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

Ashley KilroyUpdated August 2, 2023

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Students struggling to repay their federal student loans can apply for income-driven repayment plans like Pay as You Earn (PAYE) and Income-Based Repayment (IBR). The PAYE plan typically limits your monthly payment to 10% of your discretionary income. The IBR plan, on the other hand, may limit your monthly payment to 10% and 15% of your discretionary income, depending on when you borrowed your loans.Student borrowers will not be eligible to access PAYE after July 1, 2024. Any borrower on PAYE as of July 1, 2024, will maintain access to their PAYE Plan so long as they do not switch to another plan, according to the U.S. Department of Education. Both the PAYE and IBR plans can help you reasonably afford to make your student loan payment, but choosing between them can be confusing. When deciding between PAYE vs. IBR, here’s what you need to know to make the best choice for your wallet and your future.

What Is PAYE and How Does It Work?

The Pay as You Earn (PAYE) plan is an income-driven student loan repayment program. It is designed to make paying off a student loan more affordable and manageable for borrowers who are struggling to pay back their federal loans. With the PAYE, payments are usually equal to 10% of the borrower’s monthly discretionary income. Since PAYE payments never exceed the amount they would be on a standard 10-year repayment plan, the program allows borrowers to lower their payment amounts. Plus, after making payments for 20 years, the borrower’s remaining loan balance will be forgiven. According to the Department of Education, discretionary income represents the difference between your annual income and 150% of the poverty guideline for the state you live in and your household size. However, you must meet specific requirements to qualify for PAYE, including:

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.

Note that while PAYE will cover most federal student loans, it does not include private student loans or loans made to parents. This includes Parent PLUS loans as well as PLUS loans from the Federal Family Education Loan (FFEL) program. However, there is the option to consolidate certain loans into a Direct consolidation loan, and then proceed with PAYE.Remember, each year, you must reapply for PAYE to verify that your income and household size are still accurate. Changes to either can impact your monthly payment. So, you might not end up paying the same amount indefinitely.

Pros and Cons of PAYE

When making a decision between PAYE vs. IBR, it helps to know the advantages and disadvantages of each plan. Here’s a look at the pros and cons of Pay as You Earn:

Pros	Cons
Lower monthly payments	Only available for new borrowers who applied for their loan on or after Oct 1, 2007
Loan forgiveness after 20 years of consecutive payments	Must reapply every year
Spouse's income is excluded when filing taxes separately	Could end up costing more than what you would pay with the standard 10-year repayment plan
Unpaid interest is capped at 10% of your original balance if you no longer qualify for PAYE	The government treats any forgiven balance as taxable income

Pros of PAYE

Qualifying for PAYE comes with an assortment of benefits, including:

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.
Loan forgiveness after 20 years. Once you’ve made payments on your loan for 20 years, your remaining balance will be forgiven.
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.
Assistance with interest. If you no longer qualify for the plan, the amount of unpaid interest that can be re-added is capped at 10% of your original balance. However, this benefit won’t apply if you leave the plan.

Cons of PAYE

While there are plenty of advantages of PAYE, there are also some drawbacks worth considering. These include:

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 reapply every year.It’s up to you to reapply for PAYE every year to verify that your financial situation has not changed. If you drop the ball and don’t reapply, 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 treats the forgiven balance as taxable income. Therefore, once you reach the 20-year mark and your remaining balance is forgiven, you must 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.

What Is IBR and How Does It Work?

Income-Based Repayment (IBR) is another federal student loan repayment plan that aids borrowers struggling to afford their monthly loan payments. Typically, IBR payments are equal to at least 10% of the borrower’s discretionary income if you borrowed a federal loan on or after July 1, 2014. For borrowers who took out federal loans before this date, payments are usually 15% of the borrower’s discretionary income. Either way, payments will be no more than what they would be with a standard 10-year repayment plan. Additionally, if you took out your loans on or after July 1, 2014, your loans could be forgiven within 20 years, whereas borrowers who took out loans before this date can get their loans forgiven within 25 years. Like PAYE, the Department of Education determines your discretionary income based on your income and poverty guidelines in your area. To qualify for IBR, you must meet the following requirements:

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.

With IBR, parent loans and private student loans do not qualify. That being said, certain loans that you would need to consolidate under PAYE in order to qualify do not need to be consolidated under IBR.

Pros and Cons of IBR

As with PAYE, there are both pros and cons to consider with IBR. Here’s a look at the advantages and drawbacks of IBR to take into account when weighing IBR vs. PAYE:

Pros	Cons
Capped monthly payment amounts	Must reapply every year
Loan forgiveness after 20 or 25 years of consecutive payments	Borrowers who took out federal loans before July 1, 2014, have longer terms and higher payments
Spouse's income is excluded when filing taxes separately	The government treats forgiven debt as taxable income

Pros of IBR

If you’re eligible for IBR there are a few advantages you should be aware of, including:

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. 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

Although choosing IBR has its advantages, it also has some drawbacks worth considering. These include:

Must reapply every year. Every year you must reapply for IBR. 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 treats forgiven debt as taxable income. This means you must 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

So, how exactly do PAYE vs. IBR stack up? Here’s an overview of the main points of comparison between the two income-driven repayment plans:

	PAYE	IBR
Monthly payment cap	10% of discretionary income (if borrowed for the first time on or after Oct 1, 2007)	10% of discretionary income (if borrowed on or after July 1, 2014) 15% of discretionary income (if borrowed before July 1, 2014)
Loan forgiveness	20 years	20 years (if borrowed on or after July 1, 2014) 25 years (if borrowed before July 1, 2014)
Requirements	Loan payments under PAYE must be less than payments under a standard 10-year repayment plan Must have borrowed federal student loans for the first time on or after Oct. 1, 2007 Must have a disbursement of a Direct loan on or after Oct. 1, 2011	Loan payments under IBR must be less than payments under a standard 10-year repayment plan
Capitalized interest	If you no longer qualify for PAYE, your capitalized interest is limited to 10% of your existing loan balance (this rule does not apply if you choose to leave the plan voluntarily)	If you no longer qualify for IBR, there is no limit to the amount of interest capitalized

Other Options to Reduce the Cost of Student Loans

Income-based repayment plans are not the only options to reduce the cost of your student loans. Here are some alternatives you might also explore.

Student Loan Refinancing

Student loan refinancing allows borrowers to consolidate private and federal loans into a new loan with new terms. When you qualify for refinancing, a private lender repays your student loan debt, leaving you with just one loan. Refinancing allows borrowers to potentially qualify for a lower interest rate, which could help them save money over the loan term. Additionally, borrowers could qualify for a longer repayment term, which can make student debt repayment more manageable.But, keep in mind, if you have federal loans, you must give up federal loan benefits like Public Service Loan Forgiveness. Before moving forward, it’s important to carefully weigh the pros and cons of refinancing a student loan.

Student Loan Forgiveness

Teachers, government employees, and non-profit workers may qualify for loan forgiveness if they have federal student loans. Under the Public Service Loan Forgiveness programs, government and non-profit employees may be eligible for forgiveness if they:

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

Teachers can qualify for up to $17,5000 on Direct Loan or FFEL Program loan forgiveness if they:

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

Some borrowers may qualify for grants to help repay student loans. For example, the Indian Health Service (IHS) loan repayment program awards up to $40,000 of student debt repayment for those who work at an IHS facility for at least two consecutive years.

The Takeaway

Comparing PAYE vs IBR, both plans help make your monthly loan payments more affordable. With PAYE, you only have to make payments that are 10% of your discretionary income (if you qualify), whereas you may have to pay up to 15% of your dictionary income with IBR. But remember that PAYE and IBR are not the only options for helping you repay your student debt.Some borrowers may find student loan refinancing beneficial to lower their monthly payments and shorten the loan term. Borrowers with a favorable credit score and financial standing may benefit the most from refinancing. Compare student loan refinancing rates to find a suitable loan for your needs.

Frequently Asked Questions

How are PAYE and IBR different?

What makes PAYE and REPAYE different?

Is REPAYE or IBR better?

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About the Author

Ashley Kilroy

Ashley Kilroy is a personal finance expert with years of experience in radio, newspapers, magazines, and online content. Her work has appeared on websites including Forbes and Yahoo Finance. Ashley writes on a variety of personal finance topics for SoFi, including student loans, taxes, and insurance.

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