Income Contingent Repayment Plan
Income-Contingent Repayment (ICR) is a type of loan repayment plan, and is differentiated from other repayment plans such as IBR, extended repayment, and standard repayment.
The purpose of the ICR plan is to make paying back student loans easier for those who pursue jobs with lower salaries, such as careers in public service. To do this, the ICR pegs the monthly payments to the student’s income, family size, and total loan amount. The monthly payment is adjusted annually, based on changes in annual income and family size.
Only student loans guaranteed by the federal government can be included in the ICR. That is, parent loans (such as Parent PLUS Loans) and private loans are not eligible
The Repayment Period
The maximum repayment period with ICR is 25 years. However, if you work in a public service job and make 120 qualifying repayments, you may qualify for the PSLF (Public Service Loan Forgiveness) program, which discharges any remaining debt after 10 years.
How Much I Pay Back?
The ICR plan has a formula that compares two payment ceilings. The federal government picks the lower ceiling as your monthly payment.
- The first ceiling is 20% of your monthly discretionary income (adjusted gross income minus the federal poverty line for your family size and state)
- The second ceiling is the amount of the 12-year standard repayment plan monthly payment, multiplied by an income percentage factor (IPF). The IPF is determined by your income and marital status, and starts at about 50% for lower incomes.
Regardless of which ceiling is lower, the minimum monthly payment is $5.
How The Interest Rate Is Determined
The interest rate is based on a weighted average of the interest rates of the loans included in the repayment plan, rounded up to the nearest 1/8th of a percentage point. This interest rate is fixed for the lifetime of the loan.
The ICR plan indirectly subsidizes the interest through an interest capitalization cap. If you cannot cover the interest with your payments, unpaid interest is capitalized once a year, but only up to 10% of the original loan amount. Any additional unpaid interest is accumulated but not compounded (in other words, you are not charged interest on your interest).
If you decide to prepay the loan or switch to a different plan, the unpaid interest will be included in the loan balance, after which it may or may not be capitalized depending on the new repayment plan.
Benefits And Drawbacks
- The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). The savings can be significant for students who are pursuing careers in public service.
- Even though your discharged debt is considered taxable income, you pay it over 25 years from the point of discharge, so that the net present value of the tax is small.
- The interest capitalization is capped to 10%, so that even if you have unpaid interest, it will not compound.
- Although you sign up for 25-year ICR initially, you are not locked into this payment plan. If your circumstances change or if you want to pay off your loan more rapidly, you can do that.
- If your income is very low, monthly payment may be as low as $0, and the unpaid balance will be forgiven at age 65.
- If you take advantage of the new PSLF (Public Service Loan Forgiveness), the repayment period is 10 years rather than 25 years.
- The amount of debt discharged after 25 years is considered taxable income.
- For married borrowers, ICR combines income of both spouses, so that there is a “marriage penalty”.
- It cannot be used for private loans or FFEL loans.
- 25 years is a very long time, and the idea of carrying debt for that long can be daunting.