Guide to Pay as You Earn (PAYE) Repayment Plan for Student Loans
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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?
What Is PAYE?
How Does PAYE Work?
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.
Pros and Cons of PAYE
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.
PAYE vs REPAYE
PAYE vs IBR
Qualifying for PAYE
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
Student Loan Refinancing
Student Loan Forgiveness
Income-Sensitive Student Loan Repayment
Frequently Asked Questions
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