Income Contingent Repayment plans are designed to relieve the stress of student debt.
College graduates often begin their careers at the bottom rung of the income ladder, and those burdened with student loan debt may find the payments devouring their paychecks. An Income Contingent Repayment plan makes it easier to pay student loans during leaner years by tying payments to income. It also frees college graduates to pursue careers in sectors where low salaries might otherwise drive away debt burdened graduates. If your student loans keep you awake at night, it might pay to learn about Income Contingent Repayment.
Eligibility
Only loans borrowed from the federal Direct Loan program qualify for Income Contingent Repayment. However, loans borrowed through the Federal Family Education Loan program might qualify for Direct Loan consolidation, making them eligible for ICR. Parent loans do not qualify. Unlike Income Based Repayment, you do not need to have a financial crisis to qualify.
Payment Amounts
The Direct Loan program calculates ICR payments based on your adjusted gross income, total Direct Loan debt and family size, advises the Direct Loans website. If you are married, your spouse's income factors into the payment amount, even if you file taxes separately, according to the Student Loan Borrower Assistance website. The program calculates the lesser of two possible payment options to match your financial picture and adjusts them annually as your income and family change.
Fixed Interest
The Direct Loan program averages the interest rates of your eligible loans to arrive at a fixed rate for your ICR plan, notes the "SmartStudent Guide to Financial Aid." A fixed interest rate never changes, giving you peace of mind and predictability. However, you can score a break by choosing an ICR repayment early in the game, because the in-school interest rate is always lower than when loans enter repayment, advises the guide.
Interest Capitalization
If your payments fail to cover interest, it will capitalize annually. In other words, the Direct Loans program tacks the interest onto your principal. However, to keep your debt from spiraling out of control, an ICR caps interest capitalization at 10 percent of your original loan, according to the "SmartStudent Guide to Student Loans." The remaining interest does not necessarily disappear, though. If you pay your loan early or choose another repayment plan, it reappears in your loan balance.
Repayment Period
With an ICR, you have a maximum of 25 years to pay off your loan, says the Federal Student Aid website. The Direct Loan program does not count periods of forbearance of deferral toward that total -- only those periods in which you pay down the balance. After 25 years, you satisfy your obligation and Direct Loans forgives the unpaid balance, according to the Federal Student Aid website. However, the Federal Student Aid website warns that the IRS might collect income taxes on the discharged debt.
Loan Forgiveness
If you pursue a career in public service, your ICR makes you eligible for loan forgiveness after 10 years and 120 payments, says the Federal Student Aid website. Those savings might just make the career of your dreams possible. Loans discharged through the Public Service Loan Forgiveness program do not count as taxable income.
Tags: Direct Loan, Contingent Repayment, Loan program, Direct Loan program, Federal Student, Federal Student website, Income Contingent