pay as you earn repayment plan
Posted : July 1, 2013
Last Updated : July 1, 2013
The Pay As You Earn repayment plan is one of several student loan repayment options that allow you to base your student loan payments on income.
To qualify for Pay As You Earn, you must be a new borrower (as of October 1, 2007) and must have a partial financial hardship. You are considered a new borrower if you had no balance on a Direct loan or Federal Family Education Loan Program (FFELP) loan as of October 1, 2007 or had no balance on a Direct loan or FFELP loan when you obtained a new loan on or after October 1, 2007. You must also have obtained a disbursement of a Direct Subsidized loan, Direct Unsubsidized loan, or Direct PLUS loan for graduate or professional students on or after October 1, 2011 or must have obtained a Direct Consolidation loan based on an application that was received on or after October 1, 2011.
To be considered a person with a partial financial hardship, your qualifying student loan debt must be high relative to your income. For the purpose of establishing a partial financial hardship, qualifying student loan debt includes all of your Direct loans and certain types of FFELP loans (Subsidized and Unsubsidized Federal Stafford loans, Federal PLUS loans made to graduate or professional students, and Federal Consolidation loans that did not repay any PLUS loans for parents). Keep in mind that although certain types of FFELP loans are counted in determining whether you have a partial financial hardship, FFELP loans cannot be repaid under the Pay As You Earn repayment plan.
Federal student loans that are eligible to be repaid under the Pay As You Earn plan include:
Direct Subsidized loans
Direct Unsubsidized loans
Direct PLUS loans made to graduate or professional students
Direct Consolidation loans without underlying PLUS loans made to parents
Loans that are not eligible include:
Direct PLUS loans made to parents
Direct Consolidation loans that repaid PLUS loans (Direct or FFELP) made to parents
Private education loans
Loans currently in default
Your student loan servicer will determine your eligibility for Pay As You Earn, but you may want to use the Pay As You Earn calculator to estimate whether you would likely qualify.
Pay As You Earn caps payments at 10 percent of the difference between Adjusted Gross Income (AGI) and 150 percent of the Department of Health and Human Services poverty line that corresponds to your family size. That amount is then divided by 12 to get the monthly Pay As You Earn repayment amount. The formula is as follows:
Monthly payments are calculated as 1/12th of:
10% x [AGI – (150% poverty line applicable to family size)]
AGI is your adjusted gross income as reported to the Internal Revenue Service (IRS). If you are married and filed jointly, then your AGI includes both your and your spouse’s income. If you are married but filed separately, then your AGI includes only your income.
Family size is determined by counting you (the borrower), your spouse, and your children (if they receive more than half of their support from you). Family size also includes other individuals who live with you and receive more than half of their support from you and will continue to receive support for the year the family size is certified. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs.
Pros and Cons
The Pay As You Earn repayment plan has benefits as well as disadvantages. You should weigh the pros and cons and make the best decision for your situation.
The benefits of Pay As You Earn include:
Lower monthly payments – The Pay As You Earn monthly payment amount is less than the monthly payment amount under the standard 10-year repayment plan (and may be less than the monthly payment under other repayment plans).
Paid interest – If your Pay As You Earn payment does not cover the interest on your loans, the government will pay your unpaid interest on your Direct Subsidized loans (and on the subsidized portion of your Direct Consolidation loans) for your first three years in Pay As You Earn.
20-year balance cancellation – If you repay under the Pay As You Earn plan for 20 years and meet other requirements, any remaining balance will be forgiven.
10-year Public Service Loan Forgiveness Program – If you work in a public service job, then your remaining loan balance could be cancelled after 120 monthly payments. Read more about the Public Service Loan Forgiveness Program.
The disadvantages of Pay As You Earn include:
Longer repayment period – A reduced payment in Pay As You Earn usually extends your repayment period.
Increased interest payment – An extended repayment period causes you to pay more total interest over the life of the loan.
Annual documentation – You have to submit updated information about your income and family size each year or your payment reverts to the standard 10-year repayment amount.
Tax payment – You may have to pay taxes on any loan amount that is forgiven after 20 years.
For more information about this repayment option, visit studentaid.ed.gov.