Pay As You Earn (PAYE) Repayment Guide

 December 30, 2020
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If you’re struggling with high student loan payments, switching to the Pay As You Earn (PAYE) plan could help make your monthly dues more affordable. PAYE is an income-driven repayment (IDR) plan for federal student loans.

Eligible students on the PAYE plan can have monthly payments on qualifying federal student loans reduced to 10% of their discretionary income. After 20 years of payments, any remaining loan balance will be forgiven.

PAYE is one of several IDR plans that are ideal for student loan borrowers having difficulty making monthly payments. PAYE — along with the Revised Pay As You Earn (REPAYE) plan — does more than just reduce monthly payments. Opting for PAYE as your student loan payment plan could mean you don’t have to repay your entire loan balance.

If you’re interested in having your student loan payment adjusted for your income, here are some questions to answer as you decide which path to take:

What is Pay As You Earn?

“[PAYE is] a type of income-based repayment option where the amount you pay will be based on your discretionary income,” Michael Solari, the certified financial planner for Solari Financial Planning, explained. “The idea is that your payments will be less as you enter the workforce and gradually grow as you earn more.”

Federal student loan borrowers can choose the PAYE repayment program if they struggle to make normal loan payments. For qualifying borrowers, the repayment plan limits payments to 10% of discretionary income. At the end of a 20-year repayment term, any outstanding loan balance is forgiven as long as no payments were missed during the term.

PAYE differs from traditional Income-Based Repayment (IBR) because, depending upon the date your student loans were initiated, PAYE may cap loan payments at a smaller percent of income than IBR. This means monthly payments would be lower under PAYE. PAYE could also result in earlier loan forgiveness and better interest benefits for subsidized loans.

“If you qualify for PAYE, it is always superior to IBR,” said Chase Branham, a former financial planner at Wrenne Financial Planning. However, qualifying for PAYE is more challenging, and loan consolidation may be required before you apply.

How does PAYE lower your monthly costs?

The default repayment method for student loans is a 10-year standard repayment plan. Payments are determined based on the loan balance under this option. Unfortunately, this isn’t affordable if your loan balance is high but your income is low.

Under PAYE, payments are not determined by your loan balance. Instead, PAYE will “reduce your payment to 10% of your discretionary income and will cap your monthly payment,” Branham explained.

The difference can be substantial. Consider the difference between PAYE and standard repayment if you have a $35,000 student loan balance at 5.7% interest; your income is $20,000 and grows 3.5% annually; and you are single.

Original PAYE Savings
First month $383 $16 $367
Last month $383 $86 $297
Balance paid $45,960 $11,086 $34,875
Total forgiveness $0 $63,884 $63,884
Repayment term ~ 10 years ~ 20 years ~10 years

Often, your monthly payments under PAYE aren’t enough to cover interest accruing on loans. Under both IBR and PAYE, interest is not capitalized — or added to the principal balance — until you leave the repayment program or fail to recertify your income by the annual deadline.

However, under PAYE, unpaid interest is only capitalized until the principal increases by 10%. This cap is a substantial benefit because when interest is capitalized, you pay interest on the interest.

Under both IBR and PAYE, low payments also mean you often won’t repay your loan even after decades. You’ll have the remaining balance forgiven under both, as long as you made all your payments. PAYE provides for loan forgiveness after 20 years, while IBR payments on loans taken before July 1, 2014, must be made for 25 years before loans are forgiven. However, under both PAYE and IBR, you will have to pay taxes on the amount forgiven.

How is your monthly payment calculated under PAYE?

To calculate your payment under PAYE, start by figuring out your discretionary income. Discretionary income is calculated by subtracting 150% of your state’s poverty level from your household income. State poverty levels are based on household size.

The easier way to calculate your PAYE payment — and the savings this payment method provides — is to use our student loan pay as you earn calculator.

To use the calculator:

  • Input your adjusted gross income
  • Select your family size
  • Select your state of residence
  • Input information about your current student loan balance and student loan interest rate.
  • Estimate how much you expect your income to grow annually. The historical average income growth is around 3.5%, so that’s what our calculator defaults to.

The calculator will show your monthly payment, the forgiven amount, your savings and the total amount repaid.

Revised Pay As You Earn (REPAYE) Calculator

First month

Last month

Balance paid

Total forgiveness

Repayment term

OriginalREPAYESavings
First month
Last month
Balance paid
Total forgiveness
Repayment term
Your monthly payment on REPAYE would be , a difference of from what you are currently paying. If your income increases over time, your payments may increase. Assuming annual income growth of 3.5%, your final monthly payment would be . After making payments for years, you will have paid a total of and would receive in forgiveness, compared to your current plan where you will pay over the next years.

Student loan refinancing APRs as low as %. Check your rate in 2 minutes.

Total

Total

CURRENT

$0

REPAYE

$0

$0

Because your salary can change annually and PAYE is based off how much you make, you’ll need to recertify your plan each year. To recertify, you must provide proof of income. Your payment can go up as you earn more, but will not be more than 10% of your discretionary income.

What are the eligibility requirements for PAYE?

PAYE requires that borrowers and their loans pass strict eligibility requirements. These include the following:

  • The payment you’d owe under PAYE must be less than the payment you’d make if you were on the 10-year standard repayment plan.
  • You must be a new borrower as of Oct. 1, 2007. You are not eligible if you had an outstanding balance on a direct loan before Oct. 1, 2007.
  • You must have received a direct loan disbursement on or after Oct. 1, 2011.
  • Your loans must qualify for a PAYE plan. Qualifying loans include direct subsidized and unsubsidized loans, graduate PLUS loans (but not parent PLUS Loans) and consolidation loans made after Oct. 1, 2011, as long as the consolidation loans do not include direct or FFEL loans made before Oct. 1, 2007.

What are the pros and cons of PAYE?

PAYE has some significant benefits for borrowers. “The biggest pro is that you could have a ton of debt forgiven after paying 20 years,” Solari said. “For some, that could be hundreds of thousands of dollars.”

Other pros, according to Branham, include “the ability to reduce and cap your payments, more favorable interest subsidies and capitalization rules than IBR, and flexibility to file taxes to keep payments low.”

Pros of PAYE Cons of PAYE
● Reduced monthly payments
● More advantageous terms than IBR
● Forgiveness after 20 years of payments
● Higher interest costs over time than standard repayment and REPAYE plans
● Risk that forgiveness won’t be awarded

Cons of PAYE, according to Branham, include an interest rate that is less favorable than REPAYE, which could really hurt people with higher loan balances. Further, Solari points out that “since your payments are lower to start, and [you’re] paying over a longer period than a standard 10-year repayment, you will pay more interest.”

Solari also pointed out another big con: the risk that PAYE will not always remain an option. “These loan forgiveness programs were established under President Obama’s presidency. Any administration could take it away,” he warned. “Since you don’t get the benefit until you’ve paid in 20 years there is a big risk that the benefit will be there.”

Should you opt for REPAYE instead?

If you are not eligible for PAYE, you may be eligible for REPAYE, which was a Pay As You Earn expansion. “This program extends PAYE to all federal student loan borrowers,” explained Steven J. Richardson, a student loan lawyer at Richardson Law Offices. However, while comparing PAYE and REPAYE, REPAYE has some cons that PAYE doesn’t.

In 2015, the U.S. Department of Education introduced the Revised Pay As You Earn program, also known as REPAYE. This modified version of PAYE allows more borrowers to qualify because you can become eligible regardless of when you took out your loans.

However, PAYE and REPAYE have important differences in how they treat spousal income and how student loan interest is treated.

Under IBR or PAYE, a student loan debtor can file taxes separately from a spouse and the spouse’s income won’t count for determining loan payments. This option goes away under REPAYE, and a spouse’s income factors into determining monthly REPAYE payments.

REPAYE provides more help with interest to borrowers whose interest exceeds their monthly payments. If your loans accrue $100 in interest monthly and you pay only $50, your student loan balance would increase even as you made payments. REPAYE allows borrowers to have 50% of excess interest forgiven monthly. This means you’d only have $25 in monthly interest added to your loan balance each month if you paid $50 and monthly interest in the amount of $100 accrued.

However, there are no monthly payment caps under REPAYE, so your payments could end up much higher than they would on the standard repayment plan.

Is Pay As You Earn right for you?

Whether PAYE is right for you or not is “highly borrower-specific,” Branham said. Factors Branham recommended considering include your …

  • Loan balance
  • Income
  • Expected future income
  • Spousal income
  • Spousal loan balance

You’ll need to make sure you are eligible for PAYE, estimate current and future income, use our PAYE calculator to project payments, and decide which option makes sense both now and in the future.

Branham suggested PAYE could be a good option for eligible borrowers pursuing Public Service Loan Forgiveness (PSLF), because it’s the most aggressive option for lowering payments. “A good example of someone who might want to do PAYE would be a married borrower with high loan balances, who is going for PSLF, and whose spouse has no loans and high income,” he said.

However, if you have a higher income and neither spouse can take advantage of PSLF or interest subsidies, Branham recommends student loan refinancing over PAYE. “Basically, at that point, you have to pay off loans, so refinancing to a lower rate can make sense,” he said.

It’s just a matter of doing the math to find out how to keep your overall costs of student loan repayment low and determine if PAYE is the best answer for you.

Andrew Pentis contributed to this report.

Interested in refinancing student loans?

Here are the top 9 lenders of 2021!
LenderVariable APREligible Degrees 
1.88% – 6.15%1Undergrad
& Graduate

Visit Splash

1.88% – 5.64%2Undergrad
& Graduate

Visit Earnest

2.50% – 6.85%3Undergrad
& Graduate

Visit CommonBond

1.89% – 5.90%4Undergrad
& Graduate

Visit Laurel Road

2.25% – 6.59%5Undergrad
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Visit SoFi

1.88% – 5.64%6Undergrad
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Visit NaviRefi

1.90% – 5.25%7Undergrad
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Visit Lendkey

2.39% – 6.01%Undergrad
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Visit Elfi

2.13% – 5.25%8Undergrad
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Visit PenFed

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1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021.


2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Interest Rate Disclosure

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.59% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.

Auto Pay Discount Disclosure

You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.

Student Loan Refinancing Loan Cost Examples

These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.

One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.

© 2021 Earnest LLC. All rights reserved.


3 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.


4 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of April 29, 2021. Information and rates are subject to change without notice.
 


5 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates from 2.49% APR to 6.94% APR (with autopay). Variable rates from 2.25% APR to 6.59% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.


6 Important Disclosures for Navient.

Navient Disclosures

1. NaviRefi loans are made by Earnest Operations LLC, a member of the Navient family of companies, subject to individual approval and underwriting criteria. California residents only: Loans made or arranged pursuant to a California Finance Lenders Law license. Additional terms and conditions apply.

– To qualify, you must be a U.S. citizen or non-citizen permanent resident of the United States, reside in a state we lend in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.navirefi.com/help-and-questions. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Loan terms are subject to eligibility. Approval and interest rate depend on the review of a complete application. Loan approval is subject to confirmation that your debt-to-income, free cash flow, credit history and application information meet the minimum requirements. You must have a minimum FICO score to be considered.

– You can choose between fixed and variable rates. Fixed interest rates are 2.75% – 6.04% APR (2.50% – 5.79% APR with Auto Pay discount). Starting variable interest rates are 2.13% – 5.89% APR (1.88% – 5.64% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.

– You can take advantage of the 0.25% Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. NaviRefi rate ranges are current as of June 1, 2021 and are subject to change based on market conditions and borrower eligibility.

– The information provided on this page is updated as of 06/1/2021. Earnest Operations LLC reserves the right to modify or discontinue (in whole or in part) this loan program and its associated services and benefits at any time without notice. Check www.navirefi.com for the most up-to-date information. Terms and Conditions apply. Call 855-284-4893 for more information on our student loan refinance product.

– Earnest Operations LLC – NMLS #1204917, CA CFL #6054788 – 535 Mission St., Suite 1663, San Francisco, CA 94105.
Navient Solutions, LLC – NMLS #212430 – 123 Justison St., Wilmington, DE 19801. Visit https://navirefi.com/lending-licenses for a full list of licensed states.


7 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay.


8 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.