Pay As You Earn: How It Works and Whom It’s Best For for 2025

Student loan debt can be overwhelming, but the Pay As You Earn (PAYE) repayment plan offers a practical solution. By adjusting monthly payments based on income and family size, PAYE makes managing debt easier. This article explains how PAYE works. We highlight its benefits and help borrowers decide if it is the right choice for their financial needs.

Key Things You Should Know About Pay As You Earn (PAYE) for 2025

PAYE limits monthly payments to 10% of discretionary income, making it easier for borrowers with lower incomes than standard repayment plans. This keeps payments proportional to earnings and reduces financial stress.
PAYE forgives any remaining federal student loan balance after 20 years of qualifying payments.
Borrowers must recertify their income and household size annually, allowing adjustments in payment amounts based on financial changes.

What is Pay As You Earn (PAYE) for 2025?
Understanding Pay As You Earn
PAYE and Other Income-Driven Repayment (IDR) Plans
Connecting IDR and 529 Plans
Is PAYE right for you?
What loans qualify for PAYE?
How do I apply for PAYE?
How is the monthly payment amount calculated under the PAYE plans?
What is Revised Pay As You Earn (REPAYE)?
REPAYE vs. PAYE: What are the differences?
How Do Advanced Degree Costs Impact My PAYE Repayment Outcomes?
Can Competency Based Degree Programs Impact My Loan Repayment Strategy?
Can Affordable Education Alternatives Lower My Student Debt Burden?
How Will Future Federal Policy Changes Impact PAYE?
Can Student Loans Cover Living Expenses?
Managing Student Debt with Poor Credit
Common Misconceptions About PAYE and Other IDR Plans
Will PAYE Affect My Long-Term Financial Health?
Should I Make Extra Payments to Optimize My PAYE Repayment Plan?
How Can My College Major Influence My PAYE Repayment Outcomes?
Can Affordable Online Degrees Improve My PAYE Repayment Plan?
Other Things You Should Know About Pay As You Earn

What is Pay As You Earn (PAYE) for 2025?

Pay As You Earn or PAYE refers to either a system of income tax withholding by employers or an income-based repayment plan for student loans.

In the context of taxes, Pay As You Earn requires employers to deduct income tax. Sometimes, the employee portion of social insurance benefits taxes from each paycheck as an advance payment on taxes due.

For student loans, PAYE is a U.S. federal loan repayment plan where payments are based on income rather than a fixed amount. PAYE Plan bases your monthly payments on 10% of your discretionary income, divided by 12. These payments will never exceed the amount you would pay under the ten-year Standard Repayment Plan.

Understanding Pay As You Earn

The Pay As You Earn plan offers a repayment length of 20 years. As mentioned earlier, PAYE requires payments amounting to 10% of your discretionary income. To qualify, you must have Federal Direct Loans.

Federal Direct Loans are student loans provided directly by the U.S. Department of Education to help students cover educational expenses. These loans feature fixed interest rates and offer various repayment options, making them a popular choice for both undergraduate and graduate students.

Ideally, PAYE can benefit spouses with two incomes, those with graduate debt, and individuals with low earning potential. You will likely qualify for PAYE if you cannot afford your payments and start college after 2007.

Borrowers who enrolled earlier may still be eligible if they meet all the following criteria:

Took out federal student loans after October 1, 2007
Had no Federal Student Loan balance when taking out those loans
Received a direct loan on or after October 1, 2011

College planning is a multi-year process that requires careful consideration and proactive steps. These include understanding financial aid options and repayment strategies like PAYE.

At Research.com, we aim to help students navigate the complexities of college admissions and financing, ensuring they are well-prepared to make informed decisions about their education and future careers. Hence, we designed our methodology to answer the most common students’ needs.

Ever wonder how does the cost of college affect students? Check out our analysis on how financial aid, including need-based and merit-based options, influences enrollment decisions and overall college experience.

We also have articles about the cost of university by country, providing insights into how tuition varies globally and what students can expect financially when studying abroad.

PAYE and Other Income-Driven Repayment (IDR) Plans

Pay As You Earn or PAYE is a type of Income-Driven Repayment (IDR) plan. IDR plans allow you to make lower monthly payments on your federal student loans, which are adjusted based on your income and family size. Here are other types of IDR:

Income Contingent Repayment (ICR) Plan

The Income Contingent Repayment (ICR) plan is an income-driven repayment option that caps your monthly payment at the lesser of 20% of your discretionary income. It could also be what you would pay on a fixed repayment plan over 12 years, adjusted based on your income. After 25 years of payments, any remaining loan balance is forgiven.

Any borrower with an eligible federal student loan can use the ICR plan. It is the only income-driven repayment option available for Parent PLUS loan borrowers. While Parent PLUS loans are not directly eligible for income-driven repayment plans, parent borrowers can consolidate their Direct PLUS loans or Federal PLUS loans into a Direct Consolidation Loan, which then qualifies for the ICR plan.

Income-Based Repayment (IBR)

The Income-Based Repayment (IBR) program caps your monthly payment at either a percentage of your discretionary income or the amount you would pay under the ten-year Standard Repayment Plan, whichever is lower. The percentage depends on when you took out the loan and if you had existing federal student loans.

Your payment will be 10% of your discretionary income if:

You borrowed on or after July 1, 2014, and
You are a new borrower or had no outstanding Federal Student Loan balances when you received the new loan.

Your payment will be 15% of your discretionary income if:

You borrowed your first loan before July 1, 2014.

IBR is beneficial if your federal student loan debt is high relative to your income and family size. Your loan servicer will determine your eligibility, but you can use the U.S. Department of Education's Loan Simulator to estimate if you would benefit from an IBR plan.

If your monthly IBR payment is less than the interest that accrues each month on a subsidized loan, the government will cover the difference for the first three years to prevent your balance from increasing. Any remaining loan balances are forgiven after 20 or 25 years of payments.

Many borrowers can enroll in IBR online. Your monthly payment adjusts annually based on your income and family size. You must also submit documentation to your servicer yearly to stay in the IBR program.

Saving on a Valuable Education (SAVE) Plan

The Saving on a Valuable Education or SAVE Plan is the newest income-driven repayment (IDR) plan for all Direct Loans, replacing the Revised Pay As You Earn (REPAYE) Plan in 2023. Borrowers on the REPAYE Plan automatically receive the benefits of the SAVE Plan.

The SAVE Plan lowers payments for most borrowers compared to other IDR plans because it bases payments on a smaller portion of your income. It caps payments at a percentage of your discretionary income. It also qualifies for Public Service Loan Forgiveness after a certain number of years, depending on whether you borrowed for undergraduate or graduate study.

Additionally, the SAVE Plan offers an “interest benefit”. If your full monthly payment does not cover the accrued monthly interest, the government pays the remaining interest for that month. This prevents your balance from growing due to unpaid interest.

Connecting IDR and 529 Plans

IDR and 529 plans play significant roles in a student’s financial strategy, but they serve different purposes in financing education. While 529 plans help families save for college expenses upfront, IDR plans assist borrowers in managing their student loan repayments after they graduate. If you are wondering how much should you contribute to 529, consider factors such as your child's age, the estimated cost of college, and your financial situation.

Trends in student aid indicate that more borrowers are turning to IDR plans as a viable solution to manage their student loan debt, especially in light of rising tuition costs and the financial challenges many face post-graduation.

Hence, you should start contributing to 529 as early as possible to benefit from compound growth. Aim to save enough to cover a significant portion of your tuition and other college fees. This approach will reduce your reliance on loans and minimize the need for IDR plans later.

Meanwhile, the chart below shows the share of college costs paid by each funding sources:

Is PAYE right for you?

PAYE may be right for you in the following instances:

You Are Married or Think You Will Get Married

Your Pay As You Earn payments depend on your tax filing status if you are married:

File taxes separately. Payments are based solely on your income.
File taxes jointly. Payments are based on both your and your spouse’s income.

Income-driven repayment plans can last up to 25 years. You might be within that timeframe even if you are not married now. At that point, you could keep your payments low by filing taxes separately.

You Can Qualify for PAYE

To qualify for the Pay As You Earn (PAYE) repayment plan, borrowers must meet specific criteria related to their federal student loans and financial situation. Here are the key requirements:

Eligibility Criteria

Loan Type. You must have federal student loans, specifically Direct Loans. Other federal loans, like Federal Family Education Loans (FFEL) or Perkins Loans, do not qualify unless consolidated into a Direct Consolidation Loan.
Loan Disbursement Dates. You must have taken out your federal student loans on or after October 1, 2011. Additionally, you should not have had any federal student loan balance as of October 1, 2007. This date defines "new" borrowers for PAYE eligibility.
Financial Hardship. You must demonstrate a partial financial hardship. This means the amount you would pay under the standard repayment plan (either ten or 30 years) must be higher than what you would pay under PAYE, calculated as 10% of your discretionary income.
Discretionary Income Calculation. Discretionary income is your income minus 150% of the federal poverty guideline for your family size. This calculation is crucial to determine your monthly payment under PAYE.
Recertification. Once enrolled, you must recertify your income and family size each year to maintain eligibility for the PAYE plan. Failure to do so may result in your payments reverting to the standard repayment amount.

You Expect Your Income to Stay Low

Payments under Pay As You Earn are limited to 10% of your discretionary income. Unlike other income-driven plans, PAYE ensures that your payments never exceed what you would pay under the standard ten-year repayment plan, even if that amount is less than 10% of your discretionary income.

However, if your income increases significantly, your payments will no longer be based on your income. Instead, you will owe the standard amount each month. In addition, any unpaid interest will be added to your balance, increasing the total amount you owe.

You have Graduate School Debt

PAYE forgives any remaining balance on your loans after 20 years of payments, regardless of the type of federal loans you have. Other income-driven plans either always require 25 years for forgiveness or extend your repayment term by five years if you took out loans for graduate or professional studies.

The table below shows the total student loan debt from 2021 to 2023.

Year

Student Loan Debt

2021

$1.73 trillion

2022

$1.76 trillion

2023

$1.73 million

What loans qualify for PAYE?

Only Federal Direct Loans qualify for the Pay As You Earn repayment plan. This includes:

Direct Subsidized Loans

A Direct Subsidized Loan is a federal student loan available through the William D. Ford Federal Direct Loan Program. Borrowers do not usually need to pay interest during school, grace periods, or deferment.

To apply for a federal student loan, start by completing and submitting the Free Application for Federal Student Aid (FAFSA). Based on your FAFSA results, your college or career school will provide a financial aid offer that may include federal student loans. Your school will guide you on accepting all or part of the loan.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to both undergraduate and graduate students without the need to demonstrate financial need. Your school determines the loan amount based on your cost of attendance and other financial aid received. You are responsible for always paying the interest on a Direct Unsubsidized Loan.

Direct PLUS Loans Made to Students

Grad PLUS loans qualify for the Pay As You Earn repayment plan. Grad PLUS loans enable graduate and professional students to borrow funds for educational expenses not covered by other financial aid. There is no cumulative borrowing limit; students can borrow up to the full cost of attendance, minus any other financial aid received. To qualify, students must:

Be enrolled at least half-time in an eligible graduate or professional program.
Pass a credit check or obtain an endorser if they do not pass.
Meet general federal student aid eligibility requirements.

While Grad PLUS loans qualify for PAYE, Parent PLUS loans do not. However, Parent PLUS loans can be consolidated into a Direct Consolidation Loan, which may qualify for different repayment plans, including Income-Contingent Repayment (ICR) but not PAYE.

Direct Consolidation Loans That Do Not Include PLUS Loans Made to Parents

Direct Consolidation Loans let borrowers combine multiple federal student loans into one loan with a single monthly payment. However, if you have both federal student loans for your education and Parent PLUS loans, do not consolidate them together. Doing so would make federal student loans ineligible for certain repayment options, including income-driven repayment plans.

The chart below shows the percentage of families who file the FAFSA by academic year.

How do I apply for PAYE?

Follow these steps to apply for PAYE:

Visit studentaid.gov

Studentaid.gov is the official website for federal student aid, where you can find comprehensive information on financial aid options, including loans, grants, and work-study programs. Log in with your Federal Student Aid ID or create one if you do not have it yet.

Select Income-Driven Repayment Plan Request

Preview the form to know which documents to prepare. These include your tax return or proof of any taxable income earned in the past 90 days.

Choose Your Plan

If you qualify for multiple income-driven repayment plans, you can either be automatically placed in the one with the lowest payment or specifically choose PAYE if it suits you better.

Fill Out the Application

Enter the required details about your income and family. Include your spouse’s information, if applicable, as it will affect your PAYE payments. Here are some ways your spouse’s income can impact your Pay As You Earn student loan payments:

If you file taxes jointly, your PAYE payment will be based on your combined household income. A high-income spouse can significantly increase your required payment.
If you file taxes separately, only your income will be used to calculate your PAYE payment. However, filing separately may have tax consequences that you should consider.
Income-driven repayment plans like PAYE can last up to 25 years. If you get married during this time and file taxes jointly, your spouse's future income could affect your payments.
Higher student loan payments due to your spouse's income might affect your eligibility for certain means-tested government benefits. You may need to report the income change to benefit providers.

Can I self-report income temporarily?

Until March 2024, borrowers can self-report their income when applying for or recertifying an income-driven repayment plan, as stated by the Education Department. This means you do not need to provide tax documents when reporting your income. You can complete this process online when submitting the IDR application.

How is the monthly payment amount calculated under the PAYE plans?

Under the Pay As You Earn repayment plan, your monthly payment is based on your discretionary income. Here is a detailed breakdown of how this calculation works:

Calculation of Monthly Payments

Discretionary Income: This is the key figure for determining your monthly payment. Discretionary income is defined as your adjusted gross income (AGI) minus 150% of the federal poverty guideline for your family size and state. The formula can be expressed as:

Discretionary Income = Your Income − (150% × HHS Federal Poverty Guideline)

Monthly Payment Calculation: Once you have your discretionary income, your monthly payment under PAYE is calculated as 10% of that amount, divided by 12 to convert it to a monthly payment.

What is Revised Pay As You Earn (REPAYE)?

The Revised Pay As You Earn or REPAYE was introduced in 2015. The plan offers an income-driven repayment option for federal student loan borrowers. With REPAYE, you pay 10% of your discretionary income each month. Payments last 20 years for undergraduate loans and 25 years for graduate loans. After this period, any remaining balance is forgiven.

REPAYE calculates your payment based on income and family size. As your income rises, so does your payment. Discretionary income is your annual income minus 150% of your state's poverty guidelines for your family size. REPAYE considers both your income and your spouse's income, regardless of tax filing status.

REPAYE also includes an interest subsidy. If your payment does not cover monthly interest, the Department of Education pays the extra fees on subsidized loans for three years. After three years, the subsidy covers half of the excess interest. Unsubsidized loans receive a 50% interest subsidy for the entire REPAYE term.

As of July 1, 2024, REPAYE is no longer an option for new applicants because the SAVE plan has been fully implemented, incorporating benefits previously offered by REPAYE.

REPAYE vs. PAYE: What are the differences?

The Pay As You Earn plan preceded the REPAYE plan. While the two plans share similarities, they also have some distinct differences.

REPAYE is more accessible, but it might lead to higher payments if your income increases. In contrast, PAYE has stricter eligibility criteria but limits payments to the 10-year standard repayment amount.

How Do Advanced Degree Costs Impact My PAYE Repayment Outcomes?

Graduate education entails a distinct financial commitment that can significantly influence PAYE repayment outcomes. Higher tuition fees may result in larger loan balances and extended repayment durations, yet the potential for increased future earnings can help mitigate these challenges. Assessing advanced degree costs alongside projected income facilitates a balanced long-term financial strategy. For a practical perspective on education expenses, consider examining our article How much does a PhD cost in USA? to better understand the investment required for advanced studies.

Can Competency Based Degree Programs Impact My Loan Repayment Strategy?

Research indicates that alternative educational models can influence future earning potential and, consequently, repayment outcomes. Competency based degree programs offer a streamlined approach that emphasizes measurable skills over traditional time-based education. This model can reduce time to graduation and may lower overall educational expenses, thereby potentially decreasing initial loan amounts and shortening repayment periods. These programs also align closely with industry needs, providing graduates with competitive advantages in the job market that could lead to higher initial salaries. For a detailed comparison between traditional degrees and competency based degree programs, consider evaluating how these pathways can optimize both your educational investment and long-term financial strategy.

Can Affordable Education Alternatives Lower My Student Debt Burden?

Exploring cost-effective education options can significantly reduce overall debt accumulation and improve repayment outcomes. In addition to pursuing traditional degrees, many borrowers are finding that alternative educational pathways—such as accredited online programs—can lower tuition costs and associated fees. Lower educational expenses can result in reduced initial loan amounts, which may subsequently ease monthly payment obligations under income-driven repayment plans. For working professionals seeking flexibility without compromising academic quality, reputable online colleges cheap can provide a viable, cost-efficient option that supports both career advancement and long-term financial health.

How Will Future Federal Policy Changes Impact PAYE?

Recent legislative revisions and regulatory updates can reshape PAYE’s eligibility requirements, interest benefits, and forgiveness provisions. Borrowers should closely monitor official announcements from the U.S. Department of Education to understand how any policy shifts might influence payment calculations and the overall structure of income-driven repayment plans. In upcoming changes, adjustments could also extend to specialized loan options, affecting niche fields. For targeted insights for fields like dentistry, consider reviewing best dental school loans to align your financial planning with potential regulatory alterations.

Can Student Loans Cover Living Expenses?

In addition to tuition, some borrowers consider leveraging student loans to manage living expenses such as housing, food, and transportation. This section evaluates the financial trade-offs when using loans to cover non-educational costs. Borrowers should weigh the potential benefit of improved cash flow against the risk of increasing their overall debt burden, which may extend repayment timelines and overall interest accumulation. For detailed analysis on leveraging loans for extra-curricular expenses, check out our article Can you take out a student loan for living expenses? and consider alternative funding strategies alongside disciplined budgeting to ensure long-term financial stability.

Managing Student Debt with Poor Credit

For families struggling with poor credit, tackling student debt can feel particularly daunting. While income-driven repayment (IDR) plans such as PAYE offer relief to borrowers based on income, they do not address the unique challenges faced by parents who take out loans on behalf of their children. This highlights the need for targeted strategies and alternative options.

One essential option to consider includes exploring the best student loans for parents with poor credit. These loans can bridge financial gaps without exacerbating credit challenges. Parents in this situation may want to look into federal Parent PLUS loans, which may have less stringent credit requirements compared to private loans. Even when denied due to adverse credit history, options like securing a co-signer or seeking loan consolidation for previous debts could provide a pathway to approval and better terms.

For current borrowers, consolidating loans to access income-driven repayment (IDR) plans like the Income-Contingent Repayment (ICR) plan is a valuable option. While PAYE excludes Parent PLUS loans directly, consolidating these loans into a Direct Consolidation Loan can make them eligible for ICR, offering a calculated repayment amount based on income. Understanding and leveraging these pathways will prove instrumental in navigating financial hurdles for parents managing student debt alongside credit struggles.

Common Misconceptions About PAYE and Other IDR Plans

While income-driven repayment (IDR) plans like PAYE and REPAYE provide critical relief to many borrowers, several misconceptions can deter individuals from exploring these helpful repayment options. It is vital to clarify these misunderstandings for informed decision-making.

IDR Plans Are Only for Low-Income Borrowers

Many people believe IDR plans, including PAYE, are strictly for those with minimal income. While lower-income individuals often benefit significantly, these plans can also assist those with fluctuating or moderate income, particularly borrowers pursuing careers in public service or other lower-paying fields. PAYE caps your payments at 10% of discretionary income, providing flexibility across various income levels.

Payments Will Always Be Minimal

Another misconception is that monthly payments under PAYE or other IDR plans will always remain at their initial low levels. Borrowers need to understand that payments adjust annually based on changes in income and family size. This can lead to increases or decreases in payments over time.

All Student Loan Debt Will Be Forgiven

Forgiveness under plans like PAYE only applies after 20 to 25 years of consistent payments, depending on the loan type and plan. Additionally, borrowers may owe taxes on the forgiven amount, except in specific circumstances, such as through Public Service Loan Forgiveness (PSLF).

Federal Loans Are the Only Option for Affordable Funding

While federal loans provide flexible repayment terms, including PAYE, borrowers looking to minimize initial debt burdens should also explore private options. Researching what banks offer the best student loans can help reduce dependence on higher-interest private loans that do not offer income-driven plans.

Switching Between IDR Plans Is Not Possible

Borrowers can switch between IDR plans, such as moving from PAYE to the newer SAVE plan, if their financial circumstances change. Consulting with a loan servicer can help determine which plan aligns best with their goals.

By addressing these common misconceptions, borrowers can better navigate their repayment options and maximize the benefits available to them under income-driven repayment plans.

Will PAYE Affect My Long-Term Financial Health?

Evaluating the long-term impact of the PAYE plan is essential for maintaining robust financial health. While lower monthly payments provide immediate relief, borrowers may face extended repayment periods that could lead to higher overall interest costs and potential tax liabilities when loan forgiveness occurs. It is important to integrate debt management with comprehensive financial planning, including saving for retirement and building an emergency fund. Regularly reviewing your income, expenses, and future financial goals can help balance the benefits of reduced payments with the need to accelerate debt reduction when possible. In cases of unexpected expenses, consider exploring alternative financing options such as quick student loans to prevent disruption in your long-term financial strategy.

Should I Make Extra Payments to Optimize My PAYE Repayment Plan?

When considering the PAYE repayment option, evaluating the benefits and drawbacks of making extra payments is critical. Additional contributions can reduce accrued interest and lower the overall balance faster; however, they may also diminish the potential benefits of loan forgiveness at the end of the term. Borrowers should assess their long-term financial goals and liquidity needs before committing to extra payments. Analyzing factors such as income stability, future earning potential, and alternative investment opportunities can further clarify whether overpaying every month aligns with their broader financial strategy. For insights into managing educational investments effectively, review our guide What is the easiest online degree to get? to understand how program costs may influence repayment decisions.

How Can My College Major Influence My PAYE Repayment Outcomes?

Choosing a field of study with higher earning potential can directly impact the monthly payments under PAYE by increasing discretionary income. This improves your ability to repay your loans faster, potentially shortening the repayment period and reducing overall interest costs. Evaluating fields of study and aligning them with market trends is a critical strategy for borrowers considering income-driven repayment plans. For insights on high-earning fields, review our article on college majors that make the most money.

Can Affordable Online Degrees Improve My PAYE Repayment Plan?

Affordable online degree programs offer a strategic way to lower overall tuition expenses and borrowing needs, which can translate into reduced monthly payments under PAYE. By selecting programs from the most affordable online colleges, borrowers may lessen the initial debt burden and achieve more favorable repayment terms. Analyzing program quality, accreditation, and projected long-term earnings can further ensure that cost savings align with a robust career path and sustainable financial planning.

Key Findings

PAYE limits monthly payments to 10% of discretionary income, significantly lowering the burden for borrowers compared to the standard 10-year repayment plan.
Any remaining loan balance under PAYE is forgiven after 20 years of qualifying payments, providing a clear end to repayment obligations.
Borrowers must have taken out federal student loans on or after October 1, 2011, and had no federal student loan balance as of October 1, 2007, to qualify for PAYE.
Under PAYE, payments will never exceed the amount required under the 10-year Standard Repayment Plan, even if that amount is less than 10% of discretionary income.
Only Federal Direct Loans qualify for PAYE, including Direct Subsidized Loans, Direct Unsubsidized Loans, and Grad PLUS Loans.
Borrowers must recertify their income and family size annually to maintain eligibility for PAYE, ensuring payments remain affordable based on current financial circumstances.
Discretionary income is calculated as adjusted gross income minus 150% of the federal poverty guideline, ensuring payments are based on what borrowers can reasonably afford.

Other Things You Should Know About Pay As You Earn

Which IDR is best?

The best IDR plan varies based on individual factors like income, marital status, and loan types. Borrowers should use tools such as the Federal Student Aid's repayment estimator to compare potential payments and forgiveness amounts across different plans before deciding.

Can I switch from PAYE to SAVE?

To switch from PAYE to SAVE, contact your loan servicer and request a change in repayment plans. Be ready to provide updated income and family size information, as these details may impact your payment amount.

Is PAYE Better than SAVE?

The PAYE plan benefits those with significant graduate debt and partial financial hardship. The SAVE plan suits low-income borrowers with undergraduate debt. Borrowers with initially low loan balances can achieve forgiveness in as few as 10 years.

References: