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Income Contingent Repayment


The Income Contingent Repayment (ICR) plan is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service. It does this by pegging the monthly payments to the borrower's income, family size, and total amount borrowed. The monthly payment amount is adjusted annually, based on changes in annual income and family size.

Income-contingent repayment is currently available only from the U.S. Department of Education, not from banks or other private institutions making government-guaranteed loans through the Federal Family Education Loan (FFEL) Program. (FFEL lenders offer Income Sensitive Repayment as an alternative.) But if you have one or more FFEL loans, the Department of Education will allow you to consolidate your loan or loans into a federal direct consolidation loan (1-800-557-7392 or TDD 1-800-557-7395) so that you can elect income-contingent repayment. Students at some schools get their loans directly from the US Department of Education through the Direct Loan program. If you already have a Federal direct loan, you may elect income-contingent repayment without having to consolidate.

The maximum repayment period is 25 years. After 25 years, any remaining debt will be discharged (forgiven). Under current law, the amount of debt discharged is treated as taxable income, so you will have to pay income taxes 25 years from now on the amount discharged that year. But the savings can be significant for students who wish to pursue careers in public service. And because you will be paying the tax so long from now, the net present value of the tax you will have to pay is small.

The interest rate is fixed for the lifetime of the loan and is not variable. It is based on a weighted average of the interest rates of the loans included in the program, rounded up to the nearest 1/8th of a percentage point. It may be advisable for students who wish to use this plan to switch to it just before their loans enter repayment, since the interest rate will then be the in-school rate, which is 3/5th of a percentage point lower.

Many students do not participate in the ICR program because they are intimidated by the thought of a 25-year repayment term. However, it is worth careful consideration, especially by students who might be considering using an extended or graduated repayment plan. The total amount repaid over the lifetime of the loan is only slightly more expensive than that of the 25-year extended repayment plan, but can be significantly cheaper on a constant dollar basis.

A new public service loan forgiveness program will discharge the remaining debt after 10 years of full-time employment in public service. The borrower must have made 120 payments as part of the Direct Loan program in order to obtain this benefit.

Only student loans may be included in the income contingent repayment plan. Parent loans, such as the Parent PLUS loan, are not eligible. Only loans that are guaranteed by the Federal government may be included.

One flaw with the government's ICR formula is the treatment of married borrowers. It combines the income of both spouses, effectively introducing a marriage penalty compared with the repayment for two borrowers who are not married. However, this effect is most evident when comparing monthly payments, and may be minimal in terms of net present value of repayment over the life of the loan.

An important feature of the government's ICR program is that although you must initially sign up for 25-year income-contingent repayment, you are not locked into this payment plan. If your circumstances change or if you just decide that you want to pay off your loan more rapidly, you may do so.


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