PAYE vs. ICR: how these income-driven plans work for student loans

After closing enrollment in July, the Department of Education has now reopened two of its income-driven repayment plans: Pay as You Earn and Income-Contingent Repayment. As of Dec. 16, 2024, borrowers can once again enroll in these plans, which allow those with federal student loans to adjust their monthly loan payments based on their income and family size, potentially lowering the amount of payments due.

Initially, the Department of Education's plan was "phasing out the two plans in favor of an alternative with better terms," instead encouraging them "to sign up for the administration's Saving on a Valuable Education program, also known as SAVE," said The New York Times. But after the SAVE plan faced numerous legal challenges, the department said in an announcement that it had decided to "'give borrowers more breathing room on their student loans' while the department continued 'vigorously defending the SAVE Plan in court,'" said the outlet.

As it now stands, "under current Education Department guidance, [PAYE and ICR] will accept enrollment until July 1, 2027," said NerdWallet. Here is what to know about the plans.

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What is PAYE?

With PAYE, "borrowers don't have to make any loan payments if they live alone and make less than $22,590 a year or $46,800 for a family of four," said USA Today. Borrowers who make above those thresholds must "pay 10% of their monthly income."

But in either case, said USA Today, borrowers can secure "full relief after 20 years of payments," meaning their remaining student loan debt is forgiven.

What is ICR?

With ICR, there "is no income requirement to be eligible for ICR and borrowers who make higher salaries are still eligible," which makes it "a good option for those who want to free up some money in their monthly budget, even if they can afford their current monthly payments," said LendEDU, an online student loan marketplace.

Similarly to PAYE, payments are determined based on a borrower's income and family size. The repayment period is 25 years.

Should you switch to PAYE or ICR?

In figuring out whether either of these plans make sense for you, "start with the Education Department’s loan simulator," said NerdWallet, which "connects with your studentaid.gov account to estimate your monthly bills, overall repayment costs and potential forgiveness timeline under different repayment plans, including PAYE and ICR." Keep in mind that "switching plans could increase your monthly payments, depending on your income."

It is also important to note eligibility requirements. For instance, PAYE is "only available to new borrowers who took out their Direct Loan or FFEL Program loan on October 1, 2007, or later (with no outstanding balance) and received a disbursement on a Direct Loan on October 1, 2011, or later," said LendEDU. Meanwhile, ICR "includes consolidated Parent PLUS loans, whereas the others do not," meaning it could be a worthwhile option to consider for borrowers with that type of loan.

What other income-based repayment plans are there?

PAYE and ICR are not the only income-driven repayment plans out there. Other options to consider include:

SAVE: Formally known as Saving on a Valuable Education, the SAVE plan was introduced by the Biden administration in 2023. Before it was put on pause in summer 2024 amid the debate over loan forgiveness, "borrowers with loans for undergraduate degrees could've seen their monthly bills drop to just 5% of their discretionary income, and many saw their payments go to $0," said USA Today.

IBR: IBR, or income-based repayment, is only available "if you demonstrate financial need and your new payment would be less than that under the Standard Repayment Plan," said LendEDU. But for those who qualify, a reduced monthly payment is possible and forgiveness is granted after 20 or 25 years.