What Is the Pay As You Earn Repayment Plan?

The Pay As You Earn repayment plan, known as PAYE, caps your monthly federal student loan payment at 10% of your discretionary income and forgives whatever balance remains after 20 years of qualifying payments. It was built for borrowers whose debt is large compared to their earnings, and among the income-driven repayment (IDR) plans still functioning in 2026, it tends to produce the lowest payments and the shortest path to forgiveness for those who qualify. The catch: PAYE is closing to new enrollees on July 1, 2027, and its eligibility rules are the strictest of any IDR plan.¹

Who Can Still Get Into PAYE

Three separate requirements have to line up: when you first borrowed, what kind of loans you have, and whether your income is low enough relative to your debt.

The New Borrower Rule

You count as a “new borrower” for PAYE purposes only if you had no outstanding balance on any Direct Loan or Federal Family Education Loan (FFEL) as of October 1, 2007, and you received at least one Direct Loan disbursement on or after October 1, 2011.² Most people who started college borrowing around 2008 or later will meet this. If you had older loans that were fully paid off before October 1, 2007, the clock resets and you can still qualify.

Which Loans Count

Direct Subsidized, Direct Unsubsidized, and Direct PLUS loans made to graduate or professional students are eligible. Direct Consolidation Loans qualify too, but only if they did not repay any Parent PLUS loans. Parent PLUS borrowers are shut out of PAYE entirely, even through consolidation.³ Older FFEL or Perkins loans have to be consolidated into the Direct Loan program before they can be repaid under PAYE.

Partial Financial Hardship

To enter PAYE, your calculated payment (10% of discretionary income, divided by 12) must be lower than what you’d owe on a standard 10-year plan.⁴ Borrowers earning roughly $50,000 to $60,000 or less with meaningful loan balances usually clear this bar, though the actual threshold shifts with your debt load and family size. If your income later rises past that point, you don’t lose PAYE. Your payment caps at the 10-year standard amount and you keep the plan’s forgiveness benefits.

How Your Monthly Payment Is Calculated

PAYE uses discretionary income, defined as your adjusted gross income (AGI) minus 150% of the federal poverty guideline for your household size and state. For 2025, the poverty guideline for a single person in the 48 contiguous states is $15,650, which puts the 150% threshold at $23,475.⁵ The guidelines rise a bit each year.

Your annual required payment is 10% of the amount above that threshold, divided by 12 for a monthly figure.⁶ Take a single borrower with an AGI of $40,000. Discretionary income is $40,000 minus $23,475, or $16,525. Ten percent of that is $1,652.50 per year, roughly $138 a month. If your AGI drops below the 150% threshold, your required payment is $0, and every $0 month still counts toward forgiveness.

PAYE also has a hard ceiling. Your payment can never exceed what a 10-year standard plan would have required, calculated from the balances and interest rates in place when you first enrolled. Income growth won’t push you above that number.

What Happens to Interest

When your PAYE payment doesn’t cover the interest accruing each month, the difference has to go somewhere. On subsidized loans, the government pays 100% of the unpaid interest for the first three consecutive years you’re on PAYE. After that, and on unsubsidized loans from day one, the interest keeps accruing but does not capitalize as long as you stay on the plan and recertify on schedule.

Capitalization, which folds unpaid interest into your principal so you start paying interest on interest, is triggered by specific events: leaving PAYE, switching to a different repayment plan, or missing your annual recertification.⁶ Missed recertifications are the most common way borrowers get hit, sometimes to the tune of thousands of dollars added to the balance in a single event.

Forgiveness After 20 Years

Any remaining balance is forgiven once you’ve made 240 qualifying monthly payments. They don’t need to be consecutive. Months where your calculated payment was $0 count. Time on other IDR plans and periods of economic hardship deferment count too.⁶

The 2026 Tax Change

The American Rescue Plan Act excluded forgiven student loan debt from federal income tax for discharges between December 31, 2020, and January 1, 2026.⁷ That exclusion has expired. As of 2026, any balance forgiven under PAYE is treated as taxable income at the federal level.⁸

The size of that bill can be startling. An $80,000 forgiven balance is treated by the IRS as if you earned an extra $80,000 that year, which could produce a tax bill of $15,000 to $25,000 or more depending on your bracket. Some states tax the forgiven amount as well; others don’t. The IRS insolvency exception can reduce or eliminate the tax if your total debts exceed your total assets at the moment of forgiveness, so it’s worth checking whether that applies.

If You Work in Public Service

Payments made under PAYE also count toward Public Service Loan Forgiveness (PSLF) if you work full-time for a government agency or qualifying nonprofit. PSLF requires 120 qualifying payments (10 years), and the balance forgiven through PSLF is not taxable. For public-service borrowers, PAYE’s low monthly payments combined with PSLF’s shorter, tax-free discharge are among the strongest strategies available.

Marriage and Filing Status

How you file taxes changes your PAYE payment. File jointly and the servicer counts both spouses’ incomes. File separately and only your income counts.⁹

Filing separately often produces a smaller PAYE payment, especially when one spouse earns more. It also disqualifies you from the earned income tax credit, education credits, and the student loan interest deduction. For some couples the tax cost outweighs the payment savings; for others it doesn’t. Run both scenarios before deciding.

Enrolling and Recertifying

You apply through the Income-Driven Repayment Plan Request on StudentAid.gov, signing in with your FSA ID. The form asks for your most recent federal tax return or transcript, your current family size, and your marital status. If your income has dropped noticeably since your last return, you can submit recent pay stubs or an employer letter instead.

Every 12 months you have to recertify your income and family size, whether anything has changed or not. Miss the deadline and your payment resets to the standard-plan amount, and all the accumulated unpaid interest capitalizes onto your principal.¹⁰ Your servicer will send reminders, but a calendar alert of your own is safer.

How PAYE Compares to Other IDR Plans

PAYE isn’t the only income-driven option, and knowing what else is on the table helps clarify whether it’s the right pick.

Income-Based Repayment (IBR): The original IBR charges 15% of discretionary income and forgives after 25 years. Borrowers whose first loan came on or after July 1, 2014, get a newer IBR that matches PAYE on both numbers: 10% and 20 years. IBR has no new-borrower cutoff, so it’s open to people PAYE excludes.
SAVE Plan: SAVE used a 225% poverty threshold and charged 5% of discretionary income for undergraduate-only debt. It is frozen by litigation, and the Department of Education has proposed a settlement that would end the plan, moving current SAVE borrowers to other plans. SAVE is not a live option for new enrollment.¹¹
Income-Contingent Repayment (ICR): The least generous of the IDR plans, with 25-year forgiveness. It is the only IDR route open to Parent PLUS borrowers who consolidate.

If you qualify for PAYE, it usually produces the lowest payment and the fastest forgiveness among the plans still working in 2026. The reasons to look elsewhere are specific: you don’t meet the new-borrower dates, you hold Parent PLUS debt, or you’re waiting on the new Repayment Assistance Plan (RAP) expected to launch July 1, 2026, which is set to replace most existing IDR plans over time. If you’re already on PAYE when RAP arrives, you’ll likely be able to stay until PAYE fully sunsets, at which point your servicer would move you to IBR or RAP.

The enrollment window on PAYE isn’t open forever. Under the November 2024 interim final rule, you must already be repaying under PAYE as of July 1, 2027, or the plan closes to you.¹ If PAYE fits your situation, the application is the next step.

1
Federal Register. Income Contingent Repayment Plan Options
2
Federal Register. Improving Income Driven Repayment for the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program
3
Consumer Financial Protection Bureau. What Are Income-Driven Repayment (IDR) Plans, and How Do I Qualify?
4
eCFR. 34 CFR 685.209 – Income-Driven Repayment Plans
5
ASPE – HHS.gov. 2025 Poverty Guidelines: 48 Contiguous States
6
eCFR. 34 CFR 685.209 – Income-Driven Repayment Plans
7
Federal Student Aid. How Will a Student Loan Payment Count Adjustment Affect My Taxes
8
Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
9
Federal Student Aid. 4 Things to Know About Marriage and Student Loan Debt
10
Federal Student Aid. What Is an Income-Driven Repayment (IDR) Plan Recertification Date?
11
Federal Student Aid. Stay Up-to-Date on Court Actions Affecting IDR Plans