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

Pay As You Earn (PAYE) is a federal student loan repayment plan that sets your student loan payment at a percentage of your income. The plan considers your household size and discretionary income and can be much more affordable than the standard repayment plan.

How PAYE worked

With the PAYE plan, you’ll pay 10 percent of your discretionary income on your student loans for 20 years. The U.S. Department of Education defines discretionary income as the difference between your annual income and 225 percent of the poverty benchmark for your state, based on family size. After 20 years is up, any outstanding federal student loan balance may be eligible for forgiveness, provided you keep up with your payments as agreed.

As with other income-driven repayment (IDR) plans, you must update your financial and household information every year or whenever a change occurs. For instance, if you have a baby or your salary changes, you’ll need to update your PAYE plan information so the plan makes the correct payment adjustments.

PAYE eligibility requirements

Not everyone qualified for PAYE. Those who qualified met the following requirements:

• 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 must have applied for PAYE before July 1, 2024 and stay continuously enrolled.

How the PAYE application worked

Before July 1, 2024, you could complete an application for PAYE or any other income-driven repayment plan on the Education Department’s website. There was no cost to apply.

If you had the information you needed in advance, the application process took around 10 minutes to complete. Information needed for a PAYE application included:

• Personal information: Your full name, address, email address, phone number 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 to 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. SAVE

Saving on a Valuable Education (SAVE) is another popular way for qualified borrowers to modify the terms of their federal student loans. Both PAYE and SAVE plans have the potential to lower monthly student loan payments. Yet there are some key differences between these two options.

• SAVE is available for more types of loans than PAYE.
• SAVE is available to anyone with qualifying loans, but with PAYE you must prove financial hardship.
• There is no payment cap with SAVE, but there is a cap of 10 percent of discretionary income for PAYE.

You can use a student loan calculator or consult your loan servicer to find out which existing repayment options are best for you.

Alternatives for lowering your student loan payments

PAYE worked well for many borrowers trying to lower their student loan payments. However, if you didn’t qualify for PAYE, or you’re looking for a plan now, 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 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 student loan refinance rate, you might lower your monthly payments and save 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, refinancing federal student loans should only be a last resort option if managing your payments becomes too difficult.

Bottom line

PAYE is an income-driven repayment program but new enrollments closed as of July 1, 2024. If you’re already enrolled in the PAYE program, you’ll need to recertify your eligibility each year. SAVE is another income-driven program that is accepting new enrollments, but is currently under litigation.

You can also consider extended repayment programs that are not based on your income — or, as a last resort, refinancing your student loans. Before you take out your first next loan, research the best student loan rates ahead of applying.