The Direct Loan Income Contingent Repayment Plan Explained

When student loans are consolidated with the Direct Loan program, the income contingent repayment plan is a popular plan for many reasons. Student loan debt is a large part of many people’s lives, and getting it under control is absolutely necessary to keep credit in good standing and avoid issues with the federal government. Though the income contingent repayment plan is just one of many options, it is among the most popular for many reasons. 

Available for Most Loans

Regardless of what kind of student loans there are, as long as the loans are not PLUS loans, they qualify for this repayment plan. This means the plan is flexible and applies to the majority of loan situations. 

Annual Monthly Payment Amount Calculation

With the income contingent plan, access must be granted to the borrower (and spouse if married) tax information. Each year after income taxes are filed, the Direct Loan program will take a look at the adjusted gross income for the borrower and calculate a loan payment based on this amount combined with the family size, and the total amount of the loans.

Under this plan, the borrower pays the lesser of: the amount repaid if you paid repaid the loan in 12 years multiplied by an income differential, or 20% of your discretionary income. Discretionary income is considered as the AGI minus the poverty income for your family size and state, divided by 12.

Maximum Loan Term is 25 Years

The maximum loan term is 25 years, not counting any time spent in forbearance or deferment. If the loans are not paid in full by the time the 25 years is up, the remaining amount due is forgiven, so the borrower does not have to pay it. An income tax may be charged on the amount forgiven, so this is an important thing to consider. 

Deferment and Forbearance Allowed

As with other loan programs, it is possible to postpone payments through deferment or forbearance. This will give borrowers a break from their monthly payments when economic hardship or other factors make it difficult to make the payments on the loan. This will also keep the accounts in good standing, therefore protecting their credit ratings.

There is a maximum amount of 5 years allowable time in this standing before the loans must either be repaid or forgiven. The time spent in forbearance or deferment does not count toward the maximum loan term of 25 years.

Since the income contingent repayment plan is so flexible, this plan is what many borrowers choose. Though it makes loans take longer to pay back, it is the simpler option to choose if income is not consistent or where it needs to be in order to pay off the loans under a standard or graduated repayment plan. 

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