ICR is the only option with capped maximum monthly payments for people with very high income. If you were on IBR or PAYE prior to having very high income, then staying on them in the best option to have payments capped at standard payment. It will be worse to switch to ICR in that case.
More affordable payment: An income-driven repayment plan can lower your monthly payments by a sizable amount. Low-income borrowers could have payments as low as $0. Potential for forgiveness: If you still have a balance at the end of your new repayment term, it'll be forgiven.
Income-driven repayment disadvantages
Since you'll be repaying your loan for longer, more interest will accrue on your loans. That means you might pay more under these plans in the long run — even if you qualify for forgiveness. It's likely you'll pay off your loan before forgiveness kicks in.
While ICR doesn't typically lower monthly payments as much as IBR does, it could be an ideal choice if you want to save on interest. For example, you might prefer making higher monthly payments in order to pay your loans off in less than 25 years. The more you pay now, the less interest you'll pay in the long run.
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.
Switching to an income-driven repayment plan won't directly affect your credit score. But, a lowered monthly payment will lower your debt-to-income ratio. That can be good for your credit. On the other hand, you will get an extended loan term, so you'll have the debt for longer.
How to pick the best income-driven repayment plan for you. Overall, the Pay As You Earn (PAYE) plan comes out as the winner against Income-Based Repayment: PAYE lowers your monthly payments to 10% of your discretionary income. PAYE offers loan forgiveness after 20 years, no matter when you borrowed your loans.
Other borrowers might have to consolidate federal student loans to qualify for IDR. Your income might be too high to qualify: If 10% of your discretionary income is higher than your monthly payment on a standard repayment plan, then you won't be able to benefit from the Income-Based Repayment or PAYE plans.
What does “after 20 or 25 years of qualifying repayment” mean? This means that you will qualify for forgiveness of any remaining loan balance after you have satisfied the equivalent of 240 or 300 qualifying monthly payments over a period of at least 20 or 25 years.
If you decide that an IDR plan is no longer right for you, you may be able to switch to a different plan. Use the Department of Education's Loan Simulator Tool to see what plans you are eligible to switch to and what your payment would be under each plan to decide what is right for you.
Starting in July 2024, there will some be additional limits on which plans you can switch between. If you're on the SAVE Plan, you will not be able to reenroll in the Pay As You Earn (PAYE) Repayment Plan or the ICR Plan after July 1, 2024.
IDR plans calculate your monthly payment amount based on your income and family size. So if your income increases, so does your payment amount. On PAYE and IBR, we limit your payments so that even if your income increases, your payments never go higher than what you'd pay on the Standard Plan.
Under the PAYE Plan, IBR Plan, or ICR Plan
If you don't recertify your income by the annual deadline, you'll remain on the same IDR plan, but your monthly payment will no longer be based on your income.
Thus, for most borrowers, IBR should be preferred over REPAYE. Income-Contingent Repayment (ICR) usually results in the highest monthly and total payments. If the borrower will be earning below 150% of the poverty line for most of their work-life, IBR, PAYE and REPAYE all yield a zero monthly loan payment.
Loan Forgiveness
Under ICR, your remaining balance will be forgiven after 25 years. You may be eligible for loan forgiveness after 10 years if you are seeking Public Service Loan Forgiveness (PSLF).
Cons of income-driven repayment plans
Recertification: You need to recertify your income and family size every year; your payment can go up or down if your situation has changed. Possible tax impact: You may need to pay income tax on any amount that's forgiven.
The IBR plan not only bases your payment on your income, but also promises loan forgiveness. To qualify for loan forgiveness, you must make on-time payments for 20 years for loans disbursed after July 1, 2014, or 25 years for loans disbursed before July 1, 2014.
Yes, you can be denied access to income-driven repayment plans. The reason? Not having a partial financial hardship. This is a requirement for certain plans, such as Income-Based Repayment (IBR) and Pay As You Earn (PAYE) plans.
Income-based plans allow you to use as little as 10% of your discretionary income as payment while an income-contingent plan requires you to use at least 20% of your discretionary income as payment. The repayment timetables and eligible loans also differ between the two plans.
Parent PLUS loans can potentially be forgiven after 10 years under specific conditions, such as through the Public Service Loan Forgiveness (PSLF) program after consolidation into a direct consolidation loan. Parent borrowers must enroll in the Income-Contingent Repayment (ICR) plan to qualify for PSLF.
Best repayment option: standard repayment. On the standard student loan repayment plan, you make equal monthly payments for 10 years. If you can afford the standard plan, you'll pay less in interest and pay off your loans faster than you would on other federal repayment plans.
After you complete the repayment period for each IDR plan, your remaining balance is forgiven. Borrowers with initial loan balances of $12,000 or less will be eligible for IDR forgiveness after 10 years of repayment.
Consolidation has potential downsides, too: Because consolidation can lengthen your repayment period, you'll likely pay more in interest over the long run.
Plus, you'll still be making progress toward loan forgiveness, which you can receive after 20 or 25 years on an IDR plan. Your $0 monthly payments can also count toward Public Service Loan Forgiveness (PSLF), which offers loan forgiveness after 10 years of working at a qualifying not-for-profit or government agency.