Yesterday, a viewer emailed me this question:
If placed on the icr plan, do you want to repay your Direct Loans jointly with your spouse?
Short answer: Hell no. That’s the last thing you want to do.
Let me explain.
Choose the REPAYE, PAYE, or IBR plans before ICR
The only one time you want to repay Direct Loans jointly with your spouse is when:
- Both you and your spouse’s federal student loans are all Direct Loans; and
- You’ve chosen to repay your loans under either the Revised Pay As You Earn plan (REPAYE) or the Pay As You Earn plan (PAYE).
The Income Contingent Repayment Plan is the last repayment plan you want to choose to repay your loans under.
As a reminder, there are 5 income driven repayment plans (that is, payment plans based on your income):
- The Revised Pay As You Earn Plan;
- The Pay As You Earn Plan;
- The Income Based Repayment plan for new borrowers;
- The Income Based Repayment plan; and
- The Income Contingent Repayment plan.
The first three plans typically give married couples the lowest monthly payment no matter if they filed taxes jointly or separately.
The fourth plan, the IBR plan, costs a little bit more each month then the first three. But it typically works out well for couples who filed their last tax return separately.
The fifth plan, the ICR plan, typically gives you a monthly payment that’s twice as much as what your payment would be under the REPAYE, PAYE, or IBR plans. And that’s true no matter how you filed your last tax return.
Why is that?
The ICR plan has its own definition of discretionary income
Your monthly payment under any of the 5 income driven repayment plans is based on your:
- Family size;
- State of residence; and
- Discretionary income
All the plans count your family size and state of residence in the same way. But when it comes to discretionary income, the ICR plan has its own definition.
The REPAYE, PAYE, and both IBR plans define your discretionary income as 150% of the poverty guideline for your family size and state of residence.
The ICR plan, on the other hand, defines your discretionary income as 100% of the poverty guideline for your family size and state of residence.
That 50% difference means the ICR plan assumes you have more money to dedicate towards repaying your student loans.
So, if you want a lower monthly payment, avoid the ICR plan.
Another reason why your payment is higher under the ICR plan is that:
The ICR plan may cost you 4 times as much
Not only does the ICR plan protect less of your income from student loan payment, but it also takes twice as much of that income.
Here’s what I mean.
The ICR plan calculates your monthly payment by taking 20% of your discretionary income. Meanwhile, the REPAYE and PAYE ask for only 10% of your discretionary income.
Let’s give an example. Let’s say:
- you’re married;
- filed your last tax return jointly;
- your combined AGI was $50 thousand;
- you live in Missouri;
- you have a family size of 4 (you, your spouse, and 2 children); and
- all of you and your spouse’s federal student loans are Direct Loans.
Under the REPAYE plan, your discretionary income would be $12,350. And your monthly payment would be $103.
Things change dramatically under the ICR plan. Given those same numbers, the ICR plan will calculate your discretionary income as being $24,900 and your monthly payment as being $415.
$415 vs $103.
The math is simple: never choose the ICR plan.
- Why does my spouse have to sign my IDR form
- How AGI affects student loans: [Tip: lower AGI, lower payments]
Okay, truthfully, there is one exception to that rule:
If you have Parent Plus loans, choose the ICR plan…but only for those loans
Parent Plus loans are ineligible for the REPAYE, PAYE, and IBR plans.
The only income driven repayment plan they qualify for is the ICR plan. And even then, you need to consolidate your Parent Plus loans before you can choose the ICR plan.
This is a stupid rule. There’s fundamentally no difference between a Parent Plus loan and a Direct Loan or a Federal Family Education Loan. But, alas, that’s the rule.
Between you and me, there may be one way to avoid this insane ICR/Parent Plus loan rule. There have been people who consolidated their Parent Plus Loans into a new Direct Consolidation Parent Plus loan and then later consolidated that loan with their other non-Parent Plus loans. The result is a new Direct Consolidation Loan that is eligible for the REPAYE, PAYE, and IBR plans. This is risky. So I don’t advise it. But it’s been done.
The ICR plan is the worst repayment plan to choose from. So don’t get placed on it.
The only time you should pay your loans under the ICR plan is if you have Parent Plus Loans.
Other than that, the REPAYE, PAYE, and IBR plans are better for you.
It’s understandable if you’re stressing about all these plans. You want to do the right thing for you and your family. If you want help with your loans, go ahead and email me or: