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How Income-Contingent Repayment Works 

income contingent repayment

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As one of the four income-driven repayment plans, Income Contingent Repayment (ICR) adjusts your student loan payments to 20% of your discretionary income. But it probably shouldn’t be your first choice of income-driven plans, unless you have parent loans. Read on to find out why.

How Income-Contingent Repayment works

As an alternative to the standard 10-year repayment plan, the Income-Contingent Repayment plan gives borrowers a chance to adjust their monthly payments while extending their terms.

Specifically, ICR either sets your payments at whichever is lower:

  • 20% of your discretionary income (which is calculated as the difference between your gross income and 150% of the poverty guideline), OR
  • The amount you’d pay on a 12-year plan, adjusted to your income

It also sets your repayment term at 25 years. If you still have a balance at the end of your term, it will be forgiven. Note that you’ll have to pay taxes on the forgiven amount.

What loans are eligible for ICR?

ICR is the only plan that accepts loans made to parents, such as parent PLUS or parent FFEL loans. But you have to consolidate them with a Direct consolidation loan before they’re eligible.

Here are all the loans that are eligible for ICR:

  • Subsidized Direct loans
  • Unsubsidized Direct loans
  • Direct PLUS loans made to graduate students
  • Direct consolidation loans
  • Direct PLUS loans made to parents, if consolidated
  • Subsidized FFEL loans, if consolidated
  • Unsubsidized FFEL loans, if consolidated
  • FFEL PLUS loans, if consolidated
  • Perkins loans, if consolidated

Unless you have a Direct subsidized loan, Direct unsubsidized loan, or grad PLUS loan, you’ll likely need to apply for consolidation before your loan is eligible for ICR.

Pros of the Income-Contingent Repayment plan

While ICR generally has less appealing terms than the other income-driven repayment plans, it does have a few advantages.

Only plan that accepts parent loans

First, ICR is the only income-driven plan that accepts parent loans. All the others don’t allow parent loans, even if you consolidate them first. So if you’re a parent borrower looking to adjust your payments on an income-driven plan, Income-Contingent Repayment is your only option.

Could end in loan forgiveness after 25 years

As with the other income-driven plans, ICR could end in loan forgiveness. This plan offers forgiveness at the end of 25 years of repayment. If you still have a large balance, this loan forgiveness could be a huge help (but be prepared for the tax bill that will come with it).

Considers only one income if spouses file separately

If you’re exploring income-driven repayment, you’re probably hoping to lower your student loan payment as much as possible. But if you’re married, some plans take both your and your spouse’s income into account when calculating your payment. ICR, however, won’t take your spouse’s income into account if you file separately.

Limits capitalized interest

Another perk that you might not know about ICR is that it limits capitalized interest. What is capitalized interest, you ask? Well, it’s when interest gets added on to your principal balance. It makes your loan more expensive, since you essentially end up paying interest on top of interest.

When you’re on ICR, the interest your loan accrues will be capitalized once per year. But ICR limits the amount that can be capitalized to 10% of your original balance. Even if more interest accrues, it won’t get added on to your balance at the end of the year.

Cons of the ICR plan

Now that you’ve considered the potential benefits of Income-Contingent Repayment, let’s take a look at some of the possible downsides.

Has the highest payment of any income-driven plan

One major downside of ICR is that it could have the highest payment of any income-driven repayment plan. ICR calculates your payment at 20% of your discretionary income, whereas plans such as Income-Based Repayment, Pay As You Earn, and Revised Pay As You Earn set your payment at 10% or 15% of your discretionary income.

If you’re looking for relief, another income-driven plan could probably be more helpful than ICR.

Has a longer repayment term than most other plans

Along similar lines, ICR has a longer repayment term than most other plans. IBR, PAYE, and REPAYE all offer 20-year terms, which means you could get loan forgiveness five whole years sooner than you would on ICR. (Note that some borrowers could get a 25-year term on IBR or REPAYE, depending on when you borrowed or what type of loans you have.)

Doesn’t have an interest subsidy

Finally, the Income-Contingent Repayment plan doesn’t have an interest subsidy. Some of the income-driven plans will cover some of the unpaid interest on your student loan. But ICR offers no such assistance, so you’ll be fully responsible for paying the interest that adds up on your debt.

Who is the ICR plan best for?

Given the pros and cons of Income-Contingent Repayment, who is this plan best for? For the most part, it’s best for parent borrowers who have parent PLUS or parent FFEL loans. If you’re a student borrower, you’ll probably find more attractive terms on IBR, PAYE, or REPAYE.

How to apply for the Income-Contingent Repayment plan

If you want to apply for ICR or another income-driven plan, you can do so online via Federal Student Aid’s Income-Driven Repayment Request form.

You’ll need to provide some basic information, as well as upload documentation of your income. If you’re not sure which plan you want, this online application will direct you toward the plan that gets you the lowest payment.

You can also call your loan servicer to discuss your individual situation. But since loan servicers aren’t always the most helpful, it’s a good idea to do your own research on your options.

Alternative ways to get relief on your student loan payments

Besides Income-Contingent Repayment, you have a few other options for reducing your student loan payments, as long as you meet eligibility requirements. As mentioned, there are three other income-driven repayment plans:

Plus, a couple of other alternatives to the standard plan:

  • Extended repayment plan
  • Graduated repayment plan

You can also consider consolidating your federal student loans via a Direct consolidation loan to simplify repayment. Or you can explore refinancing your private or federal student loans for better rates.

Refinancing could save you a bunch of money on your student debt, but it does turn federal loans private, meaning you lose access to income-driven repayment plans such as ICR.

In the end, remember that if you’re struggling to keep up with your student debt, there are options out there that can help. But it’s up to you to be proactive about finding the right plan for your budget.

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