Pay As You Earn (PAYE) vs. Income-Based Repayment (IBR) Plans

What Is PAYE and How Does It Work?

• You borrowed your first federal loan on or after Oct 1, 2007.
• You received a distribution of a Direct Loan on or after Oct 1, 2011.
• Your payments under PAYE would be less than what you would pay with a standard 10-year repayment plan.
• Your federal loans are not in default, meaning you have stopped making payments altogether.

Pros and Cons of PAYE

Pros of PAYE

• Lower monthly payments. PAYE caps monthly payments at 10% of your discretionary income. Your monthly payments will never exceed the amount you would have otherwise paid with a standard 10-year repayment plan.
• Spousal income is excluded from the income calculation. If you’re married and choose to file your taxes separately, your spouse’s income isn’t accounted for when determining your loan payment. This way, if your spouse makes more than you, it won’t hurt your chances of qualifying for PAYE. Still, it can be smart to speak with a tax professional to ensure filing separately is the way to go.
• Payments can count toward loan forgiveness if you switch to the IBR plan: Due to legal challenges, ED is no longer processing loan forgiveness at the end of the PAYE plan. However, your payments on PAYE can count toward forgiveness if you change to IBR. 

Cons of PAYE

• Only available for new borrowers who qualify. For eligibility, you must be a new borrower who applied for federal loans on or after Oct 1, 2007.
• Must recertify every year. It’s up to you to recertify your PAYE plan or allow ED to do it automatically every year to verify that your financial situation has not changed. If you drop the ball and don’t recertify, your unpaid interest will return to your remaining loan balance. Additionally, your monthly payment will increase until it matches what it would have been on a standard 10-year repayment plan.   
• Potential to cost you more than expected. Over 20 years, a lot of things can change. You can start a family, switch jobs, or get a divorce, which can impact your eligibility. So, be mindful that if you no longer qualify for PAYE, you must repay your unpaid interest.
• The government may treat the forgiven balance as taxable income starting in 2026. Therefore, once you reach the 20-year mark and your remaining balance is forgiven, you may have to pay income taxes on the forgiven amount. As a result, your tax bill could cost you several thousand or more, depending on the amount of any remaining balance.
• PAYE will be phased out by July 1, 2028. Under the recently enacted “Big, Beautiful Bill,” PAYE, along with ICR and SAVE, will be eliminated by July 1, 2028. Borrowers on these plans must switch to either the revised Income-Based Repayment (IBR) or the new Repayment Assistance Plan (RAP).

What Is IBR and How Does It Work?

• Your payments under IBR would be less than what you would pay with a standard 10-year repayment plan (usually applicable if your federal student loan debt is higher than your annual discretionary income or a significant portion of it).
• Federal loans cannot be in default, meaning you stopped making payments.

Pros and Cons of IBR

Pros of IBR

• Capped monthly payment amounts. New borrowers' payments will never exceed 10% of their discretionary income as long as the borrowed loans are on or after July 1, 2014. At the same time, borrowers who applied for federal loans before July 1, 2014 will only have to make 15% of their discretionary income payments. In both cases, payment amounts are usually less than if you were making payments on a standard 10-year repayment plan. 
• Loan forgiveness after 20 or 25 years of consecutive payments. If you're considered a new borrower (took loans on or after July 1, 2014), your remaining loan balance can be forgiven within 20 years when ED resumes processing IDR forgiveness. For those who took out their loans prior to that date, their loans will be forgiven after 25 years.
• Spousal income is excluded when filing taxes separately. Like PAYE, you don't have to include your spouse's income if you file your taxes separately. This way, you won't be penalized if your spouse makes more than you do.

Cons of IBR

• Must recertify every year. Every year you must recertify your IBR or let ED access your tax information and do it for you. If you forget to recertify your income and family size, your payments will resort to the standard 10-year repayment plan amount. Any unpaid interest is then added to your remaining balance, increasing your total debt.
• Borrowers that took out federal loans before July 1, 2014 have longer terms and higher payments. If you borrowed federal loans before July 1, 2014, your loan term is 25 years, plus you must make payments that are 15% of your discretionary income. Folks that took out loans after this date have 20-year terms and must make payments that are 10% of their discretionary income. 
• The government may treat forgiven debt as taxable income starting in 2026. This means you may have to pay taxes on the forgiven balance if your loan term has expired and your debt is forgiven. Unfortunately, depending on the amount forgiven, this could be a large chunk of change.

PAYE vs IBR Compared

Other Options to Reduce the Cost of Student Loans

Student Loan Refinancing

Student Loan Forgiveness

• Have made 120 qualifying loan payments
• Are working full-time
• Work for a qualifying employer 

• Teach full-time for five complete and consecutive years 
• Work at a qualifying low-income school or educational service agency 

Student Loan Grants for Repayment

The Takeaway