Negotiated Rule-making Sessions Focus on Pay as You Earn

Spurred by President Obama’s proposal to provide improved income-driven repayment to more borrowers, the Department of Education is considering how it might implement Pay As Your Earn (PAYE) 2 (also referred to as REPAYE), an additional loan repayment plan based on a borrower’s income.

The Department has held two rounds of talks. The first round of negotiations were held in late February, and laid out the key issues for this repayment option, and some other technical issues related to the Service Members Civil Relief Act (SCRA). The second round of talks, which concluded in early April, focused on hammering out the details of implementing REPAYE.

For the most part, the nonfederal negotiators, which included representatives of student groups, consumer advocates, higher education associations, and servicers, at the negotiated rule-making sessions supported expansion of income-driven repayment, but expressed concern about several of the conditions of the proposed repayment plan and the fact that its creation might confuse borrowers. Currently, depending on which repayment plan they qualify for, borrowers have six repayment options, under the Direct Loan Program, including four that are income-based.

The proposed REPAYE option would offer loan forgiveness after 20 years of repayment for borrowers with $57,500 or less of debt and after 25 years for borrowers with more than that amount. Monthly repayment amounts are based on income and family size. Only a borrower with “partial financial hardship,” that is, their monthly payment exceeds 10 percent of their discretionary income, are eligible for REPAYE.

The nonfederal negotiators oppose both the Department’s proposal to have the tiered loan forgiveness structure described above and using partial financial hardship as an eligibility criterion. They have provided alternative language, which will be discussed at the next session in May.

The negotiating team reached tentative agreement on a technical question related to loan rehabilitation. There also seems to be general support for the SCRA issue to allow lump sum payments received by service persons from the Department of Defense, instead of monthly payments, to be credited toward loan forgiveness based on public service, as is currently done with lump sum AmeriCorps and Peace Corps payments. The panel is also looking at the possibility of expanding the circumstances under which an institution may challenge its draft or official cohort default rate based on its participation rate index (PRI). A PRI provides schools with a small number of borrowers a more realistic calculation of its default risk.

For more information, please contact:
Maureen Budetti