Pay As You Earn (PAYE) Student Loan Repayment Plan
There is a ton of focus on getting into and paying for college. However, after those four (hopefully!) years, young adults must often face the task of not only finding employment but also repaying college student loans. There are many different ways to tackle student loan repayment. Let’s take a look at one option available: Pay As You Earn (PAYE) Student Loan Repayment Plan.
Pay As You Earn (PAYE) Plan
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What are Pay As You Earn (PAYE) Plans?
The Pay As You Earn (PAYE) plan is a federal student loan repayment plan that allows borrowers to make payments based on their income and family size. It was introduced in 2012 as part of the Obama administration's effort to make college more affordable.
Details of Pay As You Earn (PAYE) Plan
Under the PAYE plan, borrowers' monthly payments are capped at 10% of their discretionary income, which is the difference between their adjusted gross income and 150% of the federal poverty line for their family size and state of residence. Borrowers must recertify their income and family size annually to remain on the plan.
In addition, any remaining balance on the loan after 20 years of qualifying payments will be forgiven. However, this forgiveness may be considered taxable income, so borrowers should be aware of the potential tax implications.
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How to Qualify for Pay As You Earn (PAYE) Plans
To be eligible for the PAYE plan, borrowers must have a Direct Loan or a Federal Family Education Loan (FFEL) that is not in default, and must have taken out their first loan on or after October 1, 2007. Borrowers also must demonstrate partial financial hardship to qualify.
Overall, the PAYE plan can be a good option for borrowers who have a high debt-to-income ratio and are struggling to make their monthly payments. However, it is important to carefully consider the potential tax implications of loan forgiveness and to explore other repayment options before deciding on a plan.
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There is a lot to be gained from our free general financial aid advice, but it’s also a very individual process. If you have remaining financial aid questions, email us to discuss more or book an individual session.