It can be overwhelming to figure out the best way to pay off your student loans, especially if you’re already juggling a demanding job and other responsibilities. Income-Contingent Repayment, or ICR, is one of the plan options under the federal government’s Income-Driven Repayment (IDR) program that’s designed to help borrowers who are having difficulty making payments under the Standard Repayment Plan.
Like other IDR plans, ICR allows you to repay your student loans based on your income level. However, there are pros and cons to every plan, so it’s crucial to understand the ins and outs of ICR to determine whether it’s right for you. Let’s explore ICR.
Why should you choose ICR?
Income-contingent repayment is the best choice for parent borrowers with Parent PLUS loans, as these are currently excluded from eligibility under other IDR plans. ICR may also be the best IDR plan for candidates who can afford a slightly higher monthly payment that would allow them to potentially pay off their loans quicker and save on long-term interest. Additionally, ICR could be an option for married borrowers who both have student loans and want an option to pay jointly.
What is your monthly payment under ICR?
Each IDR plan calculates monthly payments differently, and to further complicate matters, your monthly payment under ICR may be calculated one of two ways:
- 20% of your discretionary income OR
- What you would pay on a Standard Repayment Plan with a 12-year repayment period, adjusted based on your income
Your monthly payment will be whichever of these options is the lower payment amount.
How discretionary income is calculated
Remember that your discretionary income is calculated differently under the different IDR plans. Under ICR, it is the difference between your annual income and 100% of the poverty guideline for your family size and state of residence. These poverty guidelines are maintained by the US Department of Health and Human Services at aspe.hhs.gov/poverty-guidelines. This means that ICR generally involves a higher monthly payment than the other IDR plans, which calculate using higher percentages of the poverty guideline.
Negative amortization under ICR plans
Another difference between ICR and the other IDR plans is how negative amortization is handled. Under all IDR plans, your monthly payment may sometimes be less than the amount of interest that accrues on your loan each month (known as negative amortization). Under other plans, the government will pay all or a portion of your interest that isn’t covered by your monthly payment, so it’s less of a worry.
However, under ICR, any unpaid interest will be added to your principal loan balance (capitalized) annually until your outstanding loan principal is 10% greater than your original. After that point, the interest will continue to accrue but will no longer be capitalized. To avoid this, you would need to pay the full monthly amount of interest—even if it is higher than your minimum monthly payment.
Student loan forgiveness under ICR
Student loan forgiveness is available under all of the government’s IDR plans. For ICR, you must make all your payments on time and remain enrolled in the plan for 25 years to reach eligibility for forgiveness. Because ICR payments are higher and the forgiveness period slightly longer than some other IDR plans, other plans may be a better choice for some borrowers.
However, note that if you’re enrolled in ICR and also eligible for Public Service Loan Forgiveness (PSLF),1 you could drastically shorten your time until forgiveness to just 10 years.
Many direct federal loan borrowers with eligible loans can qualify for ICR. Note that ICR is the only IDR plan available to Parent PLUS loan borrowers (and only if consolidated).
Types of eligible loans
Many federal loans are eligible for ICR, as well as Parent PLUS loans once consolidated. Eligible loan types include:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans made to graduate or professional students
- Direct Consolidation Loans that did not repay any PLUS loans made to parents
- Direct Consolidation Loans that repaid PLUS loans made to parents
Some loan types are only eligible for ICR if consolidated. This means that if you consolidate that loan into a Direct Consolidation Loan, you can the enroll in ICR. These eligible if consolidated loan types include:
- Direct PLUS Loans made to parents
- Subsidized Federal Stafford Loans (from the FFEL Program)
- Unsubsidized Federal Stafford Loans (from the FFEL Program)
- FFEL PLUS Loans made to graduate or professional students
- FFEL PLUS Loans made to parents
- FFEL Consolidation Loans that did not repay any PLUS loans made to parents
- FFEL Consolidation Loans that repaid PLUS loans made to parents
- Federal Perkins Loans
Recertification and adjusted payment amounts
It’s important to remember that under ICR — and all IDR plans — you need to recertify your plan each year, whether or not anything has changed with your income. This must be done annually with your loan servicer to remain enrolled and eligible for eventual forgiveness.
To recertify, you essentially reapply using the original application materials. Within the form, there will be an entry for the reason you’re submitting, where you should specify that you are documenting your income for the annual recertification.
Note that under the ICR plan, your payment is always based on your income and family size. This means that if your income increases over your 25 years of repayments, in some cases your monthly payment may grow higher than the amount you would have to pay under the 10-year Standard Repayment Plan.
If your family size, location, or income changes mid-year, you can also recertify before the annual date by submitting updated information and asking your servicer to recalculate your payment. This can benefit you by reducing your payment appropriately— for example, if your family size increases without an additional wage earner, you lose your job, or you move out of the 48 contiguous states.
Outside of the annual recertification, this midyear reporting is not required—if you do not wish to recalculate your payment, you can wait until the next annual recertification, which must be completed each year regardless of any changes.
Failure to recertify
If you fail to submit your annual recertification under ICR, your payment will revert to the Standard Repayment Plan amount (which may be higher than your previous monthly dues) and your loan servicer will revert your family size to 1, possibly further increasing your payment.
You can return to making payments based on income if you provide your servicer with updated income information, and if your new income still qualifies you to make income-based payments.
How does being married impact ICR?
Like other IDR plans, your monthly payment may change when you get married, often depending on how you file your taxes and whether or not you and your spouse both have student loan debt:
Do your research
IDR was conceived to make managing and repaying student loan debt easier, and each plan developed with new borrower circumstances in mind. It can take some attention to detail to ensure you’re choosing the right plan for your student loan situation. Always consult the federal student aid website for updates, read up on our other guides in this series on IBR, PAYE, and SAVE (formerly REPAYE). You can also set up a consultation with one of our student loan specialists, who can help you navigate all the ins and outs and choose the best IDR plan for you.