After College: Can “Pay As You Earn” Help You Repay Your College Debt?

There are eight different approaches to repaying Federal Direct Loan Program (FDLP) debt. Four of them base your monthly payment amount on your income. One of these is called Pay As You Earn (PAYE).

PAYE gives you up to 20 years to pay off your FDLP debt, which can reduce your monthly payments by having them equal 10% of your discretionary income (see below) but never more than what they’d be under a 10-year Standard Repayment Plan.

PAYE is also one of the repayment plans you need to get into to pursue Public Service Loan Forgiveness (PSLF). But even if PSLF isn’t in your future, PAYE will forgive anything you’ll still owe after 20 years of payments.

The downsides of PAYE? A 20-year repayment period means your FDLP debt can be outstanding for a longer time. It also means you’ll accumulate more interest on that debt, so it’ll cost you more in the long run to fully eliminate it.

As with other income-driven repayment plans, you can use PAYE only for certain federal student loans. These include loans you borrowed as a student — FDLP and Federal Family Education Loan Program (FFELP) Subsidized, Unsubsidized, Graduate PLUS Loans, and also Federal Perkins Loans. They’re also FDLP Consolidation Loans you borrowed to repay and replace your student loans. But Parent PLUS Loans and FDLP Consolidation Loans you borrowed to repay and replace Parent PLUS Loans aren’t PAYE-eligible.

Also, not every borrower is PAYE-eligible. You can get it only if you owed nothing on a FDLP or FFELP Loan as of October 1, 2007 and you received FDLP Loan funds on or after October 1, 2011.

Additionally, you must have a “partial financial hardship” to be eligible for PAYE. You have this hardship if you are:

  • Unmarried or Married but Filing an Individual Federal Tax Return: Under a Standard Repayment Plan of 10 years, the annual amount you’d pay on your eligible loans each month — using the greater of what you owe when you begin repayment or what you owe when you apply for PAYE — would exceed your discretionary income.
  • Married and Filing a Joint Federal Tax Return: The annual amount you and your spouse would pay on you and your spouse’s eligible loans under a 10-year Standard Repayment Plan — again, using the greater of what you owe upon beginning repayment or upon applying for PAYE — would exceed you and your spouse’s discretionary income.

What’s discretionary income? For PAYE, it’s the difference between your and, if you’re married and filing your taxes jointly, your spouse’s Adjusted Gross Income, minus 150% of the federal poverty line for your family size.

To see if you’re eligible for PAYE, and how much PAYE would initially require you to pay each month, the easiest thing to do is to use the Federal Student Loan Repayment Estimator.

PAYE is yet another plan you should consider for eliminating your FDLP debt. But remember, get into it only if it meets your needs.

Trying to figure out which repayment plan you should use? College Affordability Solutions uses its four decades of student loan administrative and policy experience to provide borrowers with free consultations. Email collegeafford@gmail.com or call (512) 366-5354 to arrange such a consultation.

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