Income-Contingent Repayment (ICR): How It Works & Who It’s Good For
An income-contingent repayment plan (ICR) is one option for repaying federal student loans. Payments are capped at a percentage of your income. It's the most expensive income-contingent repayment plan but, can be used to cap payments on Parent PLUS loans.
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Note about changes due to COVID-19:
There have been changes to the federal student loan program as a part of the $2 trillion economic stimulus bill that passed in Congress on 3/27/2020 to help those affected by the Coronavirus.
Until 12/31/2020, borrowers have the option to suspend payments without penalty, if needed. If you are pursuing forgiveness through an income-driven repayment plan, skipped payments will still count towards the time required to be eligible.
You can learn more in our federal student loans guide.
Income-contingent repayment is one of several income-driven payment plans that you can use to repay federal student loans. Income-contingent plans are more expensive than other federal student loan repayment plans that also cap payments at a percentage of your income.
But in some cases, an ICR plan may be the only option you have to avoid falling behind on your student loan debt payments.
This guide will explain how income-contingent repayment works, who it might work well for, and how your payments will be calculated under an ICR plan.
In this guide:
- What Is an ICR Plan?
- Income-Contingent Repayment: By the Numbers
- Pros & Cons of Income-Contingent Repayment
- Income-Based Repayment vs Income-Contingent Repayment
- Are ICR Student Loans Eligible for Student Loan Forgiveness?
- How to Apply for Income-Contingent Repayment
What Is an ICR Plan?
Income-contingent repayment plans cap federal student loan payments at the lesser of 20% of the discretionary income you have available to you or the amount you’d pay on a repayment plan if payments were fixed over 12 years and adjusted to your income.
It is more expensive than the other plans, which cap payments at 10% of your discretionary income. However, if you have Parent PLUS loans, it’s your only income-driven option.
Parent PLUS loans cannot be repaid under any income-driven repayment plan. However, parents can consolidate PLUS Loans into a Direct Consolidation Loan and then use the ICR Plan to repay the new consolidation loan.
How ICR Works
With an income-contingent plan, your monthly payment is based on your taxable income, and can change as your wages go up or down.
For example, if you had $1,000 in discretionary income per month and payments were capped at 20% of discretionary income, the maximum amount your payment could be is $200. But if your discretionary income increased to $1,500, then your payment could go up to as much as $300.
You must provide details on your earnings when you choose an income-contingent repayment plan.
Income-Contingent Repayment: By the Numbers
- Repayment term: Maximum of 25 years
- Payment amount: The lesser of 20% of discretionary income or the amount you’d pay with fixed payments over 12 years, adjusted based on income
- Eligible loans: Federal Direct Loans; Direct Consolidation Loans
- Who it’s best for: Parent borrowers or people who want payments that are slightly lower than on a standard repayment plan, but who still want to minimize the total amount of interest they pay
Certain additional loans could also become eligible for income-contingent repayment if you use a Direct Consolidation Loan to consolidate them. This could include FFEL and Perkins Loans.
Pros & Cons of Income-Contingent Repayment
If you are thinking about using income-contingent repayment as your payment method for federal student loans, it’s important to consider both the pros and cons. Here are some of the big advantages and disadvantages of this form of income-driven repayment.
Benefits of ICR
- You can use this approach with Parent PLUS loans if those loans have been consolidated into a Direct Consolidation Loan. This is not the case with other income-driven plans.
- You can make your student loan payments more affordable by capping payments at a percentage of discretionary income. This reduces the risk of default.
- A lower monthly payment can also make it easier to accomplish other financial goals or qualify for other forms of financing.
- Loans could be forgiven. You will need to make payments based on your annual income for 25 years. After the end of this repayment period, if there is still a remaining balance due on your federal student loans, that loan balance will be forgiven.
- You may pay off your loan more quickly and pay less interest than under other income-driven plans. Because you make larger payments than you do under other income-driven plans, you can pay off your loan more quickly and pay less total interest.
Downsides of ICR
- This plan is the most expensive of the income-driven repayment plan options. Under other plans, such as REPAYE or PAYE, payments are capped at 10% of discretionary income instead of 20%.
- Your loan forgiveness period is longer than with other income-driven options. With the PAYE plan, you can have loans forgiven after 20 years.
- With the REPAYE plan, you can also have loans forgiven after 20 years if all the loans are for undergraduate study—although this plan does have the same 25-year limit if some of the loans are for graduate or professional study. And with the income-based repayment plan, you also have loans forgiven after just 20 years if you were a new borrower after July 1, 2014.
- Your payments may not be much lower than with other plans. Depending on household income, your payment be only slightly smaller than what you’d pay on a standard 10-year repayment schedule with fixed payments.
Income-Based Repayment vs Income-Contingent Repayment
An income-based repayment plan is another plan you can use to cap your monthly payments on federal student loans. However, there are important differences between an IBR plan and an ICR plan. Some of the differences include the following:
- The IBR plan caps payments at 10% of discretionary income for new loan borrowers after July 1, 2014 and payments can never be more than they would be on a standard 10-year repayment plan. ICR plans cap payments at 20% of discretionary income or the amount you’d pay on a repayment plan with fixed payments over 12 years, adjusted by income.
- IBR plans allow loans to be forgiven after 20 years if you became a new borrower after July 1, 2014. Income-contingent repayments require you to pay loans for 25 years before you could have the remaining balance forgiven.
- Income-based repayment plans are not available for Parent PLUS loans. Income-contingent Plans are the only option available for Parent PLUS loan, although parents must consolidate Direct PLUS Loans to become eligible for ICR.
Are ICR Student Loans Eligible for Student Loan Forgiveness?
If you qualify for the Public Service Loan Forgiveness program, you can choose ICR as your repayment plan. It is one of the eligible payment plans for PSLF. With PSLF, you can have loans forgiven after making 120 on-time payments.
You can also have loans forgiven after 25 years of making payments on an ICR plan, irrespective of PSLF requirements.
How to Apply for Income-Contingent Repayment
To apply for the income-contingent repayment plan, you can submit a request to your student loan servicer via mail. You can also apply online by:
- Visit studentloans.gov. You will have to create a username and password if you do not already have one, or you can log in with your federal student aid ID.
- Choose “income-driven repayment plan request.”
- Select which plan you want. If you are able to qualify for multiple different income-driven repayment options, the plan with the lowest monthly payment amount will be selected for you by default. However, you can opt for a different income-driven plan, including choosing IBR if you want to.
- Submit an application. This will require you to input information about your financial situation and to provide documentation, such as your or your parents’ federal tax returns. If you are married, you will also need to include details about your spouse’s financial information.
Bottom Line: Is an Income-Contingent Repayment Plan Right for You?
If you have Parent PLUS Loans and want to use an income-driven plan, you will need to consolidate your loans and choose Income-Contingent Repayment.
You may also want to opt for an income-contingent plan if you don’t want to pay as much interest or take as long to pay off your loans as you would under other income-driven plans.
Author: Christy Rakoczy