Guide to Income-Contingent Repayment for Student Loans

Q: How exactly does income-contingent repayment work?

Income-Contingent Repayment sets your student loan payments to 20% of your discretionary income or the amount you’d pay on a 12-year fixed plan, whichever is lower. It also extends your loan terms to 25 years and offers forgiveness at the end of your term if you still owe a balance.

Q: Is choosing an income-contingent repayment plan for student loans a good idea?

The ICR plan might be a good idea if you’re a parent borrower who needs to make your student loan payments more affordable or are pursuing PSLF, as income-driven repayment plans are the only plans that qualify for this forgiveness program. However, it may not be your best option for income-driven repayment if you can qualify for an alternative plan, such as IBR, PAYE, or REPAYE.

What Are Income-Contingent Repayment Plans?

Rebecca SafierUpdated January 31, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you have student loans, now is a critical time to stay on top of the news about your repayment options. In August 2022, the Biden-Harris administration announced major changes to the student loan landscape. The administration stated its intention to forgive $10,000 in federal student loans for borrowers who make less than $125,000 per year, plus an additional $10,000 for borrowers who received a Pell Grant in college. This has faced some legal challenges, and the courts will now decide its fate. In addition, the student loan moratorium has been extended through up to 60 days after June 30, 2023. The Biden Administration has also proposed changes in an expanded income-driven student loan repayment plan that promises to be more affordable for borrowers.That’s a lot of potential changes swirling, and some uncertainty to contend with. But as the end to the payment pause is on the horizon, it’s worth exploring your options for repayment plans before your monthly bill kicks in again. You might take a closer look at Income-Contingent Repayment (ICR), one of the four income-driven plans for federal student loans. ICR is not the most affordable income-driven plan for most borrowers, but it is the only one available for parent loans. To get ready for what’s ahead, read on. You’ll learn more about Income-Contingent Repayment, as well as the administration’s proposed expanded income-driven repayment plan. This intel can help you manage your student loan debt more effectively.

What Is the Income-Contingent Repayment (ICR) Plan?

The Income-Contingent Repayment plan is one of the four income-driven plans for federal student loans. It adjusts your monthly payments to 20% of your discretionary income and extends your loan terms to 25 years. When compared with the other income-driven plans PAYE, REPAYE, and IBR, ICR doesn’t have the best terms. These other plans cap your payments at 10% or 15% of your discretionary income, and some offer forgiveness after 20 years. However, ICR is the only plan available for parent borrowers. Parent loans, including parent PLUS loans and consolidation loans that include FFEL or Direct loans made to parents, are not eligible for any other income-driven repayment plan. It’s worth noting that the Biden-Harris administration intends to introduce a new expanded income-driven repayment plan for student loans. This would cap payments at 5% or 10% of a borrower’s discretionary income and offer forgiveness after 10 years for borrowers who owe less than $12,000. It’s not clear at this time when this new plan will be implemented, or whether or not it will be available for parent loans.

How Does ICR Work?

The ICR plan looks at your income and family size to calculate your discretionary income, or the difference between your annual income and 100% of the poverty guideline for your family size and state of residence. Then, it adjusts your monthly student loan payments to one of the following, whichever is less:

20% of your discretionary income, or
The amount you’d pay on a fixed, 12-year plan, adjusted for your income.

ICR also extends your repayment terms to 25 years. If you still owe a balance at the end and have been paying on time all these years, the remainder could be forgiven. Pretty much any federal loan is eligible for ICR, including Direct subsidized and unsubsidized loans and PLUS loans. However, if you owe parent PLUS loans, Perkins loans, or some other types of loans, you’ll need to apply for Direct loan consolidation before applying for ICR. Recommended: How to Lower Your Student Loan Interest Rate

Pros and Cons of Income-Contingent Repayment

There are both pros and cons to the ICR plan worth considering before you apply.

Pros

Here are some of the upsides of ICR plans:

Could reduce your monthly payment. ICR could offer a more affordable payment than what you’d get on the standard 10-year plan.
May end in loan forgiveness. If you make on-time payments throughout your term, you could get any remaining balance forgiven after 25 years.
Only income-driven plan available for parent loans. Parent loans are not eligible for any other income-driven plan, even after consolidating them.

Cons

That said, there are also some downsides to be aware of:

Higher monthly payment than some other income-driven plans. ICR calculates your payment at 20% of your discretionary income, while other plans cap it at 10% or 15%.
Longer repayment term than other plans. ICR has a term of 25 years; some other plans offer 20.
No interest subsidy. The government will cover some of the student loan interest that accrues for a few years on other income-driven plans, but ICR has no such interest subsidy.

Here’s how these advantages and disadvantages look in chart form:

Pros	Cons
Could reduce your monthly payment	Higher monthly payment than some other income-driven plans
May end in loan forgiveness	Longer repayment term than other plans
Only income-driven plan available for parent loans	No interest subsidy

Calculating How Much You Will Pay With ICR

You can use Federal Student Aid’s Loan Simulator tool to calculate your payments on different federal repayment plans, including ICR. ICR sets your payments at 20% of your discretionary income or the amount you’d pay on the 12-year plan, whichever is less. For ICR, your discretionary income is the difference between your income and 100% of the poverty guideline for your family size and state.If your discretionary income is $20,000 per year, for instance, your payment on ICR may be $333 per month. If you could qualify for multiple income-driven plans, you can instruct your loan servicer to select whichever one would result in the lowest monthly payment.

Income-Contingent Repayment vs Other Income-Driven Repayment Plans

Here’s how ICR compares to the other income-driven plans.

	ICR	Income-Based Repayment (IBR)	Pay As You Earn (PAYE)	Revised Pay As You Earn (REPAYE)
Payment amount as percentage of discretionary income	20% or amount you’d pay on a 12-year plan, whichever is less	10% if you borrowed after July 1, 2014; 15% if you borrowed before	10%	10%
Repayment term	25 years	20 years if you borrowed after July 1, 2014; 25 years if you borrowed before	20 years	20 years for undergraduate loans; 25 years for graduate loans
Who qualifies	Anyone, including parent borrowers as long as they consolidate first	Anyone whose payment be less on IBR than the standard 10-year plan, except for borrowers with parent loans	Borrowers who took out a loan after Oct. 1, 2007 and borrowed a Direct loan after Oct. 1, 2011, and whose payment would be less on PAYE than the standard 10-year plan. Parent loans don’t qualify	Anyone, except for borrowers with parent loans

Who Is an Income-Contingent Repayment Plan For?

The income-contingent repayment plan is best for borrowers with parent loans who want to adjust their monthly payments but don’t qualify for the other income-driven plans. It has the potential to lower your student loan payments, but keep in mind that you’ll probably be in debt for longer and pay more interest as a result. Even though your monthly payments will feel more affordable, your loan will actually cost you more in the long run.

Applying for ICR

You can apply for ICR by submitting an income-driven plan repayment request on the Federal Student Aid website. You must recertify your income every year. Through June 30, 2023, Federal Student Aid is allowing Direct loan borrowers to self-report their income. If your income situation or family size has changed, you can report that anytime to get your monthly payments adjusted.

Alternatives to Income-Contingent Repayment

While ICR may be a good fit for your situation, it’s not the only option for repaying student loans. Here are some alternatives to consider.

Student Loan Refinancing

One strategy is refinancing your debt. Here’s how student loan refinancing works: You exchange one or more of your current loans for a new private loan. Depending on your credit and income, a lender may be able to offer you a better interest rate than you have now. Plus, you can select new repayment terms that may better fit your budget. There are both pros and cons of refinancing student loans, however. One big potential downside is that refinancing federal loans turns them private, so they’re no longer eligible for federal protections. If you need income-driven repayment, forgiveness programs, or other federal plans, you won’t be able to access those once you refinance. So avoid refinancing your federal loans with a private lender if you believe you may need such programs.

Income-Driven Repayment Plans

Another option is applying for a different income-driven plan, such as IBR, PAYE, or REPAYE. Every plan is a little different, but they all could give you a more affordable payment than ICR. As mentioned, parent loans are not eligible for these alternative plans.But if you don’t have parent loans, it could be worth applying for one of these plans instead of ICR or instructing your loan servicer to select the plan with the most affordable monthly payment.

Student Loan Forgiveness

If you owe federal student loans, you could see $10,000 of them wiped away in the months in the months to come (or $20,000 if you got a Pell Grant in college). This would happen due to Biden’s one-time student loan forgiveness program, but the timing of this is not yet clear.Outside of this mass cancellation, there are other student loan forgiveness programs you could pursue, such as Public Service Loan Forgiveness or Teacher Loan Forgiveness. While income-driven plans could end in forgiveness after 20 or 25 years, these other plans could forgive your student loans much sooner, providing you meet the qualifications for employment they require.

The Takeaway

While the ICR plan doesn’t have as appealing terms as its other income-driven counterparts, it could still be a helpful repayment plan for borrowers with parent loans. If your goal is saving money on interest and lowering your payments, though, you may want to explore your options for refinancing student loans for better rates. Refinancing can be a savvy strategy for borrowers with good credit who don’t need federal repayment plans or protections. Find out how Lantern can help you find and compare student loan refinancing rates. Lantern quickly and conveniently connects you with an array of offers from leading lenders.Ready to lower your student loan payments? See how Lantern could help.

Frequently Asked Questions

How exactly does income-contingent repayment work?

Is choosing an income-contingent repayment plan for student loans a good idea?

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Photo credit: iStock/Charday Penn

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About the Author

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).

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