Pay As You Earn Student Loan Repayment (PAYE)

The Pay As You Earn (PAYE) program, one of four Income-Driven Repayment plans (IDRs) for student loan debt offered by the federal government, was created as a lower-cost alternative for young graduates with a lot of student loan debt.

It’s intended for newer borrowers, those who didn’t have student loan balances before Oct. 1, 2007, and who borrowed a Direct Loan or Direct Consolidated Loan after Oct. 1, 2011. It was slated to be phased out July 1, 2024, to be replaced by Saving on a Valuable Education (SAVE) plan. In December 2024, PAYE began accepting enrollments again, but it is scheduled to be phased out in 2027. With the possibility the SAVE plan may be done away with, PAYE’s future could change again.

Borrowers who are already in PAYE, or enroll in it, will continue to be able to pay back their loans under the plan if it’s phased out. A phase-out means it simply won’t accept any more applicants.

How Does PAYE Work?

The PAYE program began in 2012 as a way for low-income borrowers with newer loans – those just graduating – to take advantage of an IDR that offered lower payments than established plans and help put a dent in student loan debt.

Borrowers had to have not received money from any federal student loan plan before Oct. 1, 2007, and not received money from a Direct or Direct Consolidated Loans before Oct. 1, 2011.

Because of the restrictions on loans that were accepted – debt from phased-out programs like Federal Family Education Loans (FFEL) didn’t qualify – the more flexible Revised Pay As You Earn (REPAY) plan was enacted in 2015. It was replaced with SAVE in 2022, but SAVE quickly became entrenched in the courts because of its forgiveness option, which is based on a different law than that of PAYE and other income-driven repayment plans that offer forgiveness.

PAYE has the lowest monthly payment amount of the IDRs, based on income, family size and state of residency. Monthly payments under PAYE are capped at 10 percent of your discretionary income.

Once you qualify, you continue to make payments under the plan even if your hardship no longer applies. If you’ve made payments on time until the 10 or 20 years is up, the remaining balance on your loan can be forgiven. The forgiven amount is subject to income tax.

PAYE Eligibility

All Direct Subsidized and Unsubsidized Loans, including from the phased-out Stafford Loan program, as well as PLUS Loans made to students, and Direct Consolidation Loans are eligible. Loans made to parents, including PLUS and FFEL loans, are not eligible. Also not eligible are uninsured private loans, loans in default and Perkins Loans, which were also phased out.

You also must demonstrate a partial financial hardship. If the monthly payment on your eligible federal student loans under a 10-year Standard Repayment Plan is larger than the monthly amount you would be required to pay using Pay As You Earn.

While PAYE is similar to the Income-Based Repayment Plan (IBR), which caps monthly loan payments at 10%-15% of discretionary income (based on when your loans were disbursed), Pay As You Earn caps payments at 10%. Discretionary income for both is calculated by using 150% of the federal poverty guideline income. In 2025, it was $15,650 for a single person, so $23,425 would be deducted from the borrower’s adjusted gross income, which is income before taxes and deductions, and 10% of the result would be the monthly payment.

Benefits of a PAYE Plan

If a monthly payment in this plan doesn’t cover the loan’s interest while you are still under a financial hardship, the federal government will pay the unpaid accrued interest on a Direct Subsidized Loan for up to three years from the time Pay As You Earn is implemented.

Unpaid Interest will capitalize if you are no longer facing a partial financial hardship. If that happens, the total interest that does capitalize is limited to 10% of your original principal balance.

You may be eligible for a 10-year public service forgiveness of the remaining loan balance if you are employed full-time for a public service organization and make 120 on-time, full monthly payments.

If you do not qualify for public service forgiveness, but meet certain other requirements, your remaining balance is forgiven after 20 years of repayment.

Since the Pay As You Earn Plan is based on income, you must submit income documentation each year to your loan service provider. If your income increases from year-to-year, the monthly payment may be adjusted. However, it will never be more than you would have owed with the 10-year Standard Repayment Plan. If payments significantly increase, you can switch to a Standard Plan to finish paying off the rest of your consolidated student loan balance.

Borrower Examples

Here’s an example of PAYE payments for borrowers with different incomes compared to what they’d pay in the Standard Repayment Plan. To make it simple, they’re all in households of one person. Notice that the higher borrowers benefit most from PAYE, despite the fact the difference in income isn’t that large.

Determining Which Repayment Plan Is Right for You

Deciding which repayment plan is best for you can be difficult. Don’t wait until it’s time to graduate before you decide on a plan. Research the plans and be ready to take action once you know what your employment situation will be.

If you’ve already graduated and are struggling with student loan debt, see if you qualify for PAYE or another income-drive repayment plan. Making loan payments on time will help build strong credit and a strong financial foundation.