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What Is Forgiveness With Income-Contingent Repayment (ICR)?

Income-Driven Repayment Plans are available to borrowers with federal student loans. Loans forgiven under these plans are not taxable as income by the United States government. These repayment plans base your monthly payment on your income, family size, and state of residence.

An income-contingent repayment is an option for federal Direct Loan borrowers meeting specific requirements. The qualifying repayment plan is calculated by a percentage of the borrower’s discretionary income, leaving provisional amounts to cover a family’s essential needs.

Student loans can be a huge challenge for those who need to find forgiveness. Fortunately, some options may allow you to get your student loan forgiven with income-contingent repayment. This article will review some of the different forgiveness options and their associated requirements.

What is income-contingent repayment?

Income-contingent repayment is a program that calculates your monthly student loan payment based on your income and family size. This type of plan ensures that borrowers pay no more than 20 percent of their discretionary income towards their loans, allowing them to meet other financial obligations like rent, groceries, transportation costs, and provide for their families.

Income-Contingent Repayment: How it works and Who It’s For

Income-contingent repayment is a system that sets the monthly amount an individual has to pay on their loans, based upon how much they earn. This type of plan ensures that borrowers will pay no more than 20 percent of their discretionary income towards their student loan debt and gives them flexibility in meeting other financial obligations like rent, groceries, or transportation costs and providing for family members.

Forgiveness with Income-Contingent Repayment (ICR)

Forgiveness with ICR is an option available to federal Direct Loan borrowers who meet specific requirements. These loans are forgiven under these plans and not taxable by the government of the United States of America. Eligible loans include:

-Direct Subsidized Loans (need to be in the ICR plan for 25 years)

-Direct Unsubsidized Loans

-Subsidized Federal Stafford loans

A borrower qualifies if they make 120 consecutive monthly payments after signing up for income-based repayment. There is no cap on how much time it takes to complete the 120 payments. The time limit for completing the required number of payments is 25 years, but if you consolidate or get off track, there are ways to restart the clock.

Some requirements need to be met to qualify:

-The borrower must have a high debt relative to income at entry into repayment—the loan holder determines a borrower’s debt load based on total education loan debt at the time of entering repayment.

-The borrower must have no loans in default and not be in bankruptcy when beginning the ICR plan or during their participation.

Under income-contingent repayment, your monthly payment is calculated as follows:

The formula for borrowers with new loans issued from July 2014 through June 30, 2018:

Your family size (number of people living off one paycheck) * applicable poverty line percentage = A; B= 12% of discretionary Income; C = 150 percent of the Poverty Guideline for an individual/family of your size; D = Your adjusted gross income less 150%. If the result is negative, then enter zero. E=D +C; F=A+B+D-E. Your monthly loan payment is equal to the lesser of E or F.

You can calculate your discretionary income with a simple formula: Income – (150% x Poverty Guidelines) = Discretionary Income.

For example, if you have an AGI (adjusted gross income) of $40,000 and support two people in your family, then 150 percent of the poverty guideline for 2015 is $26,675. This means that any discretionary income over $13,325 ($40k-$26k), which represents 25 percent of total household earnings, would be considered available to pay towards student loans each month under ICR repayment plan rules. If this were applied toward income-based repayment, it would equate to a monthly payment of $162.50 in this example (13k x .25 = $325, 13K + 325 = 13,325).

The formula for the ICR repayment plan is as follows: Monthly Payment under ICR Plan= Lesser of A or B; where

A= Family size*Poverty Guideline percentage/12 months and B=(monthly gross income -(150% poverty guideline X family size))*.125 per month. Note that you must use your adjusted gross income if it is lower than your total household earnings when applying these formulas. The result will be less than one dollar if negative, so enter zero instead. Please note that any debt forgiven under an ICR plan may be subject to federal tax.

To be eligible for this program, there are specific qualifications you have to meet:

You must not own more than $60,000 worth of property (not including your primary home),

If married filing separately, both spouses need to qualify independently under these rules. All direct federal loans made after October 1998 qualifies but only payments made after June 2010 count.

If you are married filing jointly, only one spouse must meet this qualification, but both must have direct federal loans made after October 1998.

You may also qualify if your payments did not cover the interest and fees accrued during periods when you were in school or for a grace period after graduation.

The amount of time this forgiveness option will cover depends on the option the borrower selected for repayment plan: Standard – up to 25 years; Alternative- between five and ten years; Graduated Repayment Periods – 12 months at 50 percent of discretionary income followed by increases over two years; Extended Repayment Periods – 30 Years Income Contingent Payment Plan Requirement Review.

Income contingent payment plans require reviews every year to make sure that you still qualify for the plan. If, after reviewing your income and family size, your monthly payment is larger than 20 percent of discretionary income, you will be placed on an alternative repayment plan with a smaller amount due each month. This new number would then become your adjusted payment under ICR.

When does it apply?

Income contingent payments are only available if you have direct federal loans before October 1998 or consolidated Federal Family Education Loans (FFEL) made before July 2010. You must also have at least one loan in this category. The first disbursement was made as part of a program that started in either September 1993 or October 2007, depending upon whether they were subsidized Stafford or unsubsidized Stafford.

How does Income-Contingent Repayment work?

If you have taken out a federal direct or consolidated loan after October 1998, your monthly payment under ICR would be equal to 20 percent of discretionary income. Discretionary income is the difference between your adjusted gross income (AGI) and 150% poverty guidelines for family size based on household living arrangements. So, for example, if one lives alone, then it will use 125 percent; if two people live in a home, it will use 200 percent, and so forth.

The highest amount that can be forgiven would depend upon the repayment plan used: Standard- $50,000, Alternative – $40,000, Graduated Repayment Periods – 60 months at 50 percent of discretionary income followed by increases over three years.

Income contingent repayment plans use a borrower’s adjusted gross income and family size to determine how much they need to pay each month.

How is my monthly payment calculated under an Income-Driven Repayment plan?

If you have direct federal loans disbursed before October 1998, your monthly payment would be the lesser of either 20% of discretionary income or what you would pay on a repayment plan with a fixed payment over 12 years. However, if you made your loan after that date, it is 15% for all categories except married filing separately, where they can only have 15 percent of what they would pay on a fixed plan over 12 years.

If your income is too low to cover the monthly payment, you can use an alternative repayment with a smaller amount due each month that ICR will cover. With this option, if you earn more than 150% poverty level for your family size in the continental United States, you could still be required to make a payment. If this is the case, your monthly fee will go toward what is owed each month, and ICR will cover any amount over that number until it has been paid off or for up to 25 years, at which time if no loans are remaining, then forgiveness can take place.

Who should consider Income-Contingent Repayment?

If you have a loan made before October 1998, ICR is worth considering as your repayment plan. After that date and you are single with no dependents and receive an adjusted gross income of fewer than 60,000 dollars per year, this can be the best option to lower monthly payments because 15% cap at 150 dollars. If you are married, the cap is $165, and both people must be earning less than $75,000 together combined to qualify for this repayment plan.

If your income fluctuates due to a change in employment or other circumstances, such as unemployment or disability, it would also be beneficial because ICR will cover anything above what they require per month.

Also, anyone with direct federal loans looking to have their remaining balance forgiven after 20 or 25 years of consecutive payments should look into this option. Because if you already qualify for some form of forgiveness, you can adjust your price based on what you earn and will count toward the total amount owed, which means less money overall.

Why choose this loan option over other types of loans?

ICR is for any direct federal loans, and if your monthly payment is too low, you can have it covered by ICR. It’s also good because anything over the required amount per month goes toward what they owe, which means less overall money owed.

If your income changes due to a change in employment or other circumstances, such as unemployment or disability, this repayment plan could also be helpful. 

Income-contingent repayment (ICR) will require a larger percentage of borrowers’ incomes than other plans do but ultimately lower the repayment cost. What makes ICR different than other repayment plans is that it accounts for the borrower’s income and family size when determining how much they should be paying back each month to prevent defaulting on their loans.

If you are making under 60,000 dollars annually, this can be a good option because if your monthly payment is too low, you may qualify to have it covered by ICR, which means less money overall owed in comparison.

How long will it take to repay my loan(s) or have them forgiven?

ICR generally charges lower interest rates, so even though there’s an increase with every two years of consecutive payments, at most 25 years could pass before all remaining balances are forgiven as opposed to 20 thanks to paying more per month. 

In addition, under the income-contingent repayment plan, borrowers will need to spend at least 15 percent of their discretionary income each year. Still, they also have up to 25 years if needed before all remaining balances are forgiven instead of 20, which is a good thing because that means less overall money owed in comparison.

If you make more than 60k, then your required monthly payment becomes 135 dollars, and anything above that counts toward what you owe at the time. It’s another excellent benefit compared with other types of loans or plans for repayment because any additional amount goes toward whatever they owe instead.

How much could I save?

If someone earns 50 thousand dollars per year, this plan would cost them 110 plus an extra 30. After making 70 thousand, their required monthly payment becomes 135, plus any additional amount can go toward what they owe at the time.

There is a cap for how much someone’s required payment could be, and it depends on whether they are married or not and based on income. Still, either way, this repayment plan would save them money each year compared to other plans because anything over will count as an extra towards whatever they owe instead of just going straight to interest, which means less overall money owed.

What are the advantages and disadvantages of income-contingent repayment?

The main advantage of ICR is that it can be a better option for those who struggle to make their monthly payments or would face financial hardship if they didn’t have the flexibility offered by this repayment plan.

Disadvantages include having to pay more over time because of how much less you’d owe in interest, and also, there are not as many options when compared with other types of loans. Still, overall, this could save someone money each year as long as what they owe doesn’t exceed whatever their payment amount ends up being, which means less overall money owed in comparison, so all-in-all, it’s worth looking into.

What are some alternatives?

As previously mentioned, income-contingent repayment (ICR) plans will cost less than other loan types or repayment plans because interest rates are lower, but there is a cap for how much someone’s required payment could be. It depends on whether they are married and based on income, which makes ICR different from other repayment plans because the qualifying payment amount could be higher than what they previously had to pay.

This means that people with loans who are struggling financially may qualify for a lower monthly payment. Still, this plan is not as flexible as other types of loans or programs, so it’s worth looking into if you only have direct federal student loans and want forgiveness after 20-25 years rather than 25, which is another good thing about ICR.

What else do I need to know?

Private lenders also offer various repayment options such as deferred, graduated, income-contingent, or standard payments. Again, it’s the same with how they would work through an employer (i.e., making payments every two weeks), then whatever their required monthly payment ends up being will depend on whether or not they are married and if their income is high or low.

What would happen if I didn’t have the required monthly payment?

Suppose you do not pay your student loan for 270-330 days. In that case, it will go into default which means that no one can get another loan until this debt has been repaid in full so make sure to stick with whatever repayment plan works for you as well as being aware of any interest rates when compared with other types of loans or plans.

Some may end up costing more over time, especially since there’s a cap on how much someone’s required payment could be, meaning overall money owed, but either way, ICR might be better than having 20 years instead.

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