What is Pay As You Earn (PAYE)? How do I know if I qualify?

Traditional Repayment Plans

Standard Repayment Plan

The standard repayment plan (for non-consolidated loans) features fixed payments made over 10 years. Since this is one of the shortest repayment periods offered, and monthly payments don’t change, it saves you the most money in interest. The catch is that the monthly payments may be slightly higher than what you’d receive on other plans.

The standard plan is ideal for someone looking to pay off their loans as quickly as possible, or someone who has a high income and doesn’t want to face even larger monthly payments on an income-driven plan. You shouldn’t use this plan if you’re seeking Public Service Loan Forgiveness (PSLF), since this program offers loan forgiveness after 120 payments—and on the standard plan, you’ll have paid off your loans by that time. Instead, choose an income-driven repayment plan, which we outline below.

If you consolidate multiple federal loans into a single loan and choose the standard plan, then your repayment period will last from 10 to 30 years, depending on the total amount of debt you have.

Pros

  • Comparatively short repayment term means you’ll pay less interest over time
  • Fixed monthly payments help you budget

Cons

  • Potentially higher monthly payments than other plans
  • Since payments are fixed, if your income drops, your loan bill may strain your finances

Graduated Repayment Plan

The graduated repayment plan features lower initial payments that increase every two years. Similar to the standard plan, the repayment period is 10 years. It’s best if you’re looking to pay off your loans quickly, but you have a low starting income that is expected to grow throughout the 10-year repayment period.

We don’t recommend this plan for those seeking PSLF, and, as with the standard plan, the repayment period may be as long as 30 years if you have consolidation loans.

Pros

  • 10-year repayment period allows you to free yourself of student debt faster than other options
  • Payments rise over time, allowing new graduates to more easily handle student loan payments on entry-level wages

Cons

  • If your income doesn’t grow as expected, higher payments toward the end of the loan repayment period may strain your finances
  • You’ll pay slightly more over time compared to the standard repayment plan since more interest accrues during years when you’re paying less

Extended Repayment Plan

If you have more than $30,000 in outstanding federal student loans, you can qualify for the extended repayment plan, which allows you to stretch out the repayment period for up to 25 years. Monthly payments may be fixed or graduated, and they’re generally lower than those found on the standard or graduated plans.

The extended repayment plan may sound like a good option, but if you’re seeking a lower payment and longer term, you’re better off choosing an income-driven plan. That’s because these provide forgiveness on the remaining balance after 20 or 25 years. You’ll have to pay income taxes on the forgiven amount, but you’ll still end up paying less overall than you would have on the extended plan.

Pros

  • Lower monthly payments than the standard and graduated plans, making the loans less burdensome on a monthly basis
  • Monthly payments may be fixed or graduated

Cons

  • Due to the longer repayment period, you will pay more interest compared to other plans
  • No forgiveness option
  • You must have more than $30,000 in outstanding federal student loans to qualify

Video

What Happens to Unpaid Interest on the PAYE Plan?

You could have unpaid interest accruing on student loans on PAYE if monthly interest is higher than monthly payments. In the example above, the borrower’s monthly interest charges are $225 on a $45,000 debt with 6% interest. After the $174 required monthly payment, that leaves $51 in unpaid interest.

So what happens to this unpaid interest on the PAYE repayment plan? If you have subsidized loans, the government will cover unpaid interest for the first three years you’re on PAYE.

But half of the interest on unsubsidized loans, and subsidized loans after those first three years, is your responsibility. Unpaid interest will accrue but won’t be added to your balance right away (which means you won’t pay interest on this interest). It will only be added to your balance, or capitalized, if you no longer qualify for payments based on income or you leave PAYE.

If you become ineligible for PAYE, capitalized interest is capped at 10% of your loan balance when entering PAYE. If you choose to leave PAYE, the full amount of unpaid interest is capitalized.

PAYE vs. other income-driven repayment plans

The Pay As You Earn Plan isn’t the only option for repaying federal student loans. The Department of Education offers three other IDR plans to choose from. The repayment plan you choose affects how much you’ll pay in interest over the life of the loan (though federal student loan interest rates are typically lower than interest rates on private student loans). To learn more about IDR plans, visit the Federal Student Aid website.

Revised Pay As You Earn (REPAYE)

  • Monthly payment amount — 10% of your discretionary income
  • Term length — 20 years for undergraduate loans; 25 years for graduate or professional study loans
  • Eligible loans — Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, Direct Consolidation Loans that don’t include PLUS Loans (Direct or FFEL) made to parents
  • When interest capitalizes — If you voluntarily leave the plan or don’t recertify

Income-Based Repayment (IBR)

  • Monthly payment amount — 10% of your discretionary income if you’re a new borrower on or after July 1, 2014; 15% of your discretionary income if you’re not a new borrower on or after July 1, 2014 (both payment amounts won’t exceed the standard 10-year Standard Repayment Plan amount)
  • Term length — 20 years if you’re a new borrower on or after July 1, 2014 (or 25 years if you’re not a new borrower on or after July 1, 2014)
  • Eligible loans — Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, PLUS Loans made to students, Consolidation Loans (Direct or FFEL) that don’t include PLUS Loans made to parents
  • When interest capitalizes — If you don’t have partial financial hardship anymore, don’t recertify, or voluntarily leave the plan

Income-Contingent Repayment (ICR)

  • Monthly payment amount — Either 20% of your discretionary income or what you’d pay on a repayment plan with a fixed payment over 12 years (whichever is less)
  • Term length — 25 years
  • Eligible loans — Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, Direct Consolidation Loans
  • When interest capitalizes — If you don’t recertify

Use Chipper for Lower Payments

Chipper can help you find a student loan repayment plan that actually fits into your budget. You simply fill out your information and link your student loan account for us to generate your options in seconds. We help the average student loan borrower save over $300 a month off their student loan monthly payment. Lowering your monthly payment plan can game changing for your personal finance and can be done in minutes! Sign up for Chipper today to get on track with your student loans.

How do you qualify for PAYE?

To qualify for PAYE, you must meet the following criteria: 

  • You must be a new borrower on or after Oct. 1, 2007.
  • If you took out a Direct or FFEL Program Loan on or after Oct. 1, 2007, you didn’t have an outstanding balance on another Direct or FFEL Program Loan at the time.
  • You received funds for a Direct or Direct Consolidation Loan on or after Oct. 1, 2011.
  • The payment you make under PAYE, based on your income and family size, is less than what you’d pay under the 10-year Standard Repayment Plan.
  • You have a Direct Subsidized Loan, Direct Unsubsidized Loan, Direct PLUS Loan as a graduate or professional student, a Direct Consolidation Loan that didn’t repay any PLUS Loans made to parents, a FFEL Loan, or federal Perkins Loan.
  • Your federal student loans aren’t in default.

It’s important to note that PAYE doesn’t have a maximum income limit. It considers how much you earn in relation to your federal student loan debt rather than how much you earn as a stand-alone number. 

If you’re thinking about refinancing, Credible lets you compare student loan refinance rates without affecting your credit.

Lender and Bonus disclosure

All rates listed represent APR range. Commonbond: If you refinance over $100,000 through this site, $500 of the cash bonus listed above is provided directly by Student Loan Planner.

CommonBond Disclosures: Refinancing

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.  If you choose to complete an application, we will conduct a hard credit pull, which may affect your credit score. 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.

CommonBond Disclosures: Private, In-School Loans

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.  If you choose to complete an application, we will conduct a hard credit pull, which may affect your credit score. 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.

Student Loan Planner® Disclosures

Upon disbursement of a qualifying loan, the borrower must notify Student Loan Planner® that a qualifying loan was refinanced through the site, as the lender does not share the names or contact information of borrowers. Borrowers must complete the Refinance Bonus Request form to claim a bonus offer. Student Loan Planner® will confirm loan eligibility and, upon confirmation of a qualifying refinance, will send via email a $500 e-gift card within 14 business days following the last day of the month in which the qualifying loan was confirmed eligible by Student Loan Planner®. If a borrower does not claim the Student Loan Planner® bonus within six months of the loan disbursement, the borrower forfeits their right to claim said bonus. The bonus amount will depend on the total loan amount disbursed. This offer is not valid for borrowers who have previously received a bonus from Student Loan Planner®.

Use Chipper for Round-Ups

Paying off your student loans doesn’t have to be a long and painful journey. Round-Ups are a way to directly pay off your loans with your everyday spending! By tracking your linked spending account(s), we will calculate the rounded up amount from each transaction in a week (IE spending $4.28 would add $0.72 to the weekly amount). We then initiate a payment towards your student loan for the weekly amount. Get chipping away on your student loans with Chipper today.

Which Loans Qualify?

  • Direct Subsidized/Unsubsidized Loans
  • Direct PLUS Loans (does not include Direct PLUS Loans made to parents)
  • Direct Consolidation Loans
  • Perkins and LDS Loans (only if part of a Direct Consolidation)

If you have loans that are not eligible for PAYE, or if you are not an eligible borrower, Income-Based Repayment (IBR) or Revised Pay As You Earn (REPAYE) could be additional repayment plans to consider. For more information about these plans, and more repayment options, visit the Federal Student Aid website and FIRST’s Resources

Is the PAYE Program Worth It?

If you are are in a tight spot financially and yet you still want to pay something towards your student loans, the PAYE program (and other income-driven programs) is an excellent idea as it can significantly decrease your monthly student loan payments so you have some breathing space.

However, since you are making lower payments, ultimately over time, you will pay significantly more than if you were on a Standard Repayment Plan.

Also, under current IRS rules, you will have to pay taxes on the part of your loan that is forgiven after 20 years of monthly payments since this is considered income.

So while a great idea in the short-term, over the long-term, this type of plan could end up costing you more.

PAYE eligibility requirements

Not everyone will qualify for PAYE. You may be eligible for PAYE if:

  • You have a Direct Loan or a consolidated Federal Family Education Loan (FFEL) Program loan.
  • Your payment amount (based on 10 percent of your discretionary income) would be smaller under PAYE than under the standard 10-year repayment plan.
  • You received your qualifying federal student loans on or after Oct. 1, 2007 (with at least one loan disbursement of a Direct Loan on or after Oct. 1, 2011).
  • You were a “new borrower” who didn’t owe outstanding federal student loan balances when you received those loans.

You also need to be current on your student loan payments when you apply for PAYE. Borrowers who are in default do not qualify for income-driven repayment plans.

Pros cons of PAYE

  • Lower monthly payments than standard repayment.
  • Payments will be lower when you have less discretionary income.
  • Interest subsidy for the first three years. If your monthly payment doesn’t cover the monthly interest on subsidized loans, the government will pay the remaining interest for three years.
  • Can help you avoid delinquency or default, which would have a negative impact on your credit score and bar you from taking advantage of certain federal student loan benefits.

Borrowers who took out loans before Oct. 1, 2007, will not qualify.PAYE extends your repayment period and thus increases the interest you pay over the life of your loan.Any forgiven balance is taxable.Interest subsidies are limited to three years for subsidized loans and are not available for unsubsidized loans.

Who is eligible for PAYE?

The 10 percent monthly payment makes PAYE a great option for borrowers struggling to make federal student loan payments. But it’s important to see if you qualify for the PAYE program first.

In order to be eligible for PAYE:

  • You have to be a new borrower. That means taking on loans on or after October 1, 2007, with a disbursement of a Direct Loan on Oct 1, 2011, or later.
  • You must have an eligible loan. Your loans must be Direct Subsidized or Unsubsidized Loans, Direct PLUS loans (for students), or Direct Consolidation Loans (PLUS loans to parents don’t qualify).
  • You must have a high debt-to-income ratio to qualify.
  • Your loan payments need to be lower than what they would be under a Standard Repayment Plan.

Under PAYE you save money on your monthly payments now, but you end up paying more over the course of your repayment due to the interest that accrues. There’s also the potential tax bill that could hit you after 20 years if there’s a remaining federal loan balance that’s forgiven, too.

If you want to pursue Public Service Loan Forgiveness — which requires you to be on an income-driven plan, PAYE could be a good option for you.

Types of Income-Driven Repayment Plans

All of the income-driven repayment plans have slight differences that may make one plan a better option for your situation. Review some of the differences here, and then use our Repayment Planner to find the plan that works best for you.

Eligibility Requirements

  • Direct loans only.
  • Does not require partial financial hardship, payment will not exceed 10% of discretionary income, but if you’re earning a lot, your monthly payment under this plan might be higher than it would be with other plans.
  • Your spouse’s income and federal student loan debt is used to calculate your monthly payment, regardless of your tax filing status, with exceptions for borrowers who certify that they are separated or cannot reasonably access their spouse’s income.

Renewal Requirements

  • If you don’t renew your REPAYE plan by the deadline, you’ll be placed into REPAYE Alternative repayment plan and any unpaid accrued interest will be capitalized. The REPAYE Alternative repayment plan period is the lesser of 10 years or whatever is left on your 20- or 25-year REPAYE repayment period and the monthly payment amount will be a fixed amount that will pay your loans in full during that period.
  • If you choose to leave REPAYE, any unpaid accrued interest will be capitalized.

Forgiveness Details

  • If a balance remains after a certain number of qualifying payments and years, your loans will be forgiven. If you have only undergraduate loans they will be forgiven after 20 years. If you have graduate loans, all of your loans including undergraduate loans will be forgiven after 25 years.

REPAYE Alternative Repayment Plan

Here’s what you need to know if you’re placed in the REPAYE Alternative repayment plan.

  • Payments made on this plan don’t count toward Public Service Loan Forgiveness.
  • The repayment plan period is the lesser of 10 years or whatever is left on your 20- or 25-year REPAYE repayment period and the monthly payment amount will be a fixed amount that will pay your loans in full during that period. For example:
    • If you only have undergraduate loans, then your REPAYE repayment period would be 20 years. If you have been in REPAYE for three years, then you have 17 years left in your repayment period.
    • Since 17 years is greater than 10 years, your repayment term would be a fixed payment over a 10-year period.
  • If you re-enter REPAYE, your monthly payment amount may increase. Your new monthly REPAYE payment may increase if your payment while you were not in REPAYE was less than what you would have paid if you were in REPAYE. This is the REPAYE Increased Amount, and it will automatically be spread out evenly over the rest of your new REPAYE payments for the life of your loan, until your loan is paid in full or forgiven.
    • Your payment schedule will indicate which of your accounts, if any, include a REPAYE Increased Amount. It won’t detail the exact amount, only which accounts include the REPAYE Increased Amount.

Eligibility Requirements

  • Direct loans only. You qualify if you:
    • Had no outstanding balance on a Direct or Federal Family Education Loan (FFEL) as of October 1, 2007, or no outstanding balance on such a loan and received a new loan after October 1, 2007 and
    • Received a disbursement of a Direct subsidized, Direct unsubsidized, or student Direct Grad PLUS loan on or after October 1, 2011
  • Requires proof of financial hardship.
  • During periods of financial hardship, your monthly payments will not exceed 10% of your discretionary income as long as you continue to renew each year.
  • If you filed your taxes jointly, your spouse’s income and federal student loan debt is used to calculate your monthly payment.

Renewal Requirements

  • If you don’t renew your PAYE repayment plan by the deadline, your payments will increase and unpaid interest that has accrued may be capitalized.

Forgiveness Details

  • If a balance remains after 20 years of making qualifying payments, your loans will be forgiven.

Eligibility Requirements

  • Federal Family Education loans and Direct loans. Eligibility requirements:
    If you had no outstanding balance as of 7/1/2014 and received a new disbursement on or after 7/1/2014: All other borrowers:
    • During periods of partial financial hardship, your monthly payments will not exceed 10% of your discretionary income as long as you continue to renew each year.
    • If a balance remains after 20 years of making qualifying payments, your loans will be forgiven.
    • During periods of partial financial hardship, your monthly payments will not exceed 15% of your discretionary income as long as you continue to renew each year.
    • If a balance remains after 25 years of making qualifying payments, your loans will be forgiven.

    If you had no outstanding balance as of 7/1/2014 and received a new disbursement on or after 7/1/2014: During periods of financial hardship, your monthly payments will not exceed 10% of your discretionary income as long as you continue to renew each year. If a balance remains after 20 years of making qualifying payments, your loans will be forgiven. All other borrowers: During periods of financial hardship, your monthly payments will not exceed 15% of your discretionary income as long as you continue to renew each year. If a balance remains after 25 years of making qualifying payments, your loans will be forgiven.

  • Requires proof of financial hardship.
  • If you filed your taxes jointly, your spouse’s income and federal student loan debt is used to calculate your monthly payment.

Renewal Requirements

  • If you don’t renew your IBR repayment plan by the deadline, your payments will increase and unpaid interest that has accrued may be capitalized.

Forgiveness Details

  • If a balance remains after a certain number of years of making qualifying payments, your loans will be forgiven.

Eligibility Requirements

  • Direct loans only—the only plan that you are eligible for if you have a Parent PLUS loan that was consolidated into a Direct loan.
  • Does not require financial hardship.
  • Payment will be the lesser of 20% of discretionary income or the amount you would pay under a repayment plan with fixed payments over 12 years based on your income.
  • If you filed your taxes jointly, your spouse’s income is used to calculate your monthly payment.

Renewal Requirements

  • If you don’t renew your ICR repayment plan, your payments will increase and unpaid interest that has accrued may be capitalized.

Forgiveness Details

  • If a balance remains after 25 years of making qualifying payments, your loans will be forgiven.

Is PAYE right for you?

PAYE isn’t right for every federal student loan borrower. In fact, it features some of the strictest qualification requirements of any income-driven repayment plan. PAYE might work for you if:

  • You expect your income to remain low. You must demonstrate a partial financial hardship to qualify for the PAYE plan. If your income rises in the future, you might not qualify to recertify.
  • You’re married and you both earn an income. PAYE gives you the option to file taxes separately and have your student loan payments based solely on your income.
  • Your student loans include graduate school debt. PAYE will forgive eligible student loan balances after 20 years for both undergraduate and graduate studies.

You should also get an idea of how much the PAYE plan may save you compared with your current student loan repayment plan and any other options you may be considering. You can use a student loan calculator to find out which ones offer the best repayment for you.

Tags

Leave a Comment