Five Ways IBR Beats ICR
What’s the difference between IBR and ICR? What it comes down to is that IBR is way better than ICR. Here’s why I think so.
IBR and ICR are different in important ways
- Monthly payments are typically higher under ICR than under IBR, sometimes a whole lot higher. And ICR payments can be potentially even higher than under a 10-year repayment plan. Ouch! Score one for IBR.
- IBR payments are not based on how much you owe, just on your income and family size. But under ICR, how much you owe does affect how much you pay. IBR takes that point.
- IBR is available for both FFEL and Federal Direct loans, but ICR is only available for Federal Direct Loans. IBR scores again.
- Under IBR, the government pays the remaining unpaid accrued interest on your subsidized loans for up to three consecutive years from the date you begin repayingthe loans under IBR. But under ICR, if you pay less than the interest that is accruing, you end up paying that interest back later. Score another one for IBR.
- Under IBR, your unpaid interest does not get capitalized (or added to the principle of your loan) until you no longer have a “partial financial hardship”, or if you choose to leave IBR. But under ICR, unpaid interest is capitalized annually. That means you end up paying interest on interest. Expensive! Again, IBR takes the point.
- To qualify to choose IBR, you have to demonstrate a particular debt to income ratio, called a “partial financial hardship”. You don’t have to do that for ICR. OK, ICR avoids the shut out, but that point doesn’t much matter, because qualifying to choose IBR isn’t tricky for borrowers with either high debt or low income.
IBR and ICR are similar in many ways
- Both look to a borrower’s income and family size to determine the monthly payment amount.
- Under both IBR and ICR, you can pay even less than the interest that is accruing each month.
- Both include a forgiveness provision after 25 years.
Final score? IBR 5, ICR 1.
UPDATE: Thanks to an astute reader for pointing out that under ICR, capitalized interest is capped at 10% SCORE!