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What is Pay As You Earn?

This is the newest of the three federal student debt relief programs meant for borrowers facing financial hardship. It’s designed to help people struggling to make their student loan payments each month. Pay As You Earn provides the lowest monthly payments possible, usually around 10% of your Adjusted Gross Income (AGI).

The payment may be even lower, and if you’re in a situation of extreme financial hardship – i.e. you fall below the Federal Poverty Line for your state – then payments may be reduced to zero without penalties until your income improves.

Enrollment in the PayE program also allows you to qualify for Public Service Loan Forgiveness after 10 years of payments.

What types of federal loans can be included?

The following types of federal student loan debt can be included in a Pay As You Earn plan:

  • Direct student loans, subsidized and unsubsidized
  • Stafford loans, subsidized and unsubsidized (only eligible once consolidated)
  • PLUS loans (Direct or FFEL) for graduate students
  • Direct and FFEL Consolidation Loans (as long as they don’t include a PLUS loan to parents)
  • Federal Perkins Loans (only eligible once consolidated)

This program cannot be used for Direct or FFEL PLUS loans made to parents, nor Direct or FFEL Consolidation Loans that include PLUS loans made to parents. It also cannot help with any private student loan debt.

PayE also requires that you have “new” debt. This means the loans must have been taken out after October, 2007 with at least one payment disbursement made after October 1, 2011.

How does Pay As You Earn work?

  1. First you must determine which of your federal student loans are eligible for the program and which you wish to include – you are not required to include every debt that’s eligible if you prefer to leave some out.
  2. The term for Pay As You Earn is set at 20 years.
    1. If the term ends and you still have outstanding balances left, they will be forgiven without penalties.
    2. If you are eligible for Public Service Loan Forgiveness, then your remaining balances are forgiven after 10 years.
  3. The interest rate applied to the loan is set by taking a weighted average of the rates applied to all the loans you include the program.
  4. The payments are set based on your Adjusted Gross Income (AGI) and family size. Payments are generally set at roughly 10% of your AGI.
    1. Payments never exceed what you would pay on Standard Repayment Plan
  5. In addition, if you fall below the Federal Poverty Line (FPL) in your state, then the payments may be reduced to zero without penalties until you achieve an acceptable income level that would allow you to make payments.
  6. You are required to recertify your AGI and family size each year to maintain eligibility. As a result, your payments may vary from one year to the next.

Advantages of PayE Plans

Pay As You Earn allows you to achieve the lowest payments possible on federal student loan repayment. It’s also the only program that provides the ability to reduce your payments to zero without penalties if you’re facing extreme financial hardship. So if you’re really struggling to repay your loans due to challenges with low income, this is probably the program for you as long as your debts qualify.

The other advantage is that you can qualify for Public Service Loan Forgiveness. This applies if you work in fields such as nursing or teaching.

Disadvantages of PayE

A 20-year terms means should expect higher total interest charges than you would with plans like Standard Repayment. This is true of any of the income drive repayment plans. They increase the term in order to lower the monthly payments.

This plan is also limited to “new” debt. In other words, you can’t use this program to repay older debts. If you deferred old loans or defaulted then your debts may not be eligible.