Pay As You Earn Repayment (PAYE)

NEWS ALERT

Beginning in late 2012, this new repayment plan, modeled after Income-Based Repayment (IBR), provides a new option for borrowers with lots of student debt and not enough income to pay it. The program will mimic the 2014 IBR rule changes, which are based on the Health Care and Education Reconciliation Act of 2010.

Starting Dec 21, 2012, the Pay As You Earn (PAYE) Repayment plan offers a new way to repay Direct Loans (except for Parent PLUS Loans). Modeled after the IBR rules, PAYE will cap your monthly payment at 10% of discretionary income using your pre tax income. The repayment plan is calculated over 20 years. After 20 years of payments, any remaining amount you have not repaid will be forgiven.

To qualify, applicants must have been new borrowers after October 1, 2007 and also took out a loan on or after October 1, 2011. Like other income-based plans, borrowers must apply and document their income annually to prove they meet strict requirements. The .25% interest rate reduction for automatic debit repayment is available for borrowers using the PAYE repayment plan.

To apply for PAYE, you need to document your income, record your family size, report your state of residence, and list all your student loans. Good news – PAYE monthly payments may be used for some of the 120 qualifying payments for the Public Service Loan Forgiveness Program. Contact your financial aid office or U.S. Department of Education for more details on the program.

If you don't qualify for this repayment plan, then consider IBR or Income Contingent Repayment (ICR).

Pros

  • Affordable payments start as low as $0
  • Payments eligible for Public Service Loan Forgiveness
  • Remaining payment cancellation after 20 years of repayment if you remain in program
  • Subsidized loan interest payments for any unpaid interest for up to 3 years if the calculated monthly payment is less than the monthly accrued interest
  • No prepayment penalties

Cons

  • Requires an annual application that includes reporting on income and family size
  • Monthly payments may be less than accrued interest (negative amortization)
  • Unpaid interest capitalized (added to principal balance) if you leave the plan
  • Takes longer to pay back
  • Total cost of the loan is higher
  • May have to pay taxes on the amount forgiven
  • Parent PLUS or Consolidation with Parent PLUS do not qualify