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Pay As You Earn is a federal student loan repayment plan that fixes your student loan payment at a percentage of your income. The plan takes into account your household size and discretionary income and can be much cheaper than the standard repayment plan. Here’s how it works and how to determine if it’s the right plan for you.

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What is Pay As You Earn (PAYE)?

The Pay As You Earn Income-Based Repayment Plan (PAYE) caps your monthly student loan payments at 10% of your discretionary income, but never above the standard 10-year repayment amount. The US Department of Education defines discretionary income as the difference between your annual income and 150% of your state’s poverty line (based on family size).


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How does PAYE work?

With the PAYE plan, you will pay 10% of your discretionary income on your student loans for 20 years. After that, any outstanding student loan balances may be eligible for a discount, provided you keep track of your payments as agreed.

As with other IDR plans, you will need to update your financial and family information every year or whenever a change occurs. For example, if you have a baby or find a better paying job, you will need to update your PAYE plan to make the correct payment adjustments.

CAFE eligibility conditions

Not everyone will be eligible for PAYE. You may be eligible for PAYE if:

  • You have a direct loan or a consolidated loan from the Federal Family Education Loan Program (FFEL).
  • Your payment amount (based on 10 percent of your discretionary income) would be smaller under the PAYE than under the standard 10-year repayment plan.
  • You received your eligible federal student loans on or after October 1, 2007 (with at least one loan disbursement of a direct loan on or after October 1, 2011).
  • You were a “new borrower” who owed no outstanding federal student loan balances when you received those loans.

You should also be up to date on your student loan payments when you apply for PAYE. Borrowers in default are not eligible for income-based repayment plans.

How to apply for PAYE

You can complete an application for PAYE or any other income-based repayment plan. There is no charge to apply, but you may be contacted by private companies who offer to help you with the application process for a fee.

You will need to complete the application in one session. If you gather the information you need in advance, the application process should take around 10 minutes.

The information you need for your application includes:

  • Personal information: Provide your full name, address, email address, phone numbers, and the best time to contact you.
  • Financial information: You can use an online IRS data recovery tool to document your income. If you are married, you may also need to include your spouse’s information.
  • Verified FSA ID: Confirm or create the username and password which can be used as a legal signature.

Remember that in addition to making an initial PAYE request, you will also need to recertify your plan eligibility each year.

CAFE vs. Income Based Repayment Plan

The Income-Based Repayment Plan, or IBR, is another popular way for qualified borrowers to change the terms of their federal student loans. The PAYE and IBR plans have the potential to lower monthly student loan payments. However, there are key differences between these two options.

Qualification criteria Available to borrowers with qualifying loans issued on or after October 1, 2007, with loan disbursement on or after October 1, 2011. Adjusted payments (income-based) cannot exceed the standard repayment plan over 10 years. Available to borrowers with eligible federal student loans issued on any date. Adjusted payments (income-based) cannot exceed the standard 10-year repayment plan.
Monthly payment 10% of discretionary income 10% to 15% of discretionary income (depending on loan issue date)
Loan remission Available after 20 years Available after 20-25 years (depending on the loan issue date)
Interest benefits Government pays interest not covered by monthly installments for three years Government pays interest not covered by monthly installments for three years

Is PAYE right for you?

PAYE is not suitable for all federal student loan borrowers. In fact, it has some of the strictest qualification requirements of any income-driven repayment plan. PAYE might work for you if:

  • You expect your income to remain low. You must demonstrate partial financial hardship to be eligible for the PAYE plan. If your income increases in the future, you may not be eligible for recertification.
  • You are married and you both earn an income. PAYE gives you the option of filing your taxes separately and having your student loan payments based solely on your income.
  • Your student loans include graduate student debt. PAYE will cancel eligible student loan balances after 20 years for undergraduate and graduate studies.

You should also have an idea of ​​what the PAYE plan can save you compared to your current student loan repayment plan and any other options you might consider. You can use a student loan calculator to find out which ones offer the best repayment for you.

Alternatives to Lower Your Student Loan Payments

PAYE works well for many borrowers who are trying to lower their student loan payments. However, if you are not eligible for PAYE or do not think it is best for you, there are other options to consider.

First, you may be eligible for different federal student loan repayment plans. Some plans are income driven, like Revised Pay As You Earn (REPAYE), while others, like extended repayment plans, are not based on how much you earn.

You can also consider refinancing your student loans through a private lender. If you qualify for a better interest rate, this option could lower your monthly payments and save you money in interest over the life of your loan. In exchange, however, you’ll forgo some government benefits, like the income-based repayment plans mentioned above and student loan forgiveness. It is therefore essential to consider both the pros and cons before deciding to refinance federal student loans.

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