contingent repayment plan or the income-based repayment plan may repay the Direct PLUS Loan or Direct Consolidation Loan separately from other Direct Loans obtained by the borrower; and (ii) A borrower of a Direct PLUS Consolidation Loan that entered repayment before July 1, 2006 may repay the Direct PLUS Consolidation Loan separately from other Direct Loans obtained by that borrower. (5) Except as provided in Sec. 685.209 and Sec. 685.221 for the income contingent or income-based repayment plan, the repayment period for any of the repayment plans described in this section does not include periods of authorized deferment or forbearance. * * * * * (m) Income-based repayment plan. (1) Under this repayment plan, the required monthly payment for a borrower who has a partial financial hardship is limited to no more than 15 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. 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) The specific provisions governing the income-based repayment plan are in Sec. 685.221. 22. Section 685.209 is amended by revising paragraph (c)(4) to read as follows: Sec. 685.209 Income contingent repayment plan. * * * * * (c) * * * (4) Repayment period. (i) The maximum repayment period under the income contingent repayment plan is 25 years. (ii) The repayment period includes-- (A) Periods in which the borrower makes payments under the income- contingent repayment plan on loans that are not in default; (B) 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)(i); (C) 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); (D) Periods in which the borrower makes payments under the standard repayment plan described in Sec. 685.208(b); (E) 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); (F) 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 (G) Periods of economic hardship deferment after October 1, 2007. * * * * * 23. Section 685.210 is amended by revising paragraph (b)(2) to read as follows: Sec. 685.210 Choice of repayment plan. * * * * * (b) * * * (2)(i) A borrower 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, except that a borrower may change to either the income contingent or income-based repayment plan at any time. (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 or the income- based repayment plan, the repayment period is calculated as described in Sec. 685.209(c)(4) or Sec. 685.221(b)(6), respectively. * * * * * 24. Section 685.211 is amended by: A. Revising paragraph (a) introductory text and (a)(1). B. Revising paragraph (d)(3)(ii). The revisions read as follows: Sec. 685.211 Miscellaneous repayment provisions. (a) Payment application and prepayment. (1) Except as provided for the income-based repayment plan under Sec. 685.221(c)(1), the Secretary applies any payment first to any accrued charges and collection costs, then to any outstanding interest, and then to outstanding principal. * * * * * (d) * * * (3) * * * (ii) If a borrower defaults on a Direct Subsidized Loan, a Direct Unsubsidized Loan, a Direct Consolidation Loan, or a student Direct PLUS Loan-- (A) The Secretary may designate the income contingent repayment plan for the borrower; or (B) If the borrower qualifies, the borrower may select the income- based repayment plan. * * * * * 25. Section 685.212 is amended by: A. Redesignating paragraph (i) as paragraph (j). B. Adding new paragraph (i) to read as follows: Sec. 685.212 Discharge of a loan obligation. * * * * * (i) Public Service Loan Forgiveness Program. If a borrower meets the requirements in Sec. 685.219, the Secretary cancels the remaining principal and accrued interest of the borrower's eligible Direct Subsidized Loan, Direct Unsubsidized Loan, Direct PLUS Loan, and Direct Consolidation Loan. * * * * * 26. A new Sec. 685.219 is added to read as follows: Sec. 685.219 Public Service Loan Forgiveness Program. (a) General. The Public Service Loan Forgiveness Program is intended to encourage individuals to enter and continue in full-time public service employment by forgiving the remaining balance of their Direct loans after they satisfy the public service and loan payment requirements of this section. (b) Definitions. The following definitions apply to this section: AmeriCorps position means a position approved by the Corporation for National and Community Service under section 123 of the National and Community Service Act of 1990 (42 U.S.C. 12573). Eligible Direct loan means a Direct Subsidized Loan, Direct Unsubsidized Loan, Direct PLUS loan, or a Direct Consolidation loan. Employee or employed means an individual who is hired and paid by a public service organization. [[Page 37723]] Full-time (1) means working in qualifying employment in one or more jobs for the greater of-- (i)(A) An annual average of at least 30 hours per week, or (B) For a contractual or employment period of at least 8 months, an average of 30 hours per week; or (ii) The number of hours the employer considers full-time. (2) Vacation or leave time provided by the employer is not considered in determining the average hours worked on an annual or contract basis. Government employee means an individual who is employed by a local, State, Federal, or Tribal government. Law enforcement means service performed by an employee of a public service organization that is publicly funded and whose principal activities pertain to crime prevention, control or reduction of crime, or the enforcement of criminal law. Military service, for uniformed members of the U.S. Armed Forces or the National Guard, means ``active duty'' service or ``full-time National Guard duty'' as defined in section 101(d)(1) and (d)(5) of title 10 in the United States Code, but does not include active duty for training or attendance at a service school. For civilians, ``Military service'' means service on behalf of the U.S. Armed Forces or the National Guard performed by an employee of a public service organization. Public interest law refers to legal services provided by a public service organization that are funded in whole or in part by a local, State, Federal, or Tribal government. Public service organization means: (1) A Federal, State, local, or Tribal government organization, agency, or entity; (2) A public child or family service agency; (3) A non-profit organization under section 501(c)(3) of the Internal Revenue Code that is exempt from taxation under section 501(a) of the Internal Revenue Code; (4) A Tribal college or university; or (5) A private organization that-- (i) Provides the following public services: Emergency management, military service, public safety, law enforcement, public interest law services, public child care, public service for individuals with disabilities and the elderly, public health, public education, public library services, school library or other school-based services; and (ii) Is not a business organized for profit, a labor union, a partisan political organization, or an organization engaged in religious activities, unless the qualifying activities are unrelated to religious instruction, worship services, or any form of proselytizing. (c) Borrower eligibility. (1) A borrower may obtain loan forgiveness under this program if he or she-- (i) Is not in default on the loan for which forgiveness is requested; (ii) Is employed full-time by a public service organization or serving in a full-time AmeriCorps position-- (A) When the borrower makes the 120 monthly payments described under paragraph (c)(1)(iii) of this section; (B) At the time of application for loan forgiveness, and (C) At the time the remaining principal and accrued interest are forgiven; (iii) Makes 120 separate monthly payments after October 1, 2007, on eligible Direct loans for which forgiveness is sought. Except as provided in paragraph (c)(2) of this section for a borrower in an AmeriCorps position, the borrower must make the monthly payments within 15 days of the scheduled due date for the full scheduled installment amount; and (iv) Makes the required 120 monthly payments under one or more of the following repayment plans-- (A) Except for a Parent PLUS borrower, an income-based repayment plan, as determined in accordance with Sec. 685.221; (B) Except for a Parent PLUS borrower, an income-contingent repayment plan, as determined in accordance with Sec. 685.209; (C) A standard repayment plan, as determined in accordance with Sec. 685.208(b); or (D) Any other repayment plan if the monthly payment amount paid is not less than what would have been paid under the Direct Loan standard repayment plan described in Sec. 685.208(b). (2) If a borrower uses all or part of a Segal Education Award received after a year of AmeriCorps service to make a lump sum payment on an eligible loan for which the borrower is seeking forgiveness, the Secretary considers the borrower to have made qualifying payments equal to the lesser of-- (i) The number of payments resulting after dividing the amount of the lump sum payment from the Segal Education Award by the monthly payment amount the borrower would have made under paragraph (c)(1)(iv) of this section; or (ii) Twelve payments. (d) Forgiveness Amount. The Secretary forgives the principal and accrued interest that remains on all eligible loans for which loan forgiveness is requested by the borrower. The Secretary forgives this amount after the borrower makes the 120 monthly qualifying payments under paragraph (c) of this section. (e) Application. (1) After making the 120 monthly qualifying payments on the eligible loans for which loan forgiveness is requested, a borrower may request loan forgiveness on a form provided by the Secretary. (2) If the Secretary determines that the borrower meets the eligibility requirements for loan forgiveness under this section, the Secretary-- (i) Notifies the borrower of this determination; and (ii) Forgives the outstanding balance of the eligible loans. (3) If the Secretary determines that the borrower does not meet the eligibility requirements for loan forgiveness under this section, the Secretary notifies the borrower of that determination. (Authority: 20 U.S.C. 1087e(m)) 27. Section 685.220 is amended by: A. Redesignating paragraph (d)(1)(i)(B)(3) as (d)(1)(i)(B)(4). B. In newly redesignated paragraph (d)(1)(i)(B)(4), adding the words ``is in default or'' after the word ``that''. C. Adding new paragraph (d)(1)(i)(B)(3). D. Adding new paragraph (d)(1)(i)(B)(5). E. In paragraph (d)(1)(ii)(A), removing the word ``a'' and adding, in its place, the words ``the grace'' before the word ``period''. F. In paragraph (d)(1)(ii)(D), adding the words ``, or the income- based repayment plan described in Sec. 685.208(m),'' after the reference to ``Sec. 685.220(k)'' and the words ``or Sec. 685.221(e)'' after the reference to ``Sec. 685.209(d)(5)''. The additions read as follows: Sec. 685.220 Consolidation. * * * * * (d) * * * (1) * * * (i) * * * (B) * * * (3) The borrower wishes to use the Public Service Loan forgiveness program; * * * * * (5) The borrower has a FFEL Consolidation Loan and the borrower wants to consolidate that loan into the Federal Direct Loan Program for purposes of using the Public Service Loan Forgiveness Program. * * * * * 28. A new Sec. 685.221 is added to read as follows: [[Page 37724]] Sec. 685.221 Income-based repayment plan. (a) Definitions. As used in this section-- (1) 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. (2) Eligible loan means any outstanding loan made to a borrower under the FFEL or Direct Loan programs except for a FFEL or Direct PLUS Loan made to a parent borrower or a FFEL or Direct Consolidation Loan that repaid a FFEL or Direct PLUS Loan made to a parent borrower. (3) Family size means the number that is determined by counting the borrower, the borrower's spouse, and the borrower's children 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-- (i) Live with the borrower; and (ii) 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. (4) Partial financial hardship means a circumstance in which the annual amount due on all of a borrower's eligible loans, as calculated under a standard repayment plan based on a 10-year repayment period, exceeds 15 percent of the difference between the borrower's AGI and 150 percent of the poverty guideline for the borrower's family size. (5) 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. (b) Terms of the repayment plan. (1) A borrower may select the income-based repayment plan only if the borrower has a partial financial hardship. Except as provided under paragraph (b)(2) of this section, the borrower's aggregate monthly loan payments are limited to no more than 15 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. (2) The Secretary adjusts the calculated monthly payment if-- (i) 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 amount of eligible loans that are Direct Loans; (ii) The calculated amount is less than $5.00, in which case the borrower's monthly payment is $0.00; or (iii) The calculated amount is equal to or greater than $5.00 but less than $10.00, in which case the borrower's monthly payment is $10.00. (3) 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 date the borrower began repayment of the loans under the income-based repayment plan for that loan. 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. (4) Except as provided in paragraph (b)(3) of this section, accrued interest is capitalized at the time a borrower chooses to leave the income-based repayment plan or no longer has a partial financial hardship. (5) 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 income-based repayment plan or no longer has a partial financial hardship. (6) The repayment period for a borrower under the income-based repayment plan may be greater than 10 years. (c) Payment application and prepayment. The Secretary applies any payment made under an income-based repayment plan in the following order: (1) Accrued interest. (2) Collection costs. (3) Late charges. (4) Loan principal. (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 borrower may be required to repay is the amount the borrower would have paid under the standard repayment plan based on the amount of the borrower's eligible loans that were 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) 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-- (i) A 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 (ii) For a Direct Consolidation Loan, the applicable repayment period specified in Sec. 685.208(j) for the amount of the borrower's loan that was outstanding at the time the borrower discontinued paying under the income-based repayment plan. (e) Eligibility documentation and verification. (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)(A) Provide written consent to the disclosure of AGI and other tax return information by the Internal Revenue Service to the Secretary. The borrower provides consent by signing a consent form and returning it to the Secretary; (B) If a 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, the Secretary may use other documentation provided by the borrower to verify income; and (ii) 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) The Secretary designates the repayment option described in [[Page 37725]] paragraph (d)(1) of this section for any borrower who selects the income-based repayment plan but-- (i) Fails to provide or renew the required written consent for income verification; or (ii) Withdraws consent and does not select another repayment plan. (f) Loan forgiveness. (1) To qualify for loan forgiveness after 25 years, a borrower must have participated in the income-based repayment plan and satisfied at least one of the following conditions during that period: (i) Made reduced monthly payments under a partial financial hardship as provided in paragraph (b)(1) or (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). (iv) Made monthly payments under the Direct Loan standard repayment plan described in Sec. 685.208(b) based on the amount of the borrower's loans that were outstanding at the time the borrower first selected the income-based repayment plan. (v) Paid Direct Loans under the income-contingent repayment plan. (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)(ii) of this section; and (ii)(A) The borrower made those monthly payments each year for a 25-year period, or (B) Through a combination of monthly payments and economic hardship deferments, the borrower has made the equivalent of 25 years of payments. (3) For a borrower who qualifies for the income-based repayment plan, the beginning date for the 25-year 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; (ii) If the borrower did not make payments under the income contingent repayment plan-- (A) For a borrower who has a 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 (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 after qualifying for the income-based repayment plan; 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 (ii) of this section, determining the date the borrower made a payment under the income-based repayment plan on the loan. (4) If the Secretary determines that a borrower satisfies the loan forgiveness requirements, the Secretary cancels the outstanding balance and accrued interest on the Direct Consolidation Loan described in paragraph (f)(3)(i), (iii) or (iv) of this section or other eligible Direct Loans described in paragraph (f)(3)(ii) or (iv) of this section. (Authority: 20 U.S.C. 1098e) 29. Section 685.304 is amended by: A. Revising paragraph (b)(4)(ii). B. Revising paragraph (b)(4)(vi). The revisions read as follows: Sec. 685.304 Counseling borrowers. * * * * * (b) * * * (4) * * * (ii) Review for the student borrower available repayment options including the standard repayment, extended repayment, graduated repayment, income contingent repayment, and income-based repayment plans, and loan consolidation. * * * * * (vi) Review for the student borrower the conditions under which the student borrower may defer or forbear repayment or obtain a full or partial forgiveness or discharge of a loan; * * * * * [FR Doc. E8-14140 Filed 6-30-08; 8:45 am] BILLING CODE 4000-01-P
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Last Modified: 06/30/2008