What’s the difference with income-contingent repayment (ICR) programs?

Paying a little more on your consolidated loans so you can get out of debt more efficiently.

income contingent consolidation

Even just looking at the names of the five programs you can use for student loan consolidation, you can see two of the programs sound very similar. There’s income-based repayment (IBR) programs that set your monthly payments at 15 percent of your taxable income as long as you can prove at least partial financial hardship. So if that’s what an IBR will do, what’s the difference with an ICR?

In fact, the two programs are very similar. The only difference is what percentage of your monthly income is used to set your payment amount. With income-based repayment it is 15 percent, while with an income-contingent programs it’s increased to 20 percent.

So what’s the benefit of an ICR versus an IBR?

Why it’s worth it to pay more

The whole point of student loan consolidation programs is to lower your monthly payments so you can afford to pay off your federal student loans comfortably. Still, if that’s the case, then why would you choose a program that makes you pay more and sets your payments at a higher percentage of your income?

The real benefit comes in how long it takes to and how much interest you’ll pay before you eliminate the debt in-full. If you’re paying 20 percent instead of 15 percent every month at the same interest rate, then you’ll be able to pay off the debt faster because you’re eliminating more of the debt each month.

Fact: Student loan interest is set according to government standards, so the interest is the same regardless of which program you choose).

So for every month you can shave off of the time it takes to pay off your debt means you pay one month less of added interest. You can basically save money on interest charges so it costs less overall to pay back your student loans.

How you qualify for an ICR

Just like other hardship-based programs such as an IBR and Pay as You Earn program, you have to be able to prove at least partial financial hardship to qualify for income-contingent repayment.

Basically, your gross income will be compared to the Federal Poverty Line (FPL) for your state. As long as your income is no more than 150 percent of the FPL in your state, then you can use both income-contingent repayment OR income-based repayment.

You also have to have the right kinds of loans to qualify. As long as you have federal student loans, you should be able to consolidate with an ICR. These include:

  • Subsidized and unsubsidized direct loans
  • Subsidized and unsubsidized Stafford loans
  • PLUS loans
  • Loans already consolidated through a standard repayment program or graduated repayment program.

That last point surprises people. If you use a consolidation program designed for people who aren’t facing hardship and then you get into a period of distress, you can reconsolidate with this type of program to reduce your payments even more.

Pop Quiz

True or false: Parents who take out student loans to pay for their children’s education can use an ICR to consolidate those loans.

a) True

b) False

Reveal Answer

Tip: PLUS loans can be taken out by parents and unlike the Pay as You Earn program, parents can consolidate PLUS loans through either an ICR or IBR.

a) True

Return to question

It’s also important to note that as with the other two hardship-based programs, enrollment in an income-contingent repayment program will make you eligible for student loan forgiveness after 10 years if you work in an applicable public service field.

Deciding between an IBR and ICR

So both programs are available to the same types of people, they both will carry the same interest rate, and they both can make you eligible for forgiveness after 10 years if you work in the right field. If that’s the case, when should you choose an ICR and when should you choose an IBR?

In truth, it’s really dependent on your debt, your current budget outlook and your career. Here’s why…

If you’re working in the private sector and you don’t have a lot of other obligations to cover because you’re just starting out, then it may be in your best interest to choose an ICR because you may pay off the debt faster so you can pay less in added interest. It might be worth it to see how fast you can pay off your debt at 20 percent versus 15 percent to see how much faster you can eliminate your debt.

That being said, if it would take more than 25 years to pay off your debt in either case, then you should choose the IBR. Consolidation programs have a maximum term of 25 years. So if you make 25 years of payments and still have outstanding debt, it will be forgiven without any penalty. If you’re paying 25 years in either case, why not pay less each month if you can qualify?

This also applies to public servants who can have their debts forgiven after 10 years. If an ICR will take longer than 10 years to pay off and you’re eligible for forgiveness, then choosing an IBR makes sense because you get lower monthly payments.

Confused? This kind of comparison and strategy can be tough to assess on your own. If you’re having trouble or you just want to make sure you’re running the numbers correctly, talk to a student loan consultant to get a free evaluation so you can get a professional opinion on the best option for your situation.