Income Contingent Repayment (ICR)

NEWS ALERT

President Obama created a new repayment plan called Pay As You Earn (PAYE) starting in late 2012 to improve upon income-based repayments. For borrowers who received a federal loan since 2008 and also receive a federal loan after 2011, a more generous calculation of eligibility is available. Under this plan, your monthly payment will be capped at 10% of discretionary income. Also, any amount you have not repaid after 20 years of payments will be forgiven.

Designed to help borrowers repay their student loans without financial hardship, ICR plans adjust monthly payments annually based on borrower's current adjusted gross income, family size, and total amount borrowed. Only Federal Stafford and Grad PLUS loans qualify for this program.

With the ICR plan, you may have up to 25 years for repayment. Any remaining balance after 25 years will be discharged as a taxable write-off of the remaining balance. Payments may be as low as $5 even if that payment is less than the accumulated interest. However, the unpaid accumulation will be capitalized once a year up to 10% of the original amount you owed when you entered repayment. This means you could be paying interest on interest, raising your total cost. To qualify for ICR, the amount your monthly payment would have been under standard repayment must be more than 20% of your current discretionary income.

ICR payments are one of the three plan types that qualify borrowers to apply for the Public Service Loan Forgiveness Program . Contact your financial aid office or the US Department of Education to find out more about whether or not you qualify.

Although ICR is a great repayment option, many borrowers qualify for lower payments using the Pay As You Earn (PAYE) or Income Based Repayment (IBR) plans.

Pros

  • Affordable payments
  • Payments eligible for Public Service Loan Forgiveness
  • Remaining payment cancellation after 25 years of repayment
  • No prepayment penalties

Cons

  • Requires an annual application which includes reporting on income and family size
  • Monthly payments may be less than accrued interest (negative amortization)
  • Unpaid interest capitalized annually (added to principal balance), but no more than 10% of the original loan amount
  • Takes longer to pay back
  • Total cost of the loan is higher
  • May have to pay taxes on the amount forgiven