Douglas Olsen
The Pay As You Earn (PAYE) plan is an income-driven repayment plan for student loans. It is one of several repayment plans for federal student loan borrowers. The PAYE plan is calculated by taking 10% of an individual's discretionary income and dividing it by 12. Discretionary income is defined as an individual's annual income minus 150% of the federal poverty guideline. The PAYE plan does not apply to private student loans. Private student loans are ineligible for any income-driven repayment (IDR) plan.
| Characteristics | Values |
|---|---|
| Plan Name | Pay As You Earn (PAYE) |
| Eligibility | Only federal student loan debt is eligible for repayment under a PAYE plan. Private student loans are ineligible for any IDR plan. |
| Repayment Length | 20 years |
| Payment Amounts | 10% of 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 |
| Application | Submit an application to your loan servicer |
| Requirements | Must know adjusted gross income and family size |
| Calculation | 10% of discretionary income, divided by 12 |
| Forgiveness | After 20 years of payments, the remaining loan balance will be eligible for student loan forgiveness |
| Interest Rate Reduction | Auto Pay interest rate reduction |
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What You'll Learn
- PAYE repayment plans are only eligible for federal student loan debt
- PAYE repayment plans are calculated by taking 10% of discretionary income
- Private student loans are ineligible for PAYE or IDR plans
- Direct deposit can lower your interest rate but won't change the monthly payment
- Auto Pay can reduce interest rates for some private student loan repayment programs
PAYE repayment plans are only eligible for federal student loan debt
The Pay As You Earn (PAYE) repayment plan is an income-driven repayment plan that is only eligible for federal student loan debt. Private student loans are not eligible for PAYE or any other IDR plan.
PAYE caps monthly federal student loan payments at 10% of an individual's discretionary income. Discretionary income is calculated as the difference between one's annual income and 150% of the federal poverty guideline, or 225% of the poverty benchmark for one's state, based on family size.
To qualify for PAYE, an individual must have federal direct loans and a partial financial hardship. Additionally, they must not have had any outstanding direct loan or FFEL Program loan debt as of October 1, 2007, and must have taken out a direct loan on or after October 1, 2011.
The PAYE plan also considers the borrower's family size when calculating their monthly payment. After 20 years of payments through PAYE, the remaining loan balance is eligible for student loan forgiveness, provided the borrower meets the program requirements. However, borrowers who receive this type of student loan forgiveness will likely have to pay income tax on the forgiven amount.
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PAYE repayment plans are calculated by taking 10% of discretionary income
The Pay As You Earn (PAYE) repayment plan is an income-driven repayment (IDR) plan that applies only to federal student loans. It does not apply to private student loans. The PAYE repayment plan is calculated by taking 10% of an individual's discretionary income. Discretionary income is the amount of income left after paying for necessities such as taxes, living expenses, and bills. This is used to determine what a borrower can afford to pay each month toward their IDR student loans.
The formula for calculating discretionary income is as follows:
- Find the federal poverty guideline for your state and family size. For example, the 2025 federal poverty guideline for a single person in most states is $15,650, while it is $21,150 for a family of two.
- Multiply the federal poverty guideline by 150%. In the previous example, 150% of $15,650 is $23,475, and 150% of $21,150 is $31,725.
- Subtract the above amount from your annual income to get your discretionary income. For instance, if your annual income is $50,000, your discretionary income would be $26,525 ($50,000 minus $23,475).
- Multiply your discretionary income by 10% to get your annual PAYE repayment amount. In the previous example, 10% of $26,525 is $2,652.50.
- Divide your annual repayment amount by 12 to get your monthly PAYE repayment amount. $2,652.50 divided by 12 is approximately $221 per month.
It is important to note that the PAYE repayment plan has certain eligibility requirements. Borrowers must have federal direct loans and demonstrate a partial financial hardship. Additionally, to qualify for PAYE, your payments must be lower than they would be under the 10-year Standard Repayment Plan.
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Private student loans are ineligible for PAYE or IDR plans
To qualify for PAYE, your payments must be lower than they would be under the 10-year Standard Repayment Plan. Additionally, you must have federal direct loans and a partial financial hardship. You will also need to know your adjusted gross income and family size when applying for a PAYE plan.
It's important to note that if you have more than one loan servicer, you will need to repeat the application process for each of them. Private student loan borrowers may have other options available to lower their monthly payments, such as refinancing through a private lender. However, refinancing federal student loans should only be considered as a last resort, as it will result in the loss of certain government benefits, such as income-based repayment plans and student loan forgiveness.
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$6.99
Direct deposit can lower your interest rate but won't change the monthly payment
The Pay As You Earn (PAYE) plan is an income-driven repayment (IDR) plan that caps federal student loan payments at 10% of an individual's discretionary income. This repayment plan only applies to federal student loan debt and does not cover private student loans.
Direct deposit is a method of receiving funds electronically into a bank account, as opposed to receiving a physical paper check. Direct deposits are often used for payroll, where employers transfer wages directly into employees' bank accounts. Direct deposits can also be used for various other transactions, such as rental income, commissions, and government benefits.
While direct deposit may not be directly related to the Pay As You Earn plan for student loans, it can play a role in managing your finances and loan repayments. By setting up direct deposit, you can automate your income and ensure that funds are readily available in your account. This can help you better manage your loan repayments and maintain financial stability.
Additionally, some banks offer incentives for customers who receive direct deposits into their accounts. For example, certain banks may offer higher interest rates or annual percentage yields (APYs) on savings accounts for customers who maintain a certain level of direct deposits or have consistent direct deposits each month. Taking advantage of these incentives can help you grow your savings over time.
However, it's important to note that direct deposit itself does not directly lower your monthly loan payment amount. The PAYE plan calculates your monthly payment amount based on a percentage of your discretionary income, regardless of the payment method. While direct deposit can provide benefits in terms of convenience, financial management, and potential savings through higher interest rates, it does not alter the calculated monthly payment for student loans under the PAYE plan.
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Auto Pay can reduce interest rates for some private student loan repayment programs
The Pay As You Earn (PAYE) plan is an income-driven repayment (IDR) plan that caps federal student loan payments at 10% of an individual's discretionary income. This plan forgives the remaining loan balance after 20 years of repayment. PAYE only applies to federal student loan debt and does not cover private student loans.
Some private student loan repayment programs offer interest rate reductions for enrolling in Auto Pay. Auto Pay allows for the automatic withdrawal of loan payments, and the interest rate reduction is only available while the loan is enrolled in Auto Pay. It is important to note that interest rate incentives for Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction.
For example, SoFi offers a discount that lowers the interest rate on loans during periods in which eligible direct deposits are received or the SoFi Plus Subscription Fee is paid. This discount does not change the amount of the regular monthly payment and can be removed or terminated at any time.
Additionally, Earnest offers clients the opportunity to skip one payment every 12 months after making at least six months of consecutive on-time payments. However, the interest accrued during the skipped month will result in an increase in the remaining minimum payment, and the final payoff date on the loan will be extended.
While Auto Pay can provide interest rate reductions for some private student loan repayment programs, it is important to carefully review the terms and conditions of any loan program before making a decision.
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Frequently asked questions
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.
No, PAYE is only available for federal student loan debt. Private student loans are ineligible for any IDR plan.
You can apply for PAYE on the Education Department’s website. You will need to provide personal information, including your full name, address, email address, phone number, and the best time to contact you. You will also need to submit your income and verification to determine if you qualify for PAYE.
