Pay As You Earn (PAYE) Student Loan Repayment: How to Qualify

If you want to lower your federal student loan payment, choosing an income-driven repayment (IDR) plan can help.Income-driven plans include various repayment options that are more affordable and based on your income.One IDR plan option is the Pay As You Earn (PAYE) student loan repayment plan.All of the income-driven plans are a bit different, so in this guide, we’ll cover everything you need to know about PAYE.

What is Pay As You Earn student loan repayment plan? All current IDR plans cap their monthly payments as a specific percentage of borrowers’ discretionary income, including the Pay As You Earn student loan repayment plan.Under PAYE, your monthly student loan payments are 10% of your discretionary income — but not more than what it would be on a Standard Repayment Plan (because if that were the case, then technically you could afford to be on a 10-year Standard Repayment Plan).Your monthly payment amount may change year to year depending on your income as well as your family size.Having payments that are 10% of your income can make the student loan repayment process more manageable, making PAYE an attractive option.

Not only that but after 20 years of repayment, any eligible federal student loan balance you still have is forgiven.However, with current IRS code, you’ll have to pay taxes on that forgiven amount.While PAYE is a great option, not every borrower qualifies.Who is eligible for PAYE? The 10% monthly payment makes PAYE a great option for borrowers struggling to make federal student loan payments.

But it’s important to see if you qualify for the PAYE program first.In order to be eligible for PAYE: You have to be a new borrower.That means taking on loans on or after October 1, 2007, with a disbursement of a Direct Loan on Oct 1, 2011, or later.You must have an eligible loan.

Your loans must be Direct Subsidized or Unsubsidized Loans, Direct PLUS loans (for students), or Direct Consolidation Loans (PLUS loans to parents don’t qualify).Due to new regulations, the PAYE plan won't be available to borrowers who have any loans issued or consolidated on or after July 1, 2026.PAYE will then be completely phased out for all borrowers by July 2028, leaving only IBR, the new RAP plan and non-income-based repayment.Under PAYE you save money on your monthly payments now, but you end up paying more over the course of your repayment due to the interest that accrues.

There’s also the potential tax bill that could hit you after 20 years if there’s a remaining federal loan balance that’s forgiven, too.If you want to pursue Public Service Loan Forgiveness — which requires you to be on an income-driven plan, PAYE could be a good option for you.What are the pros and cons of PAYE? If you’re thinking about choosing PAYE as a repayment plan, consider the pros and cons first.It’s also good to know that if this repayment plan ultimately isn’t a fit, you can change your repayment plan at any time with your loan servicer.

Pros of PAYE: Caps monthly payments at 10% of discretionary income Forgiveness after 20 years Good plan for newer borrowers If married, your spouse’s income won’t affect your payment unless you file a joint tax return There are some subsidies available for accrued interest Cons of PAYE: Not all borrowers are eligible Being phased out by July 2028 You’ll pay more interest Pay taxes on forgiven student loan amount if you don't qualify for PSLF How does PAYE differ from other income-driven plans? As noted above, PAYE is just one income-driven plan available to federal student loan borrowers.While they are similar, there are some important differences to be aware of.The PAYE option differs from the other income-driven plans as only “new borrowers” are eligible for this option.In contrast, Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) plans are available to all Direct Loan borrowers.

Note that there are different rules (e.g., 10% versus 15% of discretionary income) for IBR borrowers based on when you took out your first loan.Another important distinction affects married borrowers.Under the PAYE program, your spouse’s income will only be considered if you file a joint tax return.If you file separately, only the primary borrower’s income is considered.

This was not the case for some previous repayment plans that are no longer available.When it comes to interest savings, PAYE and IBR plans offer interest subsidies.So let’s say that your monthly payment doesn’t cover all of the interest that accrues on your loans.In that case, there are subsidies that can help.

The PAYE program, as well as IBR, have subsidies available for up to three years if your monthly payments do not cover all of the interest that accrued.In other words, the government will pay your remaining interest on your subsidized loans for up to three years.The Federal Student Aid website offers this example: “For example, if the monthly interest that accrues on your subsidized loans is $40, but your monthly PAYE or IBR plan payment covers only $25 of this amount, the government will pay the remaining $15 for the first three consecutive years from the date you began repaying your loans under the PAYE or IBR plan.” Your unsubsidized loans aren’t eligible for any subsidies so you must pay the interest for those loans as well as the interest on your subsidized loans after your three-year period is up.It's also important to point out that PAYE is going away.

So, while you might benefit from it for the next couple of years, you'll need to be thinking ahead for whether you need to switch into the IBR plan or if the new RAP plan or another repayment strategy (e.g., refinancing) might be more advantageous.How to sign-up for PAYE PAYE will only remain available to borrowers with all loans taken out before July 1, 2026.If you take out a new loan or consolidate after that date, PAYE will no longer be an option for you.But if you're eligible and have decided that the Pay As You Earn repayment plan is the right income-driven plan for you, you need to apply.

You won’t be automatically enrolled in the program.You can easily apply on StudentAid.gov or talk to your loan servicer before submitting the Income-Driven Repayment Plan application.When submitting your application, you can choose the PAYE plan or ask your loan servicer which IDR options you may be eligible for that have the lowest payment amount possible.It’s important to note that if you have more than one loan servicer, you need to repeat this process for all of them.

Also, private student loans are ineligible for any IDR plan.During the application process, you’ll need to submit your income and verification which can determine if you qualify for PAYE.Additionally, your income will be used when determining how much your monthly payment will be.Once you’ve submitted the relevant paperwork, your loan servicer will process the application which could take several weeks or longer to get approved.

Remember, being on an Income-Driven Plan, including PAYE, is not a set it and forget it arrangement.You must recertify each year by updating your income and family size.It’s important to do this in a timely manner because if you don’t recertify on time your payments will revert back to what they were on a Standard Repayment Plan.However, you’re not required to report changes to your finances until it’s actually time for your annual recertification.

If you’re on an Income-Driven Plan it’s likely because you can’t reasonably afford the Standard Repayment Plan, so this can come to be a financial shock to your system.To add insult to injury, your interest will be capitalized, too.How will your income be verified? If you want to pursue PAYE, verifying your income to determine your monthly payment is a part of the process.To calculate your discretionary income, you’d take 150% of the poverty guideline for your state and family size, and subtract that number from your Adjusted Gross Income (AGI).

So, let's say you're single with no children and live in one of the 48 contiguous states or the District of Columbia.Your AGI is $40,000, and you have $45,000 in eligible federal student loan debt.Using 150% of the 2026 HHS Poverty Guideline amount, you'd receive a deduction of $23,940.The difference between your AGI and your PAYE poverty guideline deduction is $16,060.

This is your discretionary income.Under PAYE, 10% of your discretionary income is $1,606.Dividing this amount by 12 results in a monthly payment of about $134.When it comes to proving your income, your loan servicer will use your most recent tax return.

The IRS Data Retrieval tool makes this part easy.But what if you haven’t filed a tax return recently or your income situation has changed? You’re not totally out of luck.But you’ll need to provide some form of alternative documentation, like a current pay stub or signed document explaining your taxable income sources.You can use the Repayment Estimator tool or you can use our handy student loan repayment calculator to get a glimpse into what your monthly payments will look like.

And remember, with federal student loans, you can change your repayment plan if you’re not happy with your current option.Using PAYE to help you afford student loan repayment The Pay As You Earn student loan repayment plan can be a useful tool for federal student loan borrowers needing a little help.This plan makes payments more manageable and there are undeniable perks, such as payments being based on 10% of discretionary income and a 20-year forgiveness timeline.But PAYE is only available to certain borrowers, and that eligibility will only last through July 2028.

At which time, PAYE will be no more.If you need help getting your payments under control and decide PAYE is right for you, contact your loan servicer today.Have you considered PAYE as an option for repaying your student loan debt? Why or why not?