An Early Look at the New Income-Based Repayment Plan
May 03, 2012
Implications for the Design of the Fast-Tracked IBR Plan
This process has several implications for the fast-tracking of the new income-based repayment plan.
• Because it is reliant on the negotiated rulemaking process, the soonest the new income-based repayment plan can become available is July 1, 2013. The master calendar provisions do not permit an earlier implementation except in emergency situations.
• However, eligibility will not be restricted to new borrowers as of the effective date of the regulations. Instead, eligibility will be restricted to new borrowers who have no outstanding balances on Direct or FFEL program loans as of October 1, 2007 (the start of FY2008) and who had no outstanding balance on a Direct or FFEL program loan on the date the borrower received a new loan on or after October 1, 2007 (the start of FY2008). So borrowers who have loans from before October 1, 2007 cannot become eligible by consolidating or otherwise refinancing the loans. In addition, to be eligible the borrower must have at least one Direct Loan disbursed on or after October 1, 2011 (the start of FY2012).
The US Department of Education had to restrict eligibility for financial reasons. Making the ICR-A plan available to all borrowers would be too expensive. Only Congress can appropriate funds, so executive actions must be cost-neutral to the taxpayer. The Obama administration is using the savings from the consolidation of split borrowers to pay for the costs of the fast-tracking the new income-based repayment plan. Since the savings from the consolidation of split borrowers are limited, the eligibility of the new income-based repayment plan had to be restricted to contain the costs. In addition, the October 1, 2007 start date is partly motivated by the effective date of the College Cost Reduction and Access Act of 2007.
• Because the new income-based repayment plan is based on the income-contingent repayment plan, it is restricted to loans that are in the Direct Loan program. Borrowers with loans in the federally-guaranteed student loan program (FFELP) will need to consolidate their loans into the Direct Loan program in order for those loans to qualify for the new income-based repayment plan. Otherwise, the loan payments under the new income-based repayment plan will be applied only to loans in the Direct Loan program, prorated by the percentage of the outstanding principal balance of the borrower’s federal student loans that are Direct Loans.
• Defaulted loans are not eligible, nor are Parent PLUS loans or private student loans.
• The clock on the 20-year forgiveness period begins the date the borrower first made payments under ICR-A, ICR-B or IBR or the date the borrower received an economic hardship deferment, whichever came earliest, but no earlier than October 1, 2007.
• Borrowers who were in the old version of income-contingent repayment that was in effect prior to July 1, 2013 (ICR-B) will be able to continue in the ICR-B plan, as will borrowers who are ineligible for ICR-A or IBR. Borrowers who were already in the income-contingent repayment plan will not be required to switch to the ICR-A or IBR plans. Since borrowers who are eligible for ICR-B are almost always eligible for ICR-A or IBR, the ICR-B plan will eventually be phased out as ICR-B borrowers reach the 25-year cancellation of the remaining debt. (ICR-B borrowers who made payments under ICR-B before October 1, 2002 are unlikely to switch to ICR-A, as they will reach the 25-year forgiveness sooner than they would reach the 20-year forgiveness under ICR-A.)