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Income Contingent Repayment for Direct Loans

Income Contingent Repayment for Direct Loans
Daniel Cohen
UpdatedJul 29, 2016
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    4 min read
Key Takeaways:
  • Borrowers can pay zero under Income Contingent Repayment.
  • Maximum repayment period is up to 25 years.
  • Income Contingent Payments can be greater than in other repayment plans.

Direct Loan Borrowers Can Expand or Contract Payments as Their Finances Change.

Income Contingent Repayment is one of several payment plans offered to borrowers of federal student loans. In Income Contingent Repayment, the borrower’s monthly repayment amount is based on total Direct Loan amounts, family size, and adjusted gross income, reported for the most recent year. The Dept. of Education calculates the borrower's payment amount each year. The maximum repayment period is 25 years, after which the Dept. of Education cancels the unpaid balance.

Under certain conditions, borrowers qualify for a repayment amount of zero. Because payment amounts can expand or contract with the borrower's ability to pay, Income Contingent Repayment allows borrowers with low incomes or high debt to fit their student loan payments in their budget.

Loans You Can Include in Income Contingent Repayment

Income Contingent Repayment is available for the following federal education loans that were paid to the school directly:

  • Direct Stafford Loan (subsidized, for students)
  • Direct Unsubsidized Stafford Loan (for students)
  • Direct Consolidation Loan (for students and parents)

Direct PLUS Loan for Parents, and private loans are not eligible for the Dept. of Education Income Contingent Repayment plan. Neither are Federal Family Education Loan (FFEL) Program loans. See the resources Income Based Repayment Plan and Consolidate Student Loans if you do not qualify for the Income Contingent Repayment plan.

Student Loan Options

Need a student loan? See the resource Student Loans resource page. Problem with a student loan? Learn more about Student Loan Consolidation.

Income Contingent Repayment Eligibility

First, you must have one of the loans listed above.

Second, to participate in Income Contingent Repayment, you must sign a form that permits the Internal Revenue Service to provide information about your income to the Dept. of Education. This information will be used to recalculate your monthly payment, adjusted annually based on the updated information.

How Income Contingent Repayment Works

In Income Contingent Repayment, the Dept. of Education calculates the borrower's monthly payments on the basis of the borrower's adjusted gross income (AGI) The AGI includes a spouse's income (if you married), family size, and the total amount of your Direct Loans. Under the ICR plan you will pay each month the lesser of:

  1. The amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that varies with your annual income, or
  2. 20% of your monthly discretionary income

Under Dept. of Education rules, monthly discretionary income equals your AGI minus the poverty level for your state of residence and family size, divided by 12. You can review the current poverty level and other poverty guidelines, issued annually by the U.S. Department of Health and Human Services.

According to the Dept. of Education, if your payments are not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10% of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized.

The maximum repayment period is 25 years. If you have not fully repaid your loans after 25 years (time spent in deferment or forbearance does not count) under this plan, the unpaid portion will be discharged. You may, however, have to pay taxes on the amount that is discharged.

Under Income Contingent Repayment, the monthly payment is $0 for borrowers with family incomes that are less than or equal to the U.S. Dept. of Health and Human Services poverty level for their family size. Borrowers whose calculated monthly payment is greater than $0 but less than $5 are required to make a $5 monthly payment. Other borrowers must pay the calculated monthly payment.

Until the Dept. of Education receives income information from the IRS or alternative documentation of income, borrowers' monthly payments are equal to the interest that accrues each month. If they are unable to make the interest-only payments, borrowers may request a forbearance until the first scheduled Income Contingent Repayment Plan payment is due.

Pros of Income Contingent Repayment

Income Contingent Repayment allows low-income borrowers to pay zero in monthly payments on their Direct Loans. The borrower can choose another repayment plan if his or her financial circumstances change.

Cons of Income Contingent Repayment

The term of the loan is extended by 10 years to 25 years. Under normal circumstances, stretching a loan's term increases the lifetime cost of the loan. However, given that the remaining balance of the loan is discharged, this cuts the overall cost of the loan.

The amount of debt discharged is treated as taxable income, under current law, so you may have to pay income taxes 25 years from now on the amount discharged that year.

Income Contingent Repayment may not give you the lowest payment amount. Use the Repayment Estimator at the official government website to compare payment amounts, based on your specific, personal circumstances.

Applying for Income Contingent Repayment

Complete the Dept. of Education William D. Ford Federal Direct Loan Program Income Contingent Repayment Plan (PDF) form, and send it to Dept. of Education Consolidation Department.