Is the Pay As You Earn Repayment Plan Going Away?

The Pay As You Earn repayment plan, known as PAYE, caps your federal student loan payment at 10% of your discretionary income and forgives whatever balance remains after 20 years of qualifying payments. It’s a Direct Loan program with narrow eligibility, and the Department of Education is winding it down: new enrollment is limited to borrowers who were already repaying under PAYE before a regulatory cutoff, and the plan is scheduled to end entirely by July 1, 2028.

Is PAYE Still Available

PAYE is being phased out. Under current regulations, you can only repay under PAYE if you were already on the plan as of a specific cutoff date, and if you switch away after that date, you cannot re-enroll.¹ A November 2024 interim final rule initially extended the enrollment window to July 1, 2027, but a March 2026 court order invalidated portions of related income-driven repayment regulations, leaving uncertainty about which version of the rule currently applies.²

Two practical consequences follow. First, the plan sunsets by July 1, 2028; remaining borrowers will need to move to a different repayment plan at that point. Second, the SAVE plan that was designed to replace PAYE and REPAYE has also been blocked by court order, so Income-Based Repayment (IBR) is the primary income-driven option available to most new applicants in 2026.² If you are already on PAYE and thinking about switching, understand that you likely cannot return. Confirm current rules with StudentAid.gov or your servicer before making a change.

Who Qualifies for PAYE

PAYE has four eligibility requirements defined in federal regulation: you must hold eligible loan types, meet a “new borrower” definition, show partial financial hardship, and (as above) have been repaying under PAYE before the cutoff.¹

Eligible Loans

PAYE covers Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans made to graduate or professional students, and Direct Consolidation Loans that did not repay a parent PLUS loan. Parent PLUS loans themselves are excluded.¹ Older FFEL loans aren’t eligible on their own, but consolidating them into a Direct Consolidation Loan can make the consolidated balance eligible, provided the consolidation doesn’t disqualify you under the new borrower rule.

The New Borrower Rule

“New borrower” is a technical label. You qualify if you had no outstanding balance on any Direct Loan or FFEL loan as of October 1, 2007 (or paid off all such loans before taking a new one after that date), and you received a disbursement of a Direct Loan on or after October 1, 2011.¹ Both conditions must be met. A borrower who carried a pre-October-2007 balance continuously into 2011 does not qualify even if they took new loans afterward.

Partial Financial Hardship

The hardship test compares your monthly payment under the standard 10-year plan against 10% of your discretionary income. If the 10-year payment is higher, you have a partial financial hardship and qualify.¹ You only have to meet this test at entry. If your income later rises past the threshold, your payment increases but stays capped at the 10-year standard amount.

How Your Monthly Payment Is Calculated

Your monthly payment equals 10% of your discretionary income, divided by 12. Discretionary income is your adjusted gross income minus 150% of the federal poverty guideline for your family size.¹ If the result is negative, discretionary income is treated as zero and your payment is $0, and that $0 still counts toward forgiveness.

For 2026, the poverty guideline for a single person in the 48 contiguous states is $15,960, and for a family of four it’s $33,000. Alaska and Hawaii use higher figures.³ A single borrower earning $40,000 subtracts $23,940 (150% of $15,960) from AGI, leaving $16,060 in discretionary income; 10% of that is $1,606 a year, or about $134 a month.

Your payment never exceeds the amount you would owe under the standard 10-year plan, based on your loan balance and interest rate when you entered PAYE.¹ Once the calculated payment reaches that cap, it stops climbing even if your income keeps rising.

If you’re married and file jointly, both your and your spouse’s income and eligible loan debt feed the calculation. Filing separately lets you keep spousal income out of the formula, which can lower your payment, though separate filing may cost you other tax benefits. Run the numbers both ways.

How Interest Is Handled

When your PAYE payment doesn’t cover all the interest accruing, the shortfall is treated in a way that’s more favorable than most plans. On subsidized loans, the government pays 100% of the unpaid interest during your first three consecutive years on PAYE.⁴ After that window closes, and for unsubsidized loans from the start, unpaid interest accrues but does not automatically capitalize while you remain on the plan.

Capitalization happens when you leave PAYE: switching plans, missing your annual recertification, or entering certain deferments or forbearances. Once unpaid interest is added to principal, you start paying interest on a larger balance. Staying on PAYE continuously and recertifying on time is how you avoid it.

Annual Recertification

Every year, you must update your income and family size so your servicer can recalculate your payment. Your servicer will send a notice roughly three months before the deadline.⁵ Missing the deadline can trigger a sharp payment increase and capitalize any outstanding unpaid interest.

The simplest approach is to consent to IRS data sharing at enrollment, which lets the Department of Education pull your tax data automatically each year.⁶ Without that consent, you submit your most recent tax return, or, if your income has dropped since filing, alternative documentation like recent pay stubs. Anything other than a tax return must be dated within 90 days of when you sign the form.

One tradeoff to know: automatic recertification uses your most recent return, so an income increase gets picked up immediately. Some borrowers recertify manually to control the timing. That’s a legitimate choice, but you still have to submit on time; missing the deadline while trying to manage timing defeats the purpose.

Forgiveness After 20 Years

After 240 qualifying monthly payments, any remaining balance is forgiven.¹ The 240 don’t all have to be under PAYE. Credit also counts for:

Months when your calculated payment was $0 because your income was low enough.
Payments under the 10-year standard plan or another income-driven plan.
Specific deferment and forbearance periods, including economic hardship deferments, unemployment deferments, and military service deferments.

The list of qualifying deferments is specific, and not every forbearance counts. A general forbearance unrelated to economic hardship likely won’t. Ask your servicer for your current qualifying-payment count so you know where you stand.¹

Taxes on the Forgiven Balance

The federal tax exemption for student loan forgiveness under income-driven plans, created by the American Rescue Plan Act, expired on December 31, 2025. Starting in 2026, any balance forgiven under PAYE is treated as taxable income.⁷ Your servicer reports the forgiven amount on Form 1099-C, and you include it on your return for the year of discharge. A borrower with $50,000 forgiven could face a tax bill of several thousand dollars depending on their bracket.

One meaningful escape valve exists. Under 26 U.S.C. § 108, if your total liabilities exceed the fair market value of your assets at the time of discharge (meaning you are insolvent), you can exclude the forgiven amount from taxable income up to the amount of your insolvency.⁸ You claim it on IRS Form 982. Many borrowers who reach the 20-year mark are insolvent, so this provision often shields a real portion of the forgiven balance.

Two other categories of forgiveness remain permanently tax-free: Public Service Loan Forgiveness, and discharges due to total and permanent disability or death.⁸

The Public Service Shortcut

Payments made under PAYE count toward Public Service Loan Forgiveness. PSLF requires only 120 qualifying payments (10 years) and the forgiveness is tax-free.⁸ The 120 payments don’t have to be consecutive; earlier qualifying payments still count if you leave public service and return.

PAYE pairs well with PSLF because its 10% payment formula keeps monthly payments low, which maximizes the balance available to be forgiven at year 10. If you work in public service and are already on PAYE, the faster tax-free route through PSLF is usually the better goal than waiting for PAYE’s 20-year discharge.

How to Apply

You apply through the Income-Driven Repayment Plan Request, available online at StudentAid.gov or as a paper form sent to your servicer.⁹ The online version is faster and can pull your tax data directly. You’ll need your FSA ID,¹⁰ income documentation (IRS consent, a recent tax return, or pay stubs if income has changed),⁶ your family size, and your tax filing status.

Select PAYE by name on the form. Checking the generic box that asks your servicer to pick the lowest payment plan may land you on a different income-driven plan. After you submit, your account goes into administrative forbearance while the servicer processes the request, no payments are due during that window, and you receive a notice with your new payment amount and start date once processing finishes.⁹

1
eCFR. 34 CFR 685.209 – Income-Driven Repayment Plans
2
Federal Student Aid. IDR Court Actions
3
HHS ASPE. 2026 Poverty Guidelines
4
Edfinancial Services. Pay As You Earn (PAYE) Plan
5
Federal Student Aid. Do I Need to Recertify My Income-Driven Repayment (IDR) Plan Every Year
6
Federal Student Aid. Top FAQs About Income-Driven Repayment Plans
7
Taxpayer Advocate Service. What to Know About Student Loan Forgiveness and Your Taxes
8
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
9
Federal Student Aid. Income-Driven Repayment (IDR) Plan Request
10
Federal Student Aid. Creating and Using the FSA ID