Income Contingent Repayment Options: Right For You?

Consolidate Student Loans

Income Contingent Repayment Options: Right For You? 

An income contingent repayment plan to consolidate student loans is an option for some people. This type of repayment plan, often called an ICR, is for those who are likely to work in lower paying jobs. This repayment plan makes it easier for those individuals to repay their student loan debt. People with public service jobs often have high debt, from school loans, but have a low income paid to the worker.

With the income contingent repayment plan, the amount the borrower will pay monthly towards their student loan debt is based on their income. Specifically, the income of the borrower, total borrowed amount and the family size determines how much they will pay. Each year, this amount is adjusted to match any changes in the income for the coming year.

This repayment plan is not widely used. It may only be used for U.S. Department of Education loans. Other lenders, such as banks and private sector lenders are unable to use this type of repayment plan. Those lenders who offer FFEL (Federal Family Education Loan) programs also do not qualify for this type of repayment. However, many of these lenders offer a similar program called an Income Sensitive Repayment to consider.

For those who have several qualifying loans, you can use income contingent repayment plans if you obtain a federal direct consolidation loan. Those who already have a Direct Loan may obtain an income contingent repayment without the need to consolidate student loans.

An income contingent repayment plan does have a maximum repayment time of twenty-five years. After that time, the government will discharge any debt still owed towards the loan. Keep in mind that any discharged debt like this is the same as taxable income. You may need to pay taxes on any debt discharged, then. Nevertheless, for those who have a low income, this type of repayment plan can be idea.

The income contingent repayment plan also puts in place an interest capitalization cap. This applies to situations in which the monthly payment is not high enough to pay off the interest charged on the loan. When this occurs, the interest that is unpaid is capitalized, which means it is an addition to the principle of the loan. This occurs yearly. The most that can be capitalized per year is 10 percent of the loan’s original balance. The interest will continue to accumulate, but will not compound, which means new interest is not applied to it.

For those that do qualify for this type of repayment plan, the biggest concern is having to repay the debt over a period of 25 years. Some are intimated by this. However, with the low interest rate and the low monthly payment, this may be one of the best options for the individual with a lower income like this.

An income contingent repayment plan may be the right choice for some individuals. This type of plan is not available for parent loans, such as the Parent PLUS Loan. Only student loans may be wrapped into this plan. For those wishing to consolidate student loans, keep in mind that you can do so using the federal consolidation program. In addition, this plan is not always set in stone. Over time, you may see your circumstances change, which may require you to enter a different repayment loan to pay off your debt faster.

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