Federal Updates

Final rules 101: Income based repayment, Part 2

In our last edition of Shoptalk Online (see edition 481), we provided a summary of various key elements of the Income Based Repayment (IBR) plan, including borrower eligibility and definitions, the repayment and forgiveness process, and information dissemination. In this article we will cover how interest and special allowance will be calculated in IBR, and how loans in this repayment plan will be monitored for the purpose of determining the borrower's eligibility for loan forgiveness.

Remember, although IBR will not become available until July 1, 2009, it is not too early to begin educating borrowers about this repayment plan, which will benefit certain borrowers by minimizing monthly payments and, in some cases, by providing loan forgiveness after 25 years of repayment.

Interest
In the IBR plan, interest accrues on the loan as normal. Consequently, negative amortization could occur if the payment amount is less than the accrued interest, particularly in the case of a borrower with a very low — or $0 — monthly payment amount.

To partially offset the impact of negative amortization, ED will assist borrowers with subsidized Stafford loans by paying the difference between the monthly payment amount attributable to the subsidized loans (or the subsidized portion of a Consolidation loan), and the monthly accrued interest, for up to three years. However, on any unsubsidized portion of the loan debt (whether unsubsidized Stafford, Grad PLUS, or an unsubsidized portion of a Consolidation loan), interest will accrue and, in some cases, be capitalized.

Special allowance
Lenders will receive special allowance payments based on the average daily balance, as well as the average daily accrued interest, during the time that a borrower meets the partial financial hardship (PFH) criteria. ED has not yet provided guidance on the reporting mechanism for IBR special allowance, but is expected to issue a Dear Partner Letter regarding this topic.

Monitoring
Maintaining careful documentation of a borrower's payment history in IBR is crucial in determining his or her eligibility for forgiveness. A lender must track all payments made under a PFH (including $0 payments), and payments made under separate IBR calculations. The lender must also maintain a record of the borrower's use of an Economic Hardship Deferment, if applicable. All of these factors are taken into consideration in the lender and guarantor's evaluation of loan forgiveness eligibility. After 25 years (or 300 months) of qualifying payments in IBR, the loan holder will file a claim with the guarantor for forgiveness on any remaining balance.

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 e-mail message to cust.assist@tgslc.org.

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