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If you’re looking for a way to lower your federal student loan payments, the Pay As You Earn (PAYE) plan is one to consider. However, the criteria to qualify are stricter than those for some of the other repayment plans.
PAYE is best for borrowers 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
- Demonstrate partial financial hardship
What are the requirements for PAYE?
The PAYE repayment plan is one of four income-driven repayment plans available to federal student loan borrowers.
Here are the basic criteria you’ll need to meet to qualify for PAYE
- You have federal student loans. PAYE is only available to federal student loan borrowers. Private student loans aren’t eligible for PAYE
- You took out your federal loan on or after October 1, 2011. Your loan’s disbursement date is the date that counts for this purpose
- You had no federal student loan balance as of October 1, 2007. The Department of Education uses this date as a cutoff to define “new” borrowers for PAYE eligibility
- You have a lot of debt relative to your income. The annual amount you would have to pay under the 10- or 30-year Standard Repayment Plan (which does not take your income into account) must be higher than what you would pay under PAYE (which does take your income into account). Federal Student Aid calls this a “partial financial hardship.”
In many ways, PAYE is similar to REPAYE, or Revised Pay As You Earn, which is another option you may want to consider. REPAYE also gives you a monthly payment of about 10% of your discretionary income. However, it doesn’t cap your monthly payment amount, so you could end up paying more than you would have under the standard 10-year repayment plan.
Learn More: REPAYE: How it Works and Who it’s For
What if you don’t qualify for PAYE?
If you have excellent credit, you might also be able to save money by refinancing your student loans, but if you do that you’ll 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 certain period of time
If you’re considering refinancing, visit Credible to compare private student loan rates from various lenders in minutes
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How do you apply for PAYE?
Some companies will help you apply for PAYE for a fee, but you don’t need to use their services. You can apply for PAYE yourself for free. You can also get free help from your student loan servicer. You can research who your servicer is by logging in at StudentAid.gov/login. If you have more than one servicer, you’ll need to apply for PAYE with each servicer. The Department of Education recommends that you apply online.
If you don’t want to apply online, you can print out a paper application and mail it to your loan holder. The official form says “Income-Driven Repayment (IDR) Plan Request” at the top
However you apply, you’ll need to provide the following information:
- Name, address, Social Security number, and phone number
- Which IDR plan you’re applying to
- Your family size and number of dependents
- Your marital status
- If you’re married and have access to your spouse’s income, information about your spouse, their income, and their student loans
- Income information, including whether you’ve recently lost income due to job loss or another reason
- At least one document proving each source of income and dated within 90 days of your application
Pros of PAYE
Applying for PAYE might be a good choice if these benefits appeal to you:
- Limit your monthly payment to 10% of your discretionary income, not to exceed what you would have paid under the 10-year Standard Repayment Plan.
Discretionary income is the income you have left after subtracting 150% of the poverty guideline amount, which is based on your family size and state of residence. “Income” is your adjusted gross income from your most recent federal tax return
- For subsidized loans, get interest forgiveness for the first three years on the difference between your monthly payment and the interest that accrues
- Become eligible for federal student loan forgiveness after 20 years
- Switch to another income-driven repayment plan anytime, as long as you’re eligible for that plan
- Keep the federal student loan benefits that you would lose by refinancing your student loans with a private lender
- You’re married but don’t want your spouse’s income considered, which is an option if you file separately or don’t have access to your spouse’s income
Cons of PAYE
PAYE is not the best choice for everyone. A different repayment plan might be better for you if any of the following apply:
- You have parent loans. These aren’t eligible for PAYE
- You don’t want to carry student loan debt for two decades
- You can afford the monthly payments under the Standard Repayment Plan or Graduated Repayment Plan and they will cost you less in the long run given your total debt and starting income
- Your spouse’s income prevents you from qualifying or results in a substantially higher payment
- You don’t meet the plan’s definition of “new borrower” or “partial financial hardship.”
- You’re not great at following up and meeting deadlines. Failure to annually recertify your eligibility for PAYE will result in capitalized interest that will increase your loan balance
- You need an income-driven repayment plan for loans that are not Federal Direct Loans
- Your income is likely to increase substantially. If that happens, you could stop qualifying for PAYE. The low payments you make under many income-driven repayment plans mean that the total interest you owe can grow over time. If you leave PAYE, you could end up with a lot of capitalized interest added to your loan balance
Erik Rosenberg has contributed to the reporting of this article.