Guide to Income-Contingent Repayment and Whether It’s Right for You

If you’re struggling to make payments on your federal student loans, the income-contingent repayment (ICR) plan could help make them more affordable. However, you could find a lower monthly payment on a different income-driven repayment plan, unless you’ve got parent loans.

Let’s take a closer look at how the income-contingent repayment plan compares to the other income-driven plans, as well as tips on how to apply. Specifically, we’ll seek to answer the following questions:

What is income-driven repayment?

Federal student loan borrowers have four income-driven repayment options: 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 or 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 amount paid over the life of the loan

The PAYE, REPAYE and IBR plans could give you a lower monthly payment than income-contingent repayment. On these plans, you could get a payment that’s as low as 10% of your discretionary income, whereas ICR typically caps your payment at 20%.

What’s more, they could have shorter repayment periods. These plans have the potential to forgive your student loan balance after 20 years, whereas the ICR plan only forgives your loans after 25 years.

If you’re looking for the lowest monthly payment and shortest repayment term, income-contingent repayment might not be the right plan for you. That said, it’s the only income-driven plan for which parent loans are eligible (though you will have to consolidate them first). So if you’re looking to adjust your payments on a parent loan, ICR is your only option for income-driven repayment.

What is the income-contingent repayment plan?

Let’s take a closer look at what makes income-contingent repayment different from the other income-driven plan options.

No income eligibility requirement

Despite its downsides, the ICR plan, along with the REPAYE plan, may have an advantage in that it doesn’t have any income eligibility requirements.

With an IBR or PAYE plan, the amount owed under each income-driven plan has to be less than what you’d owe on a 10-year standard repayment plan. Your income and family size affect the calculation.

Because ICR student loans aren’t subject to this partial financial hardship requirement, it could be easier to qualify for.

Most loans are eligible

The income-contingent repayment plan is available for the following loans:

• Direct loans (both subsidized and unsubsidized)
• Direct consolidation loans
• Direct PLUS loans made to graduate students

The following loans are also eligible for ICR if the borrower first consolidates them into a direct consolidation loan:

• Direct PLUS loans made to parents
• Federal Stafford loans (both subsidized and unsubsidized)
• Federal Family Education Loan (FFEL) PLUS loans
• FFEL consolidation loans
• Federal Perkins loans

ICR is the only plan that accepts consolidation loans that contain a parent loan — the other plans do not. As mentioned, it’s your only option for income-driven repayment for PLUS or FFEL loans made to parents.

How does income-contingent repayment work?

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 of a 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 one percent.

Are you eligible for Public Service Loan Forgiveness?

Borrowers on an income-driven repayment plan such as 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 forgiveness from PSLF and forgiveness after 25 years on ICR is that forgiven amounts are not considered taxable income under PSLF. The majority of PSLF applicants have been denied, though, so take that into consideration as you explore your options.

How do you apply for income-contingent repayment?

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’ll 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.

How can you estimate your income-contingent repayment?

LendingTree has an income-contingent repayment calculator that can help you estimate your payments under this plan.

Enter the following personal info:

• Your adjusted gross income
• Your family size
• Your state of residence
• Your marital status
• Your annual income growth

Along with the following loan info:

• Your total student loan balance
• Your current monthly payment
• Your average weighted interest rate

Use the example below:

Say you make $50,000 a year and expect an annual income growth of 3.5%. You have a student loan balance of $70,000 with an average interest rate of 6%. Finally, you’re married with a family of four and live in 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. You’d end up paying $22,089 more if you switched to an ICR plan, though you wouldn’t pay as much monthly.

Note that you wouldn’t qualify for any forgiveness under this scenario, as 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, use calculators to compare your loan costs on different plans.

What can you do if you don’t qualify for ICR?

If you realize that you don’t qualify for the 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 loans and lock in a lower interest rate. However, when you refinance your loans with a private lender, you give up many of the protections that you have with federal student loans, such as deferment or forbearance, as well as the ability to switch to an income-driven plan like ICR.

While some private lenders do offer certain protections, consider all your options as you figure out what’s best for you.

What are potential drawbacks to income-contingent repayment?

ICR won’t be the right plan for everyone. Extending the repayment term beyond the standard 10 years means you’ll probably pay more in total interest over time. As mentioned, you may also be able to get a lower monthly payment on another income-driven plan, unless you have parent loans.

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.

Why would you choose income-contingent repayment?

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, this repayment plan is available even to 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 able to do so.

All that said, you should compare all your income-driven plan options before choosing. The other plans could result in a lower monthly payment, as well as a shorter repayment term.

By being proactive about staying on top of your payments, you’ll have a smoother journey to becoming debt-free.