Note that the government has paused all repayment on federally held student loans through the end of 2022, with no interest to be charged during that period and no loans to be held delinquent or in default.
* * *
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?
- How does PAYE lower your monthly costs?
- How is your monthly payment calculated under PAYE?
- What are the eligibility requirements for PAYE?
- What are the pros and cons of PAYE?
- Should you opt for REPAYE instead?
- Is Pay As You Earn right for you?
“[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.
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.
|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.
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
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.
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.
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.”
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.
Whether PAYE is right for you or not is “highly borrower-specific,” Branham said. Factors Branham recommended considering include your …
- Loan balance
- 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 2022!
|Lender||Variable APR||Eligible Degrees|
|2.75% – 8.90%1||Undergrad & Graduate|
|2.50% – 6.80%2||Undergrad & Graduate|
|2.81% – 7.21%3||Undergrad & Graduate|
|2.49% – 7.99%4||Undergrad & Graduate|
|3.24% – 7.99%5||Undergrad & Graduate|
|3.24% – 8.24%6||Undergrad & Graduate|
|3.53% – 7.24%||Undergrad |
|1.74% – 7.99%7||Undergrad & Graduate|
|3.69% – 9.92%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews!
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. Fixed loans feature repayment terms of 5 to 20 years. For example, the monthly payment for a sample $10,000 with an APR of 5.47% for a 12-year term would be $94.86. Variable loans feature repayment terms of 5 to 25 years. For example, the monthly payment for a sample $10,000 with an APR of 5.90% for a 15-year term would be $83.85.
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 October 1, 2022.
2 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 $9 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.
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 30-day Average Secured Overnight Financing Rate (“SOFR”) and changes in the SOFR 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%. There is no limit on the amount your interest rate can increase at one time. The Index is currently published by the Federal Reserve Bank of New York (“New York Fed”). If the Index is no longer available, it will be replaced by a replacement Index according to the terms of the promissory note.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of October 31, 2022. Information and rates are subject to change without notice.
3 Important Disclosures for LendKey.
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 10/26/2022 student loan refinancing rates range from 2.81% APR – 7.21%APR Variable APR with AutoPay and 3.99% APR – 10.68 APR% Fixed APR with AutoPay.
4 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
You can choose between fixed and variable rates. Fixed interest rates are 3.99% – 8.74% APR (3.74% – 8.49% APR with Auto Pay discount). Starting variable interest rates are 2.74% APR to 8.24% APR (2.49% – 7.99% 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.
5 Important Disclosures for Navient.
6 Important Disclosures for SoFi.
Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 3.24% APR to 8.24% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
7 Important Disclosures for Purefy.
Purefy Student Loan Refinancing Rate and Terms Disclosure: Annual Percentage Rates (APR) ranges and examples are based on information provided to Purefy by lenders participating in Purefy’s rate comparison platform. For student loan refinancing, the participating lenders offer fixed rates ranging from 2.73% – 7.99% APR, and variable rates ranging from 1.74% – 7.99% APR. The maximum variable rate is 25.00%. Your interest rate will be based on the lender’s requirements. In most cases, lenders determine the interest rates based on your credit score, degree type and other credit and financial criteria. Only borrowers with excellent credit and meeting other lender criteria will qualify for the lowest rate available. Rates and terms are subject to change at any time without notice. Terms and conditions apply.
8 Important Disclosures for Citizens.
Education Refinance Loan Rate Disclosure: Variable interest rates range from 3.69%-9.92% (3.69%-9.92% APR). Fixed interest rates range from 4.49%-10.11% (4.49%-10.11% APR).
Undergraduate Rate Disclosure: Variable interest rates range from 6.39%- 9.60% (6.39% – 9.60% APR). Fixed interest rates range from 6.58% – 9.79% (6.58% – 9.79% APR).
Graduate Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).
Education Refinance Loan for Parents Rate Disclosure: Variable interest rates range from 3.69%- 9.09% (3.69%- 9.09% APR). Fixed interest rates range from 4.49% – 9.28% (4.49% – 9.28% APR).
Medical Residency Refinance Loan Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).