PAYE
Definition
The Pay As You Earn (PAYE) plan is a federal student loan repayment method that sets monthly payments based on income and family size, aiming to make student debt more manageable.
Detailed Explanation
The PAYE plan is designed for borrowers with Direct Loans, offering a manageable repayment structure based on their financial circumstances. Monthly payments are capped at 10% of the borrower's discretionary income, which is the difference between their adjusted gross income and 150% of the poverty guideline for their family size and state of residence.
The repayment period under PAYE is 20 years, after which any remaining loan balance may be eligible for forgiveness. To qualify, borrowers must demonstrate a partial financial hardship, meaning that the PAYE payment would be lower than what they would pay under the Standard 10-year Repayment Plan. This plan is particularly beneficial for those with a significant debt-to-income ratio, as it aims to prevent student loan payments from becoming an overwhelming financial burden.
Example
Suppose a borrower has $35,000 in federal student loans with an average interest rate of 5.5%. If their adjusted gross income is $35,000 annually and they are single with no dependents, living in a state where the poverty guideline is $12,760 for a single-person household, their monthly PAYE payment would be calculated based on 10% of their discretionary income.
This makes their payments significantly lower compared to a standard repayment plan, thus making their student loan debt more manageable.
Key Articles Related To PAYE
Related Terms
Income-Based Repayment (IBR): A repayment plan offering monthly payments capped at 10-15% of a borrower's discretionary income, with a 20-25 year forgiveness period.
Revised Pay As You Earn (REPAYE): A variant of PAYE that doesn't require proving financial hardship, with payments also set at 10% of discretionary income.
Income-Contingent Repayment (ICR): A plan that calculates payments as the lesser of two figures: 20% of discretionary income or the amount you'd pay on a repayment plan with a fixed payment over 12 years, adjusted according to income.
Standard Repayment Plan: A fixed repayment plan where borrowers pay a fixed amount each month for 10 years, not based on income.
Frequently Asked Questions
Who qualifies for PAYE?
Borrowers with Direct Loans who can prove partial financial hardship based on their income and family size.
How does PAYE affect interest?
While PAYE can lower monthly payments, it may result in paying more interest over time due to the extended repayment period.
Can any loan type be repaid under PAYE?
PAYE is available for Direct Loans only. Private loans and some other types of federal loans, like FFEL or Perkins Loans, are not eligible unless consolidated into a Direct Consolidation Loan.
What happens after 20 years of payments?
Any remaining loan balance after 20 years of qualifying payments may be forgiven, but the forgiven amount may be taxable as income.
Editor: Ashley Barnett
