IBR vs. PAYE vs. SAVE | Understanding Income-Driven Repayment Plans

Do you have big student loans, a lower income, or both? If so, you've probably seen the acronyms IBR, PAYE, or even SAVE tossed around as you look for ways to make your budget work without defaulting on your debt.

IBR, PAYE, and SAVE are income-driven repayment plans. This means they can offer lower monthly payments and, eventually, loan forgiveness to people that meet their standards. We’ve mentioned them on multiple occasions. 

But what are the similarities and key differences between these income-driven repayment plans? In this post, we provide a head-to-head comparison of IBR vs. PAYE vs. SAVE to explain exactly what these programs are, where they come from, and how they can help you manage your student debt.

What Is “Discretionary Income”?

Both IBR and PAYE rely on “discretionary income” to calculate your payment. So it’s worth understanding what this is before we get into how the programs work.

“Discretionary income” has a technical definition under federal education law. The government will calculate it for you when you apply for any income-driven repayment plans. But you can estimate it now:

Basically, the government thinks some level of income should not be available for student loan repayment. Whereas anything you make above that line is fair game. Check out our discretionary income calculator >>>

IBR: Everything You Need To Know

“IBR” stands for “Income-Based Repayment." Sometimes people talk about “IBR” casually to mean all types of income-driven repayment plans. But it’s actually a specific federal program for certain types of borrowers. We typically use the term IDR (income-driven repayment) to refer to all student loan repayment plans that are based on income. 

IBR has been around since 2007 when President George W. Bush signed a big overhaul of federal financial aid practices. It was one of the first of a group of programs that recognized the reality that some people take out a lot of debt in anticipation of an income they just can’t get.

There’s almost no way to discharge student debt in bankruptcy. But these repayment plans at least offer some kind of way forward for borrowers who have federal (but not private) student loans.

IBR: Who And What Loans Are Eligible?

The federal government maintains a big guide to all the various income-driven repayment plans. As always, make sure to check the source to see if anything’s changed! But as of right now, you can apply for IBR if:

Note that Parent PLUS loan borrowers are kind of screwed by this program (as well as by PAYE below.) It’s generally a lot easier for a former student to get loan relief. So be really careful about taking out loans if you’re a parent, especially if you don’t feel like your income is secure.

IBR: How Payments Are Calculated

IBR payments are calculated based on 10 or 15% of your discretionary income. And payments recalculate every year based on updated information you provide about your income and family size.

Whether your payment is 10% or 15% of your discretionary income depends on when you took the loan out. If you took it out after July 1, 2014, you’re in luck. If you have an older loan and qualify for PAYE you’ll be in better shape there (see below).

If your 10% to 15% payment doesn’t cover the interest on your loans, they will keep growing. Let’s say you can only afford $100 a month (10% of your discretionary income) and your loan accumulates $200 of interest a month. That leaves you with $100/month of what’s called “excess interest.”

For subsidized loans, IBR will forgive all of that unpaid interest for the first three years. After that, there is no interest subsidy. If your income grows to the point where you leave the program, excess interest will be capitalized.

IBR: How To Apply

You can apply for IBR through the Department of Education at this link. (Note: you have to submit a separate application for each loan servicer, if you have more than one!) This application actually is good for all the income-driven repayment plans, including IBR. You can ask for a specific program or allow your student loan servicer to determine what you’re eligible for.

You’ll need to submit information about your family size, location, and adjusted gross income so that the government can calculate your payment. If your AGI is pretty close to what’s been on your recent federal tax returns, this will be an easy process. But if you’re applying because of a recent job loss or income drop, you’ll need to provide some alternative documentation, like pay stubs. 

IBR: Payoff And Loan Forgiveness

Getting the most out of IBR loan forgiveness depends heavily on keeping up to date on your paperwork. You have to recertify your income and family size every year, reporting any changes. 

If you miss the deadline, accrued interest will be capitalized (VERY BAD). Your monthly payment will revert to what it would be under the standard 10-year plan. So seriously, don’t miss the deadline.

However, if you start IBR today, and keep making your payments for 20 or 25 years (for loans made before July 1, 2014), any remaining balance will be forgiven. The only caveat is that you may have to pay income taxes on any forgiven debt.

PAYE: Everything You Need To Know

“PAYE” stands for “Pay As You Earn.” It’s been around since 2012 and was signed into law as part of another big student loan reform under President Obama.

While you’re in the program, your monthly payments will be a maximum of 10% of your discretionary income. Below, we look at each of the same factors as above to make it easier to directly compare IBR vs. PAYE.

PAYE: Who And What Loans Are Eligible?

When you compare the eligibility standards of IBR vs. PAYE, you'll find that PAYE is more strict. As of writing, here are the requirements:

Once again, careful before you take out a Parent PLUS loan for your kids. You won't be able to join PAYE or IBR either. The only income-driven repayment that you can qualify for as a Parent Plus borrower is the (much less attractive) Income-Contingent Repayment (ICR) plan. And you won't even qualify to join ICR until after you've consolidated your loans into a Direct Consolidation Loan.

PAYE: How Payments Are Calculated

Your monthly payment will be 10% of your discretionary income.  As with IBR, if this payment doesn’t cover the interest on your loans, unpaid interest will accumulate. And, like IBR, PAYE will cover all of the excess interest on subsidized loans for the first three years. 

PAYE is unique, though, in how it handles unpaid interest if your income grows to the point where you no longer qualify to make income-based payments. In this case, the maximum that can be capitalized is 10% of your original balance. 

It's important to note, however, that this benefit only applies if you stay on the PAYE plan. If you leave the plan (for any reason), there is no limit to the amount of unpaid interest that can be capitalized.

PAYE: How To Apply

You can apply for PAYE at this link. (Note: you have to submit a separate application for each loan servicer, if you have more than one!) This application actually is good for all the student loan income driven programs, including IBR; you can ask for a specific program or allow your student loan servicer to determine what you’re eligible for.

You’ll need to submit information about your family size, location, and adjusted gross income so that the government can calculate your payment. If your AGI is pretty close to what’s been on your recent federal tax returns, this will be an easy process. If you’re applying because of recent job loss or income drop, however, you’ll need to provide some alternative documentation, like pay stubs

PAYE: Payoff And Loan Forgiveness

As with IBR, you have to re-certify your income and family size every year. Do not miss the deadline. If you do, accrued interest capitalize. Plus, your payment will be reset to what it would be under the standard 10-year repayment plan. Very not good! Keeping up with these plans’ paperwork is key.

The good news is that if you still have debt left after 20 years of PAYE payments, it will be forgiven. This is another one of the big pluses of PAYE in the IBR vs. PAYE comparison. While borrowers with older loans may have to wait for 25 years to earn forgiveness on IBR, all PAYE participants receive 20-year terms.

Note: The 20-year forgiveness is a big perk for graduate school student loan borrowers, because the other plans only allow 25-year forgiveness for graduate school borrowers.

What About SAVE?

SAVE stands for Saving on a Valuable Education, and is the newest student loan repayment plan. It's actually a rebranding of the REPAYE plan, but has some better perks.

We have a full breakdown of the SAVE student loan repayment plan here, but here's what you need to know on how it compares to IBR and PAYE.

SAVE: How Payments Are Calculated

The SAVE plan cuts your monthly payment to just 5% of your discretionary income for undergraduate borrowers, and 10% for graduate school and professional degree borrowers.

The great thing is that the "definition" of discretionary income for the SAVE plan is different - this plan uses 225% of the poverty line (versus 150% for IBR and PAYE). As a result, you'll see potentially bigger savings because more of your AGI is sheltered.

Another huge benefit with SAVE is that any interest accrued beyond your monthly payment is forgiven - meaning that your loan balance cannot grow as long as you remain in repayment (it can stay the same, but it cannot grow).

SAVE: How To Apply

It's really easy to apply for SAVE. You can apply for SAVE on the Department of Education's website, or via your student loan servicer.

SAVE: Student Loan Forgiveness

SAVE also has built-in student loan forgiveness like the other income-driven repayment pans. 

This plan also includes loan forgiveness of either 20 or 25 years. It's 20 years for only undergraduate loans, and 25 years for graduate school loans.

But for borrowers with a low balance, there is a better options. If you enter repayment with $12,000 or less, you will receive loan forgiveness in 10 years if you don't pay off the loans before then. Furthermore, one year is added for each extra $1,000 you have. If you enter repayment with $13,000, that's 11 years.

Quick Comparison Of IBR, PAYE, and SAVE

Here's a quick comparison table of what each plan (IBR, PAYE, and SAVE) offer:

Are There Downsides To Income-Driven Repayment Plans?

Potentially. Income-driven repayment plans can be great options if you have a lot of debt relative to your income. But you should know that there are downsides.

First, you may end up paying more over time than you would if you just paid off your loans in ten years (or less). This is because you’ll be paying for 20 or 25 years. So even with a lower payment per month, it’s going to add up.

However, with plans like SAVE, that is less likely since your loan balance cannot gorw.

Second, as of right now, you may have to pay income taxes on any debt that’s forgiven. That could be a HUGE problem if your debt keeps growing over time and what ends up getting forgiven is tens to hundreds of thousands of dollars. This is a long way in the future for most borrowers. But it’s good to be aware of it and keep up to date with the latest student loan legislation.

Third, relative to standard payment plans, income-driven repayment plans are just more of a pain. They require a lot more paperwork to get started. And you have to keep recertifying and providing new information every year.

None of these downsides should stop you from pursuing IBR, PAYE, or SAVE if you qualify. These programs can be lifesavers if you simply can’t afford the standard payments. But if you can make standard payments, those are probably a better option to avoid these downsides.

IBR vs. PAYE vs. SAVE: Final Thoughts

If you're struggling with huge loans and a low income, the PAYE, IBR, or SAVE income-driven repayment plans could massively reduce the amount you have to come up with each month.

They won’t solve all your problems. And even 5-10% of your discretionary income might end up feeling like a lot. But they can prevent you from ruining your credit. And they do provide a path forward to forgiveness even though it's pretty far in the future.