If you have federal student loans, then you will have to choose a repayment plan when it is time for you to start making payments. There are many repayment plans to choose from, including a standard (10 year) repayment plan, an extended (25 year) repayment plan, and three other repayment plans based on your income. One of the three income repayment plans is the Income-Contingent Repayment plan (ICR).
What Is the Income-Contingent Repayment Plan?
The ICR plan is an income driven repayment plan that sets your payments to the lesser of: 1) 20% of your discretionary income, or 2) what you would pay on a repayment plan with a fixed payment over a 12 year period, adjusted according to your income. If you file taxes individually or you are married filing separate, only your income will count. If you file jointly, both incomes will count.
After 25 years, your remaining loan balance is forgiven. However, you will owe taxes on the forgiven amount.
What Makes You Eligible for the Income-Contingent Repayment Plan?
In order to qualify for ICR, you simply must be a borrower with eligible federal student loans. That’s it. There is no initial income eligibility requirement. All federal loans qualify to be on the ICR plan (private loans do not qualify).
Each year, you must provide your income and family size to qualify for ICR. Your payments may increase or decrease based on whether your income and/or family size increases or decreases. Under ICR, your payment is always based on your income even if that means your payments are higher than what they would be on the Standard, 10-year plan (this is different than other income driven plans, which keep your payments capped once your payments would exceed what they would be under the Standard plan).
Pros and Cons of the Income-Contingent Repayment Plan
ICR was the first income driven repayment plan (created in 1993), and it was great until the Income Based Repayment (IBR) plan was created in 2009. Now, the only benefit of ICR over IBR is when you cannot qualify for IBR. For example, certain loans, like Parent PLUS Loans, do not qualify for IBR but do qualify for ICR.
On the ICR plan, your payments are generally lower than if you were on the Standard, 10-year plan. However, they are generally higher than other income driven plans, which is why most people do not use the ICR plan. The benefit of ICR compared to a standard plan is that lower payments mean your loans will likely be more manageable. The downside of ICR is that you will have to pay taxes on any debt that is forgiven, and you will likely pay more in interest over time. In fact, your payments may not even cover the interest you owe.
Most people do not use ICR these days, but for people with low incomes and Parent PLUS loans, ICR is still a good option.