Pay As You Earn (PAYE)

Pay As You Earn is a federal income-driven repayment plan under which the monthly payment is the lesser of 10 percent of the borrower's discretionary income divided by twelve or the amount they would have paid on a ten-year standard plan, with any remaining balance canceled after 240 qualifying payments over at least 20 years. The regulation names it "The Pay As You Earn (PAYE) Repayment plan" at 34 CFR 685.209(a)(3), so the formal name carries the word "Repayment" that everyday usage drops. It is worth separating from a similarly named plan in the same regulation: Revised Pay As You Earn, listed at 685.209(a)(1) and described there as a plan that "may also be referred to as the Saving on a Valuable Education (SAVE) plan", is a different plan with a different protected income threshold and a different subsidy. Pay As You Earn is closed to new enrollment, and the authority it rests on is repealed effective July 1, 2028, so this entry is written for the borrower who is already in it and has a decision to make.

Who can be in it, which is now a narrow set. 34 CFR 685.209(c)(4) requires five things at once: the borrower has loans eligible for the plan, is a "new borrower" as the regulation defines that term for this plan, elects to have the aggregate monthly payment recalculated so it does not exceed the applicable amount on entry, was repaying a loan under the plan on July 1, 2024, and has not received a Direct Loan on or after July 1, 2026. The fourth condition is what closes the plan, and the same paragraph closes the door behind anyone who walks out: a borrower who was repaying under it on or after July 1, 2024 and changes to a different plan "may not re-enroll in the PAYE plan." Only Direct Loans made before July 1, 2026 may be repaid under it at all (685.209(d)(5)).

The plan's own "new borrower" test is older and stricter than the one Income-Based Repayment uses, and the difference between the two tests is what makes the transition expensive for many borrowers. For Pay As You Earn, 685.209(b)(13)(i) requires no outstanding Direct Loan or FFEL balance as of October 1, 2007, or none on the date the borrower received a new loan after that date, and a disbursement of a Direct Subsidized, Direct Unsubsidized, graduate or professional Direct PLUS, or Direct Consolidation Loan on or after October 1, 2011. A borrower is not a new borrower if the consolidation loan repaid a loan that would itself have disqualified them.

How the payment is computed. Discretionary income for this plan is income above 150 percent of the applicable federal poverty guideline (685.209(b)(4)(ii)). The payment is 10 percent of that figure divided by twelve, or the ten-year standard amount computed on the balances and rates as they stood when the borrower entered the plan, whichever is less (685.209(f)(2)). That ceiling is the plan's most useful feature and it is shared with Income-Based Repayment. It is not shared with the Repayment Assistance Plan, which takes a percentage of all adjusted gross income on a sliding scale with no cap. For the first three consecutive years in the plan the Secretary does not charge unpaid accrued interest on the borrower's Direct Subsidized loans, excluding months of economic-hardship deferment (685.209(h)(2)). Cancellation arrives at 240 qualifying payments over at least 20 years (685.209(k)(2)), and a month in which the payment obligation is $0 counts (685.209(k)(4)(i)(A)).

The 2028 election, stated as the regulation states it. Before July 1, 2028 every borrower repaying under the plan, or in an administrative forbearance associated with it, must elect one of six things: the Repayment Assistance Plan, Income-Based Repayment, a standard repayment plan, a graduated repayment plan, an extended repayment plan, or, through June 30, 2028 only, Pay As You Earn or Income-Contingent Repayment (685.209(c)(7)(i)). Repayment under the elected plan begins on July 1, 2028, though the borrower may start earlier (685.209(c)(7)(ii)). A borrower who elects nothing is placed on the Repayment Assistance Plan for the loans eligible for it, and on Income-Based Repayment for loans the newer plan cannot take (685.209(c)(7)(iii)).

The honest cost of the move, which most summaries omit. The obvious successor is Income-Based Repayment, and it shares the ten-year payment ceiling. But that plan has two sets of terms, and which set applies is decided by its own new-borrower definition at 685.209(b)(13)(ii), which turns on whether the borrower had a federal loan balance before July 1, 2014. A large share of the Pay As You Earn population began borrowing between late 2007 and mid-2014, precisely because that is what the plan's own entry test required, so they carried a balance before July 1, 2014 and therefore meet neither route of the newer definition. For them Income-Based Repayment means 15 percent of discretionary income with cancellation after 300 payments over at least 25 years, not 10 percent over 20. The Repayment Assistance Plan cancels after 360 payments over at least 30 years. So the realistic choice for that cohort is between a higher percentage over five more years and a different income base over ten more, and every option is longer than the plan they are leaving. A borrower who first borrowed after July 1, 2014 and was nonetheless repaying under Pay As You Earn on July 1, 2024 is in the better position, because they can meet the newer definition and keep 10 percent over 20 years.

Payment counts carry across, and that is the reassuring half. 34 CFR 685.209(k)(4)(i)(B) credits a month toward Income-Based Repayment forgiveness for a payment made on or before June 30, 2028 under Pay As You Earn or Income-Contingent Repayment, or a $0 obligation in such a month. So years already spent on this plan are not discarded on the move; they count toward the new plan's total, which for many borrowers is a total of 300 rather than 240. Payments made under the plan also count as qualifying payments for public service loan forgiveness, because 20 USC 1087e(m)(1)(A)(iv) reaches payments under an income-contingent repayment plan carried out under 20 USC 1087e(d)(1)(D) as that provision stood before the repeal. Once the plan ceases to exist there are no further payments of that kind to make, but credit already earned is not withdrawn.

Two administrative points complete the picture. Missing the annual recertification raises the payment to the ten-year standard amount until the documentation is filed (685.209(l)(9)(i)). And cancellation at the end of the term is generally taxable income again for discharges after December 31, 2025, which is the position for every income-driven plan other than public service loan forgiveness.

For a borrower already in the plan, the annual cycle is unchanged: certify income and family size or let the Department obtain the tax information, the servicer applies 10 percent of discretionary income subject to the ten-year ceiling, and the payment holds for twelve months. What is new is the deadline.

A hypothetical example, resolving what a borrower's options actually are rather than an amount. Naomi's first federal loan was disbursed in 2012, she enrolled in Pay As You Earn in 2016, and she has made 96 qualifying payments toward the plan's 240. She must elect a successor before July 1, 2028.

Her Income-Based Repayment terms are the older ones, not the newer ones. That plan's new-borrower definition needs either no outstanding balance before July 1, 2014, or no outstanding balance on the date she obtained a loan after July 1, 2014 and before July 1, 2026. She had a balance from 2012, so the first route fails, and she had a balance on the date of every subsequent loan, so the second fails too. Income-Based Repayment for Naomi therefore means 15 percent of discretionary income and cancellation after 300 payments over at least 25 years.

Her payment count travels, against the new total. Her 96 Pay As You Earn payments count toward that plan's 300 under 685.209(k)(4)(i)(B), as do any further payments she makes under Pay As You Earn on or before June 30, 2028. So she does not restart, but her finish line moves out by 60 payments.

The alternative is longer still. The Repayment Assistance Plan cancels after 360 payments over at least 30 years, and takes a percentage of all adjusted gross income rather than only the portion above the poverty threshold, with no ten-year ceiling. Which of the two costs Naomi less depends on her own income relative to her balance, and it is a comparison worth running on her actual numbers rather than settling by rule of thumb. What is not in doubt is that both take longer than the plan she is leaving. Figures are illustrative.

Pros

• Ten percent of discretionary income with cancellation at 240 payments is the shortest income-driven term still available to anyone, and it is why the borrowers on it are reluctant to move.
• The payment is capped at the ten-year standard amount, so a rising income does not push it up indefinitely.
• A $0 payment counts toward the 240.
• Payments count toward public service loan forgiveness, and they carry across to Income-Based Repayment's total if the borrower moves there.
• Unpaid interest on subsidized loans is not charged for the first three years in the plan.

Cons

• It is closed. Nobody can join, and a borrower who leaves cannot come back.
• It ends on July 1, 2028 whatever the borrower does, so the plan is a waiting room rather than a destination.
• For many of its borrowers the successor plan carries 15 percent over 25 years rather than 10 over 20, which is a real increase in both rate and duration.
• The plan's own entry test is what put most of its borrowers in that position, because it required borrowing to have begun in a window that also disqualifies them from the newer Income-Based Repayment terms.
• Cancellation at the end of the term is generally taxable income again for discharges after 2025.
• Missing the annual recertification raises the payment to the ten-year standard amount until it is filed.