IBR vs. ICR: Which Income-Driven Repayment Plan Is Right for You?

ibr vs icr

The language around student loans gets confusing fast, but some of the most perplexing terms have to do with income-driven repayment plans.

“Income-driven repayment plan” is an umbrella term for four federal student loan repayment options:

  1. Revised Pay As You Earn (REPAYE)
  2. Pay As You Earn (PAYE)
  3. Income-Based Repayment (IBR)
  4. Income-Contingent Repayment (ICR)

If you’re struggling to make your monthly payments and you have federal student loans, one of these plans could help. In this article, we’ll focus specifically on Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).

Find out the similarities and differences of these programs, as well as how to decide which one is right for you.

IBR vs. ICR: How are they similar?

Income-Based Repayment and Income-Contingent Repayment are two income-driven plans for federal student loans. Both adjust your monthly payments based on your income, and both plans have annual requirements to recertify your income and family size.

IBR and ICR typically lower your monthly payments, but they also extend your loan repayment term to 20 or 25 years. If you still have a loan balance after that time, it will be forgiven. You won’t have to make any more payments, but you might have to pay income taxes on the forgiven balance.

Both plans are helpful if you need relief from your student loan payments. Though they share a lot of similarities, they also have some key differences in how they work and what types of loans qualify.

What’s unique about Income-Based Repayment?

IBR could be a better option for a lot of borrowers for four reasons:

1. Lower monthly payments

IBR typically lowers your monthly payment more than ICR does. It limits payments to 10 or 15 percent of your income, depending on the type of loan, whereas ICR caps them at 20 percent.

If you took out loans on or after July 1, 2014, IBR would lower your monthly payments to 10 percent of your discretionary income. If you took out loans before July 1, 2014, you’d pay 15 percent of your discretionary income.

2. Covers Direct and FFEL loans

The second reason many borrowers prefer IBR is that it covers both Direct Loans and Federal Family Education Loans (FFEL). Other income-driven plans such as ICR require you to consolidate FFEL Loans, a step you don’t have to take to get on IBR.

Federal loans for parents are not eligible for IBR, though they could be eligible for ICR.

3. Three years of interest benefits on subsidized loans

Depending on your loan type, IBR has a major advantage over ICR when it comes to student loan interest.

When IBR reduces your monthly payments, you might not pay enough to cover monthly accrued interest. If that’s the case and you have subsidized loans, the government will cover the difference between your payment and remaining interest for up to three consecutive years.

For unsubsidized loans, you still have to pay the interest that accrues. ICR has no such interest subsidy benefit for any loan type.

4. Payments will never exceed those of the 10-year Standard Repayment Plan

To qualify for IBR, you must prove your income is low relative to your debt. If your income goes up, your payments could increase, too. But they will never exceed the amount you’d pay on the Standard Repayment Plan.

Who should choose an IBR plan?

Because you pay a smaller percentage of your income with Income-Based Repayment than with Income-Contingent Repayment, IBR may be the superior choice for many student loan borrowers with financial need.

If one or more of these points describe you, you might benefit from choosing IBR over ICR:

  • You have Direct federal loans.
  • You have FFEL loans.
  • You don’t have any Parent PLUS loans.
  • You can demonstrate financial hardship.

You should also note that IBR forgives loans for “new borrowers” after 20 years. But if you took your loans out before July 1, 2014, you’ll have to wait 25 years for loan forgiveness.

What’s unique about Income-Contingent Repayment?

Income-Contingent Repayment has a few important differences from Income-Based Repayment. Here’s what you need to know:

1. No financial hardship requirement

You don’t need to demonstrate financial need to get on ICR. There’s no income requirement to get on the plan, but you will need to annually verify your income and family size to remain on it.

2. Two potential rules for monthly payments

ICR determines your monthly payments in one of two ways. For some borrowers, it caps payments at 20 percent of their discretionary income.

Alternatively, ICR could set your monthly payment equal to what you would pay on a 12-year repayment plan. If you don’t have great financial need, you might end up on this plan. A 12-year plan could offer some relief, but your monthly payment may not be that different from what you’d pay on the standard 10-year plan.

Your monthly payment will be set to the lesser of the two above options.

3. Your payments could exceed the Standard Repayment Plan

If your income increases over time, your monthly payments could be higher than what you’d pay on the 10-year plan. Unlike IBR, ICR doesn’t stop your monthly payments from increasing indefinitely along with your income.

4. Covers Parent PLUS loans

Another difference between IBR and ICR has to do with Parent PLUS loans. ICR covers any and all Parent PLUS loans, as long as they’re consolidated through a Direct Consolidation Loan first. This is the only income-driven repayment plan that will cover federal Parent PLUS loans.

Who should choose an ICR plan?

ICR doesn’t typically lower monthly payments as much as IBR, but this difference can be a positive one if you want to save money on interest. If you can pay off your loans sooner than 25 years, you might prefer to make higher monthly payments. The more you pay now, the less you’ll pay in interest in the long run.

Secondly, ICR is useful for borrowers with Parent PLUS loans. As mentioned above, IBR does not cover Parent PLUS loans.

And finally, you must be comfortable making payments based on your income. If your income rises over time, your payments could end up higher than they would be on the standard 10-year plan.

In a nutshell, you should consider ICR if:

  • You have Parent PLUS loans.
  • You can’t demonstrate financial hardship.
  • You don’t mind payments increasing with your income, even beyond what they would be on the 10-year plan.

Another option: student loan refinancing

Income-driven repayment plans can help you manage your student loans, but they also have a few major drawbacks. For one, they extend your repayment term by over a decade. You’ll be burdened with student loan payments for many years, significantly increasing the amount of interest you pay, too.

Furthermore, income-driven plans only apply to federal student loans. Since the federal student loan limit for undergrads is $31,000, many people also have a good deal of private student loan debt.

Refinancing your student loans could be useful if you have both federal and private student debt. It involves taking out one new loan with a private lender to repay your current student debt.

The new loan should have better terms, including a lower monthly payment and reduced interest rate. For the best terms, you need a steady income and a good credit score. If you qualify, student loan refinancing could help you better manage your student loan payments.

What you need to remember about IBR vs. ICR

If you’re overwhelmed by your student loan bills, explore options that can help. Income-driven repayment plans ease the burden and free up more of your monthly income.

It’s easy to get confused when sifting through the different student loan repayment plans. But by taking the time to compare, you can hone in on the option that’s best for you.

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