What Is Income-Contingent Repayment and How Does It Work?

FT Contributor
A man holding a document labeled "ICR Plan: Income-contingent repayment plan."

The federal government’s Income-Contingent Repayment (ICR) plans are a type of income-driven repayment plan. ICRs are one of four income-driven loan repayment options offered through the U.S. Department of Education.

With this plan, your monthly payments get capped at 20% of your discretionary income, and any remaining loan balance gets forgiven after 25 years of on-time payments. Like other federal income-driven options, an ICR plan allows you to adjust your payments according to your specific income, family size, and amount of debt.

The most significant advantage of the Income-Contingent Repayment plan, compared to the other income-driven options, is the lack of an income-eligibility requirement. The other federal options — PAYE, REPAYE, and IBR — have stricter income standards.  

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How Does ICR Work?

An Income-Contingent Repayment plan has a repayment period of 25 years. If you pay on time every month, any balance remaining after 25 years gets forgiven. Unfortunately, the IRS taxes the forgiven amount as regular income. If you still have a significant balance, it could impact your tax obligations.

Borrowers with student loans use this type of plan because it caps your payment. Your monthly payment is the lesser of 20% of your discretionary income or the income-adjusted amount that you would have paid had you been on a standard fixed 12-year repayment plan.

What Is Discretionary Income?

Your discretionary income is the difference between your income and 1.5 multiplied by your state’s poverty line for your family size.

Your income minus 1.5 times the state poverty line amount for your family size equals your discretionary income.

You then multiply by 0.2 (or 20%) to get your annual ICR payments. Dividing that product by 12 will show you your monthly payments.

ICRs have a fixed interest rate throughout the repayment period. You can consolidate your loans before you enroll for the plan.

You’re able to use an ICR plan with the Public Service Loan Forgiveness (PSLF) program. This program allows people in qualifying public service or nonprofit jobs to achieve loan forgiveness after 10 years of on-time payments. With ICR, these payments are limited at 20% of income, so the forgiven amount could potentially be significant. Also, under PSLF, the forgiven amount is tax-exempt.

ICR Requirements

You need to make sure that you have eligible student loans to participate in the Income-Contingent Repayment program. These include subsidized and unsubsidized loans, direct consolidation loans, and Direct PLUS loans.

If you have Parent PLUS Loans, you can make them eligible for ICR by first consolidating them into Direct PLUS loans. Other student loans that are eligible for an ICR plan include federal Stafford loans, Federal Family Education Loans (FFEL) loans, FFEL consolidation loans, and federal Perkins loans. All types of private loans do not qualify for ICR or any other income-driven repayment plan.

Income Eligibility for ICR

There is no income eligibility for ICR plans or for Revised Pay As You Earn (REPAYE) plans. With other federal income-driven repayment plans,  your payments cannot exceed the amount you would pay using a non-income-driven 10-year standard repayment plan. To qualify for these plans, you need to prove a specific level of financial hardship. This burden of proof is not necessary for ICR plan participants.

Student Loans Eligible for ICR

The following loans are eligible for ICR plans:

  • Direct PLUS loans (You should first consolidate Parent PLUS loans before applying for income-driven repayment plans);
  • Direct Subsidized and Unsubsidized loans;
  • Direct Consolidation loans;
  • Federal Family Education loans and Consolidated FFEL loans;
  • Federal Stafford loans;
  • Federal Perkins loans.

Who Would Benefit From ICR?

This income-driven repayment plan would be an excellent choice for those who might struggle with a standard 10-year repayment plan but aren’t eligible for the other income-driven repayment plans. The fact that there is no income eligibility requirement makes it easier to qualify even if your income is relatively high.

The ICR option can also work for parents who took out Parent PLUS Loans. If you consolidate these loans, they may be eligible for an ICR plan. Parent loans do not qualify for any of the other federal income-driven repayment plans.

The ICR is also an excellent choice for borrowers who intend to work in eligible public service organizations or nonprofits and want to participate in the PSLF program. They can combine an ICR plan with the PSLF program and get their loan forgiven after 10 years of manageable monthly payments.

How to Apply for ICR

You can apply for an ICR plan by completing the income-driven repayment plan request online or submitting a paper application. You can also apply through your loan servicer.

An online application is the most convenient option. You can complete a demo application to see what documents and information you need.

  • Login to your student portal with your Federal Student Aid ID.
  • Select the income-driven repayment plan request form.
  • Enter information into the required fields.
  • If you qualify for multiple IDRs, the site should automatically place you in the plan that offers the lowest monthly payment. You can, however, manually select an ICR plan if you wish.

Should You Use the Income-Contingent Repayment?

Income-Contingent Repayment plans are not right for everyone. In most cases, you’ll pay more interest (over the entire repayment period) than you would on a standard 10-year repayment plan.

The most economical plan overall is one of the standard repayment plans. However, these could require significant monthly payments. If you cannot make such payments, then an ICR plan could be a viable option.

You may qualify for loan forgiveness with an ICR plan, but you should be aware of the tax implications. You should either have money set aside to pay the tax bill or ensure that the forgiven amount does not put a strain on your finances because of tax obligations.

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