INCOME CONTINGENT REPAYMENT
Figuring out how to navigate your student loan debt is like trying to figure out what to eat for lunch when you’re already hangry. (anger induced by hunger).
There are so many different options, that it leaves you (or at least, me) feeling like sticking my head under a rug and sobbing. (I get dramatic when I’m hungry). And to make matters worse, each student loan option is needlessly complicated. Its like trying to order a basic meal (a #1– a plain hamburger with fries and a Diet Coke) and then having your waiter assault you with sundry of questions. Well do you want special sauce with that? Do you want onions? What about grilled onions? Lettuce? Tomato? What about trying something crazy on it, like pineapple? Jalapeno? And before you know it, you’ve collapsed on the ground, too hungry to make any decisions. In each of the federal student loan forgiveness options, you have to follow the rules with precision in order to have your loans forgiven. So, first, you have to know what those rules are before you can make a decision. But the rules can be hard to understand. And your hungry. And understanding things when your hungry is hard. So, in our student loans simplified series, we are breaking down each of the federal student loan repayment options in bite sized pieces to help you understand and make the best decision for you.
ICR is the oldest of the four income driven repayment plans. (PAYE, REPAYE, and IBR are the three others). It is also one of the most expensive income driven repayment plans. Really, the most important thing you should know about income contingent repayment is that you probably should not choose it as your method of repayment for your student loans unless you are struggling to make your student loan payments under a Standard Repayment plan and you have Parent PLUS loans.
Unlike other income repayment plans, your income does not determine your qualification for the program.
Your income does not determine whether you can sign up for ICR. However, the greater your income, the higher your student loan payment will be, since it is usually 20% of your income. If you have a high student loan balance and a high income, there is a good chance that refinancing with a private lender is probably the route to take even if you have Parent PLUS loans.
Only federal direct loans qualify (Direct Subsidized, Direct Unsubsidized, Direct PLUS loans, and Direct Consolidated loans)
- TIP: if you have other federal loans, you can consolidate them into a federal direct loan to qualify for the program.
- TIP: Parent PLUS loans DO NOT qualify under ICR. BUT, unlike the other income driven repayment plans, you can consolidate your Parent PLUS loans into a Direct Consolidated loan in order to qualify for ICR. This is one of the only reasons someone should choose ICR. (Since IBR, REPAYE, and PAYE are more generous and as long as you don’t have Parent PLUS loans, those are better options).
You don’t have to stay on ICR forever.
One of the scariest things to me about choosing a student loan repayment plan, was feeling like I was going to be stuck in that repayment plan forever. #commitmentissues It felt like saying yes to a romantic relationship that I only felt luke warm about. But just like you don’t have to marry that guy you’re dating but not that into, you don’t have to marry your student loan repayment plan– you can always change your mind later if it is not working for you. You might decide after a year on ICR that you are comfortable refinancing to a 15 year private loan to enjoy a lower interest rate (and probably a lower monthly payment). Don’t be afraid to change your mind if something else makes better sense/cents.
You’ll likely pay more on ICR than any other plan.
Under ICR, you will pay either (1) 20% of your discretionary income OR (2) the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income (you’ll pay whichever is cheaper). Under the PAYE, REPAYE, and IBR you will only pay 10-15% of your discretionary income. You also pay more on the life of the loan than you would on a Standard or Refinanced plan since interest will be accruing
You’ll make increasing student loan payments for 12 or 25 years. If there is a balance remaining in the 25th year, it is forgiven.
If you have a balance that is forgiven, you will be taxed on the forgiven portion as if it was earned income that year. So, for example, if you end up having $100k forgiven in the end, for tax purposes, you will pretend like you made $100k that year. That means that you need to start saving up now for that tax bill. Note that you are much less likely to have a balance forgiven under this plan since you will be paying more on ICR than any other income driven repayment plan.
Because you are making relatively small payments on your student loans each month, you will accrue more interest on an ICR plan than a Standard Repayment Plan or if you had refinanced your student loans with a private lender, for a lower interest rate. And unlike the other income driven repayment plans, ICR forces you to pay the accruing interest on your loans ad that unpaid interest is capitalized annually (though ICR caps unpaid interest at 10% of the original loan amount– interest about 10% of the loan amount will continue to accrue but won’t be compounded. So there’s that.)
Think about the tax implications to maximize your savings.
If you file married filing jointly, both you and your spouses incomes will be considered in the calculation of your monthly payment. As such, you may want to consider filing married filing separately. Speaking of taxes, you will need to start saving money for the tax bill that you will be hit with the year that your loans are forgiven (assuming you still have a balance on your student loans after 25 years has passed).
Who should use income contingent repayment?
ICR is definitely not for everyone. Basically, if you don’t have Parent PLUS loans, REPAYE, PAYE, or IBR are going to be better income driven repayment options.