What’s the income-contingent repayment plan for federal student loans?
The income-contingent repayment plan is a federal student loan repayment plan that provides the option to repay your student loans based on your income. It’s one of several income-driven repayment plans offered by the federal government, and it’s the only income-driven repayment plan option available to parent PLUS loan borrowers. However, parent PLUS loan borrowers need to consolidate their Direct PLUS Loan into a Direct Consolidation Loan first.
For a student or parent in a lower income bracket, the income-contingent repayment plan may make it easier to repay student loans.
If you’re considering the income-contingent repayment plan, there are some things to consider before you apply for it.
What’s the income-contingent repayment plan?
As outlined on StudentAid.gov, the income-contingent repayment plan offers the ability to qualify for monthly federal student loan payments that are the lesser of these two scenarios:
- An adjustment based on your income to what you’d pay on a repayment plan with a fixed monthly payment over 12 years or
- 20% of your monthly discretionary income.
Discretionary income is the amount you have left over after you pay for necessities like mortgage, rent, and food.
This repayment plan is designed to give students and parents in lower income brackets the opportunity to stay on top of their student loans and possibly qualify for student loan forgiveness later.
What student loans are eligible for the income-contingent repayment plan?
The income-contingent repayment plan is only available to Federal Direct Loan borrowers. Federal Direct Loans also include other loan types that have been consolidated.
Students and parents must also meet certain income requirements or work in a qualifying industry to qualify for the income-contingent repayment plan. To determine if you’re eligible, contact your loan servicer and ask about the options that may be available to you.
Can you get your student loans discharged with an income-contingent repayment plan?
The maximum payment term for an income-contingent repayment plan is 25 years. After 25 years of making continuous payments, any remaining debt is discharged or forgiven. The forgiven debt is generally treated as taxable income, so you may have to pay taxes on it when the time comes. You should speak with a tax advisor for more information regarding the tax consequences of having your debt forgiven.
The pros and cons of the income-contingent repayment plan
There are several possible pros and cons when considering the income-contingent repayment plan.
The pros
- This is the only income-driven repayment plan available to parent PLUS loan borrowers (they’ll have to consolidate first)
- Can make student loan payments more affordable by capping payments based on discretionary income
- Student loans in this plan may be forgiven for borrowers who’ve made continuous, on-time payments but still have a loan balance after 25 years
- It may help student loan borrowers pay less interest than with other income-driven repayment plans
The cons
- Monthly payments may be larger than other income-driven repayment plan options
- It may take longer to be eligible for student loan forgiveness in comparison to other income-driven repayment plans
How do you opt-in to the income-contingent repayment plan?
To repay your loans under the income-contingent repayment plan, you’ll need to contact your student loan servicer and request information about how to proceed. The process is different depending on who services your loan.
If you think you’re eligible, you can request an application form in which you’ll likely be asked to submit proof of income and discretionary spending.
Final thoughts
The income-contingent repayment plan can help some students and parents navigate challenging financial waters in entry-level or low-income jobs. If an income-contingent repayment plan could benefit you, contact your loan servicer and ask if you qualify.
It’s important to note that the income-contingent repayment plan isn’t the only repayment plan offered by the federal government, and other options may provide lower monthly payment options.
