Pay As You Earn (PAYE): What you need to know

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Pay As You Earn is a federal student loan repayment plan that sets your student loan payment at a percentage of your income. The plan takes into account your household size and discretionary income and can be much cheaper than the standard repayment plan. Here’s how it works and how to determine if it’s the right plan for you.

What is Pay As You Earn (PAYE)?

The Pay As You Earn income-driven repayment plan (PAYE) caps your monthly student loan payments at 10 percent of your discretionary income — but never higher than the 10-year standard repayment amount. The U.S. Department of Education defines discretionary income as the difference between your annual income and 150 percent of the poverty benchmark for your state (based on family size).

How PAYE works

With the PAYE plan, you’ll pay 10 percent of your discretionary income on your student loans for 20 years. After that, any outstanding student loan balance may be eligible for forgiveness, provided you keep up with your payments as agreed.

As with other IDR plans, you’ll need to update your financial and household information every year, or whenever a change occurs. For instance, if you have a baby or find a higher-paying job, you’ll need to update to your PAYE plan so it makes the correct payment adjustments.

PAYE eligibility requirements

Not everyone will qualify for PAYE. You may be eligible for PAYE if:

  • You have a Direct Loan or a consolidated Federal Family Education Loan (FFEL) Program loan.
  • Your payment amount (based on 10 percent of your discretionary income) would be smaller under PAYE than under the standard 10-year repayment plan.
  • You received your qualifying federal student loans on or after Oct. 1, 2007 (with at least one loan disbursement of a Direct Loan on or after Oct. 1, 2011).
  • You were a “new borrower” who didn’t owe outstanding federal student loan balances when you received those loans.

You also need to be current on your student loan payments when you apply for PAYE. Borrowers who are in default do not qualify for income-driven repayment plans.

How to apply for PAYE

You can complete an application for PAYE or any other income-driven repayment plan. There’s no cost to apply, but you may be contacted by private companies that offer to help you with the application process for a fee.

You’ll need to finish the application in a single session. If you gather the information you need in advance, the application process should take around 10 minutes to complete.

Information you need for your application includes:

  • Personal information: Provide your full name, your address, your email address, your phone numbers and the best time to contact you.
  • Financial information: You can use an online IRS data retrieval tool to document your income. If you’re married, you may need to include your spouse’s information as well.
  • Verified FSA ID: Confirm or create the username and password that can serve as your legal signature.

Remember, in addition to applying for PAYE initially, you’ll also need to recertify your eligibility for the plan every year.

PAYE vs. Income-Based Repayment Plan

The Income-Based Repayment Plan, or IBR, is another popular way for qualified borrowers to modify the terms of their federal student loans. Both PAYE and IBR plans have the potential to lower monthly student loan payments. Yet there are some key differences between these two options.

Qualification criteria
Available to borrowers with qualifying loans issued on or after Oct. 1, 2007, with a loan disbursement on or after Oct. 1, 2011. Adjusted payments (based on income) can’t exceed the standard 10-year repayment plan. Available to borrowers with qualifying federal student loans issued on any date. Adjusted payments (based on income) can’t exceed the standard 10-year repayment plan.
Monthly payment
10% of discretionary income 10%–15% of discretionary income (based on date loan issued)
Loan forgiveness
Available after 20 years Available after 20–25 years (based on date loan issued)
Interest benefits
Government pays interest not covered by monthly payments for three years Government pays interest not covered by monthly payments for three years

Is PAYE right for you?

PAYE isn’t right for every federal student loan borrower. In fact, it features some of the strictest qualification requirements of any income-driven repayment plan. PAYE might work for you if:

  • You expect your income to remain low. You must demonstrate a partial financial hardship to qualify for the PAYE plan. If your income rises in the future, you might not qualify to recertify.
  • You’re married and you both earn an income. PAYE gives you the option to file taxes separately and have your student loan payments based solely on your income.
  • Your student loans include graduate school debt. PAYE will forgive eligible student loan balances after 20 years for both undergraduate and graduate studies.

You should also get an idea of how much the PAYE plan may save you compared with your current student loan repayment plan and any other options you may be considering. You can use a student loan calculator to find out which ones offer the best repayment for you.

Alternatives for lowering your student loan payments

PAYE works well for many borrowers who are trying to lower their student loan payments. However, if you don’t qualify for PAYE or you don’t believe that it’s the best fit for your situation, there are other options to consider.

First, there’s a chance that you may qualify for different federal student loan repayment plans. Some plans are income-driven, like Revised Pay As You Earn (REPAYE), while others, like extended repayment plans, aren’t based on how much money you earn.

You might also consider refinancing your student loans through a private lender. If you qualify for a better interest rate, this option might lower your monthly payments and save you money in interest over the life of your loan. In exchange, however, you’ll give up certain government benefits, like the income-based repayment plans mentioned above and student loan forgiveness. So, it’s critical to consider both the benefits and the drawbacks before you decide to refinance federal student loans.

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Written by
Michelle Black
Contributing writer
Michelle Lambright Black is a credit expert with over 19 years of experience, a freelance writer and a certified credit expert witness. In addition to writing for Bankrate, Michelle's work is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others.
Edited by
Student loans editor