What is the Pay as You Earn Plan for federal student loans?

Pay As You Earn is an income-driven repayment plan that can lower your federal student loan payments. (Shutterstock)

Pay As You Earn (PAYE) is an income-driven repayment plan that can help make your monthly federal student loan payments more manageable. Here’s what you need to know about the Pay As You Earn Plan, who’s eligible, and how to apply.

If you’re considering refinancing private or federal student loans, learn more about student loan refinancing and compare rates from multiple lenders with Credible.

• What is Pay as You Earn (PAYE)? 
• How do you qualify for PAYE?
• When the PAYE Plan might make sense for you
• Pros and cons of PAYE
• PAYE vs. other income-driven repayment plans
• How to apply for PAYE
• Alternatives to PAYE and income-driven repayment plans

What is Pay as You Earn (PAYE)?  

Pay As You Earn is an income-driven repayment (IDR) plan offered by the U.S. Department of Education that can lower your federal student loan payments. It caps your monthly student loan payment at 10% of your discretionary income, which the education department defines as the difference between your annual income and 150% of the poverty guideline for your state and family size. 

Your remaining student loan balance will be forgiven if you haven’t fully repaid your loans by the end of PAYE’s 20-year repayment period. But if you meet the requirements of Public Service Loan Forgiveness (PSLF), your remaining loan balance may be forgiven after only 10 years of making qualifying payments.

To qualify for the PAYE Plan, you must show a partial financial hardship, meaning your payment would be lower with PAYE than the Standard Repayment Plan amount.

You should continue making your regular federal student loan payments until you’re approved for PAYE. Once you’re enrolled in the PAYE Plan, you’ll need to recertify every year — even if your income or family size hasn’t changed — or you might get removed from the program. 

And it’s important to understand that your loan balance may actually grow while you’re on a PAYE plan. This can happen if your monthly payment amount isn’t enough to cover the interest you owe and the lender capitalizes the unpaid interest. Capitalization means the lender adds your unpaid interest to the principal balance of the loan.

How do you qualify for PAYE?

To qualify for PAYE, you must meet the following criteria: 

• You must be a new borrower on or after Oct. 1, 2007.
• If you took out a Direct or FFEL Program Loan on or after Oct. 1, 2007, you didn’t have an outstanding balance on another Direct or FFEL Program Loan at the time.
• You received funds for a Direct or Direct Consolidation Loan on or after Oct. 1, 2011.
• The payment you make under PAYE, based on your income and family size, is less than what you’d pay under the 10-year Standard Repayment Plan.
• You have a Direct Subsidized Loan, Direct Unsubsidized Loan, Direct PLUS Loan as a graduate or professional student, a Direct Consolidation Loan that didn’t repay any PLUS Loans made to parents, a FFEL Loan, or federal Perkins Loan.
• Your federal student loans aren’t in default.

It’s important to note that PAYE doesn’t have a maximum income limit. It considers how much you earn in relation to your federal student loan debt rather than how much you earn as a stand-alone number. 

If you’re thinking about refinancing, Credible lets you compare student loan refinance rates without affecting your credit.

When the PAYE Plan might make sense for you

PAYE can be a great option in certain situations. You might want to explore this repayment plan if any of the following applies to you:

• You don’t expect a significant increase to your income. If you don’t currently earn a lot but receive a huge pay bump down the road, you might not be able to requalify for PAYE.
• You’re single. Since two incomes might make it more difficult to prove a partial financial hardship, PAYE may be easier to qualify for if you’re single.
• You have a low income and large loan balances. If you don’t earn that much but have a lot of federal student loans to repay, PAYE can make your monthly payments more manageable.
• You have a big family. With this repayment plan, the cost of living in your state (which is based on your family size) is important. If you have kids, it may be easier to prove partial financial hardship.

Pros and cons of PAYE

As with all IDR plans, PAYE comes with benefits and drawbacks to consider.  

Pros

• It lowers your monthly payment to 10% of your discretionary income.
• Any remaining loan balance can be forgiven after 20 years (or 10 years with PSLF).
• Your spouse’s federal student loans are also considered, which can make it easier to qualify.

Cons

• If your income increases significantly in the future, you may not be eligible to keep making payments under the PAYE Plan.
• You’ll be on the hook for taxes if your federal student loan balance is forgiven under PAYE. But if your loan is forgiven between Dec. 31, 2020, and Jan. 1, 2026, the forgiven amount won’t count as taxable income, thanks to a provision of the American Rescue Plan Act.
• If you unenroll from the PAYE Plan, your student loan payment can go up.

PAYE vs. other income-driven repayment plans

The Pay As You Earn Plan isn’t the only option for repaying federal student loans. The Department of Education offers three other IDR plans to choose from. The repayment plan you choose affects how much you’ll pay in interest over the life of the loan (though federal student loan interest rates are typically lower than interest rates on private student loans). To learn more about IDR plans, visit the Federal Student Aid website.

Revised Pay As You Earn (REPAYE)

• Monthly payment amount — 10% of your discretionary income
• Term length — 20 years for undergraduate loans; 25 years for graduate or professional study loans
• Eligible loans — Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, Direct Consolidation Loans that don’t include PLUS Loans (Direct or FFEL) made to parents
• When interest capitalizes — If you voluntarily leave the plan or don’t recertify

Income-Based Repayment (IBR)

• Monthly payment amount — 10% of your discretionary income if you’re a new borrower on or after July 1, 2014; 15% of your discretionary income if you’re not a new borrower on or after July 1, 2014 (both payment amounts won’t exceed the standard 10-year Standard Repayment Plan amount)
• Term length — 20 years if you’re a new borrower on or after July 1, 2014 (or 25 years if you’re not a new borrower on or after July 1, 2014)
• Eligible loans — Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, PLUS Loans made to students, Consolidation Loans (Direct or FFEL) that don’t include PLUS Loans made to parents
• When interest capitalizes — If you don’t have partial financial hardship anymore, don’t recertify, or voluntarily leave the plan

Income-Contingent Repayment (ICR)

• Monthly payment amount — Either 20% of your discretionary income or what you’d pay on a repayment plan with a fixed payment over 12 years (whichever is less)
• Term length — 25 years
• Eligible loans — Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, Direct Consolidation Loans
• When interest capitalizes — If you don’t recertify

How to apply for PAYE

You can complete the PAYE application process online by following these steps:

• Go to the IDR plan request page on the Federal Student Aid website.
• Click "Log In To Start" under the "New Applicants" section.
• Log in with your FSA ID, which is the same login you used for the FAFSA when you initially applied for federal student loans.
• Complete the application, which typically takes 10 minutes or less.
• Connect the application to your IRS tax form or submit the most recent copy of your tax form to your student loan servicer.
• Enter your income into the loan payment calculator.
• Select the PAYE Plan if you qualify.
• Enter additional personal details and submit your application.

Alternatives to PAYE and income-driven repayment plans

If an IDR plan isn’t right for you, or you aren’t eligible for one, consider these other ways to manage your student loan debt:

• Double up on payments — If you pay more than the minimum required each month, you can shorten your repayment period and save on interest over the life of the loan.
• Deferment or forbearance — With these options, you can temporarily postpone or lower your federal student loan payments. If your loans are in deferment, they won’t accrue interest. But if your loans are in forbearance, interest will continue to accrue on the balance. To apply, contact your student loan servicer.
• Refinance — Refinancing can potentially lower your interest rate and monthly payment. Just keep in mind that you’ll have to refinance a federal loan into a private loan, which will cause you to lose the benefits and protections that come with federal loans, including access to income-driven repayment plans and PSLF.

With Credible, you can compare student loan refinance rates from various lenders in minutes.