IBR vs PAYE: How to Calculate Which Student Loan Plan Costs Less

The Two Plans Are Not the Same. Stop Treating Them That Way.

IBR and PAYE share the same general structure: pay a percentage of discretionary income each month, receive forgiveness after a set repayment period. That surface similarity masks meaningful differences in payment caps, forgiveness timelines, and eligibility rules. Each difference translates directly into dollars.

Here is what separates them.

Income-Based Repayment (IBR):

• Payment rate: 10% of discretionary income for borrowers who first took loans after July 1, 2014. 15% for earlier borrowers.
• Forgiveness timeline: 20 years for new borrowers, 25 years for older borrowers.
• Income cap: No cap. Payments can exceed the standard 10-year payment amount, and you keep paying the higher of the two.
• Eligibility: Any federal Direct Loan or FFEL borrower with a partial financial hardship.

Pay As You Earn (PAYE):

• Payment rate: 10% of discretionary income, always.
• Forgiveness timeline: 20 years, regardless of loan age.
• Income cap: Payments are capped at the standard 10-year payment amount. If your income rises high enough, you never pay more than that ceiling.
• Eligibility: Restricted. You must be a new borrower as of October 1, 2007, with a disbursement on or after October 1, 2011. Not every borrower qualifies.

The payment cap in PAYE is the structural advantage that most borrowers ignore.

How Discretionary Income Is Calculated Under Each Plan

Both plans define discretionary income as your Adjusted Gross Income minus 150% of the federal poverty guideline for your family size. The poverty guideline changes annually. For 2025, the figure for a single person in the contiguous U.S. is $15,060.

The formula:

Discretionary Income = AGI - (1.5 x Federal Poverty Guideline)

For a single borrower earning $72,000 AGI:

Discretionary Income = $72,000 - (1.5 x $15,060) = $72,000 - $22,590 = $49,410

Annual payment under PAYE (10%): $49,410 x 0.10 = $4,941. Monthly: $411.75.

Annual payment under IBR for a new borrower (10%): Same calculation. $4,941 annually. Monthly: $411.75.

At this income level, the plans look identical. The divergence appears when income grows, when the standard 10-year payment ceiling kicks in, or when you are on the older 15% IBR track.

Worked Example 1: The 15% IBR Borrower

A borrower took out undergraduate loans in 2008. She did not qualify for PAYE because she was not a new borrower after October 1, 2007. She carries $58,000 in federal loans at a weighted average rate of 6.54%. Her current AGI is $68,000. She is single, no dependents.

Discretionary income (2025 poverty line, single): $68,000 - $22,590 = $45,410

Payment under 15% IBR: $45,410 x 0.15 = $6,811.50 per year. Monthly: $567.63.

What PAYE would cost at 10% (if she qualified): $45,410 x 0.10 = $4,541 per year. Monthly: $378.42.

Monthly difference: $567.63 - $378.42 = $189.21. Annual difference: $2,270.52. Over 10 years at that income level: $22,705.20 in additional payments.

She cannot switch to PAYE. She is locked into the 15% structure. This is not a planning optimization problem. It is an eligibility constraint. The lesson: understand which plans you actually qualify for before you assume you have options.

Worked Example 2: PAYE vs IBR New-Borrower, the Income Growth Scenario

This is where the real comparison gets consequential. Two borrowers, same profile, both qualify for PAYE and new-borrower IBR (10%). Their payments are identical today. But their paths diverge as income rises.

Profile:

• Balance: $87,000 at 6.54% weighted average rate.
• Current AGI: $61,000, single.
• Expected income growth: 4.2% per year, a reasonable assumption for a mid-career professional.
• Standard 10-year payment on $87,000 at 6.54%: $978.14 per month, or $11,737.68 per year.

At $61,000 AGI, discretionary income is $61,000 - $22,590 = $38,410. Annual payment at 10% is $3,841. Both plans charge the same.

At year 7, AGI has grown to approximately $81,500.

Discretionary income = $81,500 - $22,590 = $58,910. Annual payment at 10% = $5,891.

Still below the $11,737.68 standard cap. Both plans still match.

At year 12, AGI has grown to approximately $101,200.

Discretionary income = $101,200 - $22,590 = $78,610. Annual payment at 10% = $7,861.

Still below the cap. Both plans match. The cap has not yet become relevant for this borrower.

At year 17, AGI has grown to approximately $125,600.

Discretionary income = $125,600 - $22,590 = $103,010. Annual payment at 10% = $10,301.

Still below the $11,737.68 cap. Getting close.

At year 19, AGI has grown to approximately $136,200.

Discretionary income = $136,200 - $22,590 = $113,610. Annual payment at 10% = $11,361.

Still under the cap by $376.68 annually. At this growth trajectory, this borrower hits the cap right at year 20 forgiveness, meaning the cap provided no material benefit in this scenario.

The cap matters most in two situations: borrowers with high debt-to-income ratios who project rapid income growth, and borrowers in high-earning fields, like medicine or law, who carry large balances. For a borrower with $200,000 in loans on the same income trajectory, the cap kicks in at year 13. From year 13 through year 20, PAYE holds the payment at $11,737.68. Without the cap, IBR would continue rising. At year 17 with that $125,600 AGI, PAYE holds at $11,737.68 while uncapped IBR would charge $11,361. The difference narrows but the cap remains structurally protective.

The cleaner takeaway: PAYE is always at least as good as new-borrower IBR, and often better. If you qualify for PAYE, the default choice is PAYE.

The Forgiveness Tax Exposure Problem

Both plans result in forgiveness of any remaining balance after the repayment period. Under current federal tax law, that forgiven amount is treated as ordinary income in the year of forgiveness. Congress provided a temporary exclusion through 2025. The permanent tax treatment after that exclusion expires remains uncertain.

A borrower who entered repayment with $87,000, paid income-driven amounts for 20 years, and still has $43,000 remaining at forgiveness could face a federal tax bill of $9,460 to $15,050 depending on their marginal rate at the time. This is not a small number. Build it into your total cost comparison.

How to account for it: Estimate your forgiven balance, apply your projected marginal rate at the forgiveness year, then discount that future tax liability back to present value. A $12,000 tax bill in 20 years is worth roughly $5,400 today at a 4.1% discount rate.

How to Run the Comparison Correctly

Step one: Confirm your eligibility for both plans. PAYE eligibility is binary. If you do not qualify, the comparison ends.

Step two: Calculate your current discretionary income using the formula above. Apply the correct poverty line for your family size and state.

Step three: Project your income forward at a conservative and an aggressive growth rate. The IRS Statistics of Income data shows median income growth by age cohort. Use real numbers, not aspirational ones.

Step four: Calculate annual payments under each plan for each projected income year. Note the year, if any, where the PAYE payment cap engages.

Step five: Sum cumulative payments over the full repayment period under each plan. Add the present value of projected forgiveness tax liability.

Step six: Compare totals.

That is the analysis. It takes about 45 minutes with a spreadsheet. It is worth doing before committing to a plan that runs for 20 years.

Run Your Numbers Before You Commit

The federal student loan system does not reward inertia. Staying on the wrong plan for three years costs real money. The analysis above requires actual inputs, your balance, your rate, your income, your growth assumptions.

The CalcMoney Debt Calculator lets you model multiple repayment scenarios with your specific numbers. Enter your balance, your current income, and your expected growth rate. Compare cumulative cost across plan structures. See where the PAYE cap engages, if it does, and what forgiveness exposure you are carrying.

Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.

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Use the calculator before your next recertification deadline. The deadline is not the right time to start analyzing. The time is now, while you still have the option to switch.