Pay As You Earn (PAYE) Student Loan Repayment Plan Guide

In an attempt to reduce monthly payments for borrowers who struggle to keep up with them, the Department of Education has designed several income-driven repayment plans that set federal student loan payments based on income and family size.

One of those programs is Pay As You Earn (PAYE). In this guide, we’ll explain PAYE, who’s eligible, and how it stacks up against your other repayment options.

How does PAYE work?

The PAYE program was enacted in 2012 as part of President Obama’s first student debt relief law. Its goal is to offer extended protections to federal student loan borrowers who struggle with monthly payments.

An income-driven repayment program, PAYE uses your monthly adjusted gross income and family size to calculate a payment amount.

Monthly payments through PAYE

Payments under PAYE are limited to 10% of your discretionary income but no more than they would be on the standard repayment plan. 

The Department of Education defines discretionary income as the difference between your annual income and 150% of the poverty level for your family size and state of residence.

Here is how monthly payments would look on PAYE with different income levels. These examples assume the poverty level amounts based on 2024 federal guidelines.

Annual income	Discretionary income	Maximum monthly payment (10%)
$50,000	$30,680	$256.17
$70,000	$43,870	$365.58
$90,000	$57,060	$475.50
$110,000	$70,250	$585.42

The federal government requires you to recertify your income and family size to qualify each year for the PAYE (or other IDR) plan. This means your monthly payments will likely change throughout your repayment period.

Student loan forgiveness through PAYE

The repayment period under PAYE is 20 years. After that, any remaining balance is forgiven. 

How much is forgiven depends on your monthly payments—you may have paid off all or most of your loans by the end of the repayment period.

Typically, the forgiven balance will be taxed as part of your taxable income, so plan ahead for that potential expense.

Are you eligible for PAYE?

Many borrowers will find they’re eligible for at least one income-driven repayment plan, but the PAYE plan has some of the most stringent requirements. Only borrowers who meet the following requirements will be eligible:

• You must be a “new borrower,” which means you received a loan after Oct. 1, 2007; if you have a balance for a federal student loan that was disbursed prior to this date, you will not be eligible.
• You must have received a Direct Loan disbursement or consolidated your debt with an application for a Direct Consolidation Loan on or after Oct. 1, 2011.
• Your adjusted monthly payment under PAYE must not exceed that which you would pay under the standard repayment plan. The Federal Student Aid office suggests you’ll likely meet this requirement if your student debt balance is more than your annual discretionary income.
• Your federal student loans cannot be in default. 

These loans qualify for repayment under PAYE:

• Direct Stafford Loans (Subsidized & Unsubsidized)
• Grad PLUS Loans
• Direct Consolidation Loans made after Oct. 1, 2011, as long as they do not include Direct or FFEL (Federal Family Education Loan program) loans made before Oct. 1, 2007

The following loans are eligible after they are consolidated into a Direct Consolidation Loan:

• FFEL Subsidized Federal Stafford Loans
• FFEL Unsubsidized Federal Stafford Loans
• FFEL PLUS Loans for graduate or professional students
• FFEL Consolidation Loans that did not include PLUS Loans
• Federal Perkins Loans

Who should consider PAYE?

You may want to consider PAYE for federal student loan repayment if:

• You’re an eligible new borrower, and you’re currently struggling to make your monthly loan payments.
• You’re married but only want your individual income considered for repayment. (Under PAYE, married borrowers filing taxes separately can calculate payments based on their income without their spouse’s.)
• You’re in a profession that will make you eligible for Public Service Loan Forgiveness (PSLF). To take advantage of PSLF, you must enroll in an income-driven repayment plan.
• Your loans are in default, and you’re using a Direct Consolidation Loan to remove them from default. You must choose an income-driven repayment plan to do so.

Pros & cons of PAYE

Pros

• Lower monthly payments than standard repayment.

• Payments will be lower when you have less discretionary income.

• Interest subsidy for the first 3 years. If your monthly payment doesn’t cover the monthly interest on subsidized loans, the government will pay the remaining interest for 3 years.

• Can help you avoid delinquency or default, which would have a negative impact on your credit score and bar you from taking advantage of certain federal student loan benefits.

Cons

• Borrowers who took out loans before October 1, 2007, will not qualify.

• PAYE extends your repayment period and thus increases the interest you pay over the life of your loan.

• Any forgiven balance is taxable.

• Interest subsidies are limited to 3 years for subsidized loans and are unavailable for unsubsidized loans.

PAYE vs. other income-driven repayment options

The PAYE program isn’t the only income-driven repayment plan available to federal student loan borrowers. Here’s how those stack up.

Revised Pay As You Earn (REPAYE)

For some borrowers, the revised version of PAYE, known as REPAYE, may be more beneficial. This income-driven payment plan was launched in 2015 in an effort to increase eligibility among federal student borrowers.

	PAYE	REPAYE
Term	20 yrs.	20 yrs .(undergrad); 25 yrs. (grad)
Payment	10% of discretionary income	10% of discretionary income

Read More

PAYE vs. REPAYE: Which Is Better for You?

Income-Contingent Repayment (ICR)

With potentially higher payments and a longer repayment term, ICR may not seem like an ideal option; however, it’s one of the only income-driven repayment plans that works with Parent PLUS Loans.

Feature	PAYE	ICR
Term	20 yrs.	25 yrs.
Payment	10% of discretionary income	Lesser of 20% of discretionary income or 12-year fixed plan

Income-Based Repayment (IBR)

Income-based repayment is similar to ICR, but payments are a little lower, and this plan does not cover parent PLUS loans.

Feature	PAYE	IBR
Term	20 yrs.	20 years (after July 1, 2014), 25 years (before July 1, 2014)
Payment	10% of discretionary income	10% (after July 1, 2014), 15% (before July 1, 2014) of discretionary income

10-year Standard Repayment

If you do not take any steps toward updating your repayment plan, you’ll default into the standard repayment plan, which aims to repay your loan in 10 years (or 120 payments). 

Though monthly payments are higher than with income-driven plans, this plan helps you pay off your loan faster and pay the least amount in interest.

Feature	PAYE	10-year standard repayment
Repayment period	20 years	10 years (120 payments)
Payment amount	10% of discretionary income	Fixed monthly payment over 120 payments

Refinancing

Federal student loan borrowers can also refinance student loans with a private lender at any time. For creditworthy borrowers, refinancing could result in lower interest and significant savings over the life of the loan.

Refinancing federal loans with a private lender will make those loans ineligible for benefits included with Department of Education loans, including income-driven repayment and forgiveness.

Is PAYE right for you?

Choosing the right student loan repayment plan can make it easier to manage your debt obligations. As an income-driven repayment plan, PAYE is designed to align monthly payments with your monthly budget.

However, PAYE isn’t right for everyone. If you’re considering changing your federal student loan repayment plan, review your options first. 

When you apply for income-driven repayment with your loan servicer, you’ll typically have the option to let the servicer place you in the most beneficial plan. Note which plan you’re enrolled in, so you know how it affects your repayment timeline and eligibility for forgiveness.