Publication Date: May 2002
DCL ID: CB-02-08
New Total and Permanent Disability Discharge Procedures for Title IV Loans Effective - July 1, 2002
SUBJECT: New Total and Permanent Disability Discharge Procedures for Title IV Loans - Effective July 1, 2002
SUMMARY: This letter discusses implementation of the regulatory changes for total and permanent disability discharges in the Federal Perkins Loan, Federal Family Education Loan (FFEL), and the William D. Ford Federal Direct Loan programs. The final regulations were published on November 1, 2000. While some of the provisions went into effect on July 1, 2001, most of the regulatory changes become effective July 1, 2002. This letter provides guidance to Perkins school lenders, FFEL lenders, and guaranty agencies on the new procedures for processing total and permanent disability discharge requests.
To address weaknesses in the procedures for granting total and permanent disability discharges on federal student loans identified in a June 1999 report issued by the Department's Inspector General, the Department conducted a negotiated rulemaking process with representatives from the higher education community from January to May 2000. All members of the negotiating committee could not reach agreement on the proposed regulatory changes, and the Department published proposed regulations for public comment on August 2, 2000.
After considering the public comments received on the proposed regulations and making changes where appropriate, the Department published final regulations on November 1, 2000, that significantly revise the process for granting disability discharges. In addition, as part of those regulations, the definition of total and permanent disability was changed, removing the requirement that a borrower be unable to attend school. This revised definition became effective July 1, 2001.
Under the changed definition, a borrower is totally and permanently disabled if the borrower: "is unable to work and earn money because of an injury or illness that is expected to continue indefinitely or result in death" [34 C.F.R. §§674.51(s), 682.200]. The final regulations also made significant changes to the process for evaluating disability discharge applications. Those changes will go into effect on July 1, 2002.
This Dear Colleague Letter provides a general overview of the disability discharge regulations and procedures that go into effect on July 1, 2002. In addition, Attachments 1 and 2 to this letter provide guidance specific to Perkins school lenders and FFEL lenders and guarantors. Attachment 3 outlines the role of the Department in the new process.
I. Overview of Regulatory Changes
The regulatory changes revising the process for granting total and permanent disability discharges are contained in 34 C.F.R. §674. 61(b) of the Perkins regulations, 34 C.F.R. §§682.402(c) and 682.402(r) of the FFEL regulations, and 34 C.F.R. §685.213 of the Direct Loan regulations. Under the new regulations, the disability discharge procedures are as follows:
1. The borrower applies to the loan holder (i.e., the current owner of the loan) for a disability discharge. For Perkins Loans, the loan holder is the Perkins school lender. For FFEL loans, the loan holder is a lender or, if the loan has gone into default, a guaranty agency. For Direct Loans and other Title IV loans assigned to the Department, the loan holder is the U.S. Department of Education.
The loan holder must make a preliminary determination as to whether the borrower meets the criteria for a total and permanent disability discharge. For Perkins loans, the preliminary determination is made by the school. In the FFEL Program, the current loan holder makes the determination. For Direct Loans, the preliminary determination is made by Direct Loan staff. For other loans held by the Department, the preliminary determination is made by the Department's Federal Student Aid (FSA) Collections. In addition, for FFEL loans, the guaranty agency conducts an independent evaluation of the discharge request after the FFEL lender makes a preliminary determination that the borrower qualifies for the discharge, except in the case where the guaranty agency is the current loan holder and the borrower submitted the discharge request directly to the guaranty agency.
2. If during the preliminary determination a loan holder, guaranty agency or the Department determines that the borrower does not meet the criteria for a disability discharge, the discharge request is denied, the loan is returned to its prior status and, as appropriate, collection activity or regular servicing resumes on the loan.
3. For Perkins Loans, if the school determines that a borrower meets the criteria for a disability discharge, it must assign the loan to the Department's Disability Discharge Unit. For FFEL loans, the loan is assigned to the Department's Disability Discharge Unit if both the loan holder and the guaranty agency determine that a borrower meets the criteria for a total and permanent disability discharge.
4. The Department reviews all assigned loans with discharge applications to affirm that the borrower meets the criteria for a discharge. If we affirm that the borrower meets the criteria for a total and permanent disability discharge, the loan is placed in a conditional discharge status for three years. During this conditional discharge period, the borrower is not required to make payments and interest does not accrue.
5. During this conditional discharge period, we will monitor whether the borrower has been able to work and earn money or has received a new Title IV loan in order to ensure that the borrower continues to qualify for the total and permanent disability discharge. At the end of the conditional discharge period, we will make a determination that the borrower has met the definition of total and permanent disability if he or she has not had annual earnings from work during the conditional discharge period in excess of the poverty level for a family of two, and has not received any new Title IV loans during the period. If these conditions are met throughout the conditional discharge period, we will grant a final discharge.
6. In some cases, a borrower may have become totally and permanently disabled, as determined by a physician, three or more years before the loan is assigned. In these cases, the initial determination of eligibility - based on the borrower's medical documentation - and the final determination of eligibility - based on the borrower's earnings and subsequent Title IV loan activity - will be conducted at the same time and we may immediately grant a final discharge.
During the discharge process, borrowers will be given a phone number to call and speak with a representative if they have any questions about their discharge requests. Borrowers will also be told that they may contact our Student Loan Ombudsman for assistance in resolving disputes. However, as with the current total and permanent disability discharge process, there is no formal appeals process for a borrower who is denied a discharge.
II. Application Availability and Effective Date For Use
Currently, disability discharge requests in the FFEL and Direct Loan Program are processed using the form titled "Loan Discharge Application: Total and Permanent Disability" [OMB Number 1845-0015]. Perkins school lenders do not currently use a Department of Education form for processing disability discharge requests, although they have a comparable application process. We have developed a new total and permanent disability discharge application for use in all three of the Title IV loan programs. This form is currently under review by the Office of Management and budget. After this new total and permanent disability discharge application form is approved by OMB in the next few weeks, we will make it immediately available to the financial aid community by posting it to the Information for Financial Aid Professionals (IFAP) web site as an attachment to a Dear Colleague Letter. The new disability discharge application must be provided to all borrowers who request total and permanent disability discharges on or after July 1, 2002. However, program participants may use the previous form for borrowers who were in the discharge process prior to July 1, 2002, but must follow the new standards and procedures for all disability discharge determinations made on or after July 1, 2002.
III. Triggering Date for Implementation of New Procedures
The new standards and procedures for granting total and permanent disability discharges resulting from the November 1, 2000 final regulations that are discussed in this letter go into effect on July 1, 2002.
For all disability discharge requests approved on or after July 1, 2002 based on the previously approved total and permanent disability discharge form (or a school form for Perkins borrowers), the loan holder must, in the preliminary determination letter, inform the borrower that the regulations governing disability discharges have changed and explain the new total and permanent disability eligibility criteria and discharge process.
IV. Department's Expectations for Holders' Preliminary Determinations
We expect loan holders and guaranty agencies to conduct rigorous evaluations of disability discharge requests. If the borrower's medical documentation does not support the conclusion that the borrower is unable to work and earn money because of an injury or illness that is expected to continue indefinitely or result in death, the discharge request should be denied. Loan holders and guarantors should follow the guidance for reviewing disability claims that was provided in Dear Guaranty Agency Director Letter 99-G-324, dated November 1999. This guidance states that loan holders are expected to:
1. Require additional documentation to support a borrower's application if the information provided by the borrower is not definitive, is illegible, or is incomplete.
2. Require the physician to affirm certification of disability if the diagnosis does not appear to satisfy the standard for discharge. If it appears that the physician has used a less rigorous standard in certifying the borrower's disability, loan holders should clarify the definition of "total and permanent disability" with the physician.
Loan holders may want to seek the assistance of a qualified physician to evaluate total and permanent disability discharge requests, as appropriate. Loan holders should also report to the Department's Office of Inspector General any questionable patterns related to physicians' certifying signatures or state licensing numbers regarding the legitimacy of the disability discharge request.
The Attachments to this letter provide more detailed information on the new eligibility criteria and procedures for granting total and permanent disability discharges.
We would like to thank the student financial aid community for its assistance in developing these new procedures and designing the new total and permanent disability discharge form. We look forward to continuing to work with you to ensure that only those borrowers who are eligible will continue to receive total and permanent disability discharges on their Title IV loans. Thank you for your cooperation in implementing these new safeguards and your continued support of the federal student financial assistance programs.
|Jeffrey R. Andrade
Deputy Assistant Secretary for
Policy, Planning, and Innovation
Office of Postsecondary Education
Chief Operating Officer
Federal Student Aid
Attachment 1: Federal Perkins
Attachment 2: FFEL Program
Attachment 3: Department of Education