If you cannot afford the more standardized repayment plans but are not eligible for the income-based plan or pay as you earn plan, you might consider the income-contingent plan for repaying your student loans. This program is available for several types of federal student loans, including:
- Subsidized and Unsubsidized Direct Loans
- Direct PLUS Loans for graduate or professional students
- Direct Consolidation Loans (except Direct PLUS Consolidation Loans)
Your monthly payments are calculated using the following criteria:
- The amount you owe on your loans
- Your adjusted gross income
- The size of your family
- Your federal income tax filing status
- Your legal residence
The repayment period for the income-contingent plan can last up to 25 years, although you must have borrowed more than $30,000 in qualifying loans to be eligible for extended repayment. If you have not paid off your loan at the end of 25 years, the remainder of your loans could be discharged, but you might have to pay taxes on the amount that was forgiven.
Although this repayment plan might look similar to other programs offered by the government, the main difference that sets the income-contingent plan apart is how interest is capitalized, or added to the principal balance of your loan. Interest is capitalized once per year, as long as your monthly payments are smaller than the amount of interest that accrues on your loan. After your balance is 10% more than the amount you originally borrowed, interest no longer capitalizes. It will still accrue after this requirement is met. Also, interest that collects when you defer payments or enter forbearance is not eligible for the 10% capitalization rule.
In addition to your application for income-contingent repayment, you must submit a copy of your most recently filed federal tax return. If you have not filed income taxes in the last two years or your current income is significantly different from the last tax return that you filed, you may provide other documents that reflect your actual financial situation. Before you apply for this plan, you should talk to your loan servicer. If you are not sure who services your loan, you can find this and other information regarding your federal loans using the National Student Loan Data System. This calculator can help you determine if you might be eligible for this repayment plan. To find out for certain, you can submit your application using the Federal Student Aid website.
If you have problems paying back your federal student loans, remember that you can change your repayment plan once per year. Stopping payment or defaulting on your loans can have serious financial repercussions. If you are unable to make payments, contact your lender to see what options are available to you.