PAYE Plan (Pay As You Earn)

Pay As You Earn (PAYE) is one of four federal income-driven repayment plans. It was designed for newer borrowers and caps your monthly payment at 10% of your discretionary income, with a hard ceiling at what you'd pay under the Standard 10-year Plan.

How the math works

Under PAYE, discretionary income is your adjusted gross income minus 150% of the federal poverty line for your family size. Your monthly payment is 10% of that figure, divided by 12. Crucially, PAYE caps your payment at the Standard 10-year amount — your IDR payment can never go higher than the un-extended payment.

Who qualifies

You're eligible for PAYE if you're a "new borrower" as defined by the Department of Education — generally meaning you had no outstanding federal loans as of October 1, 2007, and received a Direct Loan disbursement on or after October 1, 2011. You also need to demonstrate a "partial financial hardship," which the application calculates automatically.

Forgiveness

PAYE forgives any remaining balance after 20 years of qualifying payments. The forgiven amount may be considered taxable income under federal law (though current federal policy excludes IDR forgiveness from tax through 2025; this is set to expire).

How PAYE compares

PAYE and the new-borrower version of IBR use the same 10% rate, but PAYE only counts your spouse's income if you file taxes jointly. IBR uses the same rule. The newer SAVE Plan usually beats PAYE for undergraduate-only borrowers because of its 225% poverty threshold; PAYE often wins for higher-income graduate borrowers.

Re-certification

Like every IDR plan, PAYE requires you to re-certify your income and family size every 12 months. Missing the re-certification deadline can default you out of PAYE and back into the Standard Plan, which can spike your monthly payment dramatically.