Student Loan Refinance or Income-Driven Repayment Plan: Which is Best For Me?

By Kassondra Cloos | Published on February 24, 2026

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Managing student loan debt can be a difficult task for many borrowers. Fortunately, there are ways to ease the burden. Two of the most popular choices are income-driven repayment plans and student loan refinancing. But how do they work? And which is best for you? Here’s what you need to know.

Key takeaways

• Student loan refinancing, on your own or with a cosigner, can save you money over time if you’re able to get a lower interest rate.
• Income-driven repayment plans can reduce your monthly payment amount to as low as $0—but may cost you more money over time.
• Refinancing student loans can also help you get lower monthly payments by extending your loan term. However this will also cost more over the life of the loan.

What are income-driven repayment plans?

Income-driven repayment plans are designed to make monthly loan payments more affordable by adjusting them based on your income and family size. These plans, offered by the federal government, include…

• Income-Based Repayment (IBR): Under this plan, your monthly payments are either 10% or 15% of your discretionary income, depending on when you took out your loans
• Income-Contingent Repayment (ICR): This plan calculates your monthly payments based on either 20% of your discretionary income or a fixed amount over a 12-year repayment period, depending on which is lower.
• Saving on a Valuable Education (SAVE, formerly known as Revised Pay As You Earn, or REPAYE): This plan caps your monthly payments at 10% of your discretionary income.
• Pay As You Earn (PAYE): Similar to SAVE, this plan also caps your monthly payments at 10% of your discretionary income

These income-driven repayment plans can vary in terms of eligibility requirements and repayment periods. It’s important to compare them to determine which one is the best fit for your individual circumstances.

Pros and cons of income-driven repayment plans

Pros

• Affordable payments: Income-driven plans calculate monthly payments based on a percentage of your discretionary income, resulting in affordable payments for borrowers with lower incomes.
• Loan forgiveness: Under certain income-driven plans, any remaining loan balance may be forgiven after 20 or 25 years of qualifying payments. If you’re on an income-driven repayment plan while simultaneously working toward Public Service Loan Forgiveness (PSLF), you may be eligible for forgiveness after only 10 years of qualifying payments instead of 20 or 25.
• Safety nets: If your income decreases or you experience financial hardship, income-driven plans provide options to temporarily lower or pause your payments through deferment or forbearance.

Cons

• Longer repayment period: By extending the repayment term, income-driven plans may result in a longer time to pay off your loans and potentially more interest accrual over time.
• Tax implications: Any forgiveness of the loan balance under an income-driven plan may be considered taxable income, resulting in a potential tax liability at the end of the repayment period.

How does income-driven repayment work?

Before you move forward with income-driven repayment, consider all of your options and make sure you understand how this decision will impact the long-term repayment of your loans. While IDR can help you lower your federal student loan payments substantially—or even eliminate them temporarily—you will end up paying more interest over time.

It’s important to remember that you can still make payments toward your loans even if you’re on an IDR plan, so you may want to keep paying as much as you can above your minimum required payment so that you can reduce your loan balance more quickly.

Here’s what you need to do to apply for IDR:

• Make an Income-Driven Repayment (IDR) Plan Request. This is a form you’ll fill out with the Department of Education (DOE), which manages federal student aid. You’ll have to provide proof of your AGI, or Adjusted Gross Income.
• Wait for an answer. This could take several weeks, depending on your student loan servicer. Never hesitate to reach out to the DOE if you have questions.
• If needed, request forbearance. If you’re unable to make your payments while you wait for your servicer to respond to your request, you can ask for forbearance, which is a temporary hiatus from required payments. This will prevent you from defaulting, which is when you fail to make payments without giving notice to your lender. Defaulting has serious, long-term implications for your credit score.
• Once your request is approved, always make your payments on time. Missing payments can hurt your credit score, incur late fees, and cause your loan to accrue even more interest.
• Recertify your income every year. If your family size or financial situation changes, your required IDR payments may increase or decrease as a result. It’s important to always report accurate information.

What is student loan refinancing?

Student loan refinancing involves borrowing a new loan from a private lender to pay off existing undergraduate loans or other educational debt. The new loan will have new terms (like a new rate and repayment term), and if your financial situation has improved since you took out your original loans, you may be able to secure a lower interest rate, which could save you a significant amount of money over time.

Pros and cons of student loan refinancing

Pros

• Ability to secure a lower rate: Refinancing allows you to qualify for a lower interest rate, reducing the overall cost of your loan.
• Simplified repayment: Refinancing multiple loans into a single loan streamlines the repayment process, making it easier to manage your finances and stay on top of payments.
• Flexibility to choose repayment terms: By refinancing, you can select loan terms and monthly payments that align with your financial goals and budget.
• Can refinance both federal and private loans: Income-driven repayment plans are only available for federal loans. Refinancing, however, can be done with federal loans, private loans, or a combination of the two.

Cons

• Loss of federal benefits: If you refinance federal student loans with a private lender, you will no longer be eligible for federal benefits such as income-driven repayment plans, deferment, forbearance, or loan forgiveness programs. Though some private lenders may offer one or more of these benefits, they are not legally required to.
• Credit and income requirements: Private lenders typically require a good credit score and sufficient income to qualify for refinancing. Borrowers with lower credit scores may not qualify. If they do, it’s often with less favorable terms.

How does student loan refinancing work?

You’ll need to make a few decisions before you start the process to refinance your loans. Here’s what you’ll need to do, from start to finish:

• Understand your priorities and determine whether student loan refinancing is right for you. Do you want to save money in the long term, or do you want to refinance student loans for a lower monthly payment now? Depending on your personal finance situation, you can also research other options, like personal loans, Home Equity Lines of Credit (HELOCs), or Direct Consolidation Loans (for federal student loan borrowers only).
• Review your current loan amounts and decide how much to refinance. Generally, it’s best to refinance loans only if you can get a lower interest rate, and you won’t be sacrificing federal benefits that you plan to take advantage of in the future.
• Research loan servicers that specialize in student debt. Getting a low interest rate should be a priority, but it isn’t the only important thing to consider. Earnest, for example, allows borrowers to apply to switch from a variable-rate to a fixed-rate loan, which can help you save money and/or get rate stability when you need it.
• Check your rate and get prequalified. Prequalification allows you to see an estimate of your approval odds and rate eligibility without a hard credit check. It’s done using a soft credit check, which won’t hurt your credit score. Depending on your potential offers, you may want to seek a cosigner to bring down your interest rate, and/or wait a little longer to refinance once you’ve built up a stronger credit history. Here’s how to apply for your first credit card and improve your credit score.
• Apply for a loan. Once you’ve identified the company you want to refinance with, submit your application, and, if approved, your 10-day payoff numbers. This is the amount your loans will cost, including interest, so that your new lender can repay them during the refinancing process and close them out completely.
• Always make your monthly payments on time. Once you’ve got the loan, consider setting up auto-pay for both an interest rate reduction and peace of mind that you’ll always make your student loan repayments on time.

Student loan refinancing vs. income-driven repayment, which is right for me?

While an income-driven repayment plan can lower your student loan payments, it generally won’t reduce the amount you pay over time. Paying off your loans more slowly will actually increase the total amount you repay, because more interest will accrue. Here’s how you can decide which is best for you.

When it makes sense to apply for income-driven repayment

Income-driven repayment options are only available for federal loans. It makes sense to apply for IDR if you have a low income and you’re struggling to make your payments. While you will end up paying more money to your loan servicer over time than you would with a standard repayment plan, IDR can reduce short-term stress and free up your disposable income for other needs.

When it makes sense to consider refinancing

Refinancing might make sense for you if you can lower your interest rate and save money over time. You’ll need a good credit score and proof of stable income in order to get approved for a student loan refinance.

Refinancing could also be a good option if you have private student loans with high interest rates and you’re not eligible for income-driven repayment, which is only for federal loans. You may be able to get a lower monthly payment by refinancing your loan for a longer repayment term.

Learn more about Earnest student loan refinancing

Choosing between income-driven repayment plans and student loan refinancing depends on your specific financial situation and goals. If you have federal loans and a lower income, income-driven plans may offer more affordability and student loan forgiveness programs. On the other hand, if you have good credit and want to potentially save on interest costs, refinancing could be advantageous.

If you want to learn more, check out our Complete Guide to Student Loan Refinancing. Or, if you think refinancing is the right option for you, try Earnest’s rate calculator to see what terms you may be eligible for. It’s fast, free, and won’t affect your credit score.

About the Author

Kassondra Cloos

Kassondra Cloos is a writer, editor, and former Earnest client. She refinanced her own student loans with Earnest after graduating and has first-hand experience with the refinancing process. She has been writing about personal finance and student loans since 2017. She also writes about sustainable travel and adventure for The Guardian, Outside, Backpacker, and many other publications. You can find more of her work via her travel newsletter, Out of Office.