What Is Pay-As-You-Earn Repayment?

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Pay-As-You-Earn Repayment, or PAYE, is a repayment plan that bases the loan payments on a percentage of the borrower’s discretionary income, as opposed to the amount owed. PAYE first became available in 2011.

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PAYE is one of four income-driven repayment plans. The others are Income-Contingent Repayment (ICR), Income-Based Repayment (IBR) and Revised Pay-As-You-Earn Repayment (REPAYE). PAYE generally provides the lowest monthly loan payment of the four income-driven repayment plans.

Eligible Loans

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PAYE is available for loans in the William D. Ford Federal Direct Loan Program (Direct Loans). The borrower must be a new borrower as of October 1, 2007 and have at least one loan disbursed on or after October 1, 2011.

PAYE is not available for loans in the Federal Family Education Loan (FFEL) and Federal Perkins Loan programs, although FFEL loans and Federal Perkins loans can be made eligible by including them in a Federal Direct Consolidation Loan.

Federal Parent PLUS Loans are not eligible for PAYE, directly or indirectly. Federal Parent PLUS loans may be eligible for ICR, if included in a Federal Direct Consolidation Loan.

Loan Payments

Monthly student loan payments in PAYE are based on 10% of discretionary income, Discretionary income is defined as the amount by which adjusted gross income (AGI) exceeds 150% of the poverty line. This percentage of discretionary income is the lowest percentage of discretionary income among the income-driven repayment plans.

The monthly student loan payment under PAYE is capped at the standard 10-year repayment amount. This prevents the monthly student loan payments from increasing too much as income increases.

PAYE also does not have a marriage penalty. If a married borrower files federal income tax returns as married filing separately, the loan payment under PAYE is based on just the borrower’s income. Otherwise, the loan payment will be based on joint income.

The minimum payment under PAYE is $10 if the calculated payment is $5 or higher, otherwise it is zero.

Treatment of Interest

Student loans can be negatively amortized under PAYE. This means that the loan payment is less than the new interest that accrues. Any accrued but unpaid interest is capitalized annually under PAYE until the total capitalized interest reaches 10% of the loan’s original principal balance.

The federal government pays the accrued but unpaid interest on subsidized loans for the first three years under PAYE. The federal government does not pay the interest on unsubsidized loans or after the first three years under PAYE.

Repayment Term and Loan Forgiveness

The maximum repayment term under PAYE is 20 years (240 payments). It is the same for borrowers who have undergraduate and graduate loans. Any remaining debt is forgiven after 240 payments are made under PAYE, including a calculated zero monthly payment.

If the borrower qualifies for Public Service Loan Forgiveness, the remaining debt is forgiven after 10 years’ worth of payments (120 payments).

Repayment Examples

Assuming an AGI of $30,000, the initial monthly student loan payment in PAYE will be about $89 for a family of one and zero for a family of four.

This increases to about $256 and $85 for an AGI of $50,000 and to about $422 and $252 for an AGI of $70,000.

These payment examples assume a 2022 poverty line of $12,880 for a family of one and $26,500 for a family of four.

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Credit: www.forbes.com /

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