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.
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