If you borrowed your first federal student loan on or after October 1, 2007, and then received an additional loan on or after October 1, 2011, and you are looking for a repayment plan with the possibility of student loan forgiveness, the Pay As You Earn (PAYE) repayment plan could be a good fit for you.
Below we answer all of the most common questions about PAYE so that you can make a more informed decision about whether or not it is right for you.
What is the Pay As You Earn (PAYE) Repayment Plan?
The Pay As You Earn (PAYE) plan is a form of income-driven student loan repayment that is available to student loan borrowers who:
- Received their first student loan on or after October 1, 2007
- Received an additional loan on or after October 1, 2011
Under PAYE, your monthly student loan payments will be capped at 10 percent of your discretionary income, and you will make payments for a total of 20 years. After this time, any remaining balance may be forgiven.
PAYE is the predecessor to the Revised Pay As You Earn (REPAYE) plan, which is available to a wider pool of borrowers.
What types of loans are eligible for the Pay As You Earn (PAYE) Repayment Plan?
In order to qualify for repayment under PAYE, you must have been a new borrower on or after October 1, 2007, and you must have received a disbursement of a Direct Loan on or after October 1, 2011.
The following types of student loans are eligible for repayment under PAYE:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct Graduate PLUS Loans
- Direct Consolidation Loans
Direct Consolidation Loans that include loans made to parents are not eligible for repayment under this plan.
How long will repayment last?
Repayment under PAYE lasts for 20 years, or 240 consecutive monthly payments. This does not include any periods of deferment or forbearance.
After this time, any outstanding balance will be forgiven.
How much will I pay?
Under PAYE, your monthly payments will equal 10 percent of your discretionary income. Your payment amount is recalculated annually depending on your income and family size. If you are married and file taxes jointly, your spouse’s income will also be included in determining your payment amount. Your monthly payment amount under this plan will never be higher than what you would pay under Standard Repayment.
Because of the lower monthly payments and extended repayment term, you will ultimately pay more in interest under PAYE than you would under either Standard or Graduated Repayment. Due to the forgiveness option, though, you would most likely pay less under this option than under the Extended Repayment plan.
That being said, you can always make additional payments in order to pay off your student loans faster, even under PAYE. This can help you save money in the form of interest, and free you from your debt faster.
Can my loan be forgiven?
Yes, after 20 years of on-time payments, any remaining balance will be forgiven under the Public Student Loan Forgiveness (PSLF) Program.
Pros and Cons of PAYE Repayment
Pros of PAYE:
- Payments are limited to 10 percent of your discretionary income
- Your payments will never be higher than what you’d pay under Standard Repayment
- Because payments are linked to your income, if your income decreases for whatever reason, your payments will decrease as well
- Any remaining balance can be forgiven after 20 years
Cons of PAYE:
- A relatively small percentage of borrowers will meet the date-based eligibility requirements for this plan
- If your calculated monthly payment would be higher than what you would pay under Standard Repayment, you will not be eligible
- Because of the longer repayment term, you will ultimately pay more in the form of interest than you would under either the Standard or Graduated Repayment plans
- You may owe taxes on any amount that has been forgiven
- If you forget to update your income and family size each year, you may automatically be removed from the payment plan
How to Apply for Pay As You Earn (PAYE)
If you would like to opt into PAYE, all you need to do is contact your student loan servicer. They will help you understand whether or not your loans are eligible for this repayment plan, and can answer any questions you may have. You can also apply by visiting this website.
Alternatives to the Pay As You Earn (PAYE) Repayment Plan
Not sure whether or not PAYE is the right repayment plan for you? You have a number of other options to choose from. Depending on the specific types of loans that you have borrowed and your income, you may be eligible for:
- Standard Repayment
- Graduated Repayment
- Extended Repayment
- Revised Pay as You Earn Repayment Plan (REPAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Income-Sensitive Repayment