The Pay As You Earn Repayment Plan or PAYE is a lesser known Loan Repayment program that was passed by President Obama on December 21st, 2012 and was his first piece of legislation to assist those with federal student loans. Currently, PAYE only applies to federal student loans that were disbursed on or after Oct. 1, 2007, and you must not have had a balance on a Direct Loan or FFEL loan when you received the loan after Oct. 1st, 2007. However, President Obama plans to issue an executive order this year that extends the application process to loan holders who began receiving federal student loans before that date as well. As with the Income Based Repayment option, applicants must prove at minimum Partial Financial Hardship as defined by the Department of Education.
- The only eligible federal loans are Direct Subsidized and Unsubsidized for Undergraduates and Direct Plus for Graduates and Professionals. Please note that this does not include Direct Plus Loans issued to parents.
- Applicants must prove Partial Financial Hardship. This includes not just income, but number of family members and their income as well.
- You must be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You are a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan when you received a Direct Loan or FFEL Program loan on or after Oct. 1, 2007.
If approved, applicants will see their loan payments capped at 10% of their income that exceeds 150 percent of the Federal poverty line. The specifics are detailed in the chart below.
|Pay As You Earn (PAYE) Monthly Calculator|
|Monthly Adjusted Gross Income||$4,280|
|(minus) 150% of Poverty Line (1)||-$1,480|
|Monthly PAYE Payment||$280|
|(1) Determined annually and based on federal poverty guidelines.|
Reduced Term & Student Loan Forgiveness
All of these factors are recalculated annually in order to determine the most fair repayment amount for every applicant. If approved, graduates enrolled in the PAYE program have up to 20 years to repay their debt. After 20 years of qualified monthly payments have been made, any remaining debt on the student loans would be forgiven or discharged. Potential applicants should know that all discharged loan amounts are still considered by the IRS as income and will be taxed accordingly. Because of this, PAYE is considered one of the more generous repayment programs that offers the lowest payment on your federal student loans.
Tax Implication for Forgiven Loan Balance
Being enrolled in the REPAYE plan may end up resulting in loan forgiveness on any unpaid balance of the loan after 20-25 years of payments. The amount forgiven may be considered taxable income.
Coming Changes To The PAYE Repayment Plan
In addition to his June executive order, the President’s proposed 2015 budget would also include these changes to PAYE in the coming year if approved by Congress:
- Eliminate the standard payment cap under PAYE so that high-income, high-balance borrowers pay an equitable share of their earnings as their income rises.
- Cap Public Sector Loan Forgiveness (PSLF) for undergraduate students at the aggregate loan limit to protect against institutional practices that may increase student indebtedness, yet ensure the program continues to provide sufficient relief for students committed to public service.
- Extend the loan period to 25 years for borrowers with balances above the aggregate loan limit.
- Prevent payments made under non-income driven repayment plans from being applied toward PSLF to ensure students with the greatest need are considered first for loan forgiveness.
- Cap the amount of interest that is allowed to continue calculating when a borrower’s monthly payment is not enough to prevent ballooning loan balances.
- Calculate payments for married borrowers who file separately on the combined household Adjusted Gross Income.
Although PAYE may be the most generous repayment option, not every applicant is going to qualify for it. Even with approved changes in President Obama’s executive order, it does currently still restrict benefits against those students with high loan balances and those who choose to pursue a public service career. If you do not believe that you will qualify or that it may not be the best option for you, details on the other Income Based Repayment Plans can be found at Student Debt Relief here.