Complete Guide to the Pay As You Earn (PAYE) Repayment Program

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Pay As You Earn

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If you’re struggling with high student loan payments, switching to the Pay As You Earn (PAYE) plan could help make your monthly dues more affordable. PAYE is an income-driven repayment (IDR) plan for federal student loans. Eligible students on the PAYE plan can have monthly payments on qualifying federal student loans reduced to 10 percent of their discretionary income. After 20 years of payments, any remaining loan balance will be forgiven.

PAYE is one of several IDR plans that are ideal for student loan borrowers having difficulty making monthly payments. PAYE — along with the Revised Pay As You Earn (REPAYE) plan — does more than just reduce monthly payments. Opting for PAYE as your student loan payment plan could mean you don’t have to repay your entire loan balance.

If you’re interested in having your student loan payment adjusted for your income, read on to learn more.

What is Pay As You Earn?

“[PAYE is] a type of income-based repayment option where the amount you pay will be based on your discretionary income,” Michael Solari, the certified financial planner for Solari Financial Planning, LLC, explained. “The idea is that your payments will be less as you enter the workforce and gradually grow as you earn more.”

Federal student loan borrowers can choose the PAYE repayment program if they struggle to make normal loan payments. For qualifying borrowers, the repayment plan limits payments to 10 percent of discretionary income. At the end of a 20-year repayment term, any outstanding loan balance is forgiven as long as no payments were missed during the term.

PAYE differs from traditional Income-Based Repayment (IBR) because, depending upon the date your student loans were initiated, PAYE may cap loan payments at a smaller percent of income than IBR. This means monthly payments would be lower under PAYE. PAYE could also result in earlier loan forgiveness and better interest benefits for subsidized loans.

“If you qualify for PAYE, it is always superior to IBR,” said Chase Branham, an associate financial planner at Wrenne Financial Planning. However, qualifying for PAYE is more challenging, and loan consolidation may be required before you apply.

How PAYE lowers your monthly costs

The default repayment method for student loans is a 10-year Standard Repayment Plan. Payments are determined based on the loan balance under this option. Unfortunately, this isn’t affordable if your loan balance is high but your income is low.

Under PAYE, payments are not determined by your loan balance. Instead, PAYE will “reduce your payment to 10 percent of your discretionary income and will cap your monthly payment,” Branham explained.

The difference can be substantial. Consider the difference between PAYE and standard repayment if you have a $35,000 student loan balance at 5.7% interest; your income is $20,000 and grows 3.5 percent annually; and you are single.

Original PAYE Savings
First month $383 $16 $367
Last month $383 $86 $297
Balance paid $45,960 $11,086 $34,875
Total forgiveness $0 $63,884 $63,884
Repayment term ~ 10 yr. ~ 20 yr. ~10 yr.

Often, your monthly payments under PAYE aren’t enough to cover interest accruing on loans. Under both IBR and PAYE, interest is not capitalized — or added to the principal balance — until you leave the repayment program, as explained by the Department of Education.

However, under PAYE, unpaid interest is only capitalized until the principal increases by 10 percent. This cap is a substantial benefit, because when interest is capitalized, you pay interest on the interest.

Under both IBR and PAYE, low payments also mean you often won’t repay your loan even after decades. You’ll have the remaining balance forgiven under both, as long as you made all your payments. PAYE provides for loan forgiveness after 20 years, while IBR payments on loans taken before July 1, 2014, must be made for 25 years before loans are forgiven. However, under both PAYE and IBR, you will have to pay taxes on the amount forgiven.

How your monthly payment is calculated under PAYE

To calculate your payment under PAYE, start by figuring out your discretionary income. Discretionary income is calculated by subtracting 150 percent of your state’s poverty level from your household income. State poverty levels are based on household size.

The poverty level for a household of one in New York was $12,060 in 2017, according to New York State Community Action Association. If you are single and living in New York with a $20,000 income, you would subtract $18,090 ($12,060*1.5) from $20,000. Your discretionary income would be $1,910. Your payments would be equal to 10 percent of this amount, so you’d owe $191 a year or $15.91 monthly.

The easiest way to calculate your PAYE payment — and the savings this payment method provides — is to use our Student Loan PAYE calculator.

To use the calculator:

  • Input your adjusted gross income
  • Select your family size
  • Select your state of residence
  • Input information about your current student loan balance and student loan interest rate.
  • Estimate how much you expect your income to grow annually. The historical average income growth is around 3.5 percent, so that’s what our calculator defaults to.

The calculator will show your monthly payment, the forgiven amount, your savings, and the total amount repaid.

Pay As You Earn (PAYE) Calculator

First month

Last month

Balance paid

Total forgiveness

Repayment term

First month
Last month
Balance paid
Total forgiveness
Repayment term
Your monthly payment on PAYE would be , a difference of from what you are currently paying. If your income increases over time, your payments may increase. Assuming annual income growth of 3.5%, your final monthly payment would be . After making payments for — years, you will have paid a total of and would receive in forgiveness, compared to your current plan where you will pay over the next — years.

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Because your salary can change annually and PAYE is based off how much you make, you’ll need to recertify your plan each year. To recertify, you will need to provide proof of income. Your payment can go up as you earn more, but will not be more than 10 percent of your discretionary income.

Eligibility requirements for PAYE

PAYE requires that borrowers and their loans pass strict eligibility requirements. These include the following:

  • The payment you’d owe under PAYE must be less than the payment you’d make if you were on the 10-year Standard Repayment Plan.
  • You must be a new borrower as of October 1, 2007. You are not eligible if you had an outstanding balance on a Direct Loan before October 1, 2007.
  • You must have received a Direct Loan disbursement on or after October 1, 2011.
  • Your loans must qualify for a PAYE plan. Qualifying loans include Direct Subsidized and Unsubsidized Loans, Graduate PLUS Loans (but not Parent PLUS Loans) and consolidation loans made after October 1, 2011, as long as the consolidation loans do not include Direct or FFEL Loans made before October 1, 2007.

Pros of PAYE

PAYE has some significant benefits for borrowers. “The biggest pro is that you could have a ton of debt forgiven after paying 20 years,” Solari said. “For some that could be hundreds of thousands of dollars.”

Other pros, according to Branham, include “the ability to reduce and cap your payments, more favorable interest subsidies and capitalization rules than IBR, and flexibility to file taxes to keep payments low.”

Cons of PAYE

Cons of PAYE, according to Branham, include an interest rate that is less favorable than REPAYE, which could really hurt people with higher loan balances. Further, Solari points out that “since your payments are lower to start and paying over a longer period than a standard 10-year repayment, you will pay more interest.”

Solari also pointed out another big con: the risk that PAYE will not always remain an option. “These loan forgiveness programs were established under President Obama’s presidency. Any administration could take it away,” he warned. “Since you don’t get the benefit until you’ve paid in 20 years there is a big risk that the benefit will be there.”

REPAYE: A Pay As You Earn expansion

If you are not eligible for PAYE, you may be eligible for REPAYE, which was a Pay As You Earn expansion. “This program extends PAYE to all federal student loan borrowers,” explained Steven J. Richardson, a student loan lawyer at Richardson Law Offices. However, as Richardson explains in a comparison of PAYE and REPAYE, REPAYE has some cons that PAYE doesn’t.

In 2015, the Department of Education introduced the Revised Pay As You Earn program, also known as REPAYE. This modified version of PAYE allows more borrowers to qualify because you can become eligible regardless of when you took out your loans.

However, PAYE and REPAYE have important differences in how they treat spousal income and how student loan interest is treated.

Under IBR or PAYE, a student loan debtor can file taxes separately from a spouse and the spouse’s income won’t count for determining loan payments. This option goes away under REPAYE and a spouse’s income factors into determining monthly REPAYE payments.

REPAYE provides more help with interest to borrowers whose interest exceeds their monthly payments. If your loans accrue $100 in interest monthly and you pay only $50, your student loan balance would increase even as you made payments. REPAYE allows borrowers to have 50 percent of excess interest forgiven monthly. This means you’d only have $25 in monthly interest added to your loan balance each month if you paid $50 and monthly interest in the amount of $100 accrued.

However, there are no monthly payment caps under REPAYE, so your payments could end up much higher than they would on the Standard Repayment Plan.

Is Pay As You Earn right for you?

Whether PAYE is right for you or not is “highly borrower-specific,” Branham said. Factors Branham recommended considering include: “current loan balance, current income, expected future income, spousal income, spousal loan balances, and where you work.”

You’ll need to make sure you are eligible for PAYE, estimate current and future income, use our PAYE calculator to project payments, and decide which option makes sense both now and in the future.

Branham suggested PAYE could be a good option for eligible borrowers going for public service loan forgiveness, because it is the most aggressive option for lowering payments. “A good example of someone who might want to do PAYE would be a married borrower with high loan balances, who is going for PSLF, and whose spouse has no loans and high income,” he said.

However, if you have a higher income and neither spouse can take advantage of public service loan forgiveness or interest subsidies, Branham recommended refinancing over PAYE. “Basically at that point, you have to pay off loans, so refinancing to a lower rate can make sense,” he said.

It’s just a matter of doing the math to find out how to keep your overall costs of student loan repayment low and to find out if PAYE is the best answer for you.

Interested in refinancing student loans?

Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit, email us at, or call 888-601-2801 for more information on ourstudent loan refinance product.

© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.

2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.

Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.

Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.

Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.

3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance:Fixed rates from 3.899% APR to 7.804% APR (with AutoPay). Variable rates from 2.470% APR to 6.990% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.470% APR assumes the current index rate derived from the 1-month LIBOR of 2.08% plus 0.64% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
  2. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (

4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.

5 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

6 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of October 1, 2018, the one-month LIBOR rate is 2.22%. Variable interest rates range from 2.72%-8.32% (2.72%-8.32% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.75%-8.69% (3.75%-8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit We also have several resources available to help the borrower make a decision at, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled. Applicants with an Associate’s degree or with no degree must have made at least 12 qualifying payments after leaving school. Qualifying payments are the most recent on time and consecutive payments of principal and interest on the loans being refinanced. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a cosigner who is a U.S. citizen or permanent resident. The cosigner (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a cosigner will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Estimated average savings amount is based on 14,659 Education Refinance Loan customers who saved on loans between August 1, 2017 and July 31, 2018. The calculation is derived by averaging monthly savings across Education Refinance Loan customers whose payment amounts decreased after refinancing, calculated by taking the monthly payment prior to refinancing minus the monthly payment after refinancing. We excluded monthly savings from customers that exceeded $4,375 and were lower than $20 to minimize risk of data error skewing the savings amounts. Savings will vary based on interest rates, balances and remaining repayment term of loans to be refinanced. Borrower’s overall repayment amount may be higher than the loans they are refinancing even if monthly payments are lower.

2.47% – 6.99%3Undergrad
& Graduate

Visit SoFi

2.47% – 5.87%1Undergrad
& Graduate

Visit Earnest

2.47% – 8.03%4Undergrad
& Graduate

Visit Lendkey

2.95% – 6.37%2Undergrad
& Graduate

Visit Laurel Road

2.48% – 6.25%5Undergrad
& Graduate

Visit CommonBond

2.72% – 8.32%6Undergrad
& Graduate

Visit Citizens

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Published in Student Loan Repayment