How Income-Contingent Repayment Can Help With Your Student Loans
An ICR just might make your student loan payments affordable.
Depending on how much you owe, it’s not uncommon to have student loan payments totaling between $300 and $500 a month—or more. For some grads, trying to fit student loan payments into a budget can be difficult.
This is where income-driven payment plans from the government can help those with federal loans. One type of income-driven plan is income-contingent repayment. With this plan, you pay a little more each month than you would with similar plans, but you might save some money on interest.
On top of that, ICR is the only income-driven plan that includes Parent PLUS loans. Here’s what you need to know about the income-contingent repayment plan for student loans.
Income-Contingent Repayment: The Basics
Income-contingent repayment is one of four income-driven options for those with qualifying federal student loans. Looking at your income and family size, it’s possible for servicers to adjust your repayment amount and schedule so that your monthly student loan payments are more affordable. Here are some of the basic features of ICR:
- Monthly payment cap: The lower amount between 20% of your discretionary income or what fixed payments would be based on a 12-year loan term.
- Repayment length: 25 years.
- Forgiveness: After 25 years the remaining balance may be forgiven, but you’ll pay taxes on the amount forgiven.
- Types of loans: Federal Direct loans, including Parent PLUS loans that have been consolidated using a Direct Consolidation loan.
Income-contingent repayment features the highest monthly payments of all the income-driven plans offered by the government. Some of the other plans offer monthly payment caps as low as 10% of discretionary income, as well as a shorter-term of 20 years.
However, there is the potential that you will pay less in interest overall because a larger payment means more of it going to offset interest and keep it from accruing at the rate you might see with other income-driven plans.
Additionally, it’s worth noting that no other plan benefits parent borrowers. As long as parents use a Direct Consolidation loan for their Parent PLUS loans, it’s possible for them to take advantage of ICR.
Finally, the good news is that being on ICR allows you to be eligible for Public Service Loan Forgiveness. Making any income-driven payment on time counts as being paid as agreed, and it’s also a payment toward PSLF, assuming you’re working with a qualified employer. So, if you do get PSLF, you could have your student debt forgiven sooner—and without paying taxes on the forgiven amount.
How to Apply for ICR
The easiest way to get into the income-driven repayment plan is to request enrollment online. You do have to meet income requirements based on the size of your household. The U.S. Department of Education's repayment estimator calculator can help you figure out whether ICR—or some other plan—is right for you.
Here’s how to apply for income-contingent repayment:
- Log into your student loan account: Visit studentloans.gov and log in using your FSA ID. You should have had one created when you fill out the FAFSA. If you don’t have an ID, you can create one.
- Review the ICR form: You will need to have various documents available, including your tax return. Make sure you have what you need before you get started.
- Decide which income-driven plan is right for you: It’s possible for you to choose to be placed in the plan with the lowest monthly payment. However, if you want ICR because of its higher cap, you can choose that plan specifically.
- Fill out the application: You can print out the application and fill it out by hand, or you can complete it online. Provide all the information requested. If you’re married, you need to include your spouse’s information.
- Send in the application: You can mail your completed application to your servicer directly, but it’s often easier to just submit the form online. Your servicer will still get it, and you won’t have to worry about the mail and other issues.
Once you’re on ICR, you’re required to submit the application form each year. Adjustments to your payment are made based on your income, so if your income rises, your payment does as well. Pay attention to the deadline, though, because if you miss it, your payments will jump to the amount you paid under the standard repayment plan.
If you miss the annual deadline for recertification, and your payments increase, you can return to income adjusted payments by providing your servicer with updated income information.
Other Tips for Paying Less on Your Student Loans
If you’re looking for a lower monthly payment, but you don’t qualify for income-driven plans like ICR, there are other options.
Federal Graduated and Extended Plans
Rather than basing your monthly payment on your income, the graduated and extended plans offered by the federal government focus on the term length.
- Graduated repayment: You still repay within 10 years, but you have a lower payment amount initially, and it rises until you’re paying much larger amounts toward the end of your term. If you expect your income to rise to meet the obligation, this can be a solid choice.
- Extended repayment: Your repayment term is extended to 25 years. You can choose graduated payments, which start small and increase every two years, or you can choose fixed payments, which remain the same throughout. You run the risk of paying much, more in interest with this plan.
In general, if you choose to get a Direct Consolidation loan to lump all your federal loans together, you can choose an extended repayment plan.
Student Loan Refinancing
Another option is to refinance your student loans. If you have private loans, this can work well to reduce your interest rate and your monthly payment, since private loans aren’t eligible for income-contingent repayment and other federal programs.
However, if you have federal loans, it’s important to note that refinancing them will result in a loss of certain borrower benefits, and you can lose credit for payments made to existing income-driven repayment plan forgiveness or PSLF. However, when you apply for a Direct Consolidation Loan, you don’t need to consolidate all eligible loans. Consolidating federal student debt into a private consolidation loan, on the other hand, can affect your eligibility for federal forgiveness programs and otherwise result in the loss of many benefits and protections that come with federal loans.
Who Should Get Income-Contingent Repayment?
In the end, it’s about your goals and your financial situation. If you can’t handle the standard repayment plan and feel like you need a bit of a break, ICR can work for you. This plan is also ideal for those who want a lower monthly payment, but want to keep interest costs under control. Income-contingent repayment is also preferred for parents who have PLUS loans and need access to a lower monthly payment.
Carefully consider your situation, run the numbers, and decide if ICR is the right move for you. Later, if you feel like you can make bigger payments, or if your income improves, you can switch payment plans and put more into reducing your student loan debt and paying it off sooner.