Income-Contingent Repayment of Student Loans

    The Income-Contingent Repayment Plan is one of the relief options available to student loan borrowers struggling to keep up with payments. There are no income hardship requirements, which means anyone with a federal loan can qualify for the program.

    The ICR plan calculates your monthly loan payment based on income and size of your family. It was the first in the family of relief options that includes Income Based Repayment (IBR), Pay As You Earn (PAYE) and Repay As You Earn (REPAYE).

    Income Contingent Repayment is considered the bridge that connects borrowers who can’t quite afford the Standard Repayment Plan, but don’t need the breaks offered by the other three income-driven repayment plans.

    ICR will take a maximum 20% of your discretionary income, while the other three only ask for 10% or 15%. The ICF plan extends repayment from 10 years to 25 years. Any balance you have remaining at that point is forgiven.

    The drawback for that is extending the payout time means you will pay more – sometimes far more – in interest on your loan.

    The plan started in 1993 as a way to target borrowers interested in working in the public sector, which at the time paid significantly lower salaries than the private sector. The Senate Committee recommended passing the bill to “allow students to take lower-paying community and public service jobs without the fear of being overburdened with loan debt.”

    Today, the plan can help graduates in any line of work. Only borrowers with federal loans qualify. Private loans don’t qualify for the program.

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    Loans that Qualify for Income Contingent Repayment

    Nearly every federal student loan is eligible to be repaid under the ICR program, and the ones that aren’t can become eligible if the borrower consolidates them under the Direct Consolidation Loans program.

    That means Direct Subsidized and Unsubsidized loans; Direct PLUS loans; and Direct Consolidation Loans are eligible for ICR. Loans that can qualify if they are consolidated include Direct PLUS loans made to parents; subsidized and unsubsidized Stafford loans; FFEL PLUS Loans; FFEL PLUS loans for parents; Federal Perkins loans and FFEL consolidation loans.

    Advantages and Disadvantages

    Some details of the income-contingent plan make it easier for you to repay federal student loans, but there are some disadvantages that could make this plan less desirable.

    The overriding advantage of ICR is that payments are adjusted as changes occur in your income and the size of your family, and the repayment period can stretch to 25 years. However, if your economic situation improves, you can pay the loan off early or change programs to one that better suits your situation.

    Using ICR keeps you eligible for the Public Service Loan Forgiveness Program.

    The most obvious disadvantages of ICR:
    • There is a “marriage penalty” involved in calculating ICR payments. This means your spouse’s income is included with yours in calculating payments.
    • The total cost of the loan can increase tremendously, if repayment is stretched to the maximum-allowable time of 25 years. For example, a married person with two children and an adjusted gross income of $50,000 will pay significantly more on a $40,000 loan over 25 years ($90,216) than they would on the standard 10-year repayment plan ($55,238). That is $34,978 more paid over the last 13 years of the loan.
    • An application must be filled out every year, because one or both of the factors involved in calculating payments – income and family size – may change each year.

    How Are the Payments Calculated?

    The ICR formula compares two payment ceilings and picks the lower of the two as your monthly payment.

    The first ceiling is defined as 20% of your monthly discretionary income, which is defined as your adjusted gross income minus the federal poverty line for your family size and state.

    The second ceiling is more complicated. It is the amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor (IPF). The IPF corresponds to your income and marital status. That can change every year, which is why you must reapply for this program every year.

    How Long Is the Repayment Period?

    The repayment period can be a maximum of 25 years, though there is no penalty for early repayment.

    However, if you work in a public service job and make 120 qualifying repayments, you may qualify for the Public Service Loan Forgiveness program, which discharges any debt remaining after 10 years.

    After 25 years, the loan balance will be forgiven under the ICR plan, but you can be taxed for the amount forgiven, as it is considered income. Time spent in deferment or forbearance does not count toward your 25 years.

    How Does the ICR Compare to the Income-Based Repayment Program?

    Generally speaking, the payments for ICR are going to be higher than those for any of the other three debt-relief options. Also, under ICR, you are responsible for paying all the interest, and unpaid interest is capitalized (added to the loan principal balance) every year.

    Is the ICR the same as Income-Sensitive Repayment Plan?

    There is a major difference between the income-contingent and income-sensitive repayment plans and that is ICR deals with loans made under the William D. Ford Direct Loan program and ISR deals only with loans made under the Federal Family Education Loan program (FFEL).

    If you received a student loan under the FFEL program and are having problems making payments, you qualify for the Income Sensitive Repayment Plan.

    The payment amount for the income-sensitive repayment plan is based on a percentage of the borrower’s gross income. The payment will be somewhere between 4% and 25% of the borrower’s gross income and the real selling point for the program is that the borrower gets to decide what percentage he or she will pay.

    There are some aspects of the income-sensitive program that borrowers should be aware of:
    • It only applies to FFEL loans, meaning loans issued before July 1, 2010. It does not apply to Federal Direct Loans, meaning those issued after July 1, 2010.
    • Payments increase or decrease, based on your annual income.
    • Monthly payments must exceed the amount of interest accrued on the loan for one month.
    • A spouse’s income is not factored into the monthly payment, unless the spouse co-signed for the loan.
    • Income-sensitive repayment plans must be renewed each year and payments can be made for a maximum of 10 years, unless the loans are consolidated.

    Income-sensitive repayment plans are best used as a remedy for short-term financial problems.

    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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