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” or IDR is an umbrella term for four federal student loan repayment options:
- Revised Pay As You Earn (REPAYE)
- Pay As You Earn (PAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
According to the U.S. Federal Reserve, some 20% of consumers who have outstanding student loans are struggling to pay off that debt. If you’re having a hard time making your monthly payments and have federal student loans, one of the four plans above might help. In this article, we’ll focus specifically on Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).
Read on to compare the similarities and differences of these plans, IBR vs. ICR, 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 from 10 years to 20 or 25 years. However, if you still have a loan balance after that time, it might be eligible to be forgiven. You won’t have to make any more payments, but you might have to pay income taxes on the forgiven balance.
Both these loans can help if you need relief from student loan payments, but they have some key differences in how they work and which 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 either 10% or 15% of your discretionary income, depending on the type of loan, whereas ICR caps payments at 20%.
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% of your discretionary income. Your discretionary income will be the difference between your adjusted gross income and 150% of the federal poverty guideline for your family size and state.
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 like ICR require you to consolidate FFELs, a step you don’t have to take to qualify for IBR.
Federal loans for parents (PLUS loans) are not eligible for IBR, though they could still be eligible for ICR.
3. Provides 3 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 with 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. Still, 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 who have financial needs or concerns.
If one or more of the following points describe you, you might be better off choosing IBR vs. ICR:
- You have direct federal loans.
- You have FFEL loans.
- You don’t have any Parent PLUS loans.
- You can demonstrate financial hardship.
It’s also important to note that IBR forgives loans after 20 years for newer borrowers who took out their loans on or after July 1, 2014. If you took out your loans after this date, you’ll have to wait 25 years for loan forgiveness.
To see whether this type of repayment plan might be a good choice for you, check this IBR calculator. It lets you put in your adjusted gross income, family size and state of residence to provide an estimate of how an IBR plan might cut down on what you owe monthly.
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 verify your income and family size annually 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% of their discretionary income.
Alternatively, an ICR plan could set your monthly payment equal to what you would pay on a 12-year repayment plan. A 12-year plan might offer you some financial relief, but your monthly payment might not be that different from what you’d pay on the standard 10-year plan. To see if how an ICR plan might work, check out this Income-Contingent Repayment Calculator. By adding some personal information, such as gross income and family size, you can get an estimate on your monthly payments under an ICR plan. This calculator will also compare your estimated payments to your current cost while showcasing any possible savings. You may find that a 2-year extension might not be enough to balance out repayment of such substantial size debt.
Under an ICR plan, your monthly payment will be set to the lesser of the two above options.
3. Your payments could exceed those with the standard repayment plan
If your income increases over time, your monthly payments could be higher than what you’d pay with the standard 10-year plan. Unlike IBR, ICR doesn’t stop your monthly payments from increasing indefinitely along with your income.
4. Covers PLUS loans
IBR and ICR also differs when it comes to federal 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 PLUS loans.
Who should choose an ICR plan?
While ICR doesn’t typically lower monthly payments as much as IBR, this difference can be a positive one if you want to save money on interest. If you can pay off your loans in less than 25 years, you might prefer making higher monthly payments. The more you pay now, the less interest you’ll pay in the long run. Also, ICR is useful for borrowers with PLUS loans. As mentioned earlier, IBR does not cover this type of parental loan.
Before deciding on an ICR plan, make sure you are comfortable making payments based on your income. If your income rises over time, your payments could actually end up higher than they would with a standard 10-year student loan repayment plan.
In a nutshell, you should consider ICR if:
- You have PLUS loans.
- You can’t demonstrate financial hardship.
- You don’t mind payments increasing with income, even beyond what they might on the standard 10-year plan.
How to apply for IBR or ICR
Applying for an income-driven repayment plan is relatively easy and can be done online. To get started, complete an online income-driven repayment plan request. Once you’re on the site, you can choose the plan you’d like to apply for (such as IBR or ICR) and also provide proof of income using your last tax return to see how you might qualify. To ensure you’re providing the most up-to-date information, make sure your income hasn’t significantly changed since you last filed your taxes.
If you have questions or need help applying for a repayment plan, contact your student loan provider directly. Keep in mind that you will need to reapply for any income-driven repayment plan every year, providing updated income and family information.
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 more than a decade, from 10 years to at least 20 years. This means you’ll be burdened with student loan payments for many years, and will also pay more interest.
One drawback to income-driven plans is that they only apply to federal student loans. Since the federal student loan limit for undergraduates is $31,000, many borrowers may also be carrying a good deal of private student loan debt.
Refinancing your student loan could be useful if you have both federal and private student debt. This involves taking out one new loan with a private lender that offers better terms for repaying your current student debt.
If you decide to refinance your loan, look for terms like a reduced interest rate and lower monthly payment. For your best terms, you will need a steady income and a good credit score. If you qualify, student loan refinancing could help you better manage your loan payments.
What you need to remember about IBR vs. ICR
If you’re overwhelmed by student loan bills, consider signing up for an income-driven repayment plan that can help ease the burden and free up more of your monthly income. If you took out a student loan on or after July 1, 2014, your repayment options may be even more attractive.
Carissa Chesanek contributed to this report.