You might be able to reduce your monthly federal student loan payment with the Pay As You Earn Repayment Plan. This is one of four income-driven repayment plans that bases your monthly payment amount on your income and family size. Only certain federal Direct Loans are eligible for the PAYE plan, but certain FFEL loans are eligible if consolidated.
Written by Attorney Thomas J. Pearson.
Updated November 1, 2023
What Is the Pay As You Earn (PAYE) Repayment Plan?
The Pay As You Earn (PAYE) Repayment Plan, is one of several income-driven repayment plans for federal student loan borrowers.
Only federal student loan debt is eligible for repayment under a PAYE plan. It doesn’t apply to private student loans. Like all income-driven plans, the PAYE plan considers the borrower’s income and family size when calculating their monthly payment.
If you want to switch to the Pay As You Earn plan, you can submit an application to your loan servicer. You’ll need to know your adjusted gross income and family size.
If you’re trying to figure out which repayment plan will yield the lowest monthly payment amount, you can use the Department of Education’s Loan Simulator tool or contact your loan servicer. Note that with the student loan pandemic-related payment pause ending, wait times may be long for phone calls with loan servicers.
What Loans Are Eligible for the PAYE Plan?
Only certain types of federal student loans are eligible for PAYE plans, including:
Direct Subsidized Loans
Direct Unsubsidized Loans
Direct PLUS Loans (made to graduate or professional students, not to parents)
Direct Consolidation Loans, including consolidated:
Subsidized Federal Stafford Loans from the Federal Family Education Loan (FFEL) Program
Unsubsidized Federal Stafford Loans from the FFEL Program
FFEL PLUS Loans (made to graduate or professional students, not to parents)
FFEL Consolidation Loans (repaying to graduate or professional students, not parents)
Federal Perkins Loans
PAYE Borrower Eligibility Requirements
Along with having one of the loans listed above, you also need to be a “new borrower” to qualify for the PAYE plan. You’re classified as a new borrower if you received a Direct Loan or FFEL Program loan on or after Oct. 1, 2007, and you have no outstanding balance.
Also, if you received a Direct Loan, it must have been disbursed on or after Oct. 1, 2011. Disbursement is when you receive your loan payment from your school, which is deposited into your school account or paid directly to you.
What if You Don’t Know Which Type of Federal Loan You Have?
There are two ways to get details on your federal student loan(s).
First you can check your account on your loan servicer’s website or call your loan servicer. Ask them to tell you the type of each loan you have with them. They can also tell you what federal student loan repayment plans those loans qualify for.
The second option is to look online. This is often quicker. You can look at your StudenAid.gov account (the same one you used to fill out your FAFSA) and/or run a report on the National Student Loan Data System. Both allow you to get detailed information on all of your federal student loans, including loan type, interest rate, loan balance, and repayment term. It can also tell you who your loan servicer is.
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How Are Monthly Payments Calculated Under the PAYE Plan?
The PAYE monthly payment amount is calculated by taking 10% of your discretionary income and dividing it by 12. Discretionary income is your annual income minus 150% of the federal poverty guideline.
If you’re married, your spouse’s income only factors in if you file a joint tax return. The Federal Student Aid’s Loan Simulator is a helpful tool to calculate your monthly payment under the PAYE and other income-driven plans.
To qualify for PAYE, your payments must be lower than your payments would be under the 10-year Standard Repayment Plan.
Can You Receive Loan Forgiveness Through the PAYE Plan?
Yes! After 20 years of payments through the PAYE plan, your remaining loan balance will be eligible for student loan forgiveness, provided you meet the program requirements. It’s important to remember, though, that borrowers who receive this kind of student loan forgiveness will most likely have to pay income tax on the amount forgiven.
What Does It Mean To Recertify a PAYE Repayment Plan?
Because the PAYE repayment plan is based on income and family size, you have to recertify this information annually to remain eligible for the plan. To recertify, you submit a new Income-Driven Repayment Plan application to your loan servicer, every year.
If there’s a significant change in your income or household size, and you want to have your payment recalculated before the annual recertification occurs, you can request this at any time. You’ll need to provide documentation to support the changes. Your PAYE monthly payment can increase or decrease based on changes to your income or household size.
Why Do You Need To Recertify Your PAYE Plan?
If you’re on a PAYE plan and don’t recertify by the annual deadline, your monthly payment will no longer be based on your income. Instead, it will be the amount you would pay under the 10-year Standard Repayment Plan which is usually much higher.
Failing to recertify also causes any unpaid interest on your student loans to be capitalized. This means that all unpaid interest is added to the total loan balance. This will increase your student loan balance and the amount of interest that grows over time. Even if you’re recertifying late, doing so will put you back on the PAYE plan amount and stop the capitalizing interest.
Is the PAYE Repayment Plan Right for You?
Each student loan repayment plan has its pros and cons. You should explore all repayment options before choosing one. The first step in deciding if PAYE is right for you is to contact your loan servicer to discuss your income-driven repayment options. If you don’t know who your loan servicer is, you can call the Federal Student Aid Information Center at (800) 433-3234 or visit the Federal Student Aid’s website.
The PAYE repayment plan is often a good choice for borrowers planning on applying for Public Service Loan Forgiveness (PSLF). PSLF provides loan forgiveness for federal student loan borrowers who work in qualifying public service jobs for 10 years. To be eligible for PSLF, you must be on an income-based repayment plan.
Other Income-Driven Repayment Plans (IDR plans) include:
Having a Hard Time Keeping Up With Your Student Loan Payments?
Staying on top of your student loan payments is important. If you start missing payments, you risk going into default on your loan, which can hurt your credit score and cause a lot of stress. But what if your debt is simply too high for you to manage? Most people who have student loan debt also have credit card debt or other types of debt. This can get overwhelming fast.
If you feel like you’ve tried everything, but you aren’t making headway, you may want to look into filing bankruptcy to discharge your student loans.
If you meet the eligibility requirements, discharging your student loan debt through bankruptcy is a safe way to get your finances back on track.
Hesitant to file bankruptcy? We understand! But there is no shame in using this legal tool. In fact, it was designed to help people just like you get a financial fresh start. Take our free, five minute student loan screener to see if you’re eligible for free help discharging your student loans through bankruptcy.