Income contingent repayment (ICR) plans are pitched as a fair and flexible student-aid program which would enable student loan borrowers to repay their loans even as their income permitted. Even professional analysts involved in designing and implementing ICR models acknowledge this critical point. This is because, although many aspects of the program are designed to be fair to borrowers, other elements serve to suppress borrower’s real spending power.
It would be inaccurate to claim that income contingent student loan repayment programs are designed to give students an unfair advantage over other students applying for the same funding. However, certain aspects of these programs may give students an unfair advantage over those not receiving such student loan support. There are two main factors which lead to this. One factor is the degree to which a lender limits the borrower’s ability to repay the borrowed funds; another factor is the extent to which lenders deny the borrower access to federal student aid because of his or her limited ability to repay the borrowed funds.
The limitation of the borrower’s ability to repay borrowings rests on two factors. The first is the lender’s assessment of the borrower’s monthly income. This amount is calculated by taking into account each month’s income type and each month’s repaying expenses. The resulting monthly payment is then divided between the two types of income: the monthly payment is then determined by dividing the total monthly payment of each income type by the number of income years in which the loans are borrowed. Note that the total payment is not just the monthly repayment; it also includes the interest charged on the borrowings.
The second factor affecting the determination of the borrower’s eligibility for income contingent repayment programs is the lender’s assessment of the borrower’s discretionary income. The lender may consider the borrower’s annual income, both expected and actual, as part of its review of the borrower’s discretionary income. The lender uses this percentage in computing for monthly payments and may also include it in the formula for determining the borrower’s eligibility for subsidized and unsubsidized loan repayment options. Eligibility for federal student loans is determined on the basis of the borrower’s actual and expected federal income as well as the total amount of borrowings.
To help borrowers understand how the graduated payment plan and the adjusted gross income percentage factor work, let’s discuss how the graduated payment plan makes up the income percentage factor. Under the graduated payment plan, payments are made gradually based on a borrower’s ability to make them. At each stage of the loan repayment period, a borrower has the option to switch to a more expensive monthly payment or postpone the payments until a later period. In most cases, the option to postpone the monthly payments is chosen so that payments will be spread out over a longer period.
The reason why the income percentage factor is used in calculating a borrower’s eligibility for subsidized and unsubsidized loan repayments is to help the government find the most affordable monthly payment that a borrower can make. The goal is to keep monthly payments low enough so that a borrower will be able to afford his or her college costs. The percentage used in the calculation is also known as the subsidized interest rate ratio. The greater the subsidized interest rate ratio, the more affordable it will be for a borrower to borrow.
Another factor that lenders use in their calculations is the parent plus loan factor, which considers the difference between a borrower’s eligible interest on an approved unsubsidized loan and the amount of money that a borrower is required to borrow from the federal government based on the borrower’s application for subsidized and unsubsidized student loans. For unsubsidized loans, a borrower must be in full financial need before his or her parent PLUS loans will be applied to. The parent PLUS loan amount is figured by subtracting the borrower’s eligible interest from the federal poverty level. If the monthly payments on the parent PLUS loan surpass the borrower’s financial need amount, the parent PLUS loan will be adjusted to cover the borrower’s increased need.
Lenders use these two terms interchangeably, especially when calculating a borrower’s eligibility for repayment plans. “Subsidy” is the federal government’s term for providing financial aid to students in need. “Reimbursement” is the process of paying loans back after graduation. Private student loans can be paid back in two ways: by making payments directly to the lender or through a repayment plan with the lender. Private school loans usually have a monthly payment that is made directly by the student, or through a repayment plan with the student, and may not include interest.