Using Pay-As-You-Earn Student Loan Consolidation
Get the lowest payments possible so high monthly payments don’t hold you back.
If you’re looking for the lowest payments possible on consolidated student loan debt, then Pay as You Earn is the best program to use – if you can qualify. While income-contingent sets your monthly payments at 20 percent of your taxable income and income-based gets it down to 15 percent, pay as you earn goes even further to set payments at 10 percent – and depending on your circumstances, you may not pay anything at all.
The only catch is qualifying for the program. Unlike the other two programs mentioned above that only require you to prove financial hardship, Pay as You Earn also requires that the debts you consolidate are fairly new. In other words, this program won’t work on old debt.
What you need to qualify for a Pay as You Earn program
The number one qualifier for Pay as You Earn is the age of your debts. Not your age, but your debts’ age. You can be 93 years old and still qualify as long as the federal student loans that you want to consolidate are new.
There are two qualifying factors when it comes to assessing the age of your debt:
- The loans were taken out after October 1, 2007.
- There was at least one payment disbursement after October 1, 2011.
True or false: If you took out federal student loans in December 2007 and then graduated in May 2011, you could qualify for a Pay as You Earn program.
Tip: Since you graduated in the spring semester of 2011, there would be no disbursement from the lender after October 1st of that year, so you wouldn’t qualify for the program.
It’s important to note that you still have to prove at least partial financial hardship with Pay as You Earn. Just like other hardship-based programs, your gross (pre-tax) income will be compared to the Federal Poverty Line (FPL) for your state.
Fact: Your income has to be 150 percent or less of the FPL in your state to prove partial financial hardship.
So if you’re making good money, you may not qualify for a hardship program like this one. Instead, look into standard repayment or graduated repayment.
Types of student loans that qualify
As with any other consolidation program, you have to have federal student loans to qualify for Pay as You Earn. This specific program is only available to students themselves, so if you’re a parent who took out a PLUS loan for your child’s education, then you can’t use Pay as You Earn.
For students, you can consolidate these types of loans with Pay as You Earn:
- Direct subsidized loans
- Direct unsubsidized loans
- Student PLUS loans
- Individual loans originally consolidated under a Standard or Graduated repayment program.
Yes or No: If I’m a student who took out 3 subsidized direct loans that were cosigned by my parents and consolidated last year with a standard repayment program, can I consolidate?
Tip: Since the loans were cosigned by your parents, you cannot use Pay as You Earn. If your parents had not cosigned the loans however, you could use this program as long as you meet the other qualifications.
What happens once you qualify
Your payments are set at 10 percent of your taxable income. It’s important to note that your situation will be reevaluated every year. So if your income goes up, you’ll be expected to pay more – but only 10 percent of your new income as long as you are still below line of partial hardship where you live.
You may also have to adjust if you start making enough that you’re over partial hardship in your state, or if you move to a different state and their FPL is lower so you no longer meet the criteria. This doesn’t mean that your consolidation program will be cancelled, but you may be moved to a different program or will be expected to pay more.
The term on a Pay as You Earn program can be up 25 years. So once you’ve made payments for that period of time, even if you have debt still outstanding you won’t have to make any more payments. After 25 years, any remaining balances on your debts are forgiven.
Getting loan forgiveness faster
Of course, if you work in certain sectors, you may not have to make payments that long before you can have your remaining balances forgiven. Public servants, nurses, firefighters, teachers and police can have their remaining student loan balances forgiven after 10 years of making payments on an applicable consolidation program. Pay as You Earn is one of the three programs you can be enrolled in if you work in one of these sectors and want to qualify for student loan forgiveness.
If you can qualify for forgiveness, then you would make payments for 10 years on the Pay as You Earn program. After that, all of the remaining balances on your student loans would be forgiven. If you want to find out if you qualify, call us to speak with a student loan consultant who can evaluate your situation to see which programs you can use.