Income-Based vs. Income-Contingent Loan Repayment

Both IBR and ICR offer an affordable monthly payment amount for student loans.

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Last week, we looked in detail at one key element of the breakthrough College Cost Reduction and Access Act (CCRAA)—Income-Based Repayment (IBR). But since 1994, well before passage of the CCRAA, the federal government has had a program of Income-Contingent Repayment (ICR). So what are the similarities and differences between IBR and ICR, and which will best fit your needs?

While they are calculated differently, both IBR and ICR are intended to provide you with an affordable monthly payment amount. Under both plans, any remaining loan balance is forgiven after 25 years, and payments made can count toward the 120 payments required for Public Service Loan Forgiveness.

However, there are important differences between IBR and ICR. First, IBR generally has a broader reach: it is available under both the Federal Family Education Loan Program (FFEL) and the Federal Direct Loan Program. ICR is only available under the Federal Direct Loan Program.

ICR does have an advantage over IBR when it comes to PLUS loans made to parents. Parent PLUS loans are available under both the FFEL and Federal Direct Loan Program to help parents pay a dependent child's education expenses. IBR does not cover Parent PLUS Loans or consolidation loans that include Parent PLUS loans. While ICR also does not cover Parent PLUS loans, it does include Direct Parent PLUS loans that are part of a Federal Direct Consolidation Loan.

[Learn how to get a parent PLUS loan.]

Second, the required monthly payment under ICR is generally higher than under IBR. In fact, in some cases repayment under ICR may be higher than the monthly payment amount under a 10-year Standard Repayment Plan.

Third, under both IBR and ICR, the calculated monthly payment may not cover the full amount of the interest that accrues on your loans each month. But 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.

In addition, unpaid interest is capitalized (that is, added to the loan principal balance) only if you no longer have the "partial financial hardship" that qualified you for IBR to begin with or if you choose to leave IBR.

These benefits are not available under ICR. Under ICR, you are responsible for paying all of the interest that accrues on your loans, and unpaid interest is capitalized annually. ICR does cap the amount of unpaid interest that can be capitalized at 10 percent of the original loan amount. Unpaid interest above that 10 percent cap continues to accumulate but is not compounded.

[Read the college financial aid outlook for 2011-12.]

In general, IBR is the better choice for most borrowers. However, everybody's student loan debt is unique, and you should make a careful assessment of your own situation. Here are links to IBR and ICR calculators to get you started.

Finally, keep in mind that the lower monthly payments under both IBR and ICR normally means your payments will be made for a longer period of time and you will pay more in total interest than you would under a 10-year Standard Repayment Plan. Make sure you take the time not only to compare IBR and ICR, but also to carefully evaluate whether either is right for you.

Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.