Advantages and disadvantages of an income-contingent repayment plan

If you’ve never heard of income-contingent repayment, you’re not alone. This little-known option for student loans can offer relief if you’re struggling to meet your loan repayments.

Income Contingent Repayment (ISR) applies only to loans made under the Federal Family Education Loans (FFEL) program. Although it offers great benefits, this plan also has some limitations.

In order to see how you can lower your monthly student loan bills and whether the income-contingent repayment plan is the right solution, let’s try to answer the following questions:

What is income contingent reimbursement?

If your monthly student loan bills are overwhelming, you can reduce them with the income-contingent repayment plan made available by the Office of Federal Student Aid. It caps your monthly loan payments at 4% and 25% of your gross monthly income, depending on your lender’s unique formula.

What’s unique about the income-contingent repayment plan is that it’s tailored to your income and ability to pay, as long as you pay more than or equal to the interest accrued each month. You will need to reapply for the income-contingent repayment plan each year, recertifying your gross monthly income.

That being said, you usually only have this option for five years. After five years, your lender may ask you to revert to a standard repayment plan or switch to a graduated repayment plan to pay off your debt within the usual ten-year time frame. Other lenders and loan servicers, such as FedLoan Servicing, allow you to pay off your debt in 15 years.

If you are unable to increase your payments after you have exhausted income-contingent repayment eligibility, you can switch to another type of income-contingent repayment (IDR) plan. Income-driven plans such as income-based repayment and income-contingent repayment extend your repayment to 20 or 25 years, resulting in smaller monthly payments.

Because it typically only lasts five years, the income-contingent repayment plan is usually best for borrowers who need short-term relief. With it, you’ll pay less now, but shell out more in the future to pay off your debt on time.

What loans are eligible for income-contingent repayment?

One of the reasons the income-contingent repayment is overshadowed by other income-based plans is its limited scope: it only applies to loans made under the FFEL program. These federal loans were disbursed by private lenders and guaranteed by the government. Some lenders who disbursed FFEL loans included Sallie Mae, Citi and Wells Fargo.

Since this loan program was discontinued in July 2010, newer borrowers are not eligible for income-contingent repayment. If your loans were issued in 2010 or earlier, you may qualify.

FFEL program loans include the following:

  • Federal Subsidized Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS loans
  • FFEL consolidation loans

If you are unsure if you have FFEL loans, contact your loan manager to find out.

What are the pros and cons of income-contingent repayment plans?

Benefits of SRI Disadvantages of SRI
● Allows FFEL borrowers to reduce their monthly payments without consolidation
● Does not extend repayment to 20-25 years like other IDR plans
● Does not provide long term relief
● Allows interest to accrue faster than on a standard repayment plan
● No discount given on remaining balance like other IDR plans
At the end of the line : FFEL borrowers who expect their income to increase in the future will benefit At the end of the line : FFEL borrowers looking for extended relief may be better off consolidating and applying for another income-driven repayment plan

Benefits

One of the main advantages of income-contingent repayment is that it applies specifically to FFEL loans. Most other income-oriented plans exclude FFEL loans unless you consolidate them first.

Income-contingent repayment may also be attractive to borrowers who want short-term relief while maintaining a 10-year time frame to repay their loans. Other income-oriented plans extend your loan term to 20 or 25 years; although this gives you smaller monthly payments, you will face payments for many years and pay more interest over time.

Remember that you’ll need to start repaying your loans more aggressively after five years with income-contingent repayment (unless you opt into an IDR plan at this point). However, this plan could help borrowers who need relief now but expect their income to rise in the future.

The inconvenients

Income-contingent repayment may not be as helpful for borrowers who need long-term relief. If you need a longer repayment term, research income-oriented plans and figure out how to qualify. If you have FFEL loans, you will likely need to undertake direct loan consolidation before you are eligible for IDR.

The income-contingent repayment plan also does not offer loan forgiveness. Other income-oriented plans may cancel your remaining balance after 20 or 25 years of repayment.

Another downside of income-contingent repayment is that it can lead to interest accruing. If you lower your payments, you could end up paying more interest on your FFEL loans overall.

Finally, the full details of the income-contingent repayment plan may vary somewhat from lender to lender. You will need to work with your loan manager to find out the exact terms of your plan.

What other repayment options should you consider?

As mentioned earlier, other income-based plans are more common than income-contingent reimbursement. There are four income-based plans you may qualify for:

To qualify for most of these plans, you will need to consolidate your FFEL loans by taking out a direct consolidation loan.

These plans reduce your monthly student loan payment — calculate the amount using loan repayment calculators — but they also add years to your repayment. In these schemes, you could be in debt for 20 to 25 years.

Should you sign up for an income-contingent repayment plan?

If FFEL loan payments are weighing you down, an income-contingent repayment plan might help. But make sure you understand that this is a temporary fix.

Your lender or loan officer might only allow you to lower your monthly payments for five years. If you still need help after this time, you will need to consolidate your FFEL loans and switch to another income-oriented plan.

Assess your situation to determine the best repayment option for you. If you need long-term relief, you might be better off choosing another income-oriented plan.

But if you can stick to a 10-year repayment plan, consider the income-contingent option. Immediate relief from your student loan payments could be just what you need to get your finances under control and get back on track.

Andre Pentis contributed to this report.

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