What Is Income-Contingent Repayment?

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Income-Contingent Repayment, or ICR, is a repayment plan that bases the loan payments on a percentage of the borrower’s discretionary income, as opposed to the amount owed. ICR first became available in 1993, although it was not used by borrowers until 1994.

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ICR is one of four income-driven repayment plans. The others are Income-Based Repayment (IBR), Pay-As-You-Earn Repayment (PAYE) and Revised Pay-As-You-Earn Repayment (REPAYE). ICR generally has the highest monthly student loan payment of the four income-driven repayment plans.

Eligible Loans

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ICR is only available for loans in the William D. Ford Federal Direct Loan Program (Direct Loans).

ICR is not available for loans in the Federal Family Education Loan (FFEL) or Federal Perkins Loan programs, although FFEL and Federal Perkins loans can be made eligible by including them in a Federal Direct Consolidation Loan.

Federal Parent PLUS Loans are not directly eligible for any of the income-driven repayment plans. However, if a Federal Parent PLUS Loan entered repayment on or after July 1, 2006 and is included in a Federal Direct Consolidation Loan, the consolidation loan is eligible for ICR but not any of the other income-driven repayment plans.

Loan Payments

Monthly student loan payments in ICR are based on the lower payment calculated using two formulas.

  • The primary formula, which is dominant for most borrowers, is based on 20% of discretionary income, Discretionary income is defined as the amount by which adjusted gross income (AGI) exceeds 100% of the poverty line. This is a larger percentage of discretionary income and a larger definition of discretionary income than the other income-driven repayment plans.
  • The secondary formula is based on the monthly payment under a 12-year level repayment plan multiplied by an income percentage factor (IPF), The IPF is based on the borrower’s AGI and tax filing status. The IPF ranges from slightly more than 50% for low-income borrowers to 200% for high-income borrowers. The IPF is 100% when the AGI is slightly more than $60,000. The IPF is adjusted annually, based on inflation.

ICR does not have a cap on the monthly student loan payments, so the payments will increase as income increases. (The secondary formula does not really function as a cap on the monthly student loan payments because the payment increases as income increases.)

ICR also does not have a marriage penalty. If a married borrower files federal income tax returns as married filing separately, the loan payment under ICR is based on just the borrower’s income. Otherwise, the loan payment will be based on joint income.

The minimum payment under ICR is zero if the calculated payment is zero, otherwise it is $5.

Treatment of Interest

Student loans can be negatively amortized under ICR. This means that the loan payment is less than the new interest that accrues. Any accrued but unpaid interest is capitalized annually, causing the loan balance to increase. Interest capitalization stops when the total capitalized interest reaches 10% of the loan’s original principal balance.

The federal government does not pay any of the interest under ICR, not even on subsidized loans.

Repayment Term and Loan Forgiveness

The maximum repayment term under ICR is 25 years (300 payments). It is the same for borrowers who have undergraduate and graduate loans. Any remaining debt is forgiven after 300 payments are made under ICR, including a calculated zero monthly payment.

If the borrower qualifies for Public Service Loan Forgiveness, the remaining debt is forgiven after 10 years’ worth of payments (120 payments).

Repayment Examples

Assuming an AGI of $30,000, the initial monthly student loan payment in ICR will be about $285 for a family of one and about $58 for a family of four.

This increases to about $619 and $392 for an AGI of $50,000 and to about $952 and $725 for an AGI of $70,000.

These payment examples assume a 2022 poverty line of $12,880 for a family of one and $26,500 for a family of four.

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Credit: www.forbes.com /

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