Why Everyone* Should be on the Pay As You Earn (PAYE) Repayment Plan

Michael Lux Blog, Student Loans 16 Comments

The Pay As You Earn Repayment Plan, better known as PAYE, is the newest and for most, the best Federal Government student loan repayment plan.  It won’t help with your private loans, but if you have any federal government student loans, it could be very helpful.  If you are accustomed to the Income Based Repayment Plan (IBR), then the way the PAYE plan works will be very familiar.  It is just like the IBR plan except the payments are lower and you can get student loan forgiveness sooner.

The Basics

  • Monthly payments on the PAYE plan are limited to just 10% of your discretionary income.
  • After making 20 years worth of payments, the remainder of your student loan debt is forgiven.

For those who are unemployed or underemployed, your monthly payments could be $0.00…  It doesn’t get much better than that.  Not only would you not be spending a dime on your student loans, but each month your are on the PAYE paying zero dollars, you are one month closer to student loan forgiveness.

If you are wondering what the term discretionary income means, it is the money you make in excess of 150% of the federally defined poverty level.  To calculate: your monthly payment =’s (your income – 1.5*Poverty Level) x .1  If this calculation gives a negative number, don’t expect a check in the mail.  It just means your monthly payment will be zero.  If you would be interested in a calculator to show you exactly what your PAYE monthly payments would be, let me know in the comments and I will create one.

The Advantages

PAYE has every feature of IBR, but is better in every way.  The required percentage of your income is lower, and the number of years required for forgiveness is lower.

Even if you plan on paying off your loans sooner (like in 10 years), signing up gives you flexibility for the difficult months.  There is no prepayment penalty.  Suppose you are on the 10 year repayment plan.  If one random month finds you putting a deposit down on a new apartment, fixing your car, and paying for movers, you may not be able to afford your student loan bill for that month.  If you were enrolled in the PAYE, you could just make the minimum payment for the difficult month.  After that you could go back to making payments that would pay off the loan in 10 years.  PAYE is flexible like that.

The interest rates are exactly the same for PAYE as for other repayment plans.  Some people think they will get a lower rate by being on an accelerated repayment plan.  Unlike auto loans and mortgages, the length of the loan has nothing to do with the interest rate.

If your minimum monthly payment is less than the monthly interest, the interest on the loan will continue to accrue, but it will not capitalize.  In basic English, this means you will pay interest, but you will not have to pay interest on the interest.  Therefore, you still should pay off as much as possible when you can.  However, if you can’t pay the full amount of the monthly interest, it won’t hurt you as bad as other repayment plans.

The Bad News

Clever readers may have noticed the glaring asterisk (*) in the title behind the word everyone.  Sadly, not everyone will be able to sign up for this awesome program.  The biggest hurdle is the fact that you can not have any federal loans from before October 2007.  Thus, only recent grads will benefit from this plan.  Many, including this author, are stuck with the IBR and can only look enviously upon those lucky enough to qualify for PAYE.

The other requirement is partial financial hardship.  Your lender will look at two numbers when making this determination.  The first one will be your monthly payments under the 10-year repayment plan.  The other will be 10% of your discretionary income.  If the 10-year repayment plan costs more than the 10% of your discretionary income, you are in.  If it is actually less, don’t feel bad.  It just means you make plenty of money compared to what you owe on student loans.

Finally, the one person who should not sign up for PAYE would be Mr. Minimum Payments Guy.  If you make the minimum payments on your credit card, mortgage, car payment, and student loans even though you don’t have to, avoid this plan.  If you need to force yourself to make larger payments to get your loans paid off ahead of time, this is not the plan for you.

How to Sign Up for PAYE?

  1. Contact your lender as soon as possible.  With IBR and PAYE growing in popularity, the processing times for these programs has grown longer.
  2. Complete the paperwork provided by your lender.  It will be a short form.  In addition to the form you will also have to submit documentation of your income.
  3. Submit either your tax return or two most recent pay stubs.  This is how your income will be calculated.  Be smart with the approach you use.  Think about your personal situation and which method of calculation will likely end up with a bigger payment.
  4. Wait patiently.  Processing this information can take months.  If it is impossible to make payments on your current plan and you are waiting for processing, you can ask for an “administrative forbearance”.  Such a forbearance is not ideal as interest will grow, but its better than missing a payment.
  5. Submit you paperwork each year.  Every year your income will have to be recalculated.  Due to the slow processing times, its recommended you do this months ahead of time.

For further information about this repayment plan:

The Official Department of Education PAYE Fact Sheet

For a comparison of this repayment plan to the other federal repayment plans:

The Sherpa Guide to Federal Repayment Plans


  • This is great for some but like you my loans stem from before the 2007 period. So I will stick to making those payment and trying to clear away the debt a quickly as possible. Wow they make you do the paperwork every year, do you keep making the normal payment until they recalculate your earnings? Also if you are jobless do they still count those months or years as making payments?

    • The trick with yearly recalculation is to submit 2 to 3 months before the prior years paperwork expires. That way you never have a huge and or unaffordable monthly payment.

    • Renee

      How do you know when the time to send in paperwork for recalculation is due? I just got on program last month and they are not too clear, just say when it is time they will let me know on web site or via mail. I would like to get a jump on it like you suggest.

    • Great question!

      Each time they calculate, it is good for 12 months. The problem is that calculation times vary. They will not give you a specific deadline for when it is due. I’d suggest that after 8 or 9 months you call your loan servicer. Explain your situation and ask about processing times. This may vary from year to year. It is a pain, but for the money you are saving it is worth it.

  • I’m currently on IBR, I’ll be sure to check this out.

    • If you are on IBR it would definitely be a better program… If you are lucky enough to be eligible.

  • Sounds like an awesome system, especially for your low salary entry job. The part about the loan being forgiven in 20 years is a bit depressing if you still have student loans then!

    • Haha… It is depressing to think about not being able to pay off your student loans for 20 years… worse yet, would be it taking way more than 20 years. This program prevents that from happening.

  • That’s surprising that “after making 20 years worth of payments, the remainder of your student loan debt is forgiven.” Hopefully people won’t abuse it. I’m sure glad I didn’t have my student loans for over 20 years.

    • I think there is probably a low likelihood of abuse. 20 years is a long time to have that debt hanging over your head (remember this is twenty years worth of actual payments), its hard to imagine how somebody could take advantage in that system.

  • SupriseME

    Hey, I’m interested in a calculator to show exactly what a PAYE monthly payments would look like

    • I will be attempted to create one this weekend. Please stop back an let me know how it works for you.

  • DaddyBriefs

    how long after you submit an application, do you receive a response on whether or not you qualify?

    • I’ve been told by my servicer that it can take up to 3 months, but in my experience it has usually been on the order of 3 weeks.

  • Wes

    The term “Forgiven” is used dangerously in this piece. Forgiven loan amounts are taxed as income. 100k over 20 years on a 50k starting salary with 2% pay increases yearly would add 159k + your annual salary(72k @ 2%/yr 20). Total due to the IRS in 2034? Get ready to write a check for $76,230. Keep in mind this doesn’t adjust for inflation and taxes paid toward income on year 2034(wont make much difference).

    • You make a fair point Wes. If you do have your loans forgiven they are taxable after the 20 years. However, the term forgiven is used by the Department of Education to describe the program, so it is most consistent with the government language.