Pay As You Earn: How It Works and Whom It’s Best For

You'll likely qualify for PAYE if you can't afford your payments and didn't start college until after 2007.
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Written by Ryan Lane
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Pay As You Earn (PAYE) is an income-driven repayment (IDR) plan that caps federal student loan payments at 10% of your discretionary income and forgives your remaining balance after 20 years of repayment.

PAYE at a glance

  • Repayment length: 20 years.

  • Payment amounts: 10% of your discretionary income.

  • Other qualifications: Must have federal direct loans.

  • Best for: Spouses with two incomes; grad debt; those with low earning potential.

You'll likely qualify for PAYE if you can't afford your payments and didn't start college until after 2007. Borrowers who enrolled earlier may still be eligible if they did all of the following:

  • Took out federal student loans after Oct. 1, 2007.

  • Didn't have a federal student loan balance when taking out those loans.

  • Received a direct loan on or after Oct. 1, 2011.

Is PAYE right for you?

If you meet its requirements, PAYE is usually the best income-driven option for you in the following instances:

  • You don’t expect your income to increase much over time.

  • You have grad school debt.

  • You’re married, and you and your spouse both have incomes.

PAYE vs. other income-driven plans

All income-driven plans share some similarities: Each caps payments to between 10% and 20% of your discretionary income and forgives your remaining loan balance after 20 or 25 years of payments.

Starting July 2024, these figures will change as the rest of the Saving on a Valuable Education (SAVE) plan takes effect. Payments for undergraduate loans will be capped at 5% of discretionary income. Also, individuals can receive loan forgiveness after 10 years of payments if they have $12,000 or less in student loans.

Use Federal Student Aid’s Loan Simulator to see how much you might pay under different plans.

The biggest difference with Pay As You Earn is that it limits capitalized interest to 10% of your balance; most other income-driven plans don't offer this benefit. Capitalized interest — or interest added to your loan’s balance — increases the amount you owe, as interest then accrues on a larger balance.

For example, let's say you have a $100,000 loan that's accrued $15,000 in interest. If you left PAYE, only 10% of your original balance — or $10,000 — of that interest would be added to your balance. Other plans would capitalize the entire $15,000, not only costing you that extra $5,000 but also allowing future interest to grow on a higher balance.

If PAYE doesn't sound right for you, consider one of the other three income-driven repayment plans: SAVE, Income-Based Repayment or Income-Contingent Repayment.

In most cases, the least confusing way to select an income-driven plan is to let your servicer place you on the plan you qualify for that will have the lowest monthly payment. But based on its features, specifically choosing PAYE may be right for you in the following instances:

Pay As You Earn has the strictest requirements of any income-driven plan. To qualify, you must demonstrate a partial financial hardship — which essentially means you can't afford the standard repayment amount — and meet two distinct borrowing guidelines:

  • You must have received a direct loan on or after Oct. 1, 2007, and had no outstanding federal loans at that time.

  • You must have received a direct loan disbursement on or after Oct. 1, 2011.

If you meet PAYE's financial qualifications, but didn't borrow your loans at the right time, consider Income-Based Repayment. PAYE's features are very similar to the new version of IBR, which is available to those who borrowed loans after July 1, 2014.

Payments under Pay As You Earn are capped at 10% of your discretionary income. Unlike some other income-driven plans, PAYE never increases your payments higher than what you would pay under the standard 10-year repayment plan — even if that's less than 10% of your discretionary income.

If your income rises enough, though, your payments would stop being based on your income, you'd owe the standard amount each month and any unpaid interest would be added to your balance, increasing the amount you owe.

Consider SAVE instead if you think your income is going to increase greatly — or is already high enough that you don’t qualify for PAYE. Until July 2024 where it will become 5%, SAVE also caps payments at 10% of your discretionary income, but it doesn’t require you to demonstrate a partial financial hardship to qualify.

If you’re married, your payments under PAYE depend on your tax filing status:

  • File taxes separately. Payments will be based solely on your income.

  • File taxes jointly. Payments will be based on your and your spouse’s income.

Income-driven repayment plans can last up to 25 years. Even if you’re not married now, you may be in the next quarter-century. If you’re using PAYE at that point, you could keep your payments low by filing taxes separately.

Talk to a tax professional to understand the pros and cons of different tax filing statuses. You shouldn’t choose or change your status based solely on student loan payments.

Pay As You Earn forgives any remaining balance on your loans after 20 years of payment — no matter what type of federal loans you have.

Other income-driven plans either always take 25 years until forgiveness or add five extra years to your repayment term if you took out loans for graduate or professional studies.

If you don’t have graduate school debt — and won’t qualify for Public Service Loan Forgiveness — weigh the benefits of SAVE vs. PAYE. SAVE subsidizes more interest on your loans, potentially leaving you with a smaller balance to forgive. That’s actually a good thing since non-PSLF forgiven amounts are taxable. » MORE: Who should get on ‘SAVE’, the new student loan IDR plan?

How to apply for PAYE

You must enroll in Pay As You Earn. You can do this by mailing a completed income-driven repayment request to your student loan servicer, but it’s easier to complete the process online. You can change your student loan repayment plan at any time.

  • Visit Log in with your Federal Student Aid ID, or create an FSA ID if you don’t have one.

  • Select income-driven repayment plan request. Preview the form so you know what documents to have ready, like your tax return or alternate proof of any taxable income you’ve earned within the past 90 days.

  • Choose your plan. If you qualify for more than one income-driven repayment plan, you can be automatically placed in the plan with the lowest payment or specifically choose PAYE if it makes the most sense for you.

  • Complete the application. Enter the required details about your income and family. Remember to include your spouse’s information, if applicable, as it will affect your payments under PAYE.

Your servicer can put your loans in forbearance while processing your application. You aren’t required to make payments during forbearance, but interest will accrue on your loan. This increases the amount you owe.

You can temporarily self-report income

Through March 2024, borrowers can self-report their income when applying for or recertifying an income driven-repayment plan, according to the Education Department. That means you don't have to submit tax documentation when you report your income. This can be completed online when you submit the IDR application.

To stay on the Pay As You Earn plan, you must resubmit the income-driven repayment application every year, unless you gave consent during the application process for your tax information to be accessed. If so, your recertification will automatically renew. You will receive notice before a new payment amount goes into effect. If your income changes, your payments will change, too.

If you miss the recertification deadline — or you begin earning too much to qualify for PAYE — your payments will switch to the amount you'd pay under the standard plan. Any interest will also be capitalized, or added to your principal balance, at that point.

Other ways to pay less

If income-driven repayment isn't right for you, the federal government offers extended repayment and graduated repayment plans, which lower your payments but aren’t based on your income. You may pay more interest under these plans, though, and neither offers loan forgiveness.

You also may be able to pay less by refinancing your student loans. Refinancing federal student loans can be risky, as you’ll lose access to income-driven repayment and other federal loan programs and protections. But if you’re comfortable giving up those options and have strong credit as well as a steady income, refinancing may save you money.

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