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

Editor's note, Oct. 22, 2024: PAYE will reopen for enrollment this fall, according to an Education Department spokesperson. The spokesperson did not give an exact date or timeline.

PAYE originally closed to new enrollment on July 1. However, a recent court order has temporarily blocked the SAVE repayment plan, leaving borrowers with no way to earn credit toward Public Service Loan Forgiveness or income-driven repayment forgiveness. As a result, PAYE is coming back. It will be the best option for many PSLF borrowers, the spokesperson said.

Expect application processing delays. More information is available on ED.gov/SAVE.

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 and a partial financial hardship.
Best for: Spouses with two incomes; grad debt; those with high earning potential.

You'll likely qualify for PAYE if you can't afford your payments and you meet these timeline requirements:

You had no outstanding direct loan or FFEL Program loan debt as of Oct. 1, 2007.
You took out 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 expect to earn a high income in the future.
You have grad school debt.
You’re married, and you and your spouse both have incomes.

» MORE: How to submit an income-driven repayment application

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

» MORE: How to get income-driven repayment forgiveness

Unlike most other IDR plans, PAYE limits capitalized interest to 10% of your balance. Capitalized interest — or interest added to your loan’s balance — increases the amount you owe, as interest then accrues on a larger balance.

PAYE is also unique because you need a partial financial hardship to qualify. This is generally true if your total federal student loan debt is higher than your annual discretionary income.

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

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. Specifically choosing PAYE may be right for you in the following instances:

You can qualify for PAYE

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.

» MORE: Income-Based Repayment: Is it right for you?

You expect a future high income

PAYE payments are capped at 10% of your discretionary income, but even if your earnings grow in the future, payments will never be higher than what they would be under the standard 10-year repayment plan. Most other IDR plans don’t have this payment ceiling, which can give some high-earners very large student loan bills.

You’re married — or think you’ll get married

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.

» MORE: Guide to filing taxes with student loans

You have graduate school debt

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 PAYE. 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 studentaid.gov. 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 and submit 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.

Recertify your information to stay on PAYE

To stay on PAYE, 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.

» MORE: How to recertify income-based repayment

Other ways to pay less on your student loans

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.