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 August 21, 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. The deadline for federal student loan repayments is resuming after a three-year pause. Student loan interest will resume starting on Sept. 1, 2023, and payments will be due starting in October.To get ready for what’s ahead, read on. You’ll learn more about the SAVE Plan, Income-Contingent Repayment, and the Department of Education's other programs. This intel can help you manage your student loan debt more effectively. Recommended: Average Student Loan Debt in the United States 2023-2024

What Is the Save Plan?

The U.S. Department of Education has released a new income-driven repayment (IDR) plan, which will provide student loan borrowers with the most affordable repayment plan ever. The SAVE plan will cut payments on undergraduate loans in half compared to other IDR plans, ensure that borrowers never see their balance grow as long as they keep up with their required payments, and protect more of a borrower’s income for basic needs. Under the Saving on a Valuable Education (SAVE) plan, a single borrower who makes less than $15 an hour will not have to make any payments. Borrowers earning above that amount would save more than $1,000 a year on their payments compared to other IDR plans. A beta version of the updated IDR application is now available and includes the option to enroll in the new SAVE Plan. If you submit an IDR application now, it will be processed and will not need to be resubmitted. The application may be available on and off during this beta testing period. If the application is not available, try again later. You will receive an email confirmation after you have applied, the DOE says. If you had already enrolled in the REPAYE Plan or recently applied, you will automatically be put on the SAVE Plan. There is no need to reapply or request to change your plan. Learn how to check which plan you’re on.

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--such as SAVE and what it replaces: PAYE, REPAYE, and IBR--ICR doesn’t have the best terms. These other plans cap your payments at 5% or 10% 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. .

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.

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. Recommended: Parent PLUS Loans--the Ins and Outs of Refinancing

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.

Student Loan Forgiveness

There are programs to explore 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. Recommended: Getting Rid of Student Loan Debt with 12 Options

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 strong 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?

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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