PAYE vs. IBR: Comparing The Two IDR Plans

Pay As You Earn (PAYE) and Income-Based Repayment (IBR) are income-driven federal student loan repayment plans that adjust your student loan payments based on your income.

These plans are ideal for borrowers seeking to reduce their monthly student loan payments and enjoy other benefits, such as loan forgiveness and interest subsidies.

However, PAYE and IBR differ in many ways.

Moreover, since the Department of Education is planning to fully roll out its new SAVE plan in July 2024, it’s best to familiarize yourself with what’s in store before committing to a loan repayment plan.

Continue reading to learn how PAYE compares to IBR, what changes the new SAVE plan will bring, and which steps to take to keep your finances healthy.

Key Takeaways

PAYE and IBR are income-driven repayment plans for federal student loans.
Both plans adjust payments based on income and offer loan forgiveness.
PAYE generally has lower payments and shorter terms but stricter requirements.
New SAVE plan will replace PAYE, offering more accessible and flexible terms.

Table of Contents

PAYE vs. IBR: Summary

These plans determine the portion of your income considered available for loan repayments using your discretionary income.

They cap your monthly payment at a percentage of that income.

They also differ in their payment terms, borrower requirements, and terms of loan forgiveness.

Here is a table that summarizes the main differences; we will explain them in detail later:

IBR Plan	PAYE	IBR
Payment Amount	10% of discretionary income	10% of discretionary income if borrowed on or after July 2014 15% of discretionary income if borrowed before July 2014
Payment Terms	20 Years	20 years if borrowed on or after July 2014 25 years if borrowed before July 2014
Borrower Requirements	Payments on the 10-year standard plan must exceed 10% of the borrower’s discretionary income Must not have borrowed federal student loans before October 1, 2007 Must have borrowed a Direct loan on or after October 1, 2011	Payments on the 10-year standard plan must exceed 10% or 15% of the borrower’s discretionary income
Loan Forgiveness	Yes, after 20 years (the forgiven amount may be taxable income)	Yes, after 20 or 25 years (the forgiven amount may be taxable income)
Direct Loan Consolidation Required?	Sometimes	Less frequently

What Is Discretionary Income?

Discretionary income is the portion of your income that exceeds a basic living allowance—the money left after paying for essentials such as rent, bills, and groceries.

It is a way to ensure that your loan repayments are affordable relative to your earnings and expenses.

It is calculated using your adjusted gross income (AGI) and the federal poverty guideline for your family size and state of residence, which changes annually.

You can find the AGI on your Form 1040 federal tax return. Follow this formula:

Discretionary Income = AGI – (150% × Poverty Guideline)

PAYE vs. IBR: Comparing the Differences

Let’s see how the plans compare by individual criteria.

Payment Amount

A lower payment cap means that you pay less towards your federal student loan debt each month, leaving more money for expenses or savings.

After July 2014, this cap became inconsequential; both PAYE and IBR now cap payments at 10% of your discretionary income.

However, if you had taken your loan before that date, then PAYE would have been the better option, thanks to its 10% cap compared to IBR’s 15%.

Payment Terms

Similarly to the payment cap, IBR’s terms became more favorable for loans taken after July 2014, matching those of PAYE’s.

If you fail to fully repay your loan after 20 years, it will be forgiven. Note that you may still be liable for taxes on the remaining unpaid amount!

However, if you took your loan before July 2014, IBR will have you paying towards it for another five years before you become eligible for loan forgiveness.

Borrower Requirements

In sum, PAYE is more restrictive in terms of borrower eligibility. It focuses on Direct Loans and requires borrowers to meet specific borrowing dates.

Conversely, it’s much easier to meet IBR’s eligibility criteria, as it will cover your Direct and Federal Family Education Loan (FFEL).

Here is a more detailed overview:

Loan Types

For PAYE, you must have:

Federal Direct Loans, including Direct Subsidized/Unsubsidized Loans
Direct PLUS Loans made to students
Direct Consolidation Loans, except those that repaid PLUS loans made to parents.

The following loans do not qualify for PAYE unless consolidated:

Subsidized/Unsubsidized FFEL Loans
FFEL PLUS Loans made to graduate or professional students
FFEL Consolidation Loans that were not used to repay PLUS Loans made to parents

The loans that qualify for PAYE also qualify for IBR. Plus, IBR accepts federal loans, including:

FFEL Subsidized/Unsubsidized Stafford Loans
FFEL Plus Loans made to students
FFEL Consolidation Loans.

However, the following loans are not eligible for IBR:

Parent PLUS Loans
Direct Consolidation Loans that repaid any PLUS Loans made to parents
FFEL PLUS Loans made to parents
FFEL Consolidation Loans made to parents

Note that you can consolidate your PLUS loans into a Direct Consolidation Loan, then repay it under PAYE to benefit from lower monthly payments.

In addition, even though the Perkins Loan program expired in September 2017, you can still make your Perkins loans eligible for PAYE or IBR by consolidating them first.

Borrowing Dates

PAYE

To meet PAYE’s requirements, you must not have any remaining balance as of October 1, 2007.

If you previously borrowed but paid off your loan before this date, you still qualify, as you would be considered a new borrower.

You also must have received a new Direct Loan disbursement on or after October 1, 2011.

Alternatively, if you had existing loans that were not Direct Loans, you must have consolidated them into a Direct Consolidation Loan on or after this date.

Simply put:

Be a new borrower on or after October 1, 2007.
Receive a disbursement of a Direct Loan on or after October 1, 2011.
If you had previously borrowed but paid off your loan before October 1, 2007, you will still be considered as a new borrower.
If you still had existing loans that were not Direct Loans, you must have consolidated them into a Direct Consolidation Loan on or after October 1, 2011.

However, remember that the Department of Education plans to end new enrollments in PAYE by next month, July 2024, as it transitions to its SAVE plan!

IBR

IBR does not have any specific borrowing date requirements; it is less strict compared to PAYE.

However, the difference lies in the repayment terms, which differ based on the borrowing date.

If you borrowed on or after July 1, 2014, payments are capped at 10% of discretionary income.
If you borrowed before July 1, 2014, payments are capped at 15% of discretionary income.

Partial Financial Hardship

Both PAYE and IBR require you to demonstrate a partial financial hardship; your calculated monthly payments under either plan must be less than what you would pay under the 10-year Standard Repayment Plan.

Both plans adjust your standard payments based on your financial situation if your income makes it challenging to afford them.

However, you must submit your income and family size information annually to calculate these monthly payments and determine whether you are still eligible.

Loan Forgiveness

Both loans offer the opportunity for loan forgiveness, but until July 2014, PAYE has been more favorable with its terms in comparison to IBR.

Before that date, under IBR, loan forgiveness only occurred after 25 years, compared to today’s 20 years with IBR’s new eligibility requirements and PAYE.

Interest Benefits

Both IBR and PAYE offer interest benefits for subsidized student loans.

If your monthly income is so low that it does not cover the interest on your subsidized loans, the government steps in to assist you.

They pay the difference in interest for up to three consecutive years from the day you begin repaying under either plan.

However, note that if you leave the program, lose eligibility, or fail to renew your plan on time, any unpaid interest could be capitalized, and your loan principal will be increased!

PAYE vs. IBR: Which Is Better?

If you meet the eligibility requirements, PAYE is often objectively better due to its lower payment cap and shorter repayment term.

However, if you have loans from the FFEL program or do not meet the borrowing date requirements for PAYE, IBR is the better option for you.

To help you make the right decision, here are the pros and cons of PAYE and IBR, focusing on the major differences only:

	Pros	Cons
PAYE	Lower payment cap, at 10% of discretionary income Shorter repayment terms, with loans forgiven after 20 years of qualifying payments	Very strict borrower requirements, with specific dates and disbursement requirements Limited loan eligibility, covering Direct Loans only
IBR	Wider loan eligibility, covering both Direct Loans and FFEL Program Loans Longer repayment term, translating into lower monthly payments	Higher payment cap for loans borrowed before July 1, 2014, at 15% of discretionary income Longer loan forgiveness period, with loans borrowed before July 1, 2014, committing to a 25-year repayment term

SAVE: The Upcoming IDR Plan

We previously mentioned that the Department of Education is set to launch the Saving on a Valuable Education (SAVE) plan, which modifies REPAYE, to replace the existing PAYE plan while offering several new benefits and improved terms.

This plan has had a gradual rollout:

Some aspects became available to borrowers before repayment resumed in October 2023.
Forgiveness for certain borrowers began rolling out in February 2024.
The rest of the plan is set to launch by July 2024.

The idea is that PAYE’s repayment process is a chore to deal with, making it difficult for many borrowers to meet its eligibility criteria.

SAVE aims to rectify that; it is more accessible, affordable, and manageable in terms of repayment options for federal student loan borrowers.

Here are the most important ways it differs from PAYE:

Payment Cap: SAVE does not have a monthly payment cap. Under IBR and PAYE, your monthly payment can never be higher than the Standard 10-year repayment plan amount. But with SAVE, your monthly payments could rise if your income is high and your debt is low.
Loan Differences: Borrowers with undergraduate loans will pay only 5% of their discretionary income toward their loans monthly, while graduate loan borrowers will pay 10%.
Interest Accrual: SAVE provides ongoing interest subsidies for all loan types, and borrowers will not accumulate unpaid interest if they make their monthly payments.
Protected Income: The protected income threshold is higher with SAVE (225% of the federal poverty standard). Hence, most borrowers will enjoy lower monthly payments.
Borrower Eligibility: SAVE does not have specific borrowing date restrictions. It is more accessible to a broader range of borrowers.
Automatic Recertification: The Department of Education will simplify the recertification process by allowing automatic sharing of tax information with the IRS.

For a full breakdown, read our article comparing PAYE and SAVE!

How to Choose Your IDR Plan

There is not much to dwell on while deciding which IDR plan is best for you.

PAYE is the better option, but SAVE is set to replace it soon and generally offers the most benefits. It’s likely to be the best choice for most borrowers.

It also helps that current PAYE users will be automatically transitioned to SAVE once it is fully rolled out next month.

They also retain the right to opt out, stick with PAYE, or transition earlier by contacting their student loan servicer.

However, IBR may still be suitable in some particular cases. For example:

You have a FFEL Program Loan and do not plan on consolidating your loans for any reason.
You are a high-income borrower who has benefited from significant income increases since entering repayment. IBR caps payments at the 10-year Standard Repayment Plan amount, and this can result in lower payments compared to SAVE. However, it is very rare to experience such significant increases in income to enjoy this advantage.

Take Charge of Your Finances With PhysiciansThrive

The biggest hurdle physicians face during their careers is repaying their student debt, especially during residency or early practice years.

While income-driven repayment plans such as PAYE, IBR, and SAVE provide valuable benefits, it is often daunting to make informed financial decisions without expert advice.

But that does not have to be the case. Our team at PhysiciansThrive has helped hundreds of doctors, just like you, find the right repayment strategy.