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Pay as you earn repayment plan: Points to remember.


Pay as you earn (PAYE) is one of the income dependent repayment plans introduced by the Obama administration in 2010, and came into effect in December 2012. It is a repayment plan for graduates who are struggling to make their student loan payments, as it allows them to repay less of their student loans based on their income, and shortens the repayment period compared to other income-based repayment plans. While Income Based Repayment (IBR) came as a bonanza for borrowers, PAYE is an even better deal. Here are some points which makes PAYE a better repayment option:

  • Pay only 10% of discretionary Income.

  • Make payments only for 20 years, after that remaining loan amounts will be forgiven.

  • If the borrower is in public service, loan will be forgiven after 10 years.

  • If the total monthly payment does not cover full amount of interest, Govt pays the interest that accrues on loan each month, for up to three consecutive years from the starting date of PAYE

Eligibility for Pay as you earn :

Eligible loans:

  • Direct Subsidized loans.

  • Direct consolidation loan excluding plus loans made to parents.

  • Direct plus loans made to students.

Who is eligible?

  • Only “new Borrowers” who begin accruing student loans on or after October 1, 2007 are eligible. ( In June 2014, President Obama extended the PAYE to all student loan debtors, and these changes will be effective from December 2015)

  • Borrowers must have received at least one disbursement on or after, October 1, 2011.

  • New Borrowers are those that had no outstanding loan balances as of october 1, 2007.

  • Borrowers with partial financial hardship and their Federal Student Loans must be high relative to their income.

Factors determining payments under PAYE.

  • Adjusted gross income of the borrower.

  • Number of family members.

  • The amount of your “disposable income” which is the adjusted gross income of the borrower, minus 150% of the federal poverty level times 10 percent is the approximate amount of your payment.

Advantages of PAYE:

  • The payments are lower than they are under most other repayment plans.

  • After paying for 20 years, the remaining loan amount will be forgiven.

  • If PAYE payments don’t cover interest, the government will excuse,\ interest on direct subsidized loans and any part of a consolidated loan that’s subsidized for up to three years.

  • If you have a partial financial hardship, unpaid interest that accrues will not capitalize as long as you have a hardship – if it does capitalize it will be capped at 10% of the original balance.

  • If you qualify for Public Service Loan Forgiveness (PSLF), PAYE may help you make the most of your benefit.


  • If a borrower does not qualify for tax free public service loan forgiveness, the forgiven loan balance will be taxable – this can mean a huge lump tax payment due.

  • If the PAYE payments don’t cover borrower’s monthly interest, it can capitalize and drive up the loan balance resulting in an even larger tax bill when it’s forgiven.

Although PAYE may be the lowest monthly repayment option, its qualification criteria makes it hard to obtain. Even after the approved changes by President Obama, it is still restricted to those with high loan balances and those who choose to pursue a public service career. Nevertheless the extension of PAYE is expected to benefit 5 million additional borrowers.


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