Under the right circumstances, IBR, PAYE, or REPAYE might be the best Income-Driven Repayment (IDR) Plan.
Deciding which IDR plan is the best option will depend upon many different factors. Marital status, loan age, tax strategy, and loan type all impact which choice will have the lowest payment.
Today I will cover some of the basic terms and fine print on IBR, PAYE, and REPAYE. Most importantly, I’ll identify the borrowers and circumstances ideally suited for each loan type.
IBR, PAYE, and REPAYE: The Basics
Revised Pay As You Earn (REPAYE) – REPAYE is the newest repayment plan, and for many, it will be the best choice. REPAYE caps monthly student loan payments at 10% of your discretionary income. All federal borrowers and most federal loans are eligible for this repayment plan. REPAYE also offers a generous interest subsidy for borrowers with large balances and small monthly payments.
Pay As You Earn (PAYE) – Congress created PAYE in late 2012 to help borrowers overwhelmed by their federal student loan payments. Like REPAYE, PAYE caps monthly student loan payments at 10% of discretionary income. Unlike REPAYE, only federal borrowers who took out their first student loan after October 1, 2007, are eligible.
Income-Based Repayment (IBR) – IBR requires monthly payments calculated at 10% or 15% of your monthly discretionary income, depending upon the age of your loans. All federal borrowers and most federal loans are eligible for this plan.
Income-Contingent Repayment (ICR): There is a fourth IDR option, called ICR. This is the oldest of the IDR plans and has the largest monthly payment. ICR is the only choice for Parent PLUS loan borrowers. Borrowers who don’t have Parent PLUS will have better options.
Picking the Best Income-Driven Repayment Plan
Choosing which income-driven plan is best for you will depend upon several different circumstances.
In many cases, the best repayment plan is the one with the lowest monthly payments. Even if you can afford higher payments, lower monthly bills allow you to direct any additional funds towards your highest interest debt. Being smart about lowering payments may enable borrowers to pay off debt faster.
However, there are a few situations where it might be wise to choose a plan with slightly higher monthly payments:
If your spouse does not have student loans – Spousal income can have a huge impact on your student loan payments. If your spouse does not have student loans, the plan you choose can impact whether their income is considered when calculating your monthly payment. By filing separately, your spouse’s income is not counted on the PAYE, IBR, and ICR plans. However, REPAYE will count spousal income regardless of how you file your taxes. Learn how to decide whether to file taxes jointly or separately.
If your monthly payments are less than the monthly interest – Income-driven payments are based upon what you make, not what you owe. If your loans generate $300 in interest per month, but your payment is only $200 per month, your balance will be growing by $100 each month. REPAYE, unlike the other income-driven plans, has a considerable advantage. The government will pay half of the excess interest that accrues each month. In our example, instead of adding $100 per month in interest, a REPAYE borrower’s balance would only add $50 per month in interest.
If you have Parent PLUS loans – Parents who borrowed federal loans to pay for their child’s education have fewer options than other federal borrowers. Parent PLUS loans are not eligible for any of the income-driven repayment plans. However, borrowers can consolidate a Parent PLUS loan through the federal government into a federal direct consolidation loan. This new loan would be eligible for the ICR plan. (Note: if you have both Parent PLUS loans and other loans, be sure not to combine them… if they all get consolidated together, the other loans lose eligibility for PAYE, REPAYE, and IBR)
If your loans are older – Borrowers with loans issued before October 2007 are not eligible for PAYE. Borrowers who took out their first loan before July 2014 won’t qualify for IBR at 10% of their discretionary income. The borrowers with older loans will typically get the lowest monthly payments on REPAYE.
Tips for Deciding Between IBR, PAYE, and REPAYE
Consider the tax consequences – Filing separately can result in much lower payments using PAYE, IBR, and ICR. Unfortunately, filing separately comes at a cost. Taxes for couples filing separately are almost always more expensive than filing jointly. Be sure to consider your options at tax time.
Know how capitalized interest affects you – If your loan accrues more interest each month than what you pay, the balance is going up. Fortunately, that additional interest is not immediately added to your balance. Understand what events trigger interest capitalization and how to avoid them. By avoiding interest capitalization, you avoid paying interest on interest. For larger balances, this can save thousands in the long run.
Plan ahead for FFEL loans – FFEL loans, also called FFELP loans, were loans that were guaranteed by the federal government and are technically federal loans. These loans were last issued in 2010. If you have any of these loans, they may not be eligible for certain repayment plans or programs like Public Service Student Loan Forgiveness. However, if you consolidate these loans into a federal direct consolidation loan, the new loan becomes eligible.
Talk to your loan servicer – This often requires multiple phone calls. Unfortunately, not all customer service representatives are accurate 100% of the time. I suggest doing as much research as possible first, then make your call. Trust the loan servicers who prove to you that they are knowledgeable.
Think about student loan forgiveness – All of the income-driven repayment plans are eligible for Public Service Student Loan Forgiveness, which comes after 120 certified public service payments. Under Public Service Loan Forgiveness, the debt is forgiven tax-free. Even if you do not work in public service, your debt can be forgiven after 25 years of payments under an income-driven repayment plan (for all PAYE borrowers and REPAYE borrowers with only undergraduate debt, forgiveness comes after 20 years). Unfortunately, the 20 and 25-year forgiveness is taxed as additional income for the year the loans are forgiven.
Don’t pay for assistance managing your federal loans – Many companies offer “services” to get you signed up for various federal programs. Many of these companies are outright scams, and most cause more problems than do good. Managing your federal loans may seem overwhelming at times, but anyone can do it.
Understand discretionary income – The term discretionary income refers to a specific calculation based upon your family size and Adjusted Gross Income from your tax return. Many tax strategies that lower your yearly tax bill can also be used to lower your monthly payments on Income-Driven Repayment Plans.
Tools to Find the Best Option
Department of Education Student Loan Repayment Simulator – This page will allow you to use your actual student loan information to calculate what your monthly payments would be on various student loan repayment plans. This tool helps estimate future payments and make sure your loan servicer has not made a mistake.
Student Loan Sherpa Loan Forgiveness Program Rankings – One of the biggest perks of IDR repayment is that the plans qualify for the best federal forgiveness programs. Understanding forgiveness options may help inform repayment plan selection.
9 thoughts on “The Best Income-Driven Repayment (IDR) Plan: IBR vs PAYE vs REPAYE”
I am in default for loans taken out in 1983 and 1986 for a total sum of 9000 dollars. I have lived overseas and am a French citizen and tax paying resident. I have filed taxes since 2016. I earn less than 112,000 dollars so I file 2555 with an AGI at zero.
I am registered on the FSA site. I think I should choose REPAYE. Will i still have the interest accruing on this plan? I am 65 years old and not retired so in 20 years I will owe more than 30,000 (20,000) with the Biden Harris break. Is that correct?
Some interest accrues on REPAYE (though not as much as other repayment plans), but you will want to keep an eye out for the newly announced (as of Wednesday) repayment plan. When the new plan gets through the rulemaking process and becomes available, I think that may be your best option.
If a borrower has multiple loans some subsidized and some unsubsidized, and then consolidates into a repaye plan, does the interest subsidy still only apply to the original subsidized loans or the entire new loan? I’m looking to consolidate under a repaye for the pslf program, and not sure how that will work. Thanks
A couple of thoughts:
1) The repaye subsidy is available for both unsubsidized and subsidized federal loans. A subsidized federal loan just means the government paid the interest during school. An unsubsidized loan can still take advantage of the REPAYE subsidy.
2) When you consolidate, the subsidized and unsubsidized loans are kept separate… so instead of having one consolidation loan, you will have two.
Thanks for all the really in-depth information! I have FFEL loans and am looking to consolidate them into a direct loan, so that I can qualify for PLFP. I took out loans before 2007, would the new direct loan somehow allow me to qualify for PAYE or IBR 10%?
Consolidating FFEL loans is pretty advantageous right now with the limited waiver.
Unfortunately, due to the age of your loans, you won’t be able to qualify for PAYE or IBR for New Borrowers (the 10% IBR version). However, by consolidating your FFEL loans, you will qualify for REPAYE, which is also a 10% option.
Thanks! Yes, thank goodness for the limited waiver.
I’m in one of those mixed loan marriages, so REPAYE won’t work for me. I’ll have to go the IBR 15% route.
Once again, thanks for clarifying all of this. I called my servicer about 4 times trying to get this answered, never once got a real answer.
If a borrower is on an IBR plan for 5 years, and then in year 6 their income increases so they are no longer eligible for IBR, is the interest that was deferred during the first 5 years added back to the loan?
I think what you are asking about is capitalized interest. This article explains how interest capitalization works and what events trigger it. One common triggering event is changing repayment plans.