Pay As You Earn (PAYE): How It Works, Eligibility & What's Changing

The Pay As You Earn (PAYE) repayment plan caps your monthly federal student loan payment at 10% of your discretionary income and forgives any remaining balance after 20 years of qualifying payments. PAYE is one of the federal government’s income-driven repayment (IDR) plans.

• Eligibility is narrow. You must be a “new borrower” — meaning you had no outstanding federal loan balance on October 1, 2007, and your first Direct Loan was disbursed on or after October 1, 2011.

• Your payment has a ceiling. Your PAYE payment will never exceed what you would pay under the 10-year Standard Repayment Plan.

• PAYE qualifies for PSLF. Payments made under PAYE count toward the 120-payment requirement for Public Service Loan Forgiveness.

• The plan is being phased out. Under the One Big Beautiful Bill Act, PAYE will be eliminated by July 1, 2028. Eligible borrowers can still enroll.

PAYE is available only to borrowers who meet three requirements: you must hold the right type of loan, qualify as a “new borrower,” and demonstrate a partial financial hardship.

Loan type. You must have federal Direct Loans — Direct Subsidized, Direct Unsubsidized, or Direct PLUS loans made to graduate or professional students. Parent PLUS loans are not eligible. If you have older FFEL (Stafford) or Perkins loans, you can consolidate them into a Direct Consolidation Loan to qualify — but not if the consolidation includes a Parent PLUS loan.

New borrower status. You must meet both of these conditions:

No outstanding balance on any Direct Loan or FFEL loan on October 1, 2007.
At least one Direct Loan disbursement on or after October 1, 2011.
Paying off the balance after that date does not retroactively qualify you. You can check your loan history at StudentAid.gov.

Partial financial hardship. Your calculated PAYE payment must be less than what you would owe under the 10-year Standard Repayment Plan. You can check using the Department of Education’s Loan Simulator.

Related: REPAYE vs. PAYE: Differences, Eligibility & How to Choose

Your monthly PAYE payment equals 10% of your discretionary income, divided by 12.

Discretionary income is the difference between your adjusted gross income (AGI) and 150% of the federal poverty guideline for your family size and state of residence. The poverty guideline is higher in Alaska and Hawaii, which lowers the payment.

Example. A single borrower with a $50,000 AGI and a family size of 1 in the contiguous U.S.:

1. 150% of the 2025 federal poverty guideline for a household of 1 = $23,940

2. Discretionary income = $50,000 − $23,940 = $26,060

3. Annual PAYE amount = 10% × $26,060 = $2,606

4. Monthly payment = $2,606 ÷ 12 = $217.17

If your income is at or below 150% of the poverty line, your payment is $0. A $0 payment still counts as a qualifying payment toward forgiveness and PSLF.

Payment cap. Your PAYE payment will never exceed what you would pay under the 10-year Standard Repayment Plan — even if your income rises significantly.

Marriage. If you file taxes jointly, both your income and your spouse’s income are used to calculate your payment. If you file separately, only your income counts. Filing status does not affect your eligibility for PAYE — only the payment amount.

Annual recertification. Your servicer recalculates your payment every 12 months based on updated income and family size. You recertify by submitting an Income-Driven Repayment Plan Request through StudentAid.gov or your servicer. If you miss your recertification deadline, your payment may temporarily increase to the standard amount until you recertify.

The federal government covers unpaid interest on your Direct Subsidized Loans for the first 3 years you are in PAYE.

If your payment does not cover accruing interest during that period, the government pays the difference. After 3 years, you are responsible for all accruing interest on both subsidized and unsubsidized loans.

For Direct Unsubsidized Loans, the government does not subsidize interest at any point under PAYE. Unpaid interest accrues from the start.

When unpaid interest exceeds your payment, your balance grows — negative amortization. The unpaid interest is not capitalized (added to your principal) while you remain in PAYE, but it can capitalize if you leave the plan, fail to recertify on time, or no longer demonstrate a partial financial hardship.

Any remaining balance on your loans is forgiven after 240 qualifying monthly payments (20 years) under PAYE. This applies to both undergraduate and graduate loans — PAYE does not distinguish between loan levels.

Tax treatment. The American Rescue Plan Act made IDR forgiveness tax-free at the federal level through December 31, 2025. That exemption has expired. Starting January 1, 2026, forgiven balances are treated as taxable income unless Congress passes new legislation. The forgiven amount is added to your taxable income for the year. Some borrowers may qualify for protection under the AFT settlement or the IRS insolvency exclusion, which applies when your total debts exceed your total assets at the time of forgiveness.

Public Service Loan Forgiveness. PAYE is a qualifying repayment plan for PSLF. If you work full-time for an eligible employer — a government agency or qualifying nonprofit — and make 120 qualifying monthly payments, your remaining balance is forgiven tax-free. PSLF forgiveness is not affected by the expiration of the American Rescue Plan Act; it remains tax-free under its own statutory authority.

Related: PSLF Qualifying Payments

PAYE is being phased out under the One Big Beautiful Bill Act, signed into law on July 4, 2025. The timeline:

1. Now through June 30, 2028. PAYE remains available to eligible borrowers. If you are already enrolled, you can stay in the plan and continue earning forgiveness and PSLF credit.

2. July 1, 2028. PAYE is eliminated. Borrowers still enrolled must transition to IBR (Income-Based Repayment) or the new Repayment Assistance Plan (RAP), which becomes available July 1, 2026.

Borrowers with loans first disbursed on or after July 1, 2026, cannot enroll in PAYE at all. Their only IDR option is RAP.

Your progress carries over. Switching from PAYE to IBR or RAP does not reset your forgiveness timeline. Qualifying payments made under PAYE count toward IDR forgiveness and PSLF under the new plan. Processing forbearance months during a plan change may also receive credit.

Related: Should You Switch IDR Plans in 2026?

You apply for PAYE by submitting an Income-Driven Repayment Plan Request and selecting PAYE as your preferred plan.

1. Log in to StudentAid.gov. Sign in at StudentAid.gov/idr with your FSA ID.

2. Authorize IRS income data. Granting access to your IRS tax return data speeds up processing — most applications are completed within a few business days. If you upload income documents manually, processing takes longer.

3. Select PAYE. Choose PAYE as your plan. If you are not eligible, the application will indicate which plans you qualify for.

4. Wait for servicer confirmation. Your loan servicer reviews the application, confirms your eligibility, and updates your monthly payment. During processing, your account may temporarily show a generic “IDR” label before the plan name appears.

You can also submit a paper IDR application through your servicer’s website, by fax, or by mail. Keep a copy of your application confirmation and updated loan summary.