IBR vs. ICR: Which Income-Driven Repayment Plan Is Right for You?
An income-driven repayment plan can lower your monthly payment and extend your repayment term. Two popular options include Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR).
However, picking the right income-driven repayment plan can take time and effort. Here’s what you need to know about IBR vs. ICR and how to find the ideal plan for your unique situation.
IBR vs. ICR: How do they differ?
| Income-Based Repayment plan | Income-Contingent Repayment plan | |
|---|---|---|
| Income requirements |
|
|
| Repayment terms |
|
|
| Eligible loans |
|
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| Interest subsidy | The government provides an interest subsidy for subsidized loans | No interest subsidy — unpaid interest will accrue and capitalize |
| Financial need | Based on financial need | Not based on financial need |
| Annual renewal | Must recertify income and family size every year | Must recertify income and family size every year |
*Monthly repayment amount can never be more than what you would pay with the 10-year standard repayment plan
Income-based Repayment (IBR) and Income-Contingent Repayment (ICR) are two income-driven repayment plans available for federal student loans. Both adjust your monthly payments based on your income and family size.
IBR and ICR typically lower your monthly payments while extending your loan repayment from 10 years to 20 or 25 years. If you have a balance after that time, it may be eligible to be forgiven. However, you might have to pay income tax on the forgiven balance.
Both of these plans can help if you need relief from student loan payments, but they have some key differences in how they work and which types of loans qualify.
What is an income-driven repayment plan?
An income-driven repayment (IDR) plan helps borrowers manage their student loan debt by adjusting their monthly bill based on income and family size. Currently, the Department of Education offers four IDR plans:
- Revised Pay As You Earn (REPAYE)
- Pay As You Earn (PAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
To remain on an IDR plan, you’ll have to recertify your income and family size yearly. You can also change plans as needed.
Note: The Department of Education is working on a new IDR plan, which is expected to replace the current REPAYE plan by the end of 2023.
What’s unique about Income-Based Repayment?
IBR could be a better option for a lot of borrowers for four reasons:
1. Lower monthly payments
An IBR plan typically lowers your monthly payment more than an ICR plan. Your IBR payment cap depends on when you took out your loans:
- On or after July 1, 2014: 10% of your discretionary income
- Before July 1, 2014: 15% of your discretionary income
In comparison, an ICR plan caps payments at 20% of your discretionary income, regardless of the loan’s issue date.
What is discretionary income?Your discretionary income is calculated by taking the difference between your adjusted gross income and 150% of the federal poverty guideline for your family size and state.
2. Covers direct and FFEL loans
The second reason many borrowers prefer IBR is that it covers most federal student loans, including direct and Federal Family Education Loans (FFEL). Other income-driven plans, like ICR, require you to consolidate FFELs, a step you won’t have to take to qualify for IBR.
While parent PLUS loans are ineligible for IBR, consolidating them makes them eligible for ICR.
3. Provides 3 years of interest benefits on subsidized loans
Depending on your loan type, IBR has a significant advantage over ICR when it comes to student loan interest.
When IBR reduces your monthly payments, you might not pay enough to cover monthly accrued interest. Fortunately, the government will cover the difference between your payment and the remaining interest for up to three consecutive years — but only for subsidized loans.
You will still have to pay the accruing interest for unsubsidized loans on the IBR plan. Meanwhile, ICR provides no interest subsidy benefits, regardless of loan type.
4. Payments will never exceed those with the 10-year standard repayment plan
To qualify for IBR, you must prove that your income is low relative to your debt. If your income goes up, your payments could increase, too. Still, they’ll never exceed the amount you’d pay on the standard 10-year repayment plan.
Who should choose an IBR plan?
Because you pay a smaller percentage of your income with Income-Based Repayment than with Income-Contingent Repayment, IBR may be the superior choice for many student loan borrowers with financial needs or concerns.
You should consider IBR if:
- You have direct federal loans.
- You have FFEL loans.
- You don’t have any parent PLUS loans.
- You can demonstrate financial hardship.
Note that IBR forgives loans after 20 years for loans received on or after July 1, 2014. However, you must wait 25 years for loans issued before this date.
What’s unique about Income-Contingent Repayment?
Income-Contingent Repayment has a few essential differences from Income-Based Repayment.
1. No financial hardship requirement
You don’t need to demonstrate financial need to get on ICR. There’s no income requirement to get on the plan, but you’ll need to verify your income and family size annually to remain on it.
2. Two potential rules for monthly payments
Under an ICR plan, your monthly payment will be based on the lesser of the two options:
- 20% of your discretionary income
- What you’d pay on a 12-year repayment plan, adjusted according to your income
While a 12-year plan might offer some financial relief, your monthly payment probably won’t differ significantly from what you’d pay on the standard 10-year plan. Ultimately, you may find that a two-year extension doesn’t offer enough relief, especially if you’re juggling substantial student loan debt.
3. Your payments could exceed those with the standard repayment plan
If your income increases over time, your monthly payments could go higher than what you’d pay with the standard 10-year plan. Unlike IBR, the ICR plan doesn’t stop your monthly payments from increasing indefinitely along with your income.
4. Covers PLUS loans
IBR and ICR also differ when it comes to federal PLUS loans. ICR covers parent PLUS loans as long as they’re consolidated through a direct consolidation loan first.
IBR, however, does not cover any federal parent loans.
Who should choose an ICR plan?
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.
In addition, ICR is beneficial for borrowers with PLUS loans. As mentioned earlier, IBR does not cover this type of parental loan.
You should consider ICR if:
- You have PLUS loans.
- You can’t demonstrate financial hardship.
- You don’t mind payments increasing with income, even beyond what they might on the standard 10-year plan.
How to apply for IBR or ICR
To get started, complete an online income-driven repayment plan request. You can choose the plan you’d like to apply for (such as IBR or ICR) and provide proof of income using your last tax return.
Contact your student loan servicer directly if you have questions or need help applying for a repayment plan. Keep in mind that you’ll need to recertify your income and family size annually (or whenever your situation changes) to remain on an income-driven repayment plan.
Another option: Student loan refinancing
Although income-driven repayment plans can help you manage your student loans, they have some drawbacks. For one, they extend your repayment term by more than a decade, from 10 years to at least 20 years, which means more interest in the long run.
Another drawback to income-driven repayment plans is that they only apply to federal student loans. Since the federal student loan limit for undergraduates is $31,000, many borrowers need to turn to private student loans to help cover their total cost of attendance.
A student loan refinance allows you to replace your current private and federal student loans with a new loan, hopefully with a lower interest rate. However, it’s best to avoid refinancing federal student loans, since you’ll lose their government protections and benefits — including access to income-driven repayment plans and student loan forgiveness programs.
If you decide to refinance your private student loans, you’ll need a steady income and a good credit score to secure the lowest interest rates. Use LendingTree’s list of best student loan refinance lenders and our student loan refinance calculator to estimate your potential savings.