With ICR, pay more on your consolidated loans to get out of debt more efficiently.
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There are several different programs to choose from for student loan consolidation. Some of them have similar names, which can get confusing. There are income based repayment(IBR) programs that set your monthly payments at 15 percent of your discretionary income as long as you can prove at least partial financial hardship (10 percent if you were a new borrower on or after July 1, 2014). And then there’s the subject of this article: income contingent repayment (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’s 10 to 15 percent, but with income contingent programs, the percentage increases to 20 percent.
Knowing this, what’s the benefit of an ICR versus an IBR?
Why it’s worth it to pay a larger percentage of income
The point of student loan consolidation programs is to lower your monthly payments so you can afford to pay off your federal student loans comfortably. 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 the repayment process takes to and how much interest you’ll pay before you eliminate the debt in full. If you’re paying 20 percent instead of 10 to 15 percent of your income each 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.
Every month that you shave off of the total payoff time means one less month of added interest. Saving this interest money means you’ll pay less overall to pay off your loan.
How to qualify for income contingent repayment
Just like other hardship-based programs such as an IBR and Pay as You Earn, you must prove at least partial financial hardship to qualify for ICR.
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, then you can use either income contingent repayment or income based repayment.
You also must 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
Loans already consolidated through a standard repayment program or graduated repayment program
This last point can be a surprise. 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.
Note that as with the other two hardship-based programs, enrollment in an income contingent repayment program will make you eligible for public student loan forgiveness after 10 years if you work in an applicable public service field.
Deciding between an IBR and ICR
Both the IBR and ICR programs are available to the same income levels, carry the same interest rate, and 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?
This answer depends on your debt, current budget outlook and career. If you’re working in the private sector and you don’t have many other obligations 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 and pay less in added interest. It’s worth calculating the payoff time at 20 percent of income versus 10 to 15 percent, to see how much faster you can eliminate your debt.
If it would take more than 25 years to pay off your debt in either case, choose the IBR. Repayment plans have a maximum term of 25 years. If you make 25 years of payments and still have outstanding debt, it will be forgiven without any penalty. If you’re paying for 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 through Public Service Loan Forgiveness. 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.
Assessing which federal repayment plan is best for you can be tough to do on your own. Debt.com can match you with a trusted student loan resolution specialist who can help you find the right solution for your needs.
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