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.
If you plan to go into a low-paying but fulfilling career field, or your student loan payments are so high that they’re unaffordable even with a great salary, an income-contingent repayment (ICR) plan could help.
Here’s a look at how an ICR plan could make your student loans more manageable, as well as how to qualify. Specifically, we’ll look at:
- Understanding income-driven repayment plans
- What is income-contingent repayment?
- How income-contingent repayment works
- How to apply for income-contingent repayment
- How to estimate your income-contingent repayment
- What to do if you don’t qualify for income-contingent repayment
- Potential drawbacks to income-contingent repayment
- Why choose income-contingent repayment?
Federal student loan borrowers have four income-driven repayment options, including 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 (20 to 25 years)
- An annual review of your income, family size and debt load (meaning your monthly payment can change each year)
- Federal income tax may be owed on your forgiven balance at the end of the repayment term
- An often higher total interest paid over the life of the loan
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 income eligibility requirement
The biggest difference to consider is that ICR and REPAYE have no income eligibility requirements.
Because ICR student loans aren’t subject to this partial financial hardship requirement, it’s easier to qualify (more on this below).
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)
The following loans are also eligible for ICR if the borrower first consolidates them into a Direct Consolidation Loan:
- Federal Stafford loans (both subsidized and unsubsidized)
- Federal Family Education Loan (FFEL) PLUS loans
- FFEL consolidation loans
- Federal Perkins loans
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 century.
Your monthly payment amount under the ICR plan is calculated as the lesser of:
- 20% 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 of your loan. If you first consolidate your loans, your interest rate through ICR is the weighted average of the interest rates on the loans included, rounded up to the nearest one-eighth of 1%.
Are you eligible for Public Service Loan Forgiveness?
Borrowers on ICR who intend to pursue a career in public service could be eligible for Public Service Loan Forgiveness (PSLF) after 120 consecutive, on-time payments.
One key difference between PSLF and forgiveness with ICR is that forgiven amounts are not considered taxable income under PSLF. The majority of PSLF applicants are being denied, though, so take that into consideration as you explore your options.
To apply for ICR, complete the Income-Driven Repayment Plan Request online, which can typically be completed in 10 minutes or less. You could also request a paper application from your loan servicer.
As you fill out the request, you can specifically request ICR or ask that your loan servicer place you on the income-driven plan with the lowest monthly payment.
It’s important to note that if you have more than one servicer, you need to submit separate income-driven requests.
There is no application fee to apply for ICR. Private companies could offer help to borrowers for a fee, but they aren’t affiliated with the U.S. Department of Education.
Student Loan Hero has an Income-Contingent Repayment Calculator that can help you estimate your payments under this plan.
The calculator will seek the following personal info:
- Your adjusted gross income
- Your family size
- Your state of residence
- Your marriage status
- Your annual income growth
It also wants the following loan info:
- Your total student loan balance
- Your current monthly payment
- Your average weighted interest rate
Now that you know what is needed for the calculator, let’s provide an example.
Say you make $50,000 a year and have a student loan balance of $70,000 with an average interest rate of 6%. You’re a family of four within the continental U.S.
If you apply for ICR, you could cut your monthly payment from $766 to $423. That being said, you would pay $115,541 over the course of the loan. If you remained on your original plan, you would pay $93,452 total. So you’d pay $22,089 more if you switched to an ICR plan, but you wouldn’t pay as much monthly.
Note that you wouldn’t qualify for any forgiveness under this scenario because your loan would be paid off before the 25-year term is complete.
As you determine whether an income-driven plan is best for you, you could consider these options.
If you realize that you don’t qualify for an income-contingent repayment plan, you might seek to lower your payments through student loan refinancing.
By doing this, you may be able to refinance one or more loan and lock in a lower interest rate. However, when you refinance your loans with a private lender, you give up many protections you have with federal student loans, like deferment, forbearance and the ability to switch to an income-driven plan such as ICR.
While some private lenders do offer certain protections, consider all your options as you look for what’s best for you.
ICR won’t be the right plan for everyone. In particular, borrowers who choose ICR to lower their monthly payments might find their payments are more per month than they would have been under the standard repayment plan.
In addition, extending the repayment term beyond the standard 10 years means you’ll 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 if you file your taxes together, likely resulting in higher monthly payments.
Student loan borrowers who are struggling with payments under the standard repayment plan might consider signing up for ICR. Since there is no income 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 PSLF after 10 years.
And while the 25-year repayment term may seem daunting to potential ICR borrowers, it’s important to remember that you aren’t locked into that loan term forever. If you decide to change repayment plans for financial circumstances, you are welcome to do so.
The good news is you’re being proactive about staying on top of your payments, which is a key step along the journey to becoming debt-free.
Renee Morad contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2020!
|Lender||Variable APR||Eligible Degrees|
|1.99% – 6.65%1||Undergrad & Graduate|
|1.99% – 7.10%2||Undergrad & Graduate|
|2.99% – 6.44%3||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|1.99% – 6.43%4||Undergrad & Graduate|
|3.18% – 6.07%5||Undergrad & Graduate|
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1 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of June 23, 2020. Information and rates are subject to change without notice.
2 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.
The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.
You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2020.
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
3 Important Disclosures for SoFi.
4 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 3.19% APR (with Auto Pay) to 6.43% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.43% 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 June 15, 2020, 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 6/15/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
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 0.19% effective June 10, 2020.