Income-Based Refund Guide – Forbes Advisor

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If you have a federal student loan, you may qualify for a lower monthly payment by applying for an Income-Based Repayment Plan (IDR). Income-Based Repayment (ICR) is the oldest of the income-based repayment plans, and it can also be the most expensive. However, if you have a parent PLUS loan, income-based repayment is the only IDR plan available to you.

With the introduction of new income-based repayment plans, ICR has lost its popularity. In 2020, 730,000 borrowers are registered with the ICR, repaying billions of student loans. While those numbers may seem high, consider that over 3.1 million borrowers are signed up for Revised Pay As You Earn (REPAYE), a different repayment plan, with a repayment of $ 182.9 billion.

However, ICR can still be useful for some borrowers. Here’s what you need to know about ICR and your other payment options.

What is income-tested reimbursement?

ICR was introduced as part of the Student loan Reform Act of 1993. It offered borrowers an alternative to the standard repayment plan, where borrowers repaid their loans over 10 years with fixed monthly payments. Instead, the ICR bases borrowers’ monthly payments on their income and family size.

ICR vs. Other income-based repayment plans

Direct loan borrowers are eligible for income-based repayment plans. Depending on your income and the size of your family, you might see a significant reduction in your monthly payment by signing up for an IDR plan. Some borrowers qualify for payments as low as $ 0, but are still up to date on their loans and, if they continue Public Service Loan Discount (PSLF), on the way to forgiveness.

The ICR is just one of four income-driven repayment plans. The other three plans are:

How IC Works

Under the ICR, your payment is the lesser of:

  • 20% of your discretionary income
  • The amount you would pay under a standard repayment plan with a 12-year repayment period, adjusted using a formula based on your income

For the ICR, how the government determines your discretionary income is different from how it determines it for other income-based repayment plans. Your discretionary income under the ICR is the difference between your adjusted gross income and 100% of the poverty guideline for your condition and the size of your family. For other repayment plans, discretionary income is the difference between your adjusted gross income and 150% of the federal poverty guideline.

For example, if you earn $ 30,000 a year, are single, and live in Pennsylvania, 100% of the poverty line is $ 12,760. You subtract $ 12,760 from $ 30,000 to get your discretionary income: $ 17,240. With ICR, your monthly payments are 20% of your discretionary income, divided by 12 months. In this scenario, you would pay $ 287 per month.

The poverty line increases as the number of people living in your household increases. Using the same example above, if you have three people in your household, the poverty line would increase to $ 21,720. In this case, you would pay $ 138 per month.

The ICR repayment term is 25 years for undergraduate and graduate loans.

ICR and loan forgiveness

Like all income-based repayment plans, ICR registrants can qualify for a loan forgiveness. If you haven’t fully paid off your loans by the end of your 25-year repayment period, your loan manager will automatically return the remaining balance to you. However, the remitted amount may be taxable as income.

Loans eligible for income-based repayment

Not all federal student loans qualify for ICR. Only the following loans are eligible:

Parent PLUS Loans are not eligible for ICR. However, there is a workaround. If you have a parent PLUS loan, you can consolidate it with a direct consolidation loan. Once you consolidate your loans, then you are eligible for ICR.

Benefits of income-tested reimbursement

  • Parents who are borrowers can register with the ICR. The ICR is the only income-based repayment plan available for parent borrowers. Parents can benefit from ICR if they consolidate parent PLUS loans into a direct consolidation loan.
  • The ICR is a qualifying repayment plan for the forgiveness of public service loans. If you work for a nonprofit or government agency, you can qualify for a loan discount through PSLF. Payments made under ICR count towards the 120 payments required for the PSLF.
  • The ICR does not have a marriage penalty. If you are married but file your taxes separately, your loan manager will only use your income to determine your monthly payment. On the other hand, on the REPAYE plan, in most cases, the income of both spouses will be used to calculate your monthly payment, even if you declare your taxes separately.

Disadvantages of Income-Based Reimbursement

  • It usually has higher payouts than other plans. Your payment will likely be higher under an ICR plan than under other income-based reimbursement plans. It uses 100% of the poverty line to calculate your discretionary income rather than 150% like other plans, so the government will determine that you have more discretionary income. It also charges a higher percentage of your discretionary income. While other plans only charge 10% of your discretionary income, ICR charges 20%.
  • Your payment may be higher than it would be under the standard repayment plan. IBR and PAYE cap the monthly payments; your payment will never exceed what it would be under the standard 10 year repayment plan. But ICR does not have this same cap. If your income increases, your monthly payment could be higher than it would have been if you had made payments under the standard plan.
  • You cannot claim a loan forgiveness until you have made 25 years of payments. With other income-driven repayment plans, you can get a loan forgiveness after just 20 years of payments (unless you choose to REPAY and have graduate loans, which extends your repayment term. At 25 years). With the ICR, you will not be entitled to a loan forgiveness until after 25 years.

How to apply for ICR

If you decide that the ICR is right for you, you can contact your loan officer to request an income-based repayment request. Or, you can apply for ICR online via the Federal Student Aid website.

To apply, you will need your Federal Student Aid (FSA) ID, contact information, and tax reporting information. If you are applying online, you can use the IRS Data Recovery Tool to transfer your tax information directly into the form.

After you submit your request, it may take a few weeks to process. In the meantime, your loan manager can put your loans into abstention, which means your payments will be temporarily postponed until the repayment plan switches to ICR.

How to recertify your income and family size

Each year the government requires you to recertify your income and family size to make sure you are paying the correct amount.

If you are on the ICR plan and miss the recertification deadline, you will remain on the payment plan. However, your monthly payment will change. Your loan manager will set your payment to what it would be under the standard repayment plan with a 10-year repayment term, based on your original loan amount.

If you missed the deadline and your payment is adjusted, you can correct it by contacting your loan manager with your updated income information.

Your loan manager will send you a reminder before the recertification deadline, and you can submit your ICR recertification online.

Alternatives to income-tested reimbursement

If you don’t qualify for ICR or another income-based repayment plan, there are options that can help if you can’t pay your payments. If you have federal student loans, there are three other repayment plans:

  1. Progressive reimbursement. If you have direct loans, Federal Family Education Loans (FFEL) PLUS, or FFEL Consolidation Loans, you can take advantage of a phased repayment. With this option, your payments start low and increase every two years. Your loans are repaid in 10 years.
  2. Extended refund. Borrowers of the direct loan, the FFEL PLUS loan and the FFEL loan are eligible for extended repayment. With an extended repayment, your repayment term is extended to 25 years and you can choose between fixed or progressive payments.
  3. Reimbursement based on income. Only available to FFEL loan borrowers, your monthly payment is based on your income, but you repay the loan within 15 years.

Before submitting a request for an ICR or any other repayment plan, use the Loan simulator to see which repayment plans you qualify for, what your monthly payments would be, and how much you would repay in total under each plan.

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