Income Contingent Repayment - a better way to pay off student loans
Coming out of college with student loan debt is practically a given. Repaying that debt can be a challenge since typical loans for professional and graduate-level degrees can reach six digits. Even for graduates with a smaller number, repayment can be tough given all the other costs a new graduate is likely to encounter right out of school.
I recently learned about a repayment option that I didn’t know about. It’s called ‘Income Contingent Repayment’ (ICR) and is great for individuals who have a large amount of debt relative to their expected income. I should note right up front that ICR can only be used on federal guaranteed loans to the student. Parental loans and loans from private lenders do not qualify.
First, let me recap the more common ways to pay off student loans - there are three besides ICR.
- Standard repayment - the total amount borrowed is amortized over ten years with a fixed payment each month. Minimum monthly payment is $50.
- Extended repayment - the total amount borrowed is amortized over a 12 to 30 year period with a fixed payment each month. The length of repayment depends on total amount borrowed.
- Graduated repayment - the payment on this plan is lower at the beginning of repayment and gradually increases throughout the 12 to 30 year repayment period. The increases come every two years.
Income contingent repayment is different in that payments are based on a combination of total amount owed and the borrowers income. The term can reach 25 years (and typically will). Your monthly payment changes each year and is calculated based on your IRS adjusted gross income.
There’s one other awesome feature to ICR. If, at the end of 25 years, you haven’t paid the balance in full, the government writes off any remaining debt. The down side to that is, as the law is currently written, you’d owe tax on the amount forgiven. It sure beats paying the entire amount, though. Plus, that tax payment will occur 25 years in the future.
The ICR is ideal for someone whose profession requires a lot of expensive schooling but whose expected income is low. So if that’s you, check out the income contingent repayment plan.
September 13th, 2007 at 10:29 am
Wow. Thanks for posting this! Mr. Micah has over $100,000 in student loan debt. And he’s going to be a prof, so we don’t have high expectations for income. This could be very very handy!
September 13th, 2007 at 12:17 pm
Wow. I’m really glad someone finds this information useful to their situation. Hope it helps.
September 20th, 2007 at 12:39 pm
I am one of the pioneers who blazed the way for this program. I was one of the early defaulters and had a minimum wage income.
Student loans were based on the (flawed) premise that if you go to college, you’ll make a lot more money, and certainly you’ll make enough money to repay the student loans.
Early defaulters like me demonstrated that going to college is not a guarantee of higher income, and that some borrowers do not have the capacity to make full standard payments.