Economic Hardship Deferment (Sec. Sec. 674.34 and 682.210)
Comment: Many commenters objected to the proposed elimination of
what has been referred to as the ``20/220'' debt-to-income eligibility
criterion for an economic hardship deferment in the title IV student
loan programs. Medical and dental school students and residents,
medical and dental school administrators, and major medical and dental
associations voiced particular concern about the impact of the
elimination of the 20/220 debt-to-income test on medical and dental
interns and residents with high debt burdens and limited income during
several years of required additional training that coincide with the
borrower's first few years of loan repayment. The commenters believed
that the impact of eliminating this criterion would be particularly
acute for those borrowers pursuing their additional training in urban
areas with high living costs. The commenters urged the Secretary to use
the discretion provided to her under section 435(o)(1)(B) of the HEA to
establish additional criteria for economic hardship deferments to
either reinstate the 20/220 test permanently or to provide an
equivalent loan deferment funding mechanism to help these types of
borrowers. The commenters contended that doing so would enable these
borrowers to continue to have the option to postpone loan payments. The
commenters noted that the only other option for these borrowers would
be to request a period of forbearance during which interest would be
capitalized during this crucial period of training.
Several commenters argued that the loss of this repayment option
will deter new physicians from pursuing primary care and research
specialties, pursuing a career with the public health service, or
practicing medicine in underserved areas, in lieu of more lucrative
specialties.
A commenter who represents participating Federal Perkins Loan
schools and loan servicers argued that the rationale for eliminating
the 20/220 economic hardship category in the FFEL and Direct Loan
Programs (i.e., the availability of the new IBR plan and program costs)
does not apply to the Federal Perkins Loan program. The commenter
believed that there are no Federal costs associated with deferments
granted in the Federal Perkins Loan program and noted that IBR is not
available to Perkins Loan borrowers except through loan consolidation
in the FFEL or Direct Loan Programs, which also results in the loss to
the borrower of several Federal Perkins loan benefits. Consequently,
the commenter asked the Department to retain the 20/220 debt-to-income
criterion for an economic hardship deferment in the Federal Perkins
Loan Program regulations.
[...]
An organization that includes FFEL Program lenders and loan
servicers noted that the July 1, 2009, effective date for the
elimination of the 20/220 debt-to-income economic hardship criterion
did not appear to permit a lender to grant a deferment on or after July
1, 2009, to an eligible borrower for a retroactive deferment period
that began prior to July 1, 2009, as would normally be the case for
deferments granted under the FFEL Program. The commenter requested that
the Department clarify the implementation of the effective date to
allow a lender to grant such a deferment to an eligible borrower after
July 1, 2009, for up to a 12-month period for a deferment period that
starts prior to that date.
Discussion: The Department did not eliminate the 20/220 rule in the
final regulations published on November 1, 2007, (72 FR 61959) so that
borrowers could temporarily continue to qualify for an economic
hardship deferment on that basis and to ease the transition for
affected borrowers until the newly created IBR plan becomes available
on July 1, 2009. Congress eliminated the 20/220 rule from the HEA and
effectively replaced it with the new IBR plan, which will provide
assistance to more borrowers with high levels of debt over a much
longer period of limited earnings than the economic hardship deferment.
The IBR plan does not provide for postponing all borrower payments
for a period of time like a deferment. It provides for reduced payments
when a borrower can demonstrate partial financial hardship. Depending
upon the borrower's circumstances, IBR payments may be less than
accrued interest and some borrowers may not be required to make a
payment. A borrower has a partial financial hardship if the annual
amount due on all of his or her 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 AGI and 150
percent of the poverty line income for the borrower's family size. If
the borrower's monthly payment amount is not sufficient to cover the
accruing interest on the borrower's subsidized Stafford Loans (or on
the portion of the borrower's Consolidation Loan that represents
subsidized Stafford Loans), the Secretary pays the unpaid accrued
interest for a period of up to three
consecutive years from the point the borrower entered the IBR plan on
the loan. Any unpaid accruing interest on the same borrower's
unsubsidized Stafford Loans would be capitalized less frequently under
IBR than it otherwise would be under either an economic hardship
deferment or during a forbearance period. The Department believes that
this plan will be advantageous to many borrowers, including borrowers
who would have been eligible for the economic hardship deferment under
the 20/220 criterion.
The Department disagrees with the commenter's recommendation that
the 20/220 economic hardship eligibility criterion be retained in the
Federal Perkins Loan Program. The commenter is correct that IBR is not
available to Federal Perkins Loan borrowers unless they consolidate
their Perkins loans into a FFEL or Direct Consolidation Loan and that a
Perkins Loan borrower loses the various employment-related Perkins Loan
cancellation opportunities and other benefits by consolidating. Perkins
Loan holders, however, may provide low-income borrowers with relief
from high payments under Sec. 674.33(c)(2) by extending the borrower's
repayment period for up to an additional 10 years for low-income
individuals, which will, in most cases, result in reduced monthly
payment amounts.
The Department disagrees with the contention that there would be no
Federal costs in keeping the 20/220 provision for the Federal Perkins
Loan Program. The Perkins loan fund is a Federal asset and, during
deferment periods, the fund loses both borrower principal payments and
interest that would otherwise accrue and be paid by the borrower.
The Department also does not believe it is appropriate to continue
the 20/220 economic hardship criterion only for borrowers in the
Perkins Loan Program, the title IV loan program with the lowest average
indebtedness and the most generous repayment terms. Finally, the
Department believes that since Perkins Loan borrowers generally also
have FFEL or Direct Loans, the regulations that govern the economic
hardship deferment should be consistent across all the title IV student
loan programs.
With regard to the comments on the definition of ``family size,''
we disagree that for purposes of determining family size the period a
borrower must provide support to other individuals is the same period
as that specified for purposes of IBR. Borrowers requesting a deferment
are certifying to their eligibility for the period for which they are
requesting the deferment, and a borrower's family size is relevant for
that period. Under the IBR plan, borrowers certify to their family size
so that the loan holder can determine a borrower's eligibility for the
year the borrower elects the plan, and for each subsequent year that
the borrower remains on the plan. The period for which a borrower may
request a deferment will often differ from the initial and each
subsequent year a borrower is repaying under the IBR plan. However, we
agree that the time period for which the borrower certifies family size
for purposes of the IBR plan should be clearer in the regulations. We
also agree that an unborn child may be included if that child will be
born during the year the borrower certifies family size or for the
period the borrower requests an economic hardship deferment.
The Department agrees that a loan holder may grant an economic
hardship deferment under the 20/220 criterion to an eligible borrower
who requests a deferment after July 1, 2009, for a deferment period
that began prior to July 1, 2009, and is for a period not to exceed 12
months from that pre-July 1, 2009, start date. No additional economic
hardship deferment periods may be granted based on that criterion to
the borrower at the conclusion of that deferment period, or for any
deferment request on or after July 1, 2009, for a deferment period that
begins on or after that date.
Changes: We have added the phrase ``at the time the borrower
certifies family size'' to the definition of ``family size'' in
Sec. Sec. 682.215(a)(3) and 685.221(a)(3) for purposes of the IBR
plan. We have also amended the definition of family size for purposes
of the economic hardship deferment and the IBR plan in Sec. Sec.
674.34(e)(8)(ii), 682.210(s)(6)(ix), 682.215(a)(3), and 685.221(a)(3)
to clarify that an unborn child is included if that child will be born
in the year the borrower certifies family size.
