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Income-Contingent Repayment: How It Works and Whom It’s Best For

March 30, 2016
Loans, Student Loans
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When you can’t afford your monthly federal student loan payments, the government has a solution: income-driven repayment plans, including income-contingent repayment. ICR doesn’t offer borrowers the absolute lowest monthly payment, but it may still be the best choice for some, including those who have Parent PLUS loans or who want to lower their payment only slightly.

ICR is the oldest income-driven repayment option, but there are three others:

Each plan limits your monthly loan payment to a percentage of your income, but they have differences that make them suitable for different borrowers. For example, the three newer plans typically allow borrowers to have lower monthly payments, but that typically leads to higher interest payments in the long run.

“The name of the game isn’t to pay the least amount every month,” says Betsy Mayotte, director of regulatory compliance at American Student Assistance, a Boston-based nonprofit. “The name of the game should be to pay the least amount overall.”

Here’s what you need to know about income-contingent repayment to decide if it’s best for you.

How income-contingent repayment works

Unlike with IBR and PAYE, your income doesn’t affect your qualification for income-contingent repayment. Only borrowers with federal direct loans can sign up, but if you have other types of federal loans, you can become eligible by combining them into a federal direct consolidation loan.

Your income and tax filing status and the number of people in your household determine your monthly payment under income-contingent repayment. It’s capped at 20% of your discretionary income or the amount of your fixed monthly payments on a 12-year loan term, whichever is lower.

That might sound confusing, but you don’t have to do the math on your own. Plug in your income, student loan balance and interest rate to the federal government’s repayment estimator to see how much you’d pay on each student loan repayment plan, including ICR.

ICR also extends your loan term from the standard 10 years to 25 years. At that point, the federal government will forgive any remaining balance. This lowers your monthly payment, but it also increases the amount of interest you’ll pay over the life of the loan. Plus, the forgiven amount will be taxed as income.

That’s why switching to an ICR plan — or any other income-driven plan — is a trade-off. If you need extra monthly cash now to cover basic living expenses, consider switching to an income-driven plan. But if you can afford to stay on the standard repayment plan, you’ll save money in interest.

A word of caution: You have to resubmit information about your income and family size each year, even if your situation hasn’t changed. If you miss your annual deadline, your payment will change to what you would pay on the standard 10-year plan until you resubmit the information.

Who should use ICR

Anyone with federal direct student loans qualifies for income-contingent repayment, but it’s not best for every borrower. For example, you’ll generally have a lower monthly payment on IBR, PAYE or REPAYE. But there are two common scenarios in which ICR might be your best option.

You have Parent PLUS loans

ICR is the only income-driven plan that borrowers with Parent PLUS loans can use. Parent PLUS loan borrowers have to consolidate to a federal direct consolidation loan to qualify, but once they jump through that initial hoop, being on an ICR plan can free up cash in their monthly budgets.

» MORE: Parent PLUS loan repayment options

You can’t afford a standard payment but can afford more than you’d pay on another income-driven plan

Income-contingent repayment plans can be a good middle ground between the standard plan and IBR, PAYE and REPAYE, Mayotte says. Those three plans cap borrowers’ monthly payments at 10% or 15% of their incomes, less than ICR’s 20% cap. If you don’t qualify for those plans or can afford to pay more, making payments on ICR could end up saving you in interest in the long run.

Next steps

By default, all federal student loan borrowers start off on a standard repayment plan — fixed, equal payments made over 10 years. You’ll apply to switch plans through your federal student loan servicer.

After you’re on an ICR plan, you have to reapply every year with updated financial information. If your financial situation changes, your monthly payments will change, too. Before reapplying, check the federal government’s repayment estimator to make sure that an income-contingent plan is still best for you.

Other repayment options

If you want to save on the total cost of your loan and you have strong credit as well as a steady income, consider student loan refinancing. Refinancing with a private lender replaces your current loan with a new loan at a lower interest rate and a new term — the shorter the term, the more you’ll save.

Refinancing is a good choice for borrowers with private loans or those with federal student loans who don’t plan to use an income-driven repayment plan, federal loan forgiveness programs or other protections. Consider all options and compare offers before refinancing.


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