What are the differences between IBR and ICR repayments?
We talked quite a bit about Income based student loan repayment and Income contingent student loan repayment options in our previous articles. In this article let us take a look at the differences between the two.
The first level difference between these two programs is the underlying loans for which they are eligible. The IBR is offered as an option to those that have had both Direct Loans as well as Federal Family Education Loans (FFEL) whereas the ICR program is only available for those with Direct Loans. It is also important to note that in order to obtain approval to participate in the IBR program you must meet a standard of financial hardship. This hardship is defined when the IBR calculated payment is greater than your standard payment under traditional repayment or if you are married and your combined required IBR payment is greater than your standard combined traditional payments. This is a low standard for hardship because it in essence states that if the payment under IBR is less than your standard payment, you qualify.
With the IBR repayment program the overall debt owed in student loans is not considered as a part of the payment owed calculation. The payment is strictly restricted to using overall family income in relation to the federal poverty level for a family of that size. The ICR on the other hand does incorporate the total amount owed into its calculation. This can be helpful for those with low income and it can make it so the payment is even higher than the payment under the traditional repayment plan for high income earners. This is of course as it should be. A high income earner with low debt should stick to the traditional repayment plan and not avail themselves of special payment programs.
In addition to the above, another primary difference to the two programs is that under ICR, if your payment is less than the accrued interest for that month, the interest is added to the principal of the loan until it reaches a 110% cap. Under IBR the interest is not added to the principal as long as it is determined you are eligible for the program and you continue to have a financial hardship. This is especially important when it comes to the 25 year and loan cancellation. Should you reach the 25th year under these two special programs and the loan is canceled, you would likely be better off with the lowest unpaid balance between the two. In order to plan for this possibility it is always best to discuss the tax implications of each plan with a tax professional.
The primary similarities between the two programs are that they are options that have been designed specifically with the low income borrower in mind. Both plans have built in “fail safes” where if a high income earner wishes to participate, if qualified, their actual payment would be higher than if they did not participate in the program. Both programs are not allowed under the Parent PLUS plan, and both programs do qualify for the ten year public service forgiveness program. This is not to be confused with the 25 year cancellation pr gram that applies to both programs. The final similarity is that under both IBR and ICR, the monthly payment for the borrower will be adjusted annually dependent upon their income and continued qualification.
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