Should Borrowers Pay Off Old Student Loans to Qualify for the New 10% Version of Income-Based Repayment?

Mark Kantrowitz

December 05, 2011

I want to qualify for the “pay as you earn plan” 10% income-based repayment plan. I have $80,000 in Direct Loans from 2010-2012. I have a balance of $2,800 on an old student loan from the 1990’s. Should I pay off the old balance before a certain date to make sure and qualify for the “pay as you earn plan”? Or can I wait to see what rule changes there are? — Jesse A.

To qualify for the 10% version of income-based repayment, a borrower must have at least one federal student loan from 2012 or a later year and no loans from before 2008.

These restrictions are intended to limit the number of borrowers who are eligible for the earlier implementation of the new income-based repayment plan. President Obama pushed up the implementation through executive action, as opposed to an act of Congress. Since executive actions cannot appropriate funding, the change must be implemented at no net cost to taxpayers. This required pairing the income-based repayment plan with a program to consolidate the loans of split borrowers, so that the cost of the new income-based repayment plan can be covered by the savings from moving more loans into the Direct Loan program. This necessarily limits the scope of the new income-based repayment plan.

It is unclear, however, whether a federal student loan borrowed for the 2011-12 academic year will be enough to qualify a borrower for the new “pay as you earn” plan even if part of the loan is disbursed in 2012. The consolidation of split borrowers must occur in the first half of 2012 because the Budget Control Act of 2011 precludes the Direct Loan program from offering any discounts other than auto-debit discounts for new loans originated on or after July 1, 2012. But there are no similar restrictions on income-based repayment, so the effective date for the 10% version of income-based repayment is unclear.

The White House’s press release and fact sheet both use language like “starting in 2012” and “as soon as 2012” without mentioning when in 2012 the proposal will become effective. (The press release is even ambiguous as to whether the pay as you earn proposal is an executive order, referring to it as an “executive action”. However, the words “executive order” were used in the press conference.) Most federal legislation concerning student loans has effective dates based on the start of the fiscal year (October 1), the start of the award year (July 1) or the date of enactment. The 10% version of income-based repayment, as enacted by the Health Care and Education Reconciliation Act of 2010, was restricted to loans made to a “new borrower on or after July 1, 2014.” Accordingly, it seems likely that the effective date for the executive order will be July 1, 2012, the start of the 2012-13 award year.

Borrowers must also not have any loans from before 2008. While this date does not appear in the press release or fact sheet, it was mentioned to reporters during a press conference announcing the initiative.

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