The Income-Contingent Repayment plan became available on October 1, 1993 as part of the Direct Loan program.
Income-Contingent Repayment (ICR) is one of several repayment plans for federal student loans where the monthly loan payments are based on a percentage of the borrower’s discretionary income, with remaining debt forgiven after a specified number of years in repayment. The other repayment plans are Income-Based Repayment (IBR), Pay-As-You-Earn Repayment (PAYE), Revised Pay-As-You-Earn Repayment (REPAYE), and Alternative Repayment. Income-Sensitive Repayment (ISR) bases the monthly payments on a percentage of the borrower’s gross monthly income, as opposed to discretionary income. These repayment plans make the debt more affordable for a borrower whose debt is out of sync with his or her income.
Income-Contingent Repayment (ICR) Formula
ICR = 20% (AGI - 100% x Poverty Line) / 12
The monthly payment under income-contingent repayment is based on 20 percent of discretionary income, where discretionary income is defined as the amount by which adjusted gross income (AGI) exceeds 100 percent of the poverty line. The poverty line is based on the borrower’s family size and state of residence.
Income-contingent repayment also applies a complicated secondary calculation based on the product of the monthly payment under 12-year repayment with income-percentage factors based on the borrower’s income and marital status. In practice, however, the calculation based on discretionary income is lower for almost all borrowers.
(For many borrowers who qualify for income-contingent repayment, the monthly payment will be less than about 15 percent of the borrower’s monthly income. Examples include borrowers with a family size of one with AGI of $50,000 or less and borrowers with a family size of four and AGI of $100,000 or less.)
If the monthly payment as calculated by the income-contingent repayment formula is less than $5, the monthly payment is set to zero. If the monthly payment is greater than or equal to $5 and less than $10, the monthly payment is set to $10. Thus if the borrower’s AGI is less than 150 percent of the poverty line, the monthly payment will be zero.
Note that if the required monthly payment is zero, it still counts as a payment. A borrower with a required payment of zero is not considered to be delinquent. A required payment of zero also counts as a payment for the purpose of loan forgiveness.
Any remaining debt is forgiven after 25 years’ worth of qualifying payments. This forgiveness includes accrued but unpaid interest in addition to the remaining principal balance of the loan. Borrowers who qualify for the 25-year forgiveness will receive an IRS Form 1099-C from the U.S. Department of Education because the cancelled debt is treated as taxable income under current law. This is in contrast with the public service loan forgiveness program, where the remaining debt is forgiven after 10 years (120 qualifying payments), instead of 25 years (300 qualifying payments). The loan forgiveness under public service loan forgiveness is tax-free under current law, since the forgiveness is excluded from income.
The easiest way of applying for income-contingent repayment is to choose the repayment plan online at StudentLoans.gov. Borrowers can also file an Income-Based (IBR) / Pay As You Earn / Income-Contingent (ICR) Repayment Plan Request form with their loan servicer. (Borrowers who don’t remember the name of their servicer can visit the National Student Loan Data System (NSLDS) or call 1-800-4-FED-AID (1-800-433-3243) to get their servicer’s contact information.)
Capitalization of Interest
It is possible for the income-contingent repayment plan to be negatively amortized, where the monthly loan payment is less than the new interest that accrues.
The unpaid interest will accumulate and will be capitalized (added to the loan balance) annually. However, the capitalization of interest on a loan stops when the outstanding principal balance is 10 percent greater than the original principal balance when the loan entered repayment. Interest then continues to accrue, but is not capitalized.
The federal government does not pay the accrued but unpaid interest on Direct Subsidized Loans in the income-contingent repayment plan. That benefit is available only in the income-based repayment and pay-as-you-earn repayment plans.
While the unpaid interest will cause the debt to grow, any remaining interest will be forgiven along with the principal balance when the borrower has made 25 years’ worth of payments under the income-contingent repayment plan (10 years’ worth of payments for the public service loan forgiveness program).
The interest paid is deductible under the student loan interest deduction. However, if a married borrower chooses to file federal income tax returns as married filing separately to get a lower loan payment under income-contingent repayment, the borrower will not be eligible for the student loan interest deduction. Borrowers who file federal income tax returns as married filing jointly remain eligible for the student loan interest deduction.
Determining the Monthly Loan Payment
The monthly loan payment under income-contingent repayment is based on the borrower’s income and the poverty line for the borrower’s family size. It may change each year based on the borrower’s income during the past year and changes in the family size. A tutorial gives a step-by-step example of how to calculate the monthly payment under the income-contingent repayment plan.
Borrowers may choose to switch into a different repayment plan at any time, unless they are repaying their loans under income-contingent repayment as part of a loan rehabilitation agreement. Note that if a borrower switches into extended repayment or graduated repayment, the loan payments will not count toward the loan forgiveness period if they are less than the monthly payment under standard repayment.
If the borrower’s income changes mid-year, the borrower can appeal for an adjustment to the loan payment by filing an alternative documentation of income form. Borrowers will also be required to file this form during the first year in the income-contingent repayment program. Married borrowers who live in community property states and file separate federal income tax returns may use this form to have the repayment obligation based on the borrower’s income as opposed to half the borrower’s and spouse’s combined income.
The reduction in the monthly payment under income-contingent repayment as compared with standard repayment is maximized when the borrower’s AGI is less than 100 percent of the poverty line and when total education loan debt exceeds AGI (increasing with increasing debt). When AGI is less than 100 percent of the poverty line, the monthly payment is zero.
For example, if a borrower owes $30,000 in Direct Unsubsidized Loans at 6.8% interest, the monthly loan payment under standard repayment is $345. Under income-contingent repayment, the monthly payment is zero when the borrower’s AGI is $11,490 or less. If the borrower’s family size is one and the borrower’s AGI is $30,000, the monthly payment is $309, slightly reducing the borrower’s monthly payment. The borrower’s monthly payment under income-contingent repayment will exceed the monthly payment under standard repayment when the borrower’s AGI is $32,190 or more.
This table shows the monthly payment based on 2013 poverty line figures for the continental U.S. based on the family size and adjusted gross income.
Generally, only federal student loans, such as Direct Subsidized and Unsubsidized Loans and Grad PLUS Loans, are eligible for income-contingent repayment. Federal consolidation loans that refinance Direct Subsidized and Unsubsidized Loans and Grad PLUS Loans are also eligible. The Perkins Loan is not eligible for income-contingent repayment, but will become eligible if the Perkins Loan is included in a Direct Consolidation Loan. Parent PLUS loans and private student loans are not eligible for income-contingent repayment. However, Direct Consolidation Loans that refinance a Parent PLUS Loan are eligible for income-contingent repayment, if the Parent PLUS Loan did not enter repayment before July 1, 2006. (Parents who take advantage of this loophole should be careful to consolidate their Parent PLUS Loans separately from other federal student loans, as consolidating these loans together with the Parent PLUS Loans could make the consolidation loan ineligible for the income-based and pay-as-you-earn repayment plans.) Federal student loans that are in default are not eligible for income-contingent repayment except as part of a loan rehabilitation agreement.
Income-contingent repayment is available only for federal student loans in the Direct Loan program. It is not available to borrowers in the Federal Family Education Loan (FFEL) program.
Unlike income-based repayment and pay-as-you-earn repayment, the monthly payment under income-contingent repayment does not function as a cap. The borrower remains eligible for income-contingent repayment even if the monthly payment under income-contingent repayment exceeds the monthly payment under standard repayment. Accordingly, borrowers do not need to have a partial financial hardship to qualify for income-contingent repayment. Some high-income borrowers, such as doctors, use income-contingent repayment because it helps them repay their loans quicker than standard 10-year repayment.
If the borrower is married, the monthly loan payment is based in part on the borrower’s federal income tax filing status.
- If the borrower files a separate federal income tax return, such as married filing separately, the loan payment is based on only the borrower’s income and applies to only the borrower’s federal student loans.
- If the borrower files as married filing jointly, the loan payment is based on the joint income of both the borrower and the borrower’s spouse, but is also applied proportionately to the federal student loan debt of the borrower and spouse.
A married borrower who files a separate federal income tax return may forgo some tax benefits that are restricted to married borrowers who file joint returns, such as the student loan interest deduction. But, the loan payments will also be lower if married borrowers file separate returns as opposed to a joint return. This is especially important for borrowers who expect to qualify for public service loan forgiveness, since it can increase the amount of debt that is forgiven.
Borrowers who are struggling with their federal student loan payments may prefer income-based repayment (or pay-as-you-earn repayment, if they qualify) over income-contingent repayment because the monthly payments are lower.
As a good rule of thumb, all borrowers whose total eligible federal student loan debt exceeds their annual income will qualify for income-contingent repayment. Some borrowers with lower debt levels will also qualify, but there is no simple rule of thumb for identifying all eligible borrowers. Instead, these borrowers will need to use an income-contingent repayment calculator to determine whether they are eligible for income-contingent repayment.
The federal Direct Loan program provides a repayment estimator that includes estimates of monthly payments under all repayment plans, including income-contingent repayment, but this tool is available only to borrowers who already have loans in the Direct Loan program.