Tutorial: Calculating Monthly Loan Payments Under Income-Contingent Repayment
The monthly payment under income-contingent repayment (ICR) is based on the borrower’s income and the poverty line for the borrower’s family size. It will change each year based on the borrower’s income during the past year and changes in the family size.
Calculate the monthly loan payment as follows:
Example (Income-Contingent Repayment)
Calculate the appropriate poverty line based on the family size and state of residence (e.g., continental U.S., Alaska or Hawaii). A child or dependent is counted in family size if the borrower (and his/her spouse, if applicable) provides more than half support to the child or dependent, not whether the child or dependent is claimed as an exemption on the borrower’s federal income tax returns. Don’t forget to count the borrower’s spouse if the borrower is married.
Assume that the borrower is unmarried without any dependents, yielding a family size of 1. The poverty line for a family size of 1 in the continental U.S. was $11,490 in 2013.
Multiply the poverty line by the appropriate percentage, 100% for income-contingent repayment.
Assuming income-contingent repayment, multiply $11,490 by 100% to obtain $11,490.
Subtract this figure from the borrower’s adjusted gross income (AGI). If the borrower is married, use the borrower’s AGI if the borrower files a separate federal income tax return and the joint income if the borrower files federal income-tax returns as married filing jointly. This yields the borrower’s discretionary income.
If the borrower has an AGI of $30,000, subtracting 100% of the poverty line ($11,490) yields $18,510.
Multiply the difference by the appropriate percentage of discretionary income: 20% for ICR. This yields the annual payment.
Multiplying $18,510 by 20% for ICR yields $3,702.
Divide the result by 12 to obtain the monthly payment amount.
Dividing $3,702 by 12 yields a monthly payment of $308.50.
If the monthly payment is less than $5, set the monthly payment to zero. (A monthly payment of zero according to the repayment plan formula still counts as a payment for loan forgiveness purposes. A monthly payment of zero occurs when the AGI is less than 100% of the poverty line.) If the monthly payment is $5 to $10, set the monthly payment to $10.
Since the monthly payment is more than $10, it remains at $308.50.
The monthly payment under income-contingent repayment does not function as a cap. So, borrowers do not need to compare the monthly payment with the standard 10-year repayment amount to determine eligibility for income-contingent repayment. But many borrowers will compare the monthly payments anyway, to determine whether income-contingent repayment is worthwhile.
The borrower’s debt of $30,000 at 6.8% interest yields a monthly payment of $345.24. Since this is greater than $308.50, the borrower qualifies for income-contingent repayment with a monthly payment of $308.50.
This calculation is repeated annually.
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