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Income-contingent repayment, also known as ICR, is one of the four income-driven repayment plans offered by the U.S. Department of Education to help borrowers pay down their federal student loan debt. The ICR uses a formula that reduces a borrower’s monthly student loan repayment obligation to an amount intended to be more affordable. An ICR plan in some cases can reduce a borrower’s monthly student loan repayment costs to $0 per month in years when the borrower had an annual adjusted gross income that fell below the U.S. Department of Health and Human Services’ poverty guidelines.ICR plans have a 25-year repayment period, although some borrowers may fully pay off their federal student loan debt before the end of their repayment period. Any borrowers with an outstanding balance at the end of the ICR repayment period will have their remaining loan balance forgiven.Most instances of federal student loan interest capitalization will be eliminated under a new rule that goes into effect in July 2023. Interest capitalization is when a lender adds outstanding unpaid interest to your principal loan balance and then charges additional interest on the larger principal balance — commonly impacting borrowers on an ICR plan. Below are more details about ICR and how it contrasts with other income-driven repayment plans.What Is ICR?
As mentioned above, ICR is income-contingent repayment — one of the four income-driven repayment plans offered by the U.S. Department of Education to help borrowers pay down their federal student loan debt. Any borrower with eligible federal student loans can make payments under an ICR plan, which may reduce the borrower’s monthly repayment obligation below the federal government’s Standard Repayment Plan. Unlike the 25-year repayment period for an ICR plan, the Standard Repayment Plan typically runs for 10 years. Borrowers with an ICR plan in some years could have $0 monthly payment terms if their annual adjusted gross income falls below the poverty line, whereas borrowers with a Standard Repayment Plan would make fixed payments of at least $50 each month.Borrowers with outstanding federal student loan debt may apply for an ICR plan if they have one of the following federal student loan products:How Does Income Contingent Repayment Work?
Income-contingent repayment works by applying a mathematical formula that could potentially reduce a borrower’s monthly federal student loan repayment below the amount they would pay under the Standard Repayment Plan. Borrowers under the Standard Repayment Plan typically pay a fixed monthly payment over a 10-year period, where the fixed payment goes toward the principal and interest on the loan. Direct Loan borrowers who make repayments under an ICR plan would either pay monthly payments equal to 20% of their discretionary income divided by 12, or pay monthly payments based upon what they would pay on a 12-year repayment plan with fixed monthly payments determined by standard amortization multiplied by an income percentage factor, whichever is lesser.Discretionary income is your adjusted gross income minus the annual poverty guideline for your family size and state of residence as determined by the U.S. Department of Health and Human Services. The U.S. Department of Education in its ICR plan formula for July 2021 through June 2022 says a person with $32,238 in adjusted gross income, $19,358 in discretionary income and $15,000 in Direct Subsidized and Unsubsidized Loans with a 6% fixed interest rate would pay $105.23 per month under the ICR’s standard amortization formula multiplied by a corresponding income percentage factor of 71.89% because that’s lesser than 20% of the individual’s discretionary income divided by 12, or $322.63 per month.ICR vs Other Income-Driven Plans
As mentioned earlier, ICR is just one of four income-driven repayment plans offered by the U.S. Department of Education to help borrowers pay down their federal student loan debt. Here is a description of the other three income-driven repayment plans:1. Revised Pay As You Earn Repayment Plan (REPAYE Plan)
Any borrower with eligible federal student loans can make payments under the REPAYE plan, where borrowers will generally make monthly payments equal to 10% of their discretionary income divided by 12. The repayment period under a REPAYE plan is either 20 or 25 years depending on the federal loan type. Similar to an ICR plan, any remaining loan balance at the end of a REPAYE plan’s repayment period would be forgiven.2. Pay As You Earn Repayment Plan (PAYE Plan)
Borrowers who have received a disbursement of a Direct Loan on or after Oct. 1, 2011, and who have a high level of federal student loan debt relative to their annual discretionary income may qualify for a 20-year PAYE repayment plan, which is generally based on 10% of a borrower’s discretionary income divided by 12, but never more than the 10-year Standard Repayment Plan amount. Similar to an ICR and REPAYE plan, any remaining loan balance at the end of a PAYE plan’s repayment period would be forgiven.3. Income-Based Repayment Plan (IBR Plan)
Borrowers with a high level of federal student loan debt relative to their annual discretionary income may qualify for an IBR repayment plan, which is generally equal to 15% or 10% of a borrower’s discretionary income and may feature 20-year or 25-year repayment periods. Borrowers who qualify for an IBR plan would have monthly payments never exceeding the 10-year Standard Repayment Plan amount. As with the ICR, REPAYE and PAYE plans, any remaining loan balance at the end of an IBR plan’s repayment period would be forgiven.Pros and Cons of ICR Plans
Here are some pros and cons associated with ICR income-driven repayment plans:| Pros | Cons |
|---|
| Payments are based on the borrower’s income instead of how much they owe in principal and interest, which can make monthly payments more affordable for many borrowers. | Borrowers under any income-driven repayment plan, such as an ICR, must recertify their income and family size annually to remain eligible for income-driven payments, even if their income or family circumstances haven’t changed. |
| Any outstanding loan balance at the end of the 25-year repayment period would be forgiven. | Borrowers who enter an ICR plan run the risk of paying more interest over the life of the loan compared with the repayment terms of a 10-year Standard Repayment Plan. |
How to Apply for an ICR Repayment Plan
Eligible borrowers who wish to apply for an ICR income-driven repayment plan may create an account on the Federal Student Aid website and apply for one online. Students, parents or borrowers can create their own accounts to complete any federal student aid tasks on the FSA website.Federal Student Aid — an office of the U.S. Department of Education — says the entire income-driven repayment plan application must be completed in a single session and suggests the process usually takes 10 minutes or less. Due to the ongoing COVID-19 pandemic, the U.S. Department of Education has extended the national pause on federal student loan repayments through mid 2023.A new federal rule promises to reduce the financial burden associated with federal student debt. As mentioned earlier, interest capitalization will no longer occur when a federal student loan borrower first enters repayment or when a borrower leaves a forbearance effective July 1, 2023. Interest capitalization charges will also be eliminated on borrowers who choose an ICR plan, according to the U.S. Department of Education.The Takeaway
With more than 43 million Americans collectively holding more than $1.6 trillion in federal student loan debt, an income-contingent repayment plan can help borrowers better manage their federal student debt burden. An ICR plan can be costly in the long run because of interest payments, but such an income-driven repayment plan can provide some borrowers with immediate relief.Lantern by SoFi can help borrowers with federal or private student loans find and compare student loan refinance options. You can sort and filter a variety of cost factors in a user-friendly interface to discover a refinancing plan that may best fit your budget. Please note, though, that refinancing federal student loans will result in the loss of federal loan benefits such as repayment programs and pandemic-related payment pauses.
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About the Author
Sulaiman Abdur-Rahman
Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
