Choosing the Best IDR Plan…From What’s Left

Navigating student loan repayment just became even more complicated. A recent court decision has deemed the SAVE plan completely illegal, likely taking it off the menu for good. In this article, we discuss the remaining IDR plans to help you determine which may be best for you. We won’t touch on the oldest plan (ICR), as that plan is only beneficial to those with Parent PLUS Loans.

Old IBR vs. New IBR

Key Differences:

• Old IBR: Requires payments of 15% of discretionary income and provides (taxable) forgiveness after 25 years.
• New IBR: Lowers payments to 10% of discretionary income with forgiveness after 20 years for borrowers who took out loans after July 1, 2014.

Which One Is Better?

The New IBR is clearly the superior choice if you qualify, as it offers lower payments and a shorter forgiveness timeline. Borrowers should only utilize the Old IBR if they are ineligible for New IBR.

Important Note: You do not need to apply for “Old vs New” IBR. The payment application simply says “IBR”. If you apply for IBR, your loan servicer will automatically place you in New IBR if all your loans were taken after July 1, 2014. If you have loans from before that date, you’ll be placed in Old IBR.

New IBR vs. PAYE

What They Have in Common:

• Both cap payments at 10% of discretionary income (never exceeding the 10-year Standard Plan amount).
• Both deduct 150% of the poverty level (based on your family size) from your AGI to determine your discretionary income.
• Both require borrowers to demonstrate a partial financial hardship (PFH) to qualify. This simply means your IDR payment is lower than your 10-year payment equivalent.
• Neither plan offers interest subsidies or relief for accumulating interest.
• Both require annual recertification and will capitalize interest when leaving the plan or when losing PFH status.

Key Differences:

• Interest Capitalization: PAYE has a unique feature which limits the amount of interest which can capitalize, should you lose that PFH status. No more than 10% of the loan balance (based on the date you entered the plan) is allowed to capitalize. New IBR does not have a limit.
• Forgiveness Status: New IBR still guarantees forgiveness after 20 years in repayment. With the recent SAVE ruling (Feb 2025) taxable forgiveness will no longer be available through the PAYE plan.

Note: If you anticipate rising income that may cause you to lose PFH status, PAYE could be a better short-term option due to its interest capitalization cap.

Hybrid Strategy: Combining PAYE and New IBR

One great benefit of having multiple IDR plans to choose from is that you can often utilize different plans at different times. For instance, a borrower could start out with PAYE, utilize the interest cap, and then switch to New IBR any time before the 20-year mark to capture the forgiveness benefit. Similar strategies can be used with other IDR plans as well, depending on the features and what plans are available. Should subsidized interest benefits ever return, this strategy becomes very effective.

Key Considerations Before Switching Plans

• Interest Capitalization: Any unpaid interest under PAYE will fully capitalize upon switching to New IBR.
• Income Growth: If your income has significantly increased, the New IBR payments may be higher than PAYE’s capped amounts.
• Qualifications: If you cannot demonstrate a Partial Financial Hardship, you cannot enter IBR or PAYE. But you can stay on your current IDR plan.
• Marital Status: Both PAYE and IBR allow married borrowers to file taxes separately to exclude spousal income.

Act Now!

Review Your Repayment Plan: Are you currently enrolled in PAYE? Do you have a clear strategy for forgiveness?

Stay Updated on Policy Changes: It is unclear how much longer PAYE will be around. Unlike IBR, PAYE originated via executive order. This means it could easily be terminated.

Plan Your Transition to New IBR: If necessary, make the switch in time to qualify for 20-year forgiveness.

Student loan policies are more fluid than ever, so proactive planning to stay ahead of the curve is critical. Our full-time student loan advisors can help you optimize your repayment strategy while keeping payments low and maximizing savings.

Don’t wait. Take control of your repayment strategy today!