Student Loan Refinancing vs Income Driven Repayment

June 27, 20220

Student Loan Refinancing vs Income Driven Repayment


Deciding whether to refinance your student loans or sign up for an income-driven repayment plan can be a big decision. Refinancing can get you a lower interest rate, which translates into fewer payments over time. On the other hand, income-driven repayment plans allow you to pay less on your loans every month but will require you to pay more in the long run. I’ve created this guide to help you research and decide which option is best for you.

Refinancing will lower your student loan payments, but not by much.

A common misconception is that refinancing will lower your monthly payments by a significant amount. For example, if you have $50,000 in student loan debt and are paying 4% interest on it, refinancing to a rate of 2% would save you $1,000 per month—right?

Unfortunately for many borrowers, the answer is no. According to Nerdwallet’s analysis of over 10 million student loans backed by the U.S., only 22% of people who refinance their federal student loans save more than 1% in interest on their monthly payments and only 6% save more than 3%. The vast majority will pay less than 1%, which means they’re not actually saving any money at all!

In addition to charging fees (which can range from 0-5%), it’s important to consider how much money you’ll spend paying off other things like credit card debt or car payments before jumping into this decision because once you’ve refinanced your student loans there’s no turning back!

There are a lot of things that can go wrong when you refinance.

Some things to keep in mind:

  • You can’t refinance loans that are not in your name. This includes student loans taken out by a parent or guardian on behalf of the borrower, as well as private loans not issued directly by the federal government. Private lenders also typically do not allow you to refinance their loans into an income-driven repayment plan.
  • If you have a co-signer, they will have to undergo the application process with you (even if they don’t want the loan). And even if they don’t actually apply, the creditworthiness check will still be run against them with their information on file—which means if there is any negative history associated with that person’s credit report (i.e., delinquencies), it could affect your ability to get approved for refinancing (and affect your interest rate).

Income Driven Repayment plans offer flexible payments and forgiveness options.

Income-driven repayment plans (IDR) are available for federal loans. These programs are also available for both subsidized and unsubsidized loans, graduate school loans, professional school loans, and Parent PLUS loans.

For some IDRs there is a cap on how high your monthly payment can be; other IDRs have no limits on how high your payments could go. Even if your payments are capped at some level, you may still be able to reduce them below their current amount by entering into forbearance or deferment status while waiting out the clock until you’re eligible for forgiveness through Public Service Loan Forgiveness (PSLF) or another program that offers relief from student loan debt after 10 years of qualified payments under an income-driven repayment plan.

You have to reapply for IBR every year.

If you choose Income-Based Repayment (IBR), you will have to reapply for that program every year. If your income changes, or if you get married or have children, it is possible that you will not qualify for IBR the next year and could be stuck with higher monthly payments. If this happens, it’s likely that both of these options would be a better choice than refinancing your loans—but then again they might not be! So if this is a concern for you, we recommend checking out each option below before making an informed decision about which path to take.

IBR is only for federal loans.

Income-based repayment plans are only available for federal student loans.

If you have private student loans, or if your school is a state school, community college or for-profit institution (check with your lender to see if it’s eligible), you’ll need to apply for refinancing instead.

You won’t qualify for IBR if you’re unmarried with no children

If you’re a single borrower, then you’ll have to have a high debt-to-income ratio (DTI) and a low income in order to qualify for IBR. If your DTI is too high and/or your income is too low, then you won’t qualify for IBR.

Here are some requirements that will help you qualify:

  • You must be married or in a domestic partnership with no children under age 24–unless one spouse or partner has a permanent disability
  • Both spouses or partners must be full time students at least half of the time during the month when they apply for an income driven repayment plan
  • Your federal student loan payments must be less than 15% of your discretionary income

If you marry someone with a high income, you won’t qualify for IBR anymore.

If you marry someone with a high income, you won’t qualify for IBR anymore.

You will have to pay more for your student loans.

There are four kinds of IBR, and they’re all different.

There are four kinds of income-driven repayment plans, and they’re all different.

  • Standard: This plan has fixed monthly payments based on your income and family size. You’ll pay 10% of your discretionary income each month for 20 years, or until you’ve paid off the remaining balance. If you’re married, your spouse’s income won’t be taken into account unless he or she also wants to participate in an income-driven payment plan.
  • Graduated: This plan is similar to the standard option but allows for graduated payments depending on when you borrowed your loan (i.e., if you took out loans before July 1st 2010 then yearly payments start at 10% of discretionary income and increase by 25% each year). Payments will max out at 15% of discretionary income after 25 years unless there is a partial financial hardship (defined as when monthly debt-to-income ratio exceeds 43%). If there is no partial financial hardship then monthly payment will remain fixed at 10%.
  • Extended: This program extends the term of repayment over 25 years rather than 20 like other plans; however, it does not extend out grace period so borrowers can only receive one forbearance during this time rather than two like other plans offer.

IBR is better than refinancing if your income is low to average.

If your income is low to average, Income-Based Repayment is better than refinancing. If you have a high income and want to reduce payments, refinancing may be the way to go. If you have a low income and want to reduce payments, refinancing may be the way to go. If your income is average and you want to reduce payments, Income-Based Repayment is better than refinancing


We recommend that you strongly consider IBR if your income is low, but refinancing could be a better option if you’re making a high income. If you’re unsure about how much your income could go up, keep in mind that there’s no penalty for applying to one or both of these programs. But once you’ve lost all of the benefits of refinancing, it’s nearly impossible to get them back!