What is an Income Contingent Repayment (ICR) Plan?
TL;DR: An Income Contingent Repayment (ICR) plan is a federal student loan repayment option designed to make monthly payments more affordable by basing them on a borrower’s income, family size, and total loan balance. Payments are capped at 20% of discretionary income, and any remaining balance is forgiven after 25 years of qualifying payments.
Navigating student loan repayment can be challenging, especially when your income doesn’t align with standard repayment schedules. The Income Contingent Repayment (ICR) plan is one solution aimed at making loan payments more manageable by aligning monthly payments with your current income. This plan can be especially helpful for borrowers with low to moderate incomes or those facing financial challenges after graduation.
Here’s a breakdown of how ICR works, its eligibility requirements, how payments are calculated, and some considerations for borrowers.
How the ICR Plan Works
The ICR plan was one of the first income-driven repayment options introduced to help federal student loan borrowers. Unlike other income-driven plans, ICR is available to anyone with eligible federal loans, regardless of financial need. ICR works by calculating your monthly payment based on the lesser of:
- 20% of your discretionary income, or
- What you would pay on a 12-year fixed payment plan, adjusted for your income.
The ICR plan provides flexibility and can help reduce monthly payments. After 25 years of qualifying payments, any remaining loan balance is forgiven. However, note that forgiven amounts may be considered taxable income, which could lead to a tax bill in the year of forgiveness.
Eligibility for ICR
The ICR plan is open to borrowers with Direct Loans, including:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans (if consolidated)
- Direct Consolidation Loans
Federal Family Education Loans (FFEL) and Parent PLUS loans are not eligible for ICR unless consolidated into a Direct Consolidation Loan.
How ICR Payments Are Calculated
Monthly payments under ICR vary based on your income, family size, and the federal poverty line. Here’s a step-by-step look at the calculation:
- Determine discretionary income: Discretionary income is your adjusted gross income (AGI) minus 150% of the federal poverty guideline for your family size and state of residence.
- Calculate 20% of discretionary income: The ICR plan caps monthly payments at 20% of discretionary income, higher than the 10-15% cap on other income-driven plans.
- Alternative payment amount: If the 12-year fixed plan calculation results in a lower amount than 20% of discretionary income, you’ll pay the lesser amount.
For example, if your discretionary income is $30,000, your monthly ICR payment could be up to $500 (20% of discretionary income).
Pros and Cons of the ICR Plan
Pros:
- Available to a wide range of borrowers, including those with Parent PLUS loans if consolidated.
- Monthly payments are adjusted to match income, making payments more manageable.
- Provides a pathway to loan forgiveness after 25 years of qualifying payments.
Cons:
- Payments are often higher than those in other income-driven plans, such as PAYE or REPAYE.
- Forgiveness after 25 years may come with a tax liability.
- Not ideal for borrowers with low incomes, as the 20% discretionary income cap can still lead to relatively high payments.
Is ICR Right for You?
The ICR plan can be beneficial if you need flexibility and have federal student loans that may not qualify for other income-driven repayment plans. However, if affordability is your main concern, exploring other options like PAYE, REPAYE, or Income-Based Repayment (IBR) could provide lower payments.
As with any financial decision, it’s wise to consider all your repayment options carefully. Consulting with a loan servicer or financial advisor can help you find the plan that aligns with your financial goals and income trajectory.
Disclaimer: The information provided in this post is for general informational purposes only and should not be considered financial advice. Student loan situations can vary significantly based on individual circumstances, and decisions around deferment or forbearance can have lasting financial impacts. Before making any changes to your loan repayment plan, consult a qualified financial advisor or your loan servicer to understand the best options for your unique situation.