Federal Updates

Role of the lender and servicer in optimizing repayment success

Ensuring a borrower's successful transition from in-school status to grace to repayment is best approached as a collaborative effort among the school, lender, servicer, and guarantor. As we approach the month of December and the upcoming wave of mid-year graduates, it is important to consider the many parties involved in this process and their respective roles and responsibilities.

The school assists by providing loan counseling and serves, for many borrowers, as a familiar and knowledgeable resource for the myriad questions that arise as the borrower nears graduation. The guarantor provides default aversion and delinquency prevention services, as well as financial literacy and debt management information. The lender and servicer play a pivotal role in guiding the borrower through the sometimes perplexing process of loan repayment.

A common area of confusion for borrowers entering repayment is identifying the loan holder and its contact information, especially if loans have been assigned, sold, or transferred. According to 34 CFR 682.208(e), if a loan is in a grace or repayment status, a borrower must be notified if the loan is assigned, sold, or transferred and the transaction causes a change in the party to whom the borrower must send future payments and communications. Additionally, the Higher Education Opportunity Act of 2008 requires that in such circumstances, both lenders must notify the borrower of the effective date of the sale or other transfer, the date the current servicer will stop accepting payments, and the date the new servicer will begin accepting payments (HEA 428(b)(2)(F)(i)).

Remember that a lender is never permitted to assign, sell, or transfer a loan before it is fully disbursed, if doing so would change the identity of the party to whom borrower payments are to be made (34 CFR 682.401(b)(17)(i) and (iii)).

Making a difference
Through the collaborative efforts of the financial aid community, student loan defaults have fallen significantly from the fiscal year 1990 cohort default rate of 22.4 percent to the 2006 cohort default rate of 5.2 percent (see ED's National Student Loan Default Rates graph at www.ed.gov/offices/OSFAP/defaultmanagement/defaultrates.html.) Working together, we can continue to assist students in making the best choices in repaying the investment in education they have made.

For more information
Detailed information about loan assignments, sales, and transfers may be found in the Common Manual, Subsection 3.4.B. To learn more about TG's default aversion and default prevention services available, visit TG Online at www.tgslc.org/default/index.cfm.

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Final rules 101: Income-based repayment, Part 1

With this issue, we resurrect a series first begun in 2007 with the release of the November 1, 2007, final rules — except this time around, we will focus on regulations published by ED in the October 23, 2008, Federal Register (see Shoptalk Online edition 478).

By now, many in the financial aid community have at least heard the term "income-based repayment" (IBR) mentioned at a training session or staff meeting, or have read about it in a previous Shoptalk Online article. Many of us also know that the program will benefit certain borrowers by minimizing monthly payments and by providing loan forgiveness in some cases. But for various reasons — including the lengthy negotiated rulemaking process resulting in uncertainty as to the practical workings of the program, and the delayed effective date — there has been scant coverage of the "nuts and bolts" of the program.

Now that we have final regulations, we hope to provide clear and understandable information on the fundamentals of IBR to our customers. This article will focus on borrower eligibility and definitions, the repayment and forgiveness process, and information dissemination. In a future article, we will cover how interest and special allowance will be calculated in IBR, and how the loans in this repayment plan will be tracked.

Borrower eligibility and definitions
IBR was introduced in the College Cost Reduction and Access Act of 2007 (CCRAA), and will be available to both FFELP and Direct Loan (DL) borrowers beginning July 1, 2009. IBR is available for Stafford, Grad PLUS, SLS (Supplemental Loan for Students, eliminated in 1994), and Consolidation loans, as long as the Consolidation loan does not include a parent PLUS loan. Parent PLUS loans and any type of non-federal student loans do not qualify for IBR.

IBR is intended to provide repayment relief to borrowers experiencing "partial financial hardship" (PFH). There are various calculations used to determine a borrower's required payment amount, but PFH is determined by the lender under a standardized formula prescribed in the final rules, based upon the borrower's family size and adjusted gross income (AGI).

IBR presents unique considerations in the evaluation of AGI and family size. For example, for a married borrower who files a joint tax return, the income of both spouses is considered in determining the payment amount. However, for a borrower who files "married filing separately," only the income of the borrower is taken into account in calculating the payment amount. The criteria for determining family size have been closely aligned with those used for FAFSA purposes: It includes the borrower, the borrower's spouse, and the borrower's children and unborn children if they receive more than half of their support from the borrower. Family size also includes other individuals who live with the borrower, 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 includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs.

PFH occurs when the annual payment amount for all of the borrower's eligible loans (as calculated under a standard 10-year repayment plan) exceeds 15 percent of the difference between the borrower's AGI and 150 percent of the poverty guideline for the borrower's family size. To initially qualify for IBR, the borrower must fall within the PFH calculation.

Example 1:
An unmarried borrower with $46,000 in eligible loan debt at a 6.8 percent interest rate, an AGI of $20,000, and no dependents would likely qualify for IBR with a monthly payment of approximately $60. Under a standard 10-year repayment plan, that same borrower would have a monthly payment of approximately $530.00.

Example 2:
A married borrower with $23,000 in eligible loan debt at a 6.0 percent interest rate, an AGI of $25,000 (with no spousal income), and two dependents would also likely qualify for IBR. This borrower's monthly payment amount is estimated at $0 (more on $0 payments later). Under a standard, 10-year repayment plan, the monthly payment amount would be about $255.00.

The lender must re-evaluate the borrower's eligibility for IBR and recalculate the monthly payment amount on an annual basis. In order to fulfill this requirement, the borrower must provide permission for the IRS to disclose his or her AGI and "other tax return information" to the lender, and must also certify his or her family size on an annual basis. It's important to note, though, that even if a borrower no longer meets the PFH criteria, he or she can elect to remain in IBR.

Repayment and forgiveness
The repayment term under IBR can exceed 10 years regardless of the amount of the borrower's loan debt. After 25 years (or 300 payments) in IBR, any remaining balance and accrued interest will be forgiven. As demonstrated in Example 2 above, the monthly payment amount could be $0 — and even those $0 "payments" count toward the required 300 payments. However, payments made while a borrower is in default or during the loan rehabilitation process will not count; nor will payments made prior to July 1, 2009, or payments that are less than the monthly required payment.

Information dissemination
How will the borrower be informed of the option to request IBR? At the school level, general information about all repayment plans, including IBR, must be included in exit counseling. The lender is also required to notify the borrower of the availability of IBR at various points during the life of the loan, either through separate notices or via existing disclosures (for example, on the Master Promissory Note). This notice will inform the borrower of eligibility requirements for IBR, including obtaining a Consolidation loan; the process for choosing IBR; and where and how the borrower can obtain additional information about IBR.

More information
The final rules regarding IBR are located in 34 CFR 682.215. An integrated version of the regulations is available from TG Online at www.tgslc.org/policy/intreg.cfm. If you have questions about IBR, please contact TG customer assistance at (800) 845-6267, or send an message to cust.assist@tgslc.org.

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