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It’s no secret that student debt is a major issue for many Americans. The total federal student loan deb totals $1.6 trillion and is climbing for 45 million borrowers. With the average federal loan holder owing more than $37,000, there are a significant number of past and current students who will likely be dealing with education debt for years to come. Student loan forgiveness would be one path to alleviate this financial stress. President Biden has announced a one-time forgiveness plan of up to $20,000 in debt per qualifying borrower, but it is awaiting court decisions as to whether it can move forward. In addition, President Biden has a new income-driven repayment plan in the works (more details below) to ease debt with lower payments, but the program is not up and running yet. So if you’re looking to adjust your monthly payments, consider the Pay As You Earn (PAYE) repayment plan. With one of the lowest payments of any of the four income-driven plans, PAYE is a great option for borrowers struggling to afford their payments. But it has a few criteria you’ll need to meet to qualify. Read on to learn more, including:
What is the Pay As You Earn repayment plan?
What are the pros and cons of PAYE?
How does PAYE compare vs. REPAYE and IBR plans?
What are options to PAYE?
When is student loan forgiveness an option?
Note: There is currently a federal student loan repayment pause, which could resume as late as 60 days after June 30, 2023. It’s wise to keep an eye on this evolving situation so you can stay on top of your payments.
What Is PAYE?
PAYE is one of the four income-driven repayment plans that Federal Student Aid offers for student loans. Its name is an acronym for Pay As You Earn, or PAYE, plan. It adjusts your monthly payments along with your income and family size while extending your loan terms to 20 years. If you still have a balance after 20 years, it could be forgiven. To qualify for the Pay As You Earn repayment plan, you must not have borrowed a federal student loan before Oct. 1, 2007. In addition, any Direct or consolidation loans must have originated after Oct. 1, 2011. You also need to meet income requirements to qualify for PAYE. The main rule is that your payments on PAYE must be less than what they’d be on the standard 10-year plan. If your income increases while you’re on PAYE, you can stay on the plan, but your payments will no longer be based on your income. Instead, they’ll be calculated according to the standard 10-year plan. While PAYE is one of the most affordable income-driven repayment plans, it might not be so for long. Earlier this year, the Biden administration announced its intention to introduce a new income-driven repayment plan that would set payments on undergraduate student loans to 5% of a borrower’s discretionary income. Payments for graduate student loans would be set at 10%, and borrowers who have a mix of both loan types would get a weighted average. What’s more, borrowers who owe less than $12,000 could see loan forgiveness after just 10 years, rather than having to wait the 20 years associated with PAYE. While this plan isn’t available yet, it might be your most affordable income-driven repayment option once it is.Recommended: How to Pay off Student Loans
How Does PAYE Work?
PAYE adjusts your payments to 10% of your discretionary income while extending your loan terms to 20 years. The following loans are eligible for PAYE:
Direct subsidized and unsubsidized loans
Direct PLUS loans made to graduate or professional students
Direct consolidation loans that don’t include parent PLUS loans
FFEL subsidized, unsubsidized, PLUS, and consolidation loans, as long as you consolidate them first and none were made to parents
Perkins loans, as long as you consolidate them first.
Parent loans, as well as consolidation loans that contain parent loans, are not eligible for PAYE. The PAYE plan also has a useful interest subsidy. If your payments don’t cover your full interest charges on any subsidized loans, the government will cover the remaining interest for your first three years on the plan. You’ll still be responsible for paying any interest that accrues on your unsubsidized loans. Note for married borrowers: If you file your taxes jointly, your student loan payment on PAYE will be based on both your incomes. But if you file taxes separately, the payment will be based on the individual borrower’s income alone.
Pros and Cons of PAYE
The PAYE plan has both pros and cons worth considering before you apply.
Pros of PAYE
Could lower your monthly student loan payment. The PAYE plan adjusts your monthly payments to 10% of your discretionary income.
Offers an interest subsidy. If your payment doesn’t cover all the interest that accrues on your subsidized loans, the government will cover the difference for your first three years on PAYE.
Could end in loan forgiveness. If you still have a balance after 20 years on PAYE, it should be forgiven.
Cons of PAYE
May be more difficult to qualify for than some other plans. Unlike some other income-driven plans, PAYE requires that your payments on it are less than what you’d pay on the standard 10-year plan.
Pay more interest overall. Because PAYE extends your loan terms to 20 years, you’ll be in debt longer and pay more interest over the years as a result.
May have to pay taxes on the forgiven amount. Loan forgiveness that you receive at the end of an income-driven repayment term is typically taxable. Currently, however, taxes have been waived on forgiven student loans through 2025.
Here’s a snapshot of the pros and cons in chart form:
Pros
Cons
Could lower your monthly student loan payment
May be more difficult to qualify for than some other plans
Offers an interest subsidy
Pay more interest overall
Could end in loan forgiveness
May have to pay taxes on forgiven amount
PAYE vs REPAYE
Another option for income-driven repayment is the Revised Pay As You Earn, or REPAYE, plan. Here’s a comparison of PAYE vs. REPAYE.
PAYE
REPAYE
Payment amount
10% of your discretionary income
10% of your discretionary income
Loan term
20 years
20 years for undergraduate loans; 25 years for graduate or professional loans
Who qualifies
Borrowers who took out a loan after Oct. 1, 2007 and borrowed a Direct loan after Oct. 1, 2011, and whose payment would be less on PAYE than the standard 10-year plan
Any federal student loan borrower, except for those with parent loans
Interest subsidy
Government covers remaining interest on subsidized loans for first three years
Government covers remaining interest on subsidized loans for first three years and 50% of interest after that, as well as 50% of remaining interest on unsubsidized loans during all periods
Both incomes considered if married?
Yes if filing jointly; no if filing separately
Yes, whether filing jointly or separately
PAYE vs IBR
It’s also worth considering the Income-Based Repayment (IBR) plan, which sets your student loan payments to 10% or 15% of your discretionary income. Here’s how IBR stacks up against the PAYE plan.
PAYE
IBR
Payment amount
10% of your discretionary income
10% of discretionary income if you borrowed after July 1, 2014; 15% if you borrowed before that date
Loan term
20 years
20 years for new borrowers after July 1, 2014; 25 years if you borrowed before that date
Who qualifies
Borrowers who took out a loan after Oct. 1, 2007 and borrowed a Direct loan after Oct. 1, 2011, and whose payment would be less on PAYE than the standard 10-year plan
Borrowers whose payment would be less on IBR than the standard 10-year plan
Interest subsidy
Government covers remaining interest on subsidized loans for first three years
Government covers remaining interest on subsidized loans for first three years
Both incomes considered if married?
Yes if filing jointly; no if filing separately
Yes if filing jointly; no if filing separately
Qualifying for PAYE
If you are considering PAYE, here are some considerations to review:
To qualify for PAYE, you must be a new borrower as of Oct. 1, 2007. What’s more, you must have borrowed a Direct loan after Oct. 1, 2011.
You must demonstrate partial financial hardship. Essentially, your payment on PAYE must be lower than what it would be on the standard 10-year plan.
If you owe FFEL or Perkins loans, you must consolidate them with a Direct consolidation loan to make them eligible for PAYE. Be careful about consolidating Perkins loans, though, as doing so could cause you to lose some benefits.
Parent borrowers are not eligible for PAYE. in fact, the Income-Contingent Repayment plan (ICR) is the only income-driven plan available for parent loans (and only if you consolidate them first).
Other Ways to Pay Off Student Loans
Putting your loans on PAYE or another income-driven plan could make them more manageable, but you could be in debt for 20 years and pay more interest over the life of your loan. Here are some other student loan repayment options worth considering.
Student Loan Refinancing
Refinancing student loans has the potential to lower your interest rate and make your monthly payments more affordable. When you refinance, you exchange one or more of your current loans for a new one. A lender reviews your credit and income and assigns a new interest rate accordingly. Borrowers with good or excellent credit might score a low rate, which could reduce their interest charges and monthly payments. You’ll also get to choose new repayment terms, typically between five and 20 years. There are both risks and benefits of refinancing student loans, though. The downside of refinancing federal loans is that they become ineligible for federal plans and protections. Specifically, if you refinance your federal loans, they’ll no longer qualify for income-driven repayment plans such as PAYE. Nor will they be eligible for federal forbearance, deferment, or forgiveness programs. It would only be a good idea to swap your federal loans for a private one through refinancing if you are willing to forfeit access to such federal plans. Recommended: How Will Refinancing Affect Student Loan Forgiveness?
Student Loan Forgiveness
While the PAYE plan can end in loan forgiveness after 20 years of on-time payments, you might be able to get loan forgiveness sooner through an alternate program. The Public Service Loan Forgiveness program, for instance, offers forgiveness after 10 years of public service if you secure a job with certain government or non-profit organizations. The Teacher Loan Forgiveness offers up to $17,500 in loan forgiveness after five years of working in a qualifying school. What’s more, President Biden’s one-time student loan forgiveness plan is currently hanging in the balance. It promises to forgive up to $20K in debt to qualifying federal loan borrowers, but its legality has been questioned. Whether or not it will happen now rests with the U.S. Supreme Court, which will determine its fate.Recommended: A Guide to Student Loan Forgiveness
Income-Sensitive Student Loan Repayment
If you hold FFEL loans or unsubsidized or subsidized federal Stafford loans, check out the Income-Sensitive Repayment plan. On the income-sensitive plan, you’ll still make payments over 10 years as you would on the standard plan, but your payments can be adjusted based on your annual income. Recommended: What Is Student Loan Rehabilitation?
The Takeaway
Pay As You Earn (PAYE) can be one of the most affordable income-driven repayment plans for borrowers who can qualify. It could make your monthly payments easier to handle and potentially end in loan forgiveness. At the same time, extending your loan terms to 20 years could result in higher interest charges over the life of your loan. If your goal is saving money on interest, consider refinancing your student loans for better rates. You won’t be able to qualify for certain federal protections if you do so, but you could wind up with a scenario that better suits your financial needs. Lantern can help you review multiple offers. It quickly and conveniently allows you to compare typical student loan refinancing rates from leading lenders. Could refinancing your student loans save you money? Find out the easy way with Lantern.
Frequently Asked Questions
Does PAYE work for private student loans?
How do IBR and PAYE compare?
How does Pay As You Earn work for student loans?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/courtneyk
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About the Author
Rebecca Safier
Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
