What is Income Contingent Repayment?
Previously, we talked about the income based repayment (IBR) plan. Today’s article will highlight the income contingent repayment program. Under various student loan programs you will see this repayment option referred to as the Income Contingent Repayment Program (ICRP) and the Income Contingent Repayment (ICR) option. These are the same programs, only with two different abbreviations. The most commonly used is ICR, therefore we will use ICR to represent both ICR and ICRP
ICR is a program that is offered exclusively for Direct Loan program and direct Loan Program Consolidation borrowers. The program is available for graduate PLUS borrowers but not for parent PLUS borrowers. For the parent PLUS borrower that is looking for a new repayment plan, they should seek counseling from the loan issuer. If the parent PLUS borrower wants to participate in the ICR program they can consolidate all of their PLUS loans into a Direct Loan and then qualify for the ICR program with the new Direct Consolidation Loan.
The payments under the ICR program cover a wide range depending on your underlying level of income. If using the federal poverty guidelines you find that you and your family are below the federal poverty level your payments under ICR will be zero. If your income is above the federal poverty level for your family size then the overall payment cannot exceed 20% of the amount that you earn that is above that level. this does not mean that it will be nearly that high a percentage of your marginal income above the poverty level, it simply means that it will not exceed that 20%.
The specific amount that you will owe for each payment will be recalculated each year as you submit your proof of income to the lender. Upon submission the lender will analyze your income and debt wand will determine a payment for that year. This process will repeat for up to 25 years. If you have not paid the loan off in full by the end of the 25th year, the remaining balance will be canceled. This cancellation of the debt will have a tax consequence for you because the remaining balance will be shown as income to you for that year. This will also impact any and all other programs and public assistance that you are receiving in the year of cancellation. You should consult a tax advisor as well as talk to the overseeing agencies for other programs you are involved with to mitigate this impact.
Within the ICR program their is a single unique attribute that makes this option attractive to the low income borrower. With this program the payments that are determined based on the current income for the borrower are oftentimes less than the interest accrual for that loan. Under this circumstance the accrued interest is added to the balance of the loan. This leads to the outstanding balance of the loan increasing each month. Under the ICR program this increase in the overall balance of the loan is capped at 10%. Therefore any interest accrual that is not covered with the monthly payment that is added to the principal above that 10% cap is waived. This is an important feature to understand and will become particularly critical if the the borrower hits the 25 year cancellation for the loan. This is because the amount of cancellation will have been limited to the original principal plus 10% and will not have been allowed to grow past that level.
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