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If your federal student loan payments are more than you can handle, you should consider an income-based repayment plan. One option is Pay As You Earn (PAYE). PAYE caps your monthly federal student loan payments at 10% of your discretionary income.
PAYE is for people who:
- Took out their first federal student loan after Oct. 1, 2007
- Have Federal Direct Loans or Direct Consolidation Loans originated after Oct. 1, 2011
- Can demonstrate partial financial hardship
Here’s what you need to know about PAYE:
- How PAYE works
- When PAYE might make sense for you
- Pros and cons of PAYE
- How PAYE compares to other repayment plans
- How to apply for PAYE
- What you can do if you don’t qualify for PAYE
How PAYE works
PAYE is an income-driven repayment plan (IDR) that can lower your monthly federal student loan payments. With PAYE, your required monthly student loan payment is capped at 10% of your discretionary income. You must also demonstrate a partial financial hardship, which means your payment would be lower with PAYE than the standard repayment plan.
If you participate in PAYE for 20 years, the remainder of your student loan balance is forgiven. If you’re on track for Public Service Loan Forgiveness (PSLF), you could have your remaining balance forgiven after just 10 years.
If you apply for PAYE, you should keep making your regular, standard payments as scheduled until you’re approved. But if approved, you have to recertify every year to stay in the program.
When PAYE might make sense for you
PAYE is not the easiest income-driven repayment plan to qualify for, but if you do qualify, it will likely qualify you for the lowest possible monthly payment. Here are some examples of when PAYE could make sense:
- You have big loan balances and a low income: If the cost of your degree and the income it produces don’t line up, PAYE could make your monthly payment more affordable.
- You don’t expect your income to increase greatly: If you have a low income today, but expect a big raise in the future, you might lose your ability to requalify for PAYE in future years.
- You’re single: If you’re single, only your income counts for the PAYE calculation. Two incomes might make it tougher to prove a partial financial hardship.
- You’re married and your spouse also has federal student loans: The numbers behind PAYE include both your spouse’s income and student loans. If you both have student loans, it’s easier to qualify for a PAYE.
- You have a big family: The PAYE formula looks at the cost of living in your state. This is determined by family size. If you have kids, it is easier to demonstrate partial financial hardship.
Pros and cons of PAYE
Pros
- Lowers your monthly payment to 10% of your discretionary income
- The remaining balance is forgiven in 20 years (or 10 years with PSLF)
- Factors in spouse’s federal student loans
Cons
- If your income greatly increases, you could lose PAYE in the future
- Spouse’s income counts toward discretionary income
- You have to pay taxes on forgiven federal student loan balances under PAYE
- If you leave PAYE, your student loan balance could go up
How PAYE compares to other repayment plans
PAYE isn’t the only income-driven repayment plan to choose from. There are other income-driven repayment plans, as well. Here’s a quick look at how PAYE compares to REPAYE and other IDR plans:
| Term duration | Interest capitalizes | Who qualifies | Affects credit score | |
|---|---|---|---|---|
| PAYE | 20 years | If you no longer have partial financial hardship, fail to recertify, or leave the plan | Direct Loan borrowers with partial financial hardship who took first loan out after Sept. 30, 2007, and a new loan since Sept. 30, 2011 (no Parent PLUS Loans) | No |
| REPAYE | 20 years (25 for grad loans) | If you leave the plan or fail to recertify | Any federal student loan borrower (no Parent PLUS Loans) | No |
| IBR | 20 years | If you no longer have partial financial hardship, fail to recertify, or leave the plan | Borrowers with partial financial hardship who took first loan out after July 1, 2014 | No |
| ICR | 25 years | Annually | Federal student loan borrowers (Parent PLUS Loans must be consolidated) | No |
| Deferment | Temporary | On unsubsidized balances | Economic hardship, qualifying disability or illness, military service, continuing education, or unemployment | No |
| Forbearance | Temporary | For all loan balances | Financial hardship, medical/dental education, National Guard duty, military service, high payments relative to income, or teachers | No |
How to apply for PAYE
The PAYE application process is fairly straightforward and can be easily completed online.
- Go to the Federal Student Aid website at StudentLoans.gov
- Click the button for new applicants who are not currently in an income-driven repayment plan and want to start
- Log in with your FSA ID (this is the same login used for the FAFSA when you first applied for federal student loans)
- Complete the form with information on your employment and family
- Connect your application to your IRS tax return (or submit a copy of your most recent federal tax return to your loan servicer)
- Enter your income into the loan payment calculator and choose the PAYE plan if you qualify
- Enter additional personal information, certify, and sign your application
You can also submit a paper application, but the online process is much faster and easier.
What you can do if you don’t qualify for PAYE
If you don’t qualify for PAYE, you might qualify for REPAYE or another income-driven repayment plan. If you have excellent credit, you might also be able to save money by refinancing your student loans, but if you do that you will lose the opportunity to join PAYE or other federal student loan repayment plans in the future.
Deferment and forbearance can be a good option for shorter-term financial hardship, as interest still accrues and you will have to get back to your regular payments after a period of time.
If you struggle with your federal student loan payments, PAYE or another income-driven repayment plan could be a great option. And if you stick with it long enough, you will get rid of those student loan balances for good.
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