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Pay As You Earn Repayment Plan (PAYE Student Loan)

If you’re trying to pay off federal student loans below a 10-year Standard Repayment Plan, you may qualify for a PAYE Student Loan repayment plan. The U.S. Department of Education gives various income-driven repayment plans, but PAYE Student Loan is generally considered as one of the most beneficial.

Pay As You Earn (PAYE Student Loan) assists you to pay off your loans more efficiently by modifying your monthly payments to the value you earn currently. If you pass for the program, enrolling in PAYE Student Loan can offer a lot easier loan repayment, also full forgiveness of your loan balance.

What is Pay As You Earn (PAYE )?

The Pay As You Earn program provides federal student loan borrowers the chance to pay back their student loans at a more fair pace based on their income. The main benefit of PAYE is that your monthly loan payments are based on what you currently earn, not on what you owe. Monthly payments under the PAYE Student Loan program are capped at 10% of a borrower’s discretional income.

Part two of this program is that you may not even have to pay off your whole loan. Your federal student loans can be forgiven and discharged if you make your qualifying payments for 20 years.

The most notable benefits of PAYE Student Loan are:

  • Monthly payments capped at 10% of your discretionary income.
  • Loan forgiveness offered after 20 qualified years (the discharged number is taxable).

Obama’s PAYE Student Loan Repayment Plan

President Obama passed into law The PAYE Student Loan Repayment Plan on December 21st, 2012. PAYE was part of a bigger plan to help those trying with federal student loans, usually regarded to as “Obama’s student loan forgiveness program.”

The purpose of PAYE Student Loan within the larger system of new legislation was to make loan repayment more manageable for graduates when they first join the workforce and let them increase their monthly payments as their income increased also.

The PAYE program gives more benefits than the other income-driven repayment programs, but it is also difficult to pass for.

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Pay As You Earn vs. IBR

The most basic sort of income-driven repayment plan is Income-Based Repayment or IBR.  Your monthly payments could be lower with PAYE than with IBR, depending on when your loan was started, that is the main difference between IBR and PAYE. For some loans, monthly payments under PAYE are capped at a smaller percentage of your income than they would be under IBR.

IBR

  • Borrowers on or after July 1, 2014
  • Payments usually capped at 10% of your discretionary income.
  • 20-year repayment
  • Borrowers that are not new borrowers on or after July 1, 2014
  • Payments usually capped at 15% of your monthly discretionary income.
  • 25-year repayment

PAYE

  • Payments usually capped at 10% of your discretionary income.
  • 20-year repayment

Pay As You Earn vs. IBR

The most basic sort of income-driven repayment plan is Income-Based Repayment or IBR.  Your monthly payments could be lower with PAYE than with IBR, depending on when your loan was started, that is the main difference between IBR and PAYE. For some loans, monthly payments under PAYE are capped at a smaller percentage of your income than they would be under IBR.

IBR

  • Borrowers on or after July 1, 2014
  • Payments usually capped at 10% of your discretionary income.
  • 20-year repayment
  • Borrowers that are not new borrowers on or after July 1, 2014
  • Payments usually capped at 15% of your monthly discretionary income.
  • 25-year repayment

PAYE

  • Payments usually capped at 10% of your discretionary income.
  • 20-year repayment

Eligibility Requirements for PAYE

To qualify for PAYE,IBR or REPAYE, the number you would pay monthly under the plan have to be smaller than your monthly payment under a 10-year Standard Repayment Plan.

If your estimated monthly payment under PAYE is similar to or higher than what you’re paying monthly with your Standard Repayment Plan, you won’t benefit from PAYE, and you won’t qualify.

Plus to this general requirement, you as a borrower have to fit certain standards and make certain your loan passes for PAYE.

Borrower Requirements for PAYE Student Loan

To pass for the PAYE Student Loan repayment program, you have to meet these standards as a borrower:

  • Prove at least Partial Financial Hardship as set by the U.S. Department of Education
  • Have got a Direct Loan disbursement on or after October 1, 2011.
  • Be a new borrower from October 1, 2007 (determined as having no notable balance on a Direct or FFEL Loan when you get a Direct or FFEL Loan on or after October 1, 2007).

Loans That Qualify for PAYE

Plus, your loan has to be one of these examples of federal loan to qualify for PAYE:

  • Direct Consolidation Loans that don’t add PLUS Loans made to parents.
  • Direct Unsubsidized or Subsidized Loans made to undergraduate student borrowers
  • Direct Plus Loans made to graduate and expert student borrowers

PAYE Limitations:

  • Direct Plus Loans offered to parents do not qualify for PAYE.
  • When you got the loan after Oct. 1st, 2007 you must not have had a balance on a Direct Loan or FFEL Loan.
  • PAYE particularly applies to federal student loans that were disbursed on or after Oct. 1, 2007.

Benefits of PAYE

Pay As You Earn usually difficult to qualify for than other IDR plans, yet it can result in lower monthly payments and extra added benefits. If you are eligible for PAYE, it’s possible the preferred option over IBR.

Lower Payments

The primary advantage of PAYE Student Loan is decreased monthly payments. If ,you’re a new graduate with relatively low income and your monthly loan payment is high, PAYE Student Loan may be the best choice if you qualify. PAYE caps your monthly payment at 10% of discretionary income. And it can result in a notable decrease in your monthly payment, even reducing it to $0.

Loan Forgiveness

You are eligible for loan forgiveness after a span of 20 years when you qualify for PAYE, as long as you perform all of your payments. This is one of the advantages PAYE allows over IBR since IBR forgiveness is only given after 25 years to loans removed before July 1, 2014.

Public Service Loan Forgiveness (PSLF)

Forgiveness is open after 10 years of qualified payments under PSLF unlike with PAYE and IBR, and any balance forgiven is not regarded taxable income.

Enrolling in PAYE is an excellent option if you’re curious in qualifying for PSLF in the future or now. You will be a move closer to qualifying for PSLF by enrolling in a qualified IDR plan and also decrease your monthly payments as much as possible.

Drawbacks of PAYE

While PAYE may look like an easy choice, the plan does have drawbacks that are necessary to reflect before enrolling.

Tax Implication for Forgiven Loan Balance

If you still owe a balance on your federal student loans after 20 years of qualified repayment under PAYE, you can qualify for loan forgiveness. But, it’s necessary to record that this advantage doesn’t come without financial responsibility: any forgiven number under PAYE is regarded as taxable income by the Internal Revenue Service. Make sure you’re ready to pay a percentage of your forgiven balance on that year’s income taxes before applying for loan forgiveness.

Annual Recalculation and Re-Enrollment

All of the factors involved here are recalculated periodically to decide the fairest repayment number for each applicant. This can result in a lot of paperwork and hassle while it does result in monthly payments that better suit your monthly income.

You have two choices to recertify your PAYE plan: submitting a paper application through the mail or submitting a request electronically via StudentLoans.gov. To make your recertification request, you’ll need your spouse’s information if you’re married, proof of income, your signature, your family size information, and your FSA ID if you intend to use the website of Federal Student Aid.

If you’re interested in PAYE, the advantages have to outweigh the energy and time it takes to continue enrolled and retain your information timely.

Debt Prolongment

You might be debt-free in half the time if you can manage to make your monthly payments under the 10-year Standard Repayment Plan. It will need to get out of debt under a PAYE program. Getting out from under your student debt quicker may be worth it, even if it involves forgoing the forgiveness given by the PAYE program if you can manage it.

By eliminating or reducing your student debt in 10 years rather than 20, you better your financial health and probably will have more benefit when it comes to purchasing a home, taking out a line of credit, and everything that needs a credit check.

Private Student Loan Consolidation

Private student loan consolidation is available through various banks we work with to combine all your student loans into one new loan. Private student loan consolidation requires a good credit score and will often have better rates than the federal student loan.

What Will My Payments Be With PAYE?

Your monthly payments under PAYE are determined by applying your discretionary income. Anything your household makes over 150% of your state’s poverty level is discretionary income. You have to determine your household’s discretionary income to know what your monthly payments would be if you qualify for PAYE.

Remember that your entire household’s income goes into this calculation, not only your own, as state poverty levels are based on household size.

The Sample of monthly payment calculation under PAYE repayment plan:

The sample 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 can find your discretionary income by these steps:

  • 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

The president who began the PAYE and REPAYE programs are no longer in office. But, these IDR plans have yet to undergo any modifications under the new administration.

Discharged Student Loans Tax Burden

President Trump has made some modifications to the form student loan forgiveness works, as well as the Jobs Act and Tax Cuts, which made discharged student loans untaxable for people who got it for Total or Death and Permanent Disability. The action also eliminated the tuition and fees deduction, which let taxpayers decrease their taxable earnings by up to $4,000.

Changes to Student Loan Repayment Plans

Bonus to these changes which have already impacted, Trump has offered the elimination of IBR, PAYE, REPAYE, and ICR, and the statement of a single, new income-driven repayment plan.

The new plan would be an increase for any borrowers who currently qualify for PAYE and REPAYE  by capping borrowers’ monthly payments at 12.5%.

The new plan would also give student loan forgiveness at 15 years for undergraduate borrowers and 30 years for professional/graduate borrowers. It’s unsettled forgiven balances would be taxable as income or not.

Is PAYE Right for You?

If you’re fighting to make your monthly payments under a 10-year Standard Repayment Plan, PAYE isn’t your only choice. Even though PAYE might be the most reasonable income-driven repayment choice, not every candidate will qualify. Plus, PAYE might not be the best option for you if you’re not prepared to keep up with yearly enrollment or if you want to pay off your debt faster.

If you don’t qualify for PAYE or you’re curious about learning more on other income-based repayment plans, click here.

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