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Income-Contingent Repayment (ICR) Plans

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.

Eligible loans

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.

How can I apply for an ICR plan?

Currently, ICR is only available through the US Department of Education. Banks and other private institutions do not provide this option, even if they may make government-guaranteed loans through the FFEL Program.

However, if you have one or more FFEL loans, the Department of Education will allow you to consolidate your loan(s) into a federal direct consolidation loan so you can take advantage of ICR.

Paying back your loan

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.

What determines 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.

  1. The first ceiling is 20% of your monthly discretionary income (adjusted gross income minus the federal poverty line for your family size and state).
  2. 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. You can use the ICR calculator to determine how much you must pay back.

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.

Interest capitalization

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

Benefits

  • 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 (see below), the repayment period is 10 years rather than 25 years.

Drawbacks

  • 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.

Comparing ICR with other repayment plans

Comparing ICR to standard or extended repayment programs is somewhat like comparing apples to oranges. Because the ICR has such a long repayment period, the actual value of the loan that you pay back decreases over time.

Therefore, concluding that the 10-year standard repayment plan is less expensive than the 25-year ICR, based on the net present value, can be misleading; the relative costs change as the loan term increases.

The Public Service Loan Forgiveness Program (PSLF) and ICR

The new PSLF, which is valid for payments made on or after October 1, 2007, discharges any remaining debt after 10 years of full-time employment in the public service sector. The borrower must make 120 payments as part of the Direct Loan program.

Thus, the 25-year repayment period under ICR is effectively reduced to 10 years.

If you plan to stay in the public service sector, then this may be a very good reason to opt for ICR.

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