Credible takeaways
- The PAYE Plan limits monthly federal student loan payments to 10% of your discretionary income and never exceeds the standard 10-year repayment amount.
- The PAYE Plan is closed to new borrowers whose loans are disbursed after July 1, 2026, and all existing enrollees must switch to a different plan by July 1, 2028.
- RAP will become the default income-driven repayment option when PAYE is phased out.
- Any student loan debt forgiven under PAYE in 2026 or later is generally considered taxable income by the IRS.
The Pay As You Earn (PAYE) Plan is an income-driven repayment plan for federal student loans that caps the monthly payment at 10% of the borrower’s discretionary income. The Department of Education is phasing out PAYE, and as of July 1, 2026, no new borrowers may enroll. Current borrowers enrolled in the PAYE Plan must switch to another repayment plan by July 1, 2028.
Here’s everything you need to know about the PAYE Plan and what to do before it’s eliminated.
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What is the Pay As You Earn Plan and how does it work?
The Department of Education (ED) offers several repayment plans for federal student loan borrowers. The Pay As You Earn (PAYE) Plan is one of the income-driven repayment plans available to borrowers who may struggle to afford their monthly payments on the Standard Repayment Plan. Currently, 1.6 million borrowers are enrolled in a PAYE Plan, according to the ED.
Under PAYE, your monthly payment is equal to 10% of your discretionary income — but your payment will never be greater than the amount you would pay under the 10-year Standard Repayment Plan. The ED defines your discretionary income as the difference between your annual income and 150% of the federal poverty guideline for your family size and state of residence.
Borrowers enrolled in PAYE have a 20-year repayment period. Any remaining balance after 20 years of on-time payments will be forgiven.
Who is still eligible for PAYE in 2026?
While the ED is phasing out the PAYE Plan, current borrowers may still be eligible.
“Borrowers who had federal student loans prior to July 1, 2026, are eligible for the PAYE repayment plan,” says Mark Kantrowitz, student loan expert and the author of “How to Appeal for More College Financial Aid.”
But Kantrowitz also points out that the original PAYE eligibility criteria still apply. To enroll in the PAYE Plan, existing borrowers must meet the same requirements:
- You must have been a new borrower as of October 1, 2007, with no federal student loans prior to that date.
- You must have received a federal student loan disbursement on or after October 1, 2011.
Existing borrowers can lose their PAYE eligibility if they take out new loans, Kantrowitz adds.
“If they borrow a new federal student loan or consolidate their loans on or after July 1, 2026, they will have to switch into the Tiered Standard Plan or RAP,” he says.
But even for current eligible borrowers, the PAYE Plan will be phased out in the next two years. Existing federal student loan borrowers can continue to enroll in PAYE until July 1, 2027. The PAYE Plan will disappear for everyone by July 1, 2028.
See Also: Income-Contingent Repayment (ICR) Plan: What To Know
How much will your payment be under PAYE?
Under the PAYE Plan, your monthly payment is capped at 10% of your annual discretionary income. Your discretionary income is the difference between your annual income and 150% of the federal poverty guideline for your family size and state.
The PAYE Plan also stipulates that even if your discretionary income goes up, your monthly payment will never be more than the amount you would pay under the 10-year Standard Repayment Plan.
Let’s look at an example:
James has a federal student loan with an outstanding balance of $45,300 and an interest rate of 6.53%. Under the Standard Repayment Plan, James has a monthly payment of $515, which he is struggling to pay. He would like to know how much he would pay under the PAYE Plan.
James has an annual income of $66,600. For a single-person household in his state, 150% of the federal poverty guideline is set at $23,940. To determine his discretionary income, the ED would use this calculation:
James’s annual income - 150% federal poverty guideline = annual discretionary income
$66,600 - $23,940 = $42,660
That means James’s annual discretionary income is $42,660.
From there, the ED would use this calculation to determine James’s monthly PAYE payment:
10% of annual discretionary income ÷ 12 months = monthly PAYE payment
10% of $42,660 = $4,266
$4,266 ÷ 12 = $355.50
Under the PAYE Plan, James would have a monthly payment of $355.50 for this year.
It’s important to remember that PAYE Plan borrowers must update their income and family size every year. If James’s income increases next year, his monthly payment will also increase. But no matter how much his income increases, his monthly payment will never exceed $515, since that is the amount he would pay under the standard 10-year repayment plan.
You May Also Like: Recertifying Your Income for Student Loans: What You Need To Know
What should you do before PAYE ends by July 2028?
Borrowers currently enrolled in the PAYE Plan should start comparing alternative repayment plans to see which option works best for their situation, since PAYE will be phased out by July 1, 2028.
There will only be two income-driven repayment plan options available after July 1, 2028: the Income-Based Repayment (IBR) Plan and the Repayment Assistance Plan (RAP).
Kantrowitz offers this advice for borrowers: “For low- and moderate-income borrowers, IBR will typically yield a lower monthly payment than the RAP,” he says. That includes the possibility of a zero monthly payment, since RAP has a $10 minimum monthly payment.
“IBR will usually yield the same monthly payment as PAYE for borrowers who qualified for PAYE,” Kantrowitz adds.
Check Out: SAVE Repayment Plan: What Happens Now That It's Over
Important
Contact your loan servicer and calculate your monthly payments under IBR and RAP to determine the best option for your situation before PAYE is eliminated. If you don’t make a choice, you’ll automatically be enrolled in RAP.
How does PAYE compare to RAP and IBR?
Understanding the differences between PAYE, RAP, and IBR can help you compare your repayment options.
Here’s how they look based on minimum and capped monthly payments, timeline for forgiveness, and eligibility for Public Service Loan Forgiveness (PSLF):
Editor insight: “Student loan balances forgiven under an IDR plan in 2026 or later are treated as income by the IRS in the year they're discharged. I recommend setting money aside before your forgiveness date and consulting a tax professional to estimate what you'll owe. PSLF remains tax-free, but state laws may vary.”
— Lisa Davis, Student Loans Editor, Credible
Is PAYE right for you?
Eligible borrowers interested in the PAYE Plan may want to weigh the potential benefits and drawbacks of this repayment plan, especially given that the program ends on July 1, 2028.
Here are some factors you should keep in mind:
Pros
- Lower monthly payments
- Capped monthly payments
- PSLF eligibility
Cons
- July 1, 2028, phase-out
- Annual recertification
- Longer repayment timeline
- Any balance forgiven is taxable
Details on the pros
- Lower monthly payments: Your payment is set at 10% of your discretionary income, which will typically be lower than your payment under either the Standard Repayment Plan or RAP.
- Capped monthly payments: Unlike RAP, payments are capped at the amount you would pay under the Standard Repayment Plan.
- PSLF eligibility: Any payments you make under the PAYE Plan are eligible for Public Service Loan Forgiveness, which allows you to eliminate your remaining debt balance after 10 years of eligible payments.
Details on the cons
- July 1, 2028, phase-out: The PAYE Plan will disappear for all borrowers by July 1, 2028. Borrowers must switch to a different repayment plan before that date.
- Annual recertification: You must recertify your income and family size each year, which can be time-consuming and lead to payment increases.
- Longer repayment timeline: Extending your repayment terms to 20 years results in higher interest payments over time.
- Any balance forgiven is taxable: After 20 years of on-time payments, your remaining loan balance will be discharged, but you may have to pay income tax on the discharged amount.
FAQ
Is Pay As You Earn (PAYE) still available in 2026?
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Does getting married affect your PAYE payment?
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What happens to your loan balance when it's forgiven under PAYE?
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Can PAYE lower my monthly student loan payment?
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