Federal Updates

Income-Based Repayment: What lenders and servicers need to know

As the implementation date for the new Income-Based Repayment plan (IBR) draws near, TG wants to ensure that our customers understand the key components of the plan and are prepared to administer it beginning July 1, 2009. In this article we will discuss the fundamentals of IBR, examine how a lender or servicer can incorporate IBR into its processes, and address common questions about the treatment of interest capitalization, interest subsidies, and special allowance payments (SAP) in IBR.

IBR basics

IBR is a new repayment plan available to eligible FFELP and DL borrowers, as of July 1, 2009, that bases the borrower's monthly payment amount on his or her income, family size, and outstanding balance on eligible loans. There is no "triggering event" associated with IBR; borrowers just entering repayment or currently in repayment may request IBR beginning on July 1.

For the purpose of IBR, eligible loan types include subsidized and unsubsidized Stafford loans, SLS, Grad PLUS, and Consolidation loans that include loans other than parent PLUS (for example, Stafford, SLS, Perkins, HPSL, HEAL, FISL). IBR is not available for parent PLUS loans, Consolidation loans that include a parent PLUS loan, or defaulted loans.

The borrower must have a partial financial hardship (PFH) in order to initially qualify for IBR. PFH occurs when the annual, aggregate amount due on all of a borrower's eligible FFELP and DL loans — as calculated under a standard repayment plan based on a 10-year repayment period at the time the borrower initially entered repayment — exceeds 15 percent of the difference between the borrower's adjusted gross income and 150 percent of the poverty line for the borrower's family size. The borrower's eligibility must be re-evaluated each year, and the minimum required monthly payment may be adjusted as a result.

Good news for borrowers

IBR offers a new tool for assisting the lender and borrower in working together to address the borrower's repayment difficulties. While it is not a panacea, IBR can provide a lifeline to financially challenged borrowers by taking into account their unique circumstances in establishing monthly payment amounts. This flexibility provides important relief for those borrowers for whom other repayment options are infeasible.

Combating increases in cohort default rates

The current economic climate, the upcoming transition from 2- to 3-year cohort default rates (CDRs), and rising student loan debt levels will undoubtedly contribute to a rise in future CDRs. By making financially challenged borrowers aware of IBR as a new repayment option to address the borrower's underlying financial distress, IBR can be another important tool for minimizing defaults, both in the short-term, as measured by CDRs, and over the life of the loan.

Keeping loans in the conduit

A lender participating in the Asset-Backed Commercial Paper (ABCP) Conduit Program authorized by the Ensuring Continued Access to Student Loans Act (ECASLA) will find IBR to be a useful tool in leveraging the full potential of the conduit. Generally, FFELP loans in the conduit program remain with the lender, servicer, and guarantor, but conduit loans are required to be Put to ED if they become at least 210 days delinquent and the delinquency is not successfully addressed before the loan reaches 240 days of delinquency. Lenders may also elect to remove such loans from the conduit program when they reach 210 days of delinquency, to retain the opportunity to work with those borrowers and their guarantors to ensure successful repayment of those loans.

Since many current default prevention activities are driven by the 270-day default timeline, lenders, servicers, and guarantors must be proactive and persistent in identifying at-risk loans within the conduit program. Deferment and forbearance remain beneficial options for assisting certain borrowers; for example, those who do not qualify for IBR, or those who are experiencing only a temporary financial hardship. But for many borrowers, IBR may provide a more appropriate solution to delinquency challenges, thus positively influencing the lender's ability to retain the conduit loans and the associated servicing rights.

Integrating IBR into your operations

Under IBR, interest must be capitalized when the borrower leaves PFH voluntarily or no longer has a PFH, or when the borrower leaves IBR to enter an Expedited-Standard payment plan. If a borrower alternates between a PFH and Permanent-Standard payment plan within IBR, unpaid interest must be capitalized each time the borrower no longer has a PFH. (See NCHELP's "IBR Implementation Guide," referenced below, for an explanation of the various payment plan calculations that can occur within IBR.)

During periods of PFH, lenders can bill ED for SAP not only on the average daily principal balance, but on the average daily balance of unpaid accrued interest as well. When paying SAP on the average daily accrued interest, ED will use the same formula applicable to the loan itself, but with an interest rate of 0 percent.

ED will pay the calculated unpaid accrued interest on subsidized Stafford loans or the subsidized portion of the borrower's Consolidation loan for up to three years from the established repayment period start date on each loan repaid under the IBR plan. The subsidy is paid regardless of the borrower's monthly payment amount.

Also, note that administrative forbearance is authorized to resolve any delinquency prior to the granting of a new repayment plan, including IBR. More information on this, as well as other vital operational guidance, is available in NCHELP's IBR Implementation Guide.

Requesting IBR

A borrower may request IBR by completing an IBR request form and submitting income information to the lender. Although ED has not yet provided official IBR request forms, the NCHELP IBR Workgroup has submitted draft versions of an IBR Request form and an Alternative Documentation of Income form to ED for approval. Comments on the NCHELP draft forms are expected from ED in June. At that time, the IBR Workgroup will finalize the forms based on the comments from ED for industry use as a "good faith effort"; until the official forms are approved and distributed.

More information

The NCHELP IBR Implementation Guide may be downloaded from http://www.nchelp.org/pages/page.cfm?id=143. NCHELP has developed a series of general as well as focused training sessions on IBR. Recordings of these sessions are available free of charge at www.nchelp.org/elibrary/index.cfm?parent=1985.

Income-Based Repayment: Revised claim requirements

Effective July 1, 2009, TG claims must begin collecting new data elements in order to facilitate implementation of the new Income-Based Repayment (IBR) provisions. Members of the Default Aversion and Claims Standardization (DACS) subcommittee of the NCHELP Program Operations committee have revised the Claim Form as well as CAM Record type 54 to capture this information. The new data elements are required for all claims, with the exception of CS, DE, FC, or ID, submitted on or after July 1.

The new Claim Form reflects a new Section X which includes seven fields and their respective definitions: Loan ID, Standard-Standard Amount, Permanent-Standard Amount, 25-Year Forgiveness Begin Date, Number of Qualifying Forgiveness Months, IBR Start Date, and Number of Days in Economic Hardship Deferment.

Also, for the purpose of electronic CAM claim submissions, corresponding loan-level data fields have been added to a "filler" field, formerly field 27, in CAM Record type 54. The Standard-Standard payment amount must be provided for all loans claimed (regardless of a borrower's entrance into an IBR payment plan) but the other new fields must be provided if available. Requisite changes are currently in process for Figure 13-1 of the Common Manual (information to be provided on the Claim Form) and are tentatively scheduled for publication in September.

For claim submitters who are unable to make system revisions to capture this information prior to July 1, the DACS subcommittee has also developed a stand-alone form titled Income-Based Repayment Data for this purpose. It may be submitted with either the paper Claim Form or CAM submittal records. Every effort should be made, however, to include the new data elements with regular claim submittals no later than December 31, 2009.

Questions?

For questions concerning the IBR data elements, please contact TG's assistant vice president of claims Ron Stroud at (800) 252-9743, or send an e-mail message to ron.stroud@tgslc.org.