Pay As You Earn: How It Works and Whom It’s Best For

Pay As You Earn (PAYE) is an income-driven repayment (IDR) plan that caps federal student loan payments at 10% of your discretionary income and forgives your remaining balance after 20 years of repayment.

PAYE at a glance

• Repayment length: 20 years.

• Payment amounts: 10% of your discretionary income.

• Other qualifications: Must have federal direct loans and a partial financial hardship.

• Best for: Spouses with two incomes; grad debt; those with high earning potential.

You'll likely qualify for PAYE if you can't afford your payments and you meet these timeline requirements:

• You had no outstanding direct loan or FFEL Program loan debt as of Oct. 1, 2007.

• You took out a direct loan on or after Oct. 1, 2011.

Is PAYE right for you?

If you meet its requirements, PAYE is usually the best income-driven option for you in the following instances:

• You expect to earn a high income in the future.

• You have grad school debt.

• You’re married, and you and your spouse both have incomes.

» MORE: How to submit an income-driven repayment application

PAYE vs. other income-driven plans

All income-driven plans share some similarities: Each caps payments to between 10% and 20% of your discretionary income and forgives your remaining loan balance after 20 or 25 years of payments. Use Federal Student Aid’s Loan Simulator to see how much you might pay under different plans.

» MORE: How to get income-driven repayment forgiveness

Unlike most other IDR plans, PAYE limits capitalized interest to 10% of your balance. Capitalized interest — or interest added to your loan’s balance — increases the amount you owe, as interest then accrues on a larger balance.

PAYE is also unique because you need a partial financial hardship to qualify. This is generally true if your total federal student loan debt is higher than your annual discretionary income.

If PAYE doesn't sound right for you, consider one of the other income-driven repayment plans: SAVE, Income-Based Repayment (IBR) or Income-Contingent Repayment (ICR).

In most cases, the least confusing way to select an income-driven plan is to let your servicer place you on the plan you qualify for that will have the lowest monthly payment. Specifically choosing PAYE may be right for you in the following instances:

How to apply for PAYE

You must enroll in PAYE. You can do this by mailing a completed income-driven repayment request to your student loan servicer, but it’s easier to complete the process online. You can change your student loan repayment plan at any time.

• Visit studentaid.gov. Log in with your Federal Student Aid ID, or create an FSA ID if you don’t have one.

• Select income-driven repayment plan request. Preview the form so you know what documents to have ready, like your tax return or alternate proof of any taxable income you’ve earned within the past 90 days.

• Choose your plan. If you qualify for more than one income-driven repayment plan, you can be automatically placed in the plan with the lowest payment or specifically choose PAYE if it makes the most sense for you.

• Complete and submit the application. Enter the required details about your income and family. Remember to include your spouse’s information, if applicable, as it will affect your payments under PAYE.

Your servicer can put your loans in forbearance while processing your application. You aren’t required to make payments during forbearance, but interest will accrue on your loan. This increases the amount you owe.

Other ways to pay less on your student loans

If income-driven repayment isn't right for you, the federal government offers extended repayment and graduated repayment plans, which lower your payments but aren’t based on your income. You may pay more interest under these plans, though, and neither offers loan forgiveness.