PAYE vs RAP: How They Compare and When to Switch

PAYE uses 10% of discretionary incomeDiscretionary IncomeFor federal income-driven repayment plans, a borrower's adjusted gross income minus a set percentage of the federal poverty guideline for their family size. Monthly IDR payments are calculated as a percentage of this amount. with a payment cap and 20-year forgiveness.

RAP uses a tiered percentage of your full adjusted gross incomeAdjusted Gross Income (AGI)A borrower's total taxable income minus specific deductions, as reported on a federal tax return. Federal income-driven repayment payments are generally calculated using AGI. with no cap and 30-year forgiveness.

PAYEPay As You Earn (PAYE)A federal income-driven repayment plan that caps monthly payments at 10% of discretionary income and forgives remaining debt after 20 years. It is only available to borrowers who took out their first federal loans on or after October 1, 2007. is sunsetting by July 1, 2028, under the One Big Beautiful Bill Act (OBBBA). RAP is the plan replacing it.

How PAYE and RAP Calculate Your Payment

PAYE starts with your adjusted gross income (AGI), subtracts 150% of the federal poverty guideline for your family size and state, and charges 10% of what remains. That remainder is your discretionary income. If your AGI falls at or below 150% of the poverty guideline, your payment is $0. PAYE caps your payment at the 10-year Standard Repayment PlanStandard Repayment PlanThe default federal repayment plan, which spreads loan payments evenly over 10 years — or up to 30 years for consolidation loans. It usually results in the lowest total interest paid among federal plans. amount, calculated based on your eligible balance when you entered the plan. The cap stays fixed regardless of income growth.

RAP does not use discretionary income at all. It applies a tiered percentage directly to your total AGI — ranging from 1% at the lowest income levels to 10% at higher incomes. There is no poverty guideline deduction and no payment cap. A $10/month minimum applies to all borrowers — there are no $0 payment months under RAP. RAP allows a $50/month deduction per dependent claimed on your tax return, subtracted from the base payment.

The cap matters most for higher earners. A borrower on PAYE whose income grows substantially still pays the capped standard amount. The same borrower on RAP pays the uncapped tiered percentage, which can exceed the standard amount.

Both plans allow married borrowers to file separately to exclude a spouse’s income. Under RAP, only the filing borrower’s dependents count for the $50 deduction — no double-counting of children when both spouses file separately.

Forgiveness Timeline — 20 Years vs 30 Years

PAYE forgives any remaining balance after 20 years (240 qualifying payments). RAP requires 30 years (360 qualifying payments). That is 10 additional years of payments before forgiveness.

Even if RAP produces a lower monthly payment at some income levels, the extra decade of payments can result in a higher total cost. The breakeven depends on your income trajectory and balance — a borrower whose income rises over time may pay more total dollars on RAP despite lower early payments.

Forgiveness under both plans is taxable income under current federal tax law — the American Rescue Plan Act exemption expired December 31, 2025. PSLFPublic Service Loan Forgiveness (PSLF)A federal program that forgives the remaining balance on Direct Loans after 120 qualifying monthly payments made while working full-time for a government or qualifying nonprofit employer. forgiveness remains tax-free.

How Each Plan Handles Interest

RAP is more generous than PAYE on interest treatment, but the difference matters most for borrowers whose monthly payments don’t cover accruing interest.

Under PAYE, the government subsidizes unpaid interest on subsidized loans only for the first three consecutive years. After that, the borrower is responsible for all accruing interest on all loan types. Unpaid interest accrues but does not capitalize while the borrower remains on the plan.

Under RAP, if your monthly payment does not cover all accruing interest, the unpaid interest is waived — not capitalized, not added to your balance. Negative amortization cannot occur. Additionally, if your payment does not reduce your principal by at least $50, the Department of Education contributes up to $50 toward principal reduction.

For borrowers whose payments cover their interest in full — typically those with moderate-to-high income relative to their balance — this difference has no practical effect. The gap matters for borrowers whose payments fall short of accruing interest.

What Happens to Accrued Interest When You Switch

Under regulations effective July 1, 2023, interest does not capitalize when a borrower leaves PAYE, including when switching to a different repayment plan. Accrued unpaid interest stays separate from principal after the transition. By contrast, switching from Income-Based RepaymentIncome-Based Repayment (IBR)A federal income-driven repayment plan that caps monthly payments at 10% or 15% of discretionary income, depending on when the loans were taken out. Remaining debt is forgiven after 20 or 25 years of qualifying payments. (IBR) to another plan does trigger capitalization, because IBR’s capitalization rules are set by statute rather than regulation.

Once on RAP, unpaid interest capitalizationInterest CapitalizationThe addition of unpaid interest to the principal balance of a loan. After capitalization, interest begins accruing on the new, larger principal, which increases the total cost of repayment. is structurally eliminated going forward — any unpaid interest in a given month is waived rather than added to the balance. So, for a PAYE borrower moving to RAP, the no-capitalization outcome comes from two directions: PAYE’s exit rules don’t capitalize, and RAP’s ongoing rules don’t capitalize either.

PAYE vs RAP for PSLF

Both PAYE and RAP qualify for PSLF. Payments under either plan count toward the 120 qualifying payments, and switching plans does not reset your PSLF payment count.

For PSLF borrowers, the monthly payment amount is what determines total cost — not the forgiveness timeline. The plan that produces the lower monthly payment saves the most money, because whatever remains after 120 payments gets forgiven tax-free.

Which plan produces the lower payment depends on income:

At lower incomes — roughly under $50,000 AGI for a single borrower — RAP’s tiered percentage may produce a lower payment than PAYE’s 10% of discretionary income, especially with the $50/dependent deduction. At higher incomes, PAYE’s payment cap becomes an advantage. A borrower earning $150,000 on PAYE may still be paying a capped amount based on their original loan balance. The same borrower on RAP pays an uncapped percentage of their full AGI — potentially hundreds of dollars more per month.

Borrowers whose income will rise significantly during the PSLF window — physicians in residency, attorneys in early career, and other professionals — face the sharpest version of this trade-off. PAYE’s cap protects them as income climbs. RAP does not. However, legacy borrowers who switch to RAP are not locked in — the Department of Education has clarified that borrowers eligible for IBR can move freely between IBR and RAP. A borrower who starts on RAP for lower early payments could switch to IBR (which also caps payments) if income rises. That flexibility changes the calculus for some PSLF borrowers.

When PAYE Ends — The 2028 Transition

PAYE remains available to eligible borrowers through the OBBBA sunset. The plan phases out entirely by July 1, 2028, and the statute contains no extension provision.

Borrowers on PAYE must elect a different plan before that deadline. The options are IBR, RAP (available starting July 1, 2026), or the standard repayment plan. Under the RISE proposed regulations (§685.210), borrowers who do not select a plan by the deadline will be placed into the standard repayment plan — not RAP. Borrowers who want to remain on an income-driven plan need to affirmatively elect IBR or RAP.

RAP becomes available July 1, 2026, and borrowers can switch voluntarily at that point. For legacy borrowers — those with no loans disbursed on or after July 1, 2026 — switching to RAP is not permanent. During RISE negotiations, the Department of Education clarified that borrowers eligible for IBR may move freely between IBR and RAP even after July 2028. The one-way door that does exist is on PAYE itself: once you leave PAYE, you cannot re-enroll (proposed §685.209(c)(4)(iv)).

Switching plans involves a plan change application and a processing period. During processing, your account may be placed in forbearance, where payments generally do not count toward PSLF or income-driven repaymentIncome-Driven Repayment (IDR)A category of federal student loan repayment plans that calculate monthly payments based on income and family size rather than loan balance. Any remaining balance can be forgiven after 20–25 years of qualifying payments. (IDR) forgiveness. Borrowers close to PSLF should time the switch to avoid losing qualifying months.

Which Plan Fits Your Situation

The right choice depends on your income, your forgiveness horizon, and whether PSLF is part of your strategy.

You’re on PAYE and within a few years of 20-year forgiveness. Stay. Your payments continue to count toward the 20-year timeline. Switching to RAP would extend your forgiveness horizon to 30 years — and while prior qualifying payments carry over, you would need to reach the 30-year threshold, not the 20-year one. Switching this close to the finish line adds years.

You’re on PAYE, pursuing PSLF, and your income is high enough to hit the cap. Stay on PAYE as long as possible. The cap keeps your payments lower than what RAP would charge. When PAYE sunsets, switch to IBR — which also caps payments — rather than RAP.

You’re on PAYE, pursuing PSLF, and your income is low. RAP may produce a lower monthly payment than PAYE once it launches in July 2026 — especially with the $50/dependent deduction. Run the numbers when RAP becomes available. Switching to RAP is not permanent for legacy borrowers — you can move to IBR later if your income rises and you want a capped payment. But each plan switch involves a processing period that may cost qualifying months, so avoid switching back and forth without a clear financial reason.

You’re on PAYE, not pursuing PSLF, and have 10+ years left. The 20-year forgiveness timeline is worth protecting. Switching to RAP extends the horizon to 30 years. Stay on PAYE through the wind-down, and elect IBR before PAYE sunsets to preserve the shorter forgiveness window (20 years for New IBR, 25 years for Old IBR).

You’re a new borrower with loans after July 1, 2026. PAYE is not available to you. RAP is your only income-driven option — but you can switch between RAP and the tiered standard repayment plan at any time. The comparison in this article applies to existing borrowers choosing between the two plans.