Pay As You Earn (PAYE) Repayment Plan: A Complete Guide

About a third of federal student loan borrowers don't realize they can switch to a different repayment plan, according to the 2023-2024 Student Loan Borrower Survey from the Consumer Financial Protection Bureau.

But there are other options. The Pay As You Earn (PAYE) Plan is one of the income-driven repayment plans for federal student loan borrowers. Through this plan, eligible borrowers can tap into potentially lower monthly payments and access a path to loan forgiveness.

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This guide explores eligibility requirements for the PAYE Plan, loan forgiveness under this plan, and how PAYE compares to other income-driven repayment options.

What is the Pay As You Earn (PAYE) repayment plan?

The Pay As You Earn (PAYE) Plan is one income-driven repayment (IDR) option for federal student loan borrowers.

Under the PAYE Plan, your monthly payment is capped at 10% of your discretionary income divided by 12. As your income changes over time, your payment may also change. However, your monthly payment can't exceed what you'd pay on the 10-year Standard Repayment Plan.

After making 20 years of monthly payments, your remaining student loan balance is forgiven. For many borrowers, the opportunity to potentially pay less each month while making headway toward loan forgiveness makes PAYE an attractive opportunity.

Who qualifies for the PAYE Plan?

If you want to sign up for the PAYE plan, you'll need to meet the eligibility requirements, which include:

• Eligible loans: The PAYE Plan is available to borrowers with Direct Subsidized Loans, Direct Unsubsidized Loans, grad PLUS loans, and Direct Consolidation Loans. Parent PLUS loans aren't eligible, even if they were consolidated. 
• New borrower: You must not have had an outstanding loan balance on a Direct or FFEL program loan when you received one of those loan types on or after Oct. 1, 2007. You must have received a Direct Loan disbursement on Oct. 1, 2011, or later.
• High debt-to-income ratio: Generally, your federal student loan debt must represent a significant portion of your annual income.

Additionally, the payments calculated under the PAYE Plan must be lower than they would be under the Standard Repayment Plan. For example, if your monthly payment on the standard plan would be $200, but your monthly payment on the PAYE Plan would equal $250, you couldn't sign up for PAYE.

How PAYE calculates monthly payments

On the PAYE Plan, your monthly payment is 10% of your discretionary income, divided by 12, for a repayment term of 20 years. With this plan, discretionary income is calculated by subtracting 150% of the poverty guideline for your state and family size from your annual income.

For example, if your family size is one and you live in one of the 48 contiguous states, 150% of the 2025 poverty guideline is $23,475. If your adjusted gross income (AGI) is $40,000, your discretionary income would be $16,525. Finally, divide 10% of your discretionary income ($1,652.50) by 12 to get your monthly payment, which would be $137.71.

Loan forgiveness under PAYE

After making monthly payments for 20 years under the PAYE Plan, your loan remaining loan balance will be forgiven.

Although your loan balance might disappear, the forgiven amount might count as taxable income. With that, you might face a heavier tax burden in the year you receive student loan forgiveness through the PAYE Plan.

The payments you make under the PAYE Plan can also count toward programs like Public Service Loan Forgiveness (PSLF) if you decide to pursue that instead.

PAYE vs. other income-driven repayment plans

“Federal student loans offer a multitude of repayment plans,” says Jack Wang, a wealth adviser specializing in college financial aid at Innovative Advisory Group.

These choices can present a sticky situation for borrowers trying to find the best option for their situation.

Wang continues, “This doesn't happen anywhere else and we, as consumers, just aren't used to being able to change how much we have to pay without having to refinance a loan. For example, we can't just arbitrarily change our mortgage payment and expect the bank to accept that.”

But in the realm of student loans, PAYE and other income-driven repayment plans make it possible for eligible borrowers to change their plan and opt for a different monthly payment.

Here's a look at how PAYE compares to the other IDR options.

Income-Based Repayment (IBR)

The Income-Based Repayment (IBR) Plan is available to borrowers with Direct Subsidized Loans, Direct Unsubsidized Loans, grad PLUS loans, and Direct Consolidation Loans (as long as they didn't repay parent PLUS loans). Like the PAYE Plan, IBR has a cap so that your monthly payment will never be higher than what you'd pay on the Standard Repayment Plan.

Depending on when you borrowed, your monthly payment may equal 10% or 15% of your discretionary income, and your repayment term will either be 20 or 25 years.

Saving on a Valuable Education (SAVE)

The SAVE Plan, which replaced the Revised Pay As You Earn (REPAYE) Plan, offers the most generous repayment structure. The plan excludes 225% of the poverty line for your situation from your AGI. Your monthly payment will be 5% of your discretionary income if you have only undergraduate loans, and a weighted average between 5% and 10% if you have a mixture of undergraduate and graduate loans. However, unlike PAYE, your payments under SAVE aren't capped.

Your repayment term for SAVE could be as few as 10 years if you originally took out $12,000 or less in student loans. Every $1,000 above that adds another year to your repayment term.

Practically since its inception, the SAVE Plan has faced significant legal challenges. As of February 2025, the SAVE Plan is on pause — borrowers enrolled in the plan are in a general forbearance and don't owe any payments at the moment.

For many, the more generous terms of the SAVE Plan might make sense. But it's not the best fit for everyone.

“If you're approaching 120 payments for PSLF, you might consider changing to an 'active' repayment plan like PAYE or IBR,” says Robert Farrington, founder of The College Investor.

“I recommend this for borrowers with less than 10 payments left until forgiveness, so they can simply get it done this year,” Farrington adds.

Income-Contingent Repayment (ICR)

The ICR Plan is the only income-driven repayment plan that allows parent PLUS loan borrowers to qualify (by consolidating with a Direct Consolidation Loan). Under the this plan, your payment is the lesser of 20% of your discretionary income or what you'd pay on a fixed repayment plan over the course of 12 years, adjusted according to your income. Your repayment term is 25 years. Unlike PAYE, there's no payment cap under ICR.

How to apply for the PAYE repayment plan

If you want to sign up for the PAYE Plan, follow these steps:

• Log in to StudentAid.gov: You'll need your Federal Student Aid (FSA) ID and password.
• Submit an Income-Driven Repayment (IDR) Plan Request: Start the process by completing an application for the PAYE Plan.
• Verify your income: You'll need to add your financial information and may need documents such as tax returns or pay stubs.

According to StudentAid.gov, it takes most people just 10 minutes to complete the application. After you complete an application, you'll simply wait to see if it's approved.

Pros and cons of the PAYE Plan

As with every financial decision, there are advantages and disadvantages to consider.

One of the advantages that comes with PAYE is a potentially lower monthly payment that can never go above what you'd pay on the Standard Repayment Plan. Additionally, you can take advantage of loan forgiveness at the end of your repayment term.

However, depending on your monthly payment, your payment might not cover the interest accruing on the loan. In that case, your unpaid interest will get tacked onto the loan, which grows your loan balance over time.

In addition, you must meet the new borrower requirement in order to qualify for PAYE — this is the only IDR plan with that stipulation.