Do you have trouble making your student loan payments every month? If you have a high balance on the money you borrowed to get your degree, but your income just doesn’t support those monthly payments, you may qualify for an income-driven repayment program such as Pay As You Earn (PAYE).
The Department of Education offers a number of plans to help out grads who have high student loan debt balances and lower incomes. One option is the Pay As You Earn program, which can reduce your payments to just 10 percent of your discretionary income and eventually lead to forgiveness of your remaining balance.
Read on to find out how the PAYE plan works and if you qualify.
What is Pay As You Earn (PAYE)?
The Pay As You Earn program, or PAYE, is a federal student loan repayment program designed to help borrowers who struggle to make their normal student loan payments. The plan allows your payments to be limited to 10 percent of your discretionary income if you qualify for the program.
If you’re under the PAYE program and meet all requirements, you may receive forgiveness on the remaining balance of your student loans after 20 years of consistently making payments.
PAYE program eligibility requirements
PAYE requires that both borrowers and their loans pass strict eligibility requirements. First, the payment that you would make with PAYE must be less than the payment you would make if you were on the 10-year Standard Repayment Plan. Most people with student debt that exceeds their annual discretionary income will meet this requirement.
You must also be a new borrower as of October 1, 2007. That means you didn’t have an outstanding balance on a Direct Loan when you received a Direct Loan on or after October 1, 2007. You also need to have received a Direct Loan disbursement on or after October 1, 2011 to qualify.
If you meet the requirements as a borrower, you also need to make sure your loans qualify for a PAYE plan. Direct Subsidized and Unsubsidized Loans, as well as Graduate PLUS loans are eligible (Parent PLUS loans are not). Consolidation loans made on or after October 1, 2011 qualify, too, unless they include Direct or FFEL loans made before October 1, 2007.
How the Pay As You Earn repayment plan works
First, your discretionary income is calculated: take your adjusted gross income and subtract 150 percent of your state’s poverty level (which is based on the size of your household). Once that is determined, your payment is set at 10 percent of that sum.
You’ll make this payment each month until your loan is paid off, or until you’ve reached the end of the 20-year term. You could have the remainder of the balance forgiven after 20 years – but keep in mind that you’ll need to make every single payment to qualify. If you miss even one, you won’t be eligible for forgiveness.
It’s also important to note that while your loan balance might be forgiven after 20 years, you’ll need to pay taxes on the amount that was forgiven.
Finally, expect to prove your income each year. Because the whole program is based off how much you make, you’ll need to recertify your plan each year. Your payment can go up as you earn more, but will not be more than 10 percent of your discretionary income.
How does REPAYE impact you?
In 2015, the Department of Education introduced the Revised Pay As You Earn program, also known as REPAYE. Essentially, this is a revised version of PAYE that allows more borrowers to qualify.
Borrowers can qualify for REPAYE regardless of when they took out their loans, and there’s no more partial financial hardship requirement as there is with PAYE. Your payments are still limited to 10 percent of your discretionary income, but loan forgiveness becomes an option after 25 years if you have a professional or graduate degree.
There are some important differences between REPAYE and PAYE – one of the biggest concerns married couples. You can file your taxes separately under PAYE, which lowers the borrower’s total income (versus filing jointly, when both incomes of the couple are considered). But if you’re under REPAYE and are married, your total household income is used to calculate your discretionary income even if you choose to file separately, meaning your payments will likely be higher.
If you’re single, you also need to know there are no monthly payment caps under REPAYE, so your payments could end up being higher than they would on the Standard Repayment Plan.
REPAYE is easier to qualify for, so it’s a good option for borrowers who wouldn’t otherwise qualify for an income-driven repayment plan.
But if you’re eligible for PAYE, stick to the original program to receive a shorter period to forgiveness, a cap on monthly payments, and the ability to separate out your spouse’s income from the calculation that determines your monthly payment.
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