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If you can’t keep up with your student loan payments, you’re not alone. Student loans could eat up a significant amount of your monthly budget — especially if you’re just starting out or have a low income.
One way to more easily manage (and maybe even reduce) your federal student loan payments is to sign up for an Income-Contingent Repayment (ICR) plan.
Here’s how ICR plans work and how to sign up for one:
- What is Income-Contingent Repayment?
- Calculate your payment on an ICR plan
- How to apply for an ICR plan
- Income-Contingent Repayment and student loan forgiveness
- Alternatives to an ICR plan
What is Income-Contingent Repayment?
An ICR plan is one of four income-driven repayment (IDR) plans, which are federal repayment options. With ICR, your monthly payment is based on your income and family size.
The following types of federal student loans qualify for ICR:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans for graduate students
- Direct PLUS Loans for parents (if consolidated with a Direct Consolidation Loan first)
- Direct Consolidation Loans
- FFEL PLUS Loans (if consolidated with a Direct Consolidation Loan first)
When you apply and are approved for an ICR plan, your loan servicer will extend your loan term up to 25 years. Your payments will be the lesser of the following:
- 20% of your discretionary income
- What you would pay on a 12-year repayment plan with fixed payments, adjusted to your income
If you still have a balance at the end of your ICR repayment term, the U.S. Department of Education will forgive the remaining amount. You’ll no longer be responsible for making payments on the loan. But keep in mind that the forgiven balance is taxable as income, so you could face a hefty tax bill.
Income-Contingent Repayment is usually the most expensive IDR plan, since it requires you to pay 20% of your discretionary income. This is higher than what the other IDR plans charge. Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), and Income-Based Repayment (IBR) charge only 10% to 15% of your discretionary income. Also, the formula for calculating discretionary income in ICR is not as generous as other IDR plans.
However, PAYE and IBR have strict eligibility requirements. ICR, on the other hand, allows any borrower with eligible federal student loans to sign up for it.
Learn More: Income-Driven Repayment Plans
Calculate your payment on an ICR plan
Your discretionary income is the difference between your adjusted gross income (AGI) and 100% of the U.S. Department of Health and Human Services poverty guidelines for your family size and state.
(Discretionary Income x 20%) / 12 = Monthly Payment
For example, let’s say you’re single and make $30,000 per year. As of 2019, the poverty guideline for a single person is $12,490. You’d subtract $12,490 from $30,000 to get $17,510 — this is your discretionary income.
Because your ICR payment is 20% of your discretionary income, you’d multiply $17,510 by 20% to get $3,502. Divide that by 12 to get $291.83. This would be your monthly payment under ICR.
Monthly payment based on family size and AGI
| AGI | Family size of 1 | Family size of 2 | Family size of 3 | Family size of 4 | Family size of 5 |
|---|---|---|---|---|---|
| $10,000 | $0 | $0 | $0 | $0 | $0 |
| $20,000 | $125.16 | $51.50 | $0 | $0 | $0 |
| $30,000 | $291.83 | $218.17 | $144.50 | $70.83 | $0 |
| $40,000 | $458.50 | $384.83 | $311.16 | $237.50 | $163.83 |
| $50,000 | $625.17 | $551.50 | $477.83 | $404.17 | $330.50 |
| $60,000 | $791.83 | $718.17 | $644.50 | $570.83 | $497.17 |
| $70,000 | $958.50 | $884.83 | $811.17 | $737.50 | $663.83 |
How to apply for an ICR plan
To apply for an ICR plan, follow these steps:
- Contact your loan servicer: Explain your situation and ask about your options. Your loan servicer can help you decide which IDR plan is right for you.
- Complete the application: If you decide that an ICR plan is the best option, you can complete the application online or request a paper form from your loan servicer. You’ll need to complete an ICR application for each federal loan you have.
- Provide proof of income: You can submit your previous federal tax returns, or if your income has changed since you filed your return, you can submit pay stubs.
- Wait to hear back from the loan servicer: Your loan servicer will review the information you submitted and make a decision. This can take several weeks.
Important: Don’t forget to recertify
When you’re on an ICR plan, you must recertify your income every year. Your loan servicer will send you a reminder when you need to recertify. To do so, you’ll have to submit a new ICR plan application.
You’re only required to recertify once a year. But if you experience a major life change — like a decrease in income — you can submit a recertification application early to possibly lower your monthly payment.
Income-Contingent Repayment and student loan forgiveness
If you plan to pursue Public Service Loan Forgiveness (PSLF), signing up for an ICR plan can help you meet your goal.
Under PSLF, you could qualify for loan forgiveness if you work for an eligible nonprofit organization or government agency for 10 years and make 120 qualifying monthly payments. All payments made under an ICR plan count as qualifying payments, even if you’re eligible for a $0 monthly payment.
At the end of your 10 years, you can apply for PSLF and if accepted, your remaining balance will be discharged. Best of all, the forgiven balance isn’t taxable as income.
Alternatives to an ICR plan
While an ICR plan can help reduce your monthly payments and give you more breathing room in your budget, it isn’t for everyone. You might qualify for lower payments with another IDR plan, so it’s a good idea to compare your payments under each plan before submitting your application.
If you have federal loans that don’t qualify for an ICR plan or have private student loans, another option is loan consolidation. There are two ways to consolidate your student loans:
- Federal loan consolidation: You can consolidate your federal student loans into a Direct Consolidation Loan. This also makes you eligible for an ICR plan.
- Student loan refinancing: If you have private student loans (or a mix of both federal and private), refinancing could potentially lower your interest rate or monthly payment. With Credible, you can compare rates from up to 10 refinancing lenders at once without impacting your credit score.
