Federal Student Loans: IBR vs PAYE & REPAYE

There are several programs available to federal student loan borrowers looking for help with repayment. It’s important to know how each option stacks up against the others.

Popular student loan repayment plans include Income-Based Repayment (IBR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans.

What are the differences between each program and how do you determine which is right for you? Here’s what you need to know.

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The basics: PAYE vs REPAYE vs IBR

Here’s a quick comparison of each income-driven repayment (IDR) plans main benefits:

With PAYE and REPAYE, you generally only have to put 10% of your discretionary income toward repaying your federal student loans. With IBR, your monthly student loan payments will be 10% to 15% of your discretionary income, depending on when you took your loans out.

As for loan forgiveness, PAYE allows student loan forgiveness after 20 years of qualifying payments. Whereas REPAYE carries an interest subsidy that PAYE doesn’t have and takes five years longer to receive forgiveness if you took out graduate school loans. Otherwise, for undergraduate loans, the REPAYE repayment period is 20 years.

IBR forgiveness can be achieved after 20 to 25 years, depending on your loan disbursement date.

Note that there’s an additional repayment plan: Income-Contingent Repayment (ICR). This plan’s payments are based on the lesser of either 20% of your discretionary income or what you’d pay with fixed payments over 12 years. ICR forgiveness requires 25 years of payment.

For the purposes of this comparison, we’ll focus on IBR, PAYE and REPAYE plans.

Let’s do some hypothetical loan simulator case studies for some of the occupations I see with large debt loads using our free Student Loan Calculator.

Our assumptions when comparing IDR plans

In the following hypothetical examples, I assume a 7% interest rate for the federal student debt and 3% increases in salary for the folks we’re modeling. I’m guessing that incomes would remain independent of loan policy.

Graduate programs have a cap of $138,500 in aggregate borrowing for federal loans. But borrowers enrolled in certain health profession programs might be eligible for additional Direct Unsubsidized Loan amounts.

I’m using the option of refinancing to a 10-year 3.5% interest rate as an alternative baseline to compare against.

Another big assumption is that schools would only charge the maximum borrowing limit for the cost of education. However, this could be wildly incorrect if they can convince the private sector lenders to start originating private student loans to cover the difference in revenues.

Finally, because I encourage all my clients to max out their retirement accounts, we’ll assume everyone is saving $19,500 a year in their 401(k) or 403(b) on a pre-tax basis. This strategy lowers student loan payments.

With each example, we’re pretending that our single borrower could choose between the PAYE, REPAYE and IBR plans.

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Example 1: More debt than income

Let’s say Wendy is a veterinarian who graduated from the University of Pennsylvania and has way more debt than income. I currently see Penn alumni veterinarians come out with a loan balance around $390,000 if their education was financed completely with student debt.

But let’s assume Wendy has a federal student loan debt balance of $225,000 and works for Banfield Pet Hospital making $70,000 a year. But since she’s maxing out her pre-tax retirement contributions, her adjusted gross income is $50,500.

Let’s look at the cost of PAYE vs REPAYE vs IBR for Wendy’s situation below.

Under PAYE and REPAYE, Wendy’s student loan payment amount would start out at $260 per month and adjust with her income and family size over time. Remember that your payments on PAYE vs REPAYE have little connection to your actual debt with the Federal Direct Loan program.

However, she’d reach forgiveness five years earlier with the PAYE plan. This means she’d only pay pack about $84,000 before having her remaining balance wiped away. But she’d pay a monster tax bomb in the future, so she’d need to start saving for it now.

It’s clear the IBR plan would cost her substantially more. Refinancing her student loans would be a suboptimal decision, as well.

It’s difficult to look at the total cost column and make judgments without thinking about the cost of each path in today’s dollars. After all, these repayment periods are over different terms, and we need to adjust for alternatives where you could invest your money.

That’s why the relevant takeaway when looking at this chart is the cost in today’s dollars.

Example 2: Slim chance of repayment

For this example, meet Jim who is an associate chiropractor. Most chiropractors come out of school burdened by a ton of debt, with incomes that are not all that different from what they could’ve made as a non-specialized college graduate.

Perhaps this is due to the proliferation of chiropractors coming from private schools that charge a ridiculously high amount of tuition for the value of the degree.

Are there plenty of exceptions? Of course. I’m simply speaking in the aggregate.

Pretend Jim graduates from Palmer College of Chiropractic and decides to be an associate for another doctor long-term. He brings in $55,000 a year and left school with about $275,000 of loans on the Direct Loan program.

This is what the cost looks like for each repayment option:

If Jim maxes out his retirement, his AGI would be $35,500. His federal student loan payments would start out at $135 under PAYE and REPAYE. Both plans would result in Jim having to pay a big tax bomb.

But he’d be much better off than staying on the Standard 10-Year Repayment plan or refinancing to a lower interest rate.

Example 3: Planning on Public Service Loan Forgiveness 

For this example let’s use the fictional story of Christine, a doctor who is planning on pursuing Public Service Loan Forgiveness (PSLF). We’ll assume Christine is an OB/GYN resident who just graduated and will have an attending salary of $220,000. She works for a nonprofit hospital and qualifies for PSLF.

Let’s assume under the Direct Loan program that she owes $400,000 from attending the University of New England College of Osteopathic Medicine.

We’ll assume under both scenarios that she has built up four years of credit toward forgiveness during residency.

After maxing out her retirement contributions, her AGI is $200,500. Her monthly payment amounts would be $1,510, and she’d qualify for forgiveness after 120 PSLF qualifying payments. That’s right. All of her unpaid interest and principal will be wiped clear after 10 years with no tax consequences.

Look at the massive difference between PSLF and the next cheapest option, private student loan refinancing. We’re talking hundreds of thousands of dollars in savings by sticking with PSLF.

Example 4: High-income earners

For our final example, let’s assume Josh lives large in the big city. Although Big Law salaries increase at a rate much faster than 3%, let’s just assume for sake of simplicity that Josh, the Big Law attorney, went to the University of Virginia and is making $180,000 right now in New York City with inflation-level raises. He left school with about $250,000 of student debt under the Direct loan program.

By maxing out his retirement, he lowers his AGI to $160,500. Here’s his repayment options for REPAYE vs PAYE vs IBR. We’ve also added refinancing for comparison.

Under the PAYE and REPAYE options, Josh’s monthly payment would be the lowest. But he’d have to pay back loans over a long period and still have a tax bomb to deal with. That’s not attractive on his $180,000 income.

If Josh wanted to pay the least amount possible overall, refinancing his best option. He could refinance to a lower interest rate and have a total payback just shy of $300,000, which in today’s dollars is roughly $240,000.

Choosing the best repayment strategy

There isn’t a one-size-fits-all for student loans. In some cases, it might be a choice between PAYE vs REPAYE. In other situations, it might mean choosing to refinance to a lower interest rate or to get better repayment terms.

The best repayment strategy is going to depend on a number of factors, including your student debt and income. But it should also include your personal and professional goals.

If you currently have student debt, we’re every bit as intense and analytical with each one of our client’s student debt consultations to make sure they have the best plan in place to minimize their costs. Set up a time to review your student debt situation with one of our experts.

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