For many borrowers, student loans can help fund an education that leads to a high salary. But not everyone is looking to make six figures – what if you plan to go into a low-paying but fulfilling career field? Or maybe your student loan payments are so high they’re unaffordable even with a great salary. An Income-Contingent Repayment plan could help.
Here’s a look at how Income-Contingent Repayment could help make student loans more manageable, as well as how to qualify.
Understanding income-driven repayment plans
Federal student loan borrowers have a number of income-driven repayment options available to them. These include Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
All four of these income-driven repayment options share certain characteristics, including:
- A monthly payment determined by your income, family size, and debt load.
- Loan forgiveness after a certain repayment period (between 20 and 25 years).
- An annual review of your income, family size, and debt load (meaning your monthly payment can change from year to year).
- Federal income tax will be owed on any amount forgiven at the end of the repayment term.
- Higher total interest paid over the life of the loan.
What is Income-Contingent Repayment (ICR)?
Though there are several income-driven options available to borrowers struggling to make payments, it’s important to understand what makes Income-Contingent Repayment different from the other options.
No financial hardship requirement for eligibility
The biggest difference to consider is the fact that ICR has no income eligibility requirement.
Normally, the “partial financial hardship” criteria state the total amount due on all eligible loans must exceed 15 percent of discretionary income when calculating payments under the 10-year Standard Repayment Plan. Both PAYE and IBR require borrowers to prove financial hardship in order to qualify.
ICR (as well as REPAYE) is not subject to the partial financial hardship requirement, making it easier to qualify for in this regard.
Income-Contingent Repayment plans are available for the following loans:
- Direct Loans (both subsidized and unsubsidized)
- Direct Consolidation Loans
- Direct PLUS Loans (loans made to parents ARE eligible if they are consolidated first)
In addition, the following loans are eligible for ICR if the borrower first consolidates them into a Direct Consolidation Loan:
- Federal Stafford Loans (both subsidized and unsubsidized)
- FFEL PLUS Loans
- FFEL Consolidation Loans
- Federal Perkins Loans
How repayment works
The repayment period for ICR is 25 years. After that, your remaining loan balance is forgiven (if there’s anything left).
Keep in mind that any forgiven debt under ICR is considered to be taxable income. That means even if you do achieve loan forgiveness, you could be facing a steep tax bill in a quarter of a century.
Your monthly payment amount under the ICR plan is calculated as the lesser of:
- Twenty percent of discretionary income
- What the payment would be on a fixed, 12-year payment plan, adjusted according to income.
This does mean that depending on your income, payments could end up higher than with the Standard Repayment Plan.
The interest rate for the Income-Contingent Repayment plan is fixed for the life your loan. According to FinAid.com, your interest rate through ICR is “based on a weighted average of the interest rates of the loans included in the program, rounded up to the nearest 1/8th of a percentage point.”
Public Service Loan Forgiveness
Borrowers on ICR who intend to pursue a career in public service are eligible for Public Service Loan Forgiveness (PSLF) after 120 consecutive, on-time payments (i.e., 10 years).
Not only does qualifying for PSLF mean a much shorter repayment period, but forgiven amounts are NOT considered taxable income, making this an excellent option for full-time public service employees who are struggling under the Standard Repayment Plan.
Potential drawbacks to Income-Contingent Repayment
ICR is not the right plan for everyone. In particular, borrowers who choose ICR in order to lower their monthly payments might find their payments are more per month than they would have been under the Standard Repayment Plan.
This repayment plan also has the highest income cap of all the income-driven repayment plans.
And as with all income-driven plans, extending the repayment term beyond the standard 10 years means you will probably pay more in total interest over time.
One final consideration is the way married borrowers are treated. If you apply for ICR and are married, your spouse’s income will be considered as well, likely resulting in higher monthly payments.
Why choose Income-Contingent Repayment?
Student loan borrowers who are struggling with payments under the standard repayment plan might consider signing up for ICR. Since there is no partial hardship requirement for eligibility, this repayment plan is available to even those who earn a relatively high income.
Borrowers pursuing a career in public service could find signing up for ICR will reduce payments enough to make them affordable while still remaining eligible for Public Service Loan Forgiveness after 10 years.
And while the 25-year repayment term may seem daunting to potential ICR borrowers, it’s important to remember that you are not locked into that loan term forever. If you decide to change repayment plans due to a change in your financial circumstances, you are welcome to do so.
Since there are a few different options for lowering the payments on your federal student loans, it’s a good idea to review them all thoroughly before making a decision.
The good news is you’re being proactive about staying on top of your payments and that’s the first step along the journey to becoming debt-free.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.46% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.44%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|