What's the Difference Between Income Contingent Repayment Plans and Income Based Repayment Plans?

Compare and contrast three popular student loan repayment plans: income contingent, income based, and the new pay as you earn plan.

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The Department of Education offers several repayment plans for borrowers of federal student loans. If your debt is high relative to your income, you may be eligible for one of these plans. The three most popular payment plans are:

  • Income Based Repayment
  • Income Contingent Repayment, and
  • Pay as You Earn plan, which first became available in December 2012.

Although somewhat similar in how they work, these three student loan repayment plans have different requirements to qualify and provide different levels of relief. Read on to learn about the differences between Income Based Repayment plans, Income Contingent Repayment plans, and the new Pay as You Earn plan.

(For details on each of these repayment plans, see Student Loan Repayment Options and The Pay as You Earn Plan.)

Common Features Between These Repayment Plans

In all three of these plans, your monthly payments are determined by your income, family size, and debt load. They feature a set time period (between 20 and 25 years), after which any remaining balance on your loan is forgiven. Here are some other features shared by the three plans:

Annual Review

Your loan servicer will review your income, family size, and debt size every year. To remain in the program, you must submit annual documentation of your finances, such as tax returns and the like. If your circumstances change, your monthly payments will change.

Tax Bill for Any Forgiven Amounts

If any of your balance is forgiven after your repayment period is over (usually between 20 and 25 years), you may face significant tax consequences. That is because the IRS considers any amount of forgiven debt to be income to you. This could be a concern if you anticipate a large amount of forgiven debt. For example, if you anticipate a $40,000 remaining balance after 25 years of repayment, and you are in the 25% tax bracket, your tax bill for that year could increase by up to $10,000.

More Interest Paid Over the Life of the Loan

These repayment plans do not change your interest rate, they just reduce your monthly payments. Instead of paying back the loan over the standard ten-year period, you will make smaller payments over a longer period of time. That will likely result in payment of more total interest.

Differences Between the Plans

Below are some of the main differences between these repayment plans.

Income Based Repayment (IBR)

Following are the main features of the Income Based Repayment plan.

  • You make payments for 25 years, then any remaining balance is forgiven.
  • You must have a “partial financial hardship”. If you qualify for this at the time of application, you can remain in the program even if later you do not have a “partial financial hardship.”
  • Payments are usually 15% of your discretionary income.
  • There is some reduction in the amount of interest you will pay.

The Department of Education has a calculator to estimate your payments under this plan. You can also apply on their website, at http://studentaid.ed.gov.

Income Contingent Repayment (ICR)

Following are the main features of the Income Contingent Repayment plan.

  • You make payments for 25 years, then any remaining balance is forgiven.
  • No “partial financial hardship” requirement.
  • Payments are usually 20% of your discretionary income.
  • There is some reduction in the amount of interest you will pay, but it is less generous than under the other plans.

The Department of Education has a calculator to estimate your payments under this plan. You can also apply on their website, at http://studentaid.ed.gov.

Pay as You Earn

Following are the main features of the Pay as You Earn plan.

  • It is only available for recent borrowers. If you took out your first federal loan on or after October 1, 2007, and you received a disbursement on or after October 1, 2011, you may qualify for this plan.
  • You make payments for 20 years, then any remaining balance is forgiven.
  • You must have a “partial financial hardship”. If you qualify for this at the time of application, you can remain in the program even if later you do not have a “partial financial hardship.”
  • Payments are usually 10% of your discretionary income.
  • There is some reduction in the amount of interest you will pay.

The Department of Education has a calculator to estimate your payments under this plan. You can also apply on their website, at http://studentaid.ed.gov.

by: Angela Schmitz

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