An Early Look at the New Income-Based Repayment Plan
May 03, 2012
A new version of income-based repayment (IBR) was enacted by the Health Care and Education Reconciliation Act of 2010, but will be effective only for new borrowers on or after July 1, 2014. President Obama has proposed fast-tracking the new IBR plan to make it available to more students sooner. This article presents a sneak peak at the details of the fast-tracked IBR plan, which differs somewhat from the current and new IBR plans. Please note that these details are not yet final and may change.
Summary of the New Fast-tracked Income-Based Repayment Plan
July 1, 2013 Fall 2012
Eligibility: Borrowers with Direct Loans disbursed on or after October 1, 2011 who were new borrowers as of October 1, 2007.
Restriction: The repayment plan is available only to loans in the Direct Loan program. FFEL program loans must be consolidated into the Direct Loan program to qualify.
Loan Payment: 10% of discretionary income, which is defined as the amount by which adjusted gross income exceeds 150% of the poverty line.
Forgiveness: 20 years after the first payment in a qualifying repayment plan or receipt of an economic hardship deferment or October 1, 2007, whichever comes later.
Income-based repayment bases the monthly loan payments for federal student loans on a percentage of the borrower’s discretionary income, not the amount they owe, forgiving the remaining loan balance after a number of years in repayment. Discretionary income is defined as the amount by which adjusted gross income exceeds 150% of the poverty line. Income-based repayment provides a meaningful reduction in the monthly loan payment for borrowers whose total federal student loan debt exceeds their annual income.
The current version of income-based repayment bases the loan payment on 15% of discretionary income and forgives the remaining loan balance after 25 years in repayment. This version of income-based repayment was enacted by the College Cost Reduction and Access Act of 2007 and became available to all federal student loan borrowers on July 1, 2009.
A new version of income-based repayment was enacted by the Health Care and Education Reconciliation Act of 2010 and will become effective for borrowers who are considered to be new borrowers as of July 1, 2014. A new borrower is a borrower who had no loans prior to the effective date, not even old loans that were consolidated on or after that date. The new version of income-based repayment bases the loan payment on 10% of discretionary income and forgives the remaining loan balance after 20 years in repayment. Thus the monthly loan payment under the new income-based repayment plan is 1/3 lower than in the current income-based repayment plan and the forgiveness occurs five years sooner.
As part of his “we can’t wait” campaign, President Obama proposed fast-tracking the new income-based repayment plan to make it available to more students sooner.