If you are looking at your student loan repayment options, then you might be scratching your head when it comes to determining the difference between Income-Based Repayment (IBR) and Income Contingent Repayment (ICR).
These are great plans for borrowers who are looking for ways to get a break on their student loan payments. What’s even better is that this break can result in getting the balance of your loans forgiven after a certain repayment period.
Similarities Between IBR and ICR Repayment Plans
Both plans give borrowers an affordable monthly payment amount that is based on income and family size.
Any remaining loan balance is forgiven after 25 years under each plan.
Parent PLUS Loans may not be repaid under either IBR or ICR.
Payments made by a Direct Loan borrower under both IBR and ICR count toward the 120 payments that are required for Public Service Loan Forgiveness.
In both IBR and ICR, your monthly payment amount may be adjusted annually based on changes in your income.
Main Differences Between IBR and ICR Repayment Plans
IBR is available under both the FFEL and Direct Loan programs. ICR is available only under the Direct Loan Program.
A “partial financial hardship” is initially qualify for IBR and there is no comparable requirement for ICR. Any Direct Loan borrower (other than a parent PLUS borrower) may choose ICR.
The amount of your loan debt is not considered in determining your IBR payment amount during any period when you have a “partial financial hardship”. Your monthly IBR payment amount is determined based only on your income and family size. In contrast, the monthly payment under ICR takes into account your total Direct Loan debt in addition to income and family size. The required monthly payment under ICR is generally higher than under IBR, and in some cases it may be higher than the monthly payment amount under a 10-year standard repayment plan.
With both IBR and ICR, your calculated monthly payment may not cover the full amount of interest that accrues on your loans each month. Under IBR, the government pays the remaining unpaid accrued interest on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under IBR. This benefit is not available under ICR. Under ICR, you are responsible for paying all of the interest that accrues on your loans.
Under IBR, unpaid interest is capitalized (added to your loan principal balance) only if you are determined to no longer have a “partial financial hardship,” or if you choose to leave the IBR Plan. Under ICR, unpaid interest is capitalized annually.
Final Thoughts on Income Based Repayment vs. Income Contingent Repayment
Generally, the IBR plan is a better choice for borrowers when you evaluate each plan. However, each borrower has a unique situation, so do consider each plan carefully before coming to your own conclusion. Personally, I have signed up for the IBR plan myself.
An important thing to remember with each of these plans is that you end up making payments over a longer period than the normal repayment plan. And while your monthly payment plan under IBR or ICR will be much lower than with the standard repayment plan, you will also end up paying more interest over the life of the loan.