Pros and Cons of the Income-Contingent Loan Repayment Plan (ICR)

The federal government offers several options to manage your student loan repayment once you graduate. These options are based on how much money you make and your family size.

Income-contingent repayment is the most expensive out of all the income-driven repayment plans, but it is the only one that parent borrowers can use to pay off loans taken out for their children.

Income-contingent repayment, or ICR, has several advantages for those who qualify. However, parents who are worried about repaying student loans for their dependent children may consider if taking out a loan in the first place is the best option for their child’s post-secondary education.

How Income-Contingent Repayment Works for Federal Student Loans

The income-contingent repayment plan can help you pay less on a student loan compared to the standard repayment plan, which spreads principal plus interest payments out each month over 10 years.

If you qualify for ICR, you can either: 

1. Make monthly payments that are 20% of your discretionary income, or
2. Make payments based on paying over 12 years, multiplied by an income percentage that varies with income level

The ICR has a maximum repayment period of 25 years. Once you switch to income-contingent repayment, your payments will always be based on your income and family size, regardless of any changes to either of these.

This means that your monthly payments will go up if your income goes up and can exceed the amount you would pay under the standard repayment plan if you had not switched. Other repayment plans, like income-based repayment, do not exceed the amount you would pay under standard repayment plans.

Federal law determined that only loans in the William D. Ford Federal Direct Loan Program qualify for income-contingent repayment. With direct consolidation loans available, almost any federal loan can become part of the direct loan program. Any student loan from the Department of Education (DOE) can qualify for income-contingent repayment, although most have to be consolidated into a direct consolidation loan first.

For some student loans, ICR is the only income-driven repayment option. These loans are: 

• Direct consolidation loans that include PLUS loans for parents
• Federal Family Education Loans (FFEL) made to parents
• Subsidized and unsubsidized federal Stafford loans that have been consolidated
• Federal Perkins loans that have been consolidated

For graduates with several types of federal student loans, consolidating these loans and asking for income-contingent repayment can help to manage monthly loan payments so you can also focus on paying living expenses and supporting your family.

Technically, only direct loans qualify for ICR, but you can use the direct consolidation program to compile your FFEL, Perkins, Stafford, and PLUS loans into one loan with one monthly payment. Then, this new loan qualifies for income-contingent repayment, as long as you meet the income and family-size standards for ICR.

Any amount that remains in your student loan after 25 years on ICR will be forgiven by the federal government.

The Pros and Cons of Income-Contingent Loan Repayment

If you need help managing how much you pay each month, and you do not qualify for the very low payments with income-based repayment, ICR is a good option.

There are several benefits to ICR, especially if you took out a parent PLUS loan. 

• Payments are based on your income and spread out over a longer time frame
• Any amount that you have not paid off on the loan will be forgiven after 25 years
• There is no partial financial hardship requirement, unlike other types of income-driven repayment
• You can qualify for a lower interest rate
• Any interest capitalized into the principal caps out once the loan is 10% greater than the starting balance
• Once the 10% capitalized interest mark is hit, interest will still accrue, but it will not be added to the principal

Like other income-driven repayment options, there are some downsides to ICR compared to the standardized repayment plan. 

• You spend many more years repaying the loan as compared to loans with shorter terms
• You pay much more money on the loan due to accrued interest
• Interest that is not paid each month will be capitalized into the loan, increasing your principal amount
• Any part of the loan that is forgiven after 25 years is considered taxable income by the Internal Revenue Service (IRS)
• Under ICR, you could pay more each month than you would under standard repayment if your income goes up enough
• You have to recertify each year to adjust your monthly payments
• Once you switch your payment plan to income-contingent repayment, you cannot go back to standard repayment, even if you qualify for it

How to Apply for Income-Contingent Student Loan Repayment

Like other income-driven repayment plans, you must contact your loan servicer or apply online to see if you qualify for income-contingent repayment. Parents who took out a parent PLUS loan to help their dependent child should follow these steps to see how their consolidated PLUS loan qualifies for ICR.

Loans that are not eligible for income-contingent repayment include:

• FFEL loans
• Federal loans for parents
• Private loans

Any federal loan that does not technically qualify on its own for income-contingent repayment can use the direct consolidation program. When you consolidate your federal student loans, the loan terms change. This helps you switch to ICR.

Private loans come from different agencies outside the DOE. Because they are not managed by the federal government, private student loans have different repayment terms in their contracts. If you need help managing private loan payments, refinancing is a great option.