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  • 6m.
 (3)

    Using Pay As You Earn (PAYE) Repayment

    The Pay As You Earn plan can lower your federal student loan payments based on your income. However, you would have had to borrow your loans during a short window of time to be eligible.
    Updated: December 17, 2015

    What You'll Learn

    • How to qualify and apply for Pay As You Earn.
    • What your payments could look like under this plan.
    • What the new "REPAYE" option is.
    A stack of 100 dollar bills

    Introduced in 2012, the Pay As You Earn (PAYE) loan repayment plan has a lot in common with the "new" version of income-based repayment (IBR). In fact, it was created essentially to allow borrowers to benefit from new IBR before that plan began in 2014.

    The Basics

    • Like IBR, you will have to prove that you have a partial financial hardship—meaning the annual amount due on your federal student loans under standard repayment is more than 10% of your discretionary income. If you qualify, your payments will be no more than 10% of your discretionary income.
    • If you file your taxes jointly, your spouse's income and federal student loans will be included in calculating your payment. If you file separately, they won't. In either case, you can include your spouse in your family size.
    • The rest of your loan will be forgiven after 20 years of repayment or 240 eligible payments, if you haven't repaid the loan in full by that time. Don't forget that this amount is taxable.
    • You may receive forgiveness of your remaining balance after 10 years if you work in the public or nonprofit sector and this amount wouldn’t be taxable.
    • You need to reapply for PAYE every year to reflect your updated financial situation: If you earn more, you'll pay more, and if you earn less, you'll pay less.
    • There is no minimum monthly payment under PAYE. It can be as low as $0 per month and still count as a payment, but that means that your interest will build up over time—usually a lot more than with other repayment plans.
    • For the first 36 consecutive months (excluding any period when you have an economic hardship deferment), if your monthly payments don't cover the monthly interest accrued, you do not need to pay the amount accrued that you did not cover on subsidized loans or the subsidized portion of Consolidation loans.

    Loan Eligibility

    The limitation of PAYE is that you must meet all of the following requirements to qualify:

    • Only Direct loans (Stafford, Grad PLUS, or Consolidation loans not including Parent PLUS loans) are eligible. You may consolidate into the Direct Loan program to gain eligibility.
    • You must be a "new borrower" as of October 1, 2007. That means you have no federal loans made prior to that date or have paid off all your prior federal loans before borrowing on or after that date.
    • You must have at least one Stafford loan or Grad PLUS loan disbursed on or after October 1, 2011, or a Consolidation loan (as long as the consolidation did not repay any loans disbursed prior to October 1, 2007).
    • Parent PLUS loans and Consolidation loans that include Parent PLUS loans are noteligible for PAYE.

    Stacking It Up

    Borrowers often wonder which income-driven repayment option to choose. Sometimes, this is easy to figure out—most borrowers won't actually qualify for every plan. However, here's a look at some key features of them all to help you figure out which is right for you.

     

    PAYE

    Old IBR

    New IBR

    ICR

    REPAYE

    Monthly payment

    10% of disposable income

    15% of disposable income

    10% of disposable income

    20% of disposable income

    10% of disposable income

    Eligible loan programs

    DL

    DL or FFELP

    DL

    DL

    DL

    Forgiveness length

    20 years (240 eligible payments)

    25 years (300 eligible payments)

    20 years (240 eligible payments)

    25 years (300 eligible payments)

    20 years (240 eligible payments) for undergrad loans only

    25 years (300 eligible payments) for grad loans

    Must prove partial financial hardship

    Yes

    Yes

    Yes

    No

    No

    Interest subsidy if payments don't cover interest

    Yes, subsidized loans first 3 years

    Yes, subsidized loans first 3 years

    Yes, subsidized loans first 3 years

    No

    Yes, subsidized loans first 3 years and 50% of difference afterward and 50% of difference on unsubsidized loans afterward

    Interest capitalization

    Yes, when there is no longer a partial financial hardship or leaves plan, but capitalization is limited to 10% of the original principal balance when entered this plan

     

    Yes, when there is no longer a partial financial hardship or leaves plan

    Yes, when there is no longer a partial financial hardship or leaves plan

    Yes, annually but limited to 10% of the original principal balance when entered this plan

    Yes, when the borrower leaves the plan

    More of a numbers person? No problem! Let’s look at what your initial monthly payment could look like under PAYE and other repayments plans.Keep in mind that your monthly payment may go up over time depending on your financial circumstances and repayment plan.

    Monthly payments are $61 under PAYE plan

    PAYE typically offers low payments, but that can mean paying interest longer—which makes your loan more expensive overall. Also, you can't count on forgiveness because you can repay the loan in full before 20 years and 240 payments. Here's the total amount you'd pay under PAYE, compared to other plans. The repayment period will vary for each repayment plan.

    Overall payment under PAYE is $39,461

    To come up with the graphs above, we used the following information:

    Original Amount Owed

    $35,000

    Interest Rate

    6.8%

    Annual Income

    $25,000

    Monthly Income

    $2,083

    Family Size

    1

    Repayment Period

    240 or 300

    How To Apply

    If you decide that PAYE is for you, you may be able to apply quickly and easily through the online application at studentloans.gov. You can use this new form if you have qualifying Direct loans.

    By applying online, you'll allow your servicer to receive your tax information from the IRS—which could save you the time of requesting the information yourself. To get started, log in to your account and select "Income-Driven Repayment Request Form."

    If you aren't required to file taxes or if your economic situation has changed substantially since your last filing, pay special attention to section 5 of this form, which covers other ways to document your income.

    If you are having trouble applying online, contact your servicer directly. You can also use the paper form as a back-up option.

    Download Form

    You will also need to provide information about your family size, income, and taxes, including filling out IRS Tax Form 4506-T.

    Tax note: If you are married, file separately, and live in AZ, CA, ID, LA, NV, NM, TX, WA, WI, or Puerto Rico, your AGI as reported on your tax forms may not accurately reflect your actual income or financial hardship. If this is the case, use the alternative documentation section of the application form to provide a more accurate individual income. This may help you qualify for IBR or get a lower payment if you already qualify.

    Revised Pay As You Earn (REPAYE)

    In early 2015, the government began work on a new repayment option: Revised Pay As You Earn, or REPAYE. One of the goals for this plan was to help more individuals qualify for lower payments through an income-driven repayment option, and most federal student loan borrowers can qualify for REPAYE.

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