The Pay As You Earn Program (PAYE) is an income-based repayment plan for qualifying Direct Loans. President Obama announced the program in October 2011 as a response to provide relief to student loan borrowers struggling to make payments, which became effective on Dec. 21, 2012. PAYE was designed to benefit students who have a large amount of federal debt that is a significant portion of their annual salary.
The repayment period is set at 20 years. Any remaining loan balance after the 20 years is forgiven. A benefit of the PAYE repayment plan is that you make lower monthly payments. With an extended repayment plan, however, you will pay significantly more interest on the loan. If there is a remaining balance at the end of your repayment period you may be required to pay income tax on any amount that is forgiven.
Who is Eligible?
In order to qualify for PAYE, borrowers must meet the following criteria:
- Must be a new borrower as of October 1, 2007 and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011
- The payment on PAYE must be less than the payment on a standard 10-year repayment program.
- Your federal student loan debt is higher than your annual discretionary income or represents a large portion of your annual income.
How the Payment is Calculated:
- The Pay As You Earn Program payment is likely around 10% of your discretionary income, but never more than the 10-year standard repayment plan amount.
- Your monthly payment is calculated based on your income and family size.
- Each year you will provide your loan servicer updated income and family size information to determine if your monthly payment will increase or decrease.
Example:
The Federal Student Aid website details expected contribution of a qualifying borrower with a starting salary of $40,000, subject to a 5% raise annually and $40,000 in student loans. Under the PAYE, expected initial payments of $186 will be made and a final loan payment around $444 over 218 months. The borrower will likely pay around $19,028 dollars in interest under this plan.
Types of Loans That Are Eligible:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS loans for graduate or professional students
- Direct Consolidation Loans that did not repay any PLUS loans made to parents
- Consolidated Subsidized Federal Stafford Loans
- Consolidated Unsubsidized Federal Stafford Loans
- Consolidated FFEL PLUS loans make to graduate or professional students
- FFEL Consolidation Loans that did not repay any PLUS loans made to parents
- Consolidated Federal Perkins Loans
Benefits of the Pay As You Earn Program
There are many benefits to PAYE. First and foremost, the payments made on this plan will reduce your expected contribution and help lower your monthly payments. Pay As Your Earn Program offers greater benefit the larger the amount of debt you have.
Contact your student loan servicer to see if the Pay As You Earn Program will benefit you given your current financial position. There are various Income Based Repayment Programs also available to borrowers.
What If You Don’t Qualify?
If your loans do not qualify for the Pay As You Earn Program and are looking for ways to make your monthly payments more affordable, consider refinancing your student loan to save on interest and extend your loan term if you wish to make your monthly payments more affordable.
Visit Credible to learn more about your refinancing and consolidation options or visit studentaid.ed.gov for more information about the Pay As You Earn Program
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