Income-Contingent Repayment (ICR)
Income-contingent repayment (ICR) was the first income-driven repayment plan. Income-driven repayment plans base student loan payments on a percentage of the borrower’s discretionary income, as opposed to the amount owed. Income-driven repayment plans are intended to be a safety net, in case the borrower graduates with too much student loan debt.
ICR became available on October 1, 1993, as part of the Federal Direct Loan program.
Highest Minimum Payment among Income-Driven Repayment Plans
Typically, income-contingent repayment has the highest payment of the four income-driven repayment plans, so it is the least popular among borrowers.
The income-contingent repayment plan uses a larger definition of discretionary income than the other income-driven repayment plans. Income-contingent repayment defines discretionary income as the amount by which adjusted gross income (AGI) exceeds 100% of the poverty line. The other income-driven repayment plans subtract 150% of the poverty line.
Income-contingent repayment also requires a greater percentage of discretionary income than income-based repayment (IBR), pay-as-you-earn repayment (PAYE) or revised pays-as-you-earn repayment (REPAYE). Income-contingent repayment requires the borrower to pay 20% of discretionary income, while the other income-driven repayment plans require payments based on 15% or 10% of discretionary income.
ICR does not have a payment cap, like REPAYE, so the loan payments will increase as income increases. IBR and PAYE cap the loan payments at the standard payment amount.
The minimum monthly payment is $5.00 under ICR, unless the calculated payment is zero. For example, if the borrower’s income is less than the poverty line, the monthly loan payment will be zero. Otherwise, the monthly loan payment will be $5.00 or the calculated loan payment, whichever is greater.
The remaining debt is forgiven after 25 years of payments (300 payments) under ICR. The forgiveness is taxable under current law.
Public Service Loan Forgiveness (PSLF) cancels the remaining debt after 10 years of payments (120 payments). The forgiveness under PSLF is tax-free under current law.
No Marriage Penalty
Like IBR and PAYE, but not REPAYE, ICR does not have a marriage penalty. If the borrower is married and files a joint federal income tax return with his or her spouse, discretionary income will be based on the joint income. However, if a married borrower files his or her tax returns as married filing separately, the loan payments will be based on just the borrower’s income.
ICR also has a secondary formula that functions as a cap on the payments calculated by the primary formula based on discretionary income.
The secondary formula bases the monthly payment on the product of the monthly payment under a 12-year level amortization with an income percentage factor based on the borrower’s adjusted gross income and tax filing status.
The income percentage factors are published annually in the Federal Register (e.g., 83 FR 37802) and range from 55.00% to 200.00% for single filers and 50.52% to 200.00% for married/head of household.
After I demonstrated that the secondary formula would almost never be invoked, it was dropped from the proposal for IBR and other income-driven repayment plans. The secondary formula can safely be ignored when calculating the loan payments under ICR.
Treatment of Accrued but Unpaid Interest
Borrowers can be negatively amortized under ICR, since the payments can be less than the new interest that accrues. This may lead to accrued but unpaid interest.
The federal government does not pay the interest on subsidized or unsubsidized loans under ICR.
Accrued but unpaid interest is capitalized annually in ICR, until the capitalized interest reaches 10% or more of the principal balance when the loan entered repayment. Interest continues to accrue but is not capitalized until the loan status changes, such as when the borrower is no longer eligible for ICR or switches to a different repayment plan.
Example of Loan Payments under ICR
Consider a borrower who owes $30,000 in federal student loans with a 5% interest rate and has an AGI of $25,000 per year. The monthly payment under standard 10-year repayment is $318.20.
The 2019 poverty line in the continental U.S. for a family of one is $12,490. The borrower’s discretionary income is $25,000 – $12,490 = $12,510. 20% of this figure is $2,502. The monthly amount is one-twelfth of this figure, or $208.50.
The 2019 poverty line in the continental U.S. for a family of four is $25,750, greater than the AGI. Since discretionary income is zero, the monthly loan payment will be zero.
An income-contingent repayment calculator can be used to determine personalized estimates of the monthly payments and total payments under ICR.