Pay As You Earn Loans

For many, student loan debt can seem unmanageable and overwhelming. According to the  New York Fed Household Debt and Credit report, outstanding student loan debt was $1.48 trillion in 2019. In some cases, student debt can eb enough to deter people from going to college in the first place.

However, a relatively new loan repayment plan might be just the answer you’re looking for. A Pay as You Earn student loan (PAYE) is a repayment plan that was first introduced in 2011. The aim is to make student loan debt more manageable for those on lower incomes.

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In this article

    What is Pay as You Earn?

    A Pay as You Earn loan is an income-related repayment plan for student loans. It caps student loan repayments at 10% of your discretionary income and forgives the remaining balance after 20 years.

    This means you will never be paying more than 10% of your income which ensures repayments are manageable within your budget. If you have not paid the full amount after 20 years, your remaining loan balance will be forgiven. This means you may never fully repay your student loan by the end of your repayment period.

    To qualify for a Pay as You Earn student loan, you will need to meet certain criteria. To qualify, the payments required would need to be less than what you’d owe under a Standard Repayment Plan. This amount is based on your income and family size. Most people meet this requirement if their federal student loan debt is higher than their annual income.

    In addition to this, you will also need to be a new borrower. In other words, you won’t qualify if you already have outstanding debt on a Direct Loan or FFEL Program taken out before October 1, 2007.

    Under a PAYE repayment plan, the amount you must pay each month can change. If your monthly income increases or decreases, so will your repayment amounts. Each year, you must recertify your income and family size and give your loan provider updated information.

    The benefits of PAYE

    The main benefit is that it makes student loan repayments much more affordable and manageable. That means even if your income lowers, your repayments will reflect that and never be more than you can handle. It’s one of the most flexible repayment plans for student loan debt available.

    The other major benefit is that your student loan debt will be written off once 20 years have passed. In this case, you may not have to pay back the total amount of your loan.

    How to apply for the Pay As You Earn program

    To use the Pay as You Earn program, you must enroll and complete an income-driven repayment plan request. This can be sent by mail to your student loan servicer or completed online.

    1. Log in to studentaid.gov. Your first step is to visit studentaid.gov and log in with your Federal Student Aid ID or create an account.
    2. Start your application for an income-driven repayment plan request. Before starting it, you can preview the form to check what documents you need and come back to it later. You will need things like your proof of taxable income and a tax return.
    3. Choose a repayment plan. In some cases, you may qualify for more than one type of income-driven repayment plan. You will usually be put on the plan with the lowest repayments, but you can manually select which one you want.
    4. Complete the application request. You will need to complete all applicable sections and provide any documents requested. You will also need to include details of your household income (from a spouse, if applicable) as this can affect your PAYE repayments.

    PAYE vs. REPAYE

    Pay As You Earn (PAYE) and the Revised Pay As You Earn (REPAYE) schemes are both federal income-driven payment plans. They are both capped at 10% of your discretionary income and will forgive student loan debt after a certain period. However, there are some key differences to be aware of, listed below.

    Repayment period

    For both types of plans, it’s 20 years for undergraduates. However, if you have graduate school loans, it’s 25 years with a REPAYE plan.

    Repayments

    The payment amount is 10% of discretionary income for both types of plans. However, with REPAYE, there is no cap on this so you could be paying more than you would with a standard plan.

    Eligibility differences

    PAYE eligibility requirements mean you must have a partial financial hardship or have received a federal student loan on or after 2007. You must also have no other outstanding federal loans. With REPAYE, anyone with a qualifying federal loan is eligible.

    Household income

    PAYE plans don’t take your spouse’s income into account when calculating your repayments – that is if you file taxes separately. If you have a REPAYE plan, your spouse’s income will be taken into account regardless of if you file taxes separately.

    Interest subsidiary

    In both cases, the government will pay 100% of unpaid interest that accrues on subsidized loans in the first three years of repayment. However, with the REPAYE plan, the government also pays 50% of unpaid interest after the first three years and on unsubsidized loans too.

    Student loan FAQs

    PAYE plans can be applied to graduate school loans and the repayment timeline is 20 years. However, if you have a REPAYE plan, the repayment period is extended to 25 years for those with graduate student loans.

    To qualify for PAYE repayment plans, you must have experienced some financial hardship and received a federal student loan on or after October 1, 2007. You will also need to be free from outstanding federal loans and have received a loan disbursement on or after October 1, 2011.

    Once you are accepted onto a PAYE plan, you will need to resubmit information through an application each year. This is to notify the loan servicer about any changes in income or household size. If nothing has changed since last year, you will still need to let them know. This is because your repayments are calculated according to your current income which can fluctuate.