Transportation infrastructure is one of the largest consumers of natural materials. To improve the environmental quality and sustainable development of transportation infrastructure, it is important to implement sustainable strategies in pavement construction and rehabilitation. The use of recycled materials is a key element in generating sustainable pavement designs to save natural resources, reduce energy, greenhouse gas emissions, and costs. The objective of this study was to propose a methodology for assessing the environmental and economic life-cycle benefits when using recycled asphalt pavement (RAP) materials in highway projects. Previous studies on life cycle analysis (LCA) using RAP focused on the economics and/or environmental impacts during the material production process. Thus, there is a need to consider sustainability analysis at all stages of construction and rehabilitation during the performance period of pavement structures. This study addresses this need with the proposed methodology. The suggested approach could be potentially implemented in a pavement management system (PMS) so as to introduce sustainability principles in optimizing alternative rehabilitation strategies. The methodology includes various steps for the analysis, starting with condition assessment of the existing highway, identifying alternative structural pavement designs, predicting service life, setting up alternative rehabilitation strategies, and conducting life cycle environmental and economic analysis. To demonstrate the value of the methodology, a comparative parametric study was conducted on two real case study projects representing actual field conditions for primary roads in Maryland. These case studies were used in order to quantify the economic savings and environmental benefits of using different levels of RAP in highway rehabilitation. The results of the analysis indicate that incorporating RAP in pavement rehabilitation can contribute substantially to cost savings and environmental impact reduction (e.g., greenhouse gas emission, energy, water, and hazardous waste). The benefits illustrated in this study are expected to encourage wide adoption of the proposed methodology and the use of recycled materials in highway construction and rehabilitation. The methodology is transferable where similar materials and highway construction techniques are used.