Pay As You Earn (PAYE) helps you pay off your loans more easily by adjusting your monthly payments to the amount you earn right now. If you qualify for the program, enrolling in PAYE can offer significantly easier loan repayment, as well as complete forgiveness of your loan balance after a period of time.
What is Pay As You Earn (PAYE)?
The Pay As You Earn program gives federal student loan borrowers the opportunity to pay back their student loans at a more reasonable pace based on their income. The primary benefit of PAYE is that your monthly loan payments are based on what you currently earn, not on what you owe. Specifically, monthly payments under the PAYE program are capped at 10% of a borrower’s discretionary income.
Part two of this amazing program is that you may not even have to pay off your entire loan. If you make your qualifying payments for 20 years, your federal student loans can be forgiven and discharged.
The most impressive benefits of PAYE are:
- Monthly payments capped at 10% of your discretionary income.
- Loan forgiveness offered after 20 qualified years (discharged amount IS taxable).
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Obama’s Pay As You Earn Repayment Plan
The Pay As You Earn Repayment Plan was passed into law by then-President Obama on December 21st, 2012. PAYE was part of a larger plan to assist those struggling with federal student loans, often referred to as “Obama’s student loan forgiveness program”. This set of law reforms still exists to benefit student loan borrowers in 2018.
The role of PAYE within the larger scheme of new legislation was to make loan repayment easier for graduates when they first enter the workforce and allow them to increase their monthly payments as their income increased.
As it stands, the PAYE program offers more benefits than the other income-driven repayment programs, but it is also harder to qualify for.
Pay As You Earn vs. IBR
The most common type of income-driven repayment plan (the one most borrowers qualify for) is Income-Based Repayment or IBR. The main difference between IBR and PAYE is that your monthly payments could be lower with PAYE than with IBR, depending on when your loan was initiated. This is because, for some loans, monthly payments under PAYE are capped at a lower percentage of your income than they would be under IBR.
- Payments generally capped at 10% of your discretionary income.
- 20-year repayment
- New borrowers on or after July 1, 2014
- Payments generally capped at 10% of your discretionary income.
- 20-year repayment
- Borrowers who are not new borrowers on or after July 1, 2014
- Payments generally capped at 15% of your monthly discretionary income.
- 25-year repayment
Pay As You Earn vs. REPAYE
To help student borrowers who do not meet the more stringent requirements of PAYE, the Obama administration introduced the Revised Pay As You Earn, or REPAYE, program. The primary difference between the two programs is that you can qualify for REPAYE regardless of when your loan was initiated. If you don’t qualify for PAYE, REPAYE can offer the same benefits without many of the limitations.
The repayment term is also different between the two: with REPAYE, you can receive loan forgiveness after 20 years of qualified payments, or 25 years of qualified payments if you’re repaying Grad PLUS Loans.
- Payments generally capped at 10% of your discretionary income.
- 20-year repayment if all loans you’re repaying under REPAYE were received for undergraduate study
- 25-year repayment if any loans you’re repaying under REPAYE were received for professional or graduate study
- Interest forgiveness can be greater in REPAYE
Eligibility Requirements for PAYE
To qualify for IBR, PAYE, or REPAYE, the amount you would pay monthly under the plan must be less than your monthly payment under a 10-year Standard Repayment Plan.
If your calculated monthly payment under PAYE is equal to or greater than what you’re paying monthly with your Standard Repayment Plan, you wouldn’t benefit from PAYE, and you won’t qualify.
In addition to this general requirement, you as a borrower must meet several criteria and make sure your loan qualifies for PAYE.
Borrower Requirements for PAYE
To qualify for the PAYE repayment program, you must meet the following criteria as a borrower:
- Prove at minimum Partial Financial Hardship as defined by the U.S. Department of Education
- Be a new borrower as of October 1, 2007 (defined as having no outstanding balance on a Direct or FFEL Loan when you receive a Direct or FFEL Loan on or after October 1, 2007).
- Have received a Direct Loan disbursement on or after October 1, 2011.
Loans That Qualify for PAYE
Additionally, your loan must be one of the following types of federal loan to qualify for PAYE:
- Direct Subsidized or Unsubsidized Loans made to undergraduate student borrowers
- Direct Plus Loans made to graduate and professional student borrowers
- Direct Consolidation Loans that don’t include PLUS Loans made to parents.
- Direct Plus Loans made to parents do not qualify for PAYE.
- PAYE only applies to federal student loans that were disbursed on or after Oct. 1, 2007.
- You must not have had a balance on a Direct Loan or FFEL Loan when you received the loan after Oct. 1st, 2007.
Benefits of PAYE
Pay As You Earn is generally harder to qualify for than other IDR plans, but it can result in lower monthly payments and other additional benefits. If you qualify for PAYE, it’s likely the superior choice over IBR.
The primary benefit of Pay As You Earn is reduced monthly payments. If your monthly loan payment is high, but you’re a new graduate with relatively low income, PAYE may be the best option if you qualify. PAYE caps your monthly payment at 10% of your discretionary income, which can result in a significant decrease in your monthly payment, even lowering it to $0.
When you qualify for PAYE, you qualify for loan forgiveness after a term of 20 years, as long as you make all of your payments. This is one of the benefits PAYE offers over IBR, since IBR forgiveness is only offered after 25 years for loans taken out before July 1, 2014.
Public Service Loan Forgiveness (PSLF)
If you work in public service, or you plan to go into a public service field, you may qualify for Public Service Loan Forgiveness or PSLF. However, you’ll need to be enrolled in a qualifying repayment plan in order to qualify for this type of loan forgiveness.
Unlike with PAYE and IBR, forgiveness is available after 10 years of qualified payments under PSLF, and any balance forgiven is not considered taxable income.
Enrolling in PAYE is a great option if you’re interested in qualifying for PSLF now or in the future. Not only will you be one step closer to qualifying for PSLF by enrolling in a qualified IDR plan, but you’ll also reduce your monthly payments as much as possible.
Drawbacks of PAYE
While PAYE may seem like a no-brainer, the plan does have drawbacks that are important to consider before enrolling.
Tax Implication for Forgiven Loan Balance
If after 20 years of qualified repayment under PAYE you still owe a balance on your federal student loans, you can qualify for loan forgiveness. However, it’s important to note that this benefit doesn’t come without financial responsibility: any forgiven amount under PAYE is considered taxable income by the Internal Revenue Service. Before applying for loan forgiveness, make sure you’re prepared to pay a percentage of your forgiven balance on that year’s income taxes.
Annual Recalculation and Re-Enrollment
All of the factors included here are recalculated annually in order to determine the fairest repayment amount for every applicant. While this does result in monthly payments that better suit your monthly income, it can also result in a lot of paperwork and hassle.
To recertify your PAYE plan, you have two options: submitting a request electronically via StudentLoans.gov or submitting a paper application through the mail. To make your recertification request, you’ll need proof of income, your spouse’s information if you’re married, your family size information, your signature, and your FSA ID if you plan to use the Federal Student Aid website.
If you’re interested in PAYE, the benefits have to outweigh the time and energy it takes to remain enrolled and keep your information up-to-date.
If you can afford to make your monthly payments under the 10-year Standard Repayment Plan, you can be debt-free in half the time it will take to get out of debt under a PAYE program. Getting out from under your student debt faster may just be worth it, even if it means forgoing the forgiveness offered by the PAYE program if you can afford it.
By reducing or eliminating your student debt in 10 years rather than 20, you better your financial health and will likely have more success when it comes to buying a home, taking out a line of credit, and anything else that requires a credit check.
What Will My Payments Be With PAYE?
Your monthly payments under PAYE are calculated using your discretionary income. Discretionary income is anything your household earns over 150% of your state’s poverty level. To find out what your monthly payments would be if you qualify for PAYE, you’ll need to calculate your household’s discretionary income.
Note that your entire household’s income goes into this calculation, not just your own, as state poverty levels are based on household size.
Example of monthly payment calculation under PAYE repayment plan:
The 2018 Federal Poverty Guideline for the 48 contiguous United States and D.C. was $16,460 for a household of two.
If you’re in a household of two and living in California, making $36,000 per year as a household (both incomes included), you would find your discretionary income by the following:
- 150% of $16,460 (1.5 x 16,460) = $24,690
- $24,690 is 150% of your state’s poverty level.
- $36,000 – $24,690 = $11,310
- $11,310 is your discretionary income.
- 10% of $11,310 (.10 x 11,310) = $1,131
- $1,131 is the amount you owe yearly.
- $1,131 divided by 12 = $94.25
- $94.25 is your monthly payment.
Trump Proposals for Student Loan Forgiveness
It’s 2018, and the president who instated the PAYE and REPAYE programs is no longer in office. However, these IDR plans have yet to experience any changes under the new administration.
Discharged Student Loans Tax Burden
President Trump has made some changes to the way student loan forgiveness works, including the Tax Cuts and Jobs Act, which made discharged student loans untaxable for people who received it for Death or Total and Permanent Disability. The act also eliminated the tuition and fees deduction, which allowed taxpayers to reduce their taxable income by up to $4,000.
Changes to Student Loan Repayment Plans
In addition to these changes which have already gone into effect, Trump has proposed the elimination of IBR, PAYE, REPAYE, and ICR, and the instatement of a single, new income-driven repayment plan.
The new plan would cap borrowers’ monthly payments at 12.5%, which would be an increase for any borrowers who currently qualify for PAYE and REPAYE.
The new plan would also provide student loan forgiveness at 15 years for undergraduate borrowers and 30 years for graduate/professional borrowers. It’s unclear whether or not forgiven balances would be taxable as income.
Is PAYE Right for You?
If you’re struggling to make your monthly payments under a 10-year Standard Repayment Plan, PAYE isn’t your only option. Although PAYE might be the most generous income-driven repayment option, not every applicant will qualify. Additionally, PAYE might not be the best choice for you if you want to pay off your debt faster, or if you’re not prepared to keep up with yearly enrollment.
If you don’t qualify for PAYE or you’re interested in learning more about other income-based repayment plans, click here.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com 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 LendKey.com. 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 LendKey.com 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.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: 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: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). 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 of 10 years or less. For loan terms of 10 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 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 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 04/23/19. 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 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.