When 11-year-old Trevor McKinney (Osment) begins seventh grade in Las Vegas, Nevada, his social studies teacher Eugene Simonet (Spacey) gives the class an assignment to devise and put into action a plan that will change the world for the better. Trevor calls his plan "pay it forward", which can be described as a charitable pyramid scheme, based on good deeds rather than profit. "Paying it forward" means the recipient of a favor does a favor for a third party rather than paying the favor back.

Trevor does a favor for three people, asking each of them to return the favor by doing favors for three other people, and so on, along a branching tree of good deeds. Trevor does his first good deed for a homeless man named Jerry (James Caviezel). This effort initially appears to be unsuccessful, but Jerry will pay his debt forward later in the film by talking a suicidal woman out of jumping off a bridge.

Meanwhile, Trevor's mother Arlene (Hunt) meets Eugene after discovering Jerry in their house and confronting Eugene about Trevor's project. Then Trevor selects Eugene as his next "pay it forward" target and tricks Eugene and Arlene into a romantic dinner date. This also appears to fail, but then Trevor and Arlene argue about her alcoholism and she slaps him in a fit of anger. The two adults are brought together again when Trevor runs away from home and Arlene asks Eugene to help her find him.

Trevor's school assignment marks the beginning of the story's chronology, but the opening scene in the film shows one of the later favors in the "pay it forward" tree, in which a man gives a car to Los Angeles journalist Chris Chandler (Jay Mohr). As the film proceeds, Chandler traces the chain of favors back to its origin in Trevor's school project. After her date with Eugene, Arlene paid Trevor's favor forward by forgiving her own mother Grace (Angie Dickinson) for her mistakes in raising Arlene, and Grace, who is homeless, helped a gang member escape from the police. This gang member then helped the daughter of the man who gave Chandler his new car.
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