First available to borrowers in 2012, PAYE is a federal student loan repayment plan that is available to a specific population of student loan borrowers. Payments are based on your income and are made for a maximum of 240 monthly payments over 20 years. Any amounts remaining after 240 monthly payments are forgiven.

Three factors determine your eligibility to repay under PAYE:

  • Borrower status: You must be a new borrower as of October 1, 2007 and must have received at least one Federal Direct Loan disbursed after October 1, 2011. You are a new borrower if you have never received a loan prior to October 1, 2007, or you have paid-in-full any federal loan balances received prior to receiving a new loan after October 1, 2007.
  • Loan types: Only Federal Direct loans qualify for PAYE. Other federal loan types (Stafford, FFEL, Federal Perkins and Health Professions Student Loans) disbursed after October 1, 2007 are eligible if consolidated into a Direct Consolidation loan. Check NSLDS.ED.GOV to confirm your loan types.
  • Partial financial hardship: If the payments due under PAYE are less than the payments that would be due under a standard 10-year repayment plan, you have a partial financial hardship (PFH). A rule of thumb: If your debt exceeds your income, you likely demonstrate a PFH under PAYE.

Please note: Everyone who qualifies for PAYE would also qualify for income-based repayment (IBR). However, those who qualify for IBR may not be eligible for PAYE. There is a “gray zone” for some borrowers who have received loans between October 1, 2007 and July 1, 2010 that may not qualify for PAYE but would qualify for IBR. In those cases, your loans could be paid under PAYE and IBR. You may be able to consolidate these “gray zone” loans with a Direct Consolidation Loan that would qualify for repayment under PAYE.


Calculating Your Payment Due Under PAYE

Your payment due under PAYE is 10% of your “Discretionary Income.” Discretionary Income is a measure used by the Government to determine income remaining after accounting for essential living expenses.

Two inputs determine your Discretionary Income:

  1. Your income, reported through:
    1. Your Adjusted Gross Income (AGI) from your most recently filed tax return (no more than two years old), or
    2. Alternative documentation of income, via a pay stub, W-2, or something similar to estimate yearly gross income
  2. The U.S. Department of Health and Human Services (HHS) Poverty Guideline amount for your family size and state of residence, updated yearly and found here: http://aspe.hhs.gov/poverty
    1. Family size generally counts your spouse plus any other children/family members for whom you provide a majority of financial assistance
    2. As your family size increases, your discretionary income decreases, and your monthly student loan payment under PAYE decreases

Officially, your Discretionary Income is the difference between your AGI and 150 percent of the HHS Poverty Guideline amount for your family size and state. Written as a formula:

Discretionary Income = Your Income – (150% × HHS federal poverty guidelines)

Let’s use the above formula to calculate your 2015 Discretionary Income for a family size of one and an AGI of $70,000 (from 2014 tax return). The 2015 HHS federal poverty guideline for a family size of 1 is $11,770:

Discretionary Income = $70,000 – (1.5 × 11,770) = $52,345

Your monthly payment due under PAYE is 10% of your Discretionary Income divided by twelve:

PAYE = 0.10 × $52,345 = $5,235 per year or $5,235 ÷ 12 = $436 per month

This calculation reflects your MINIMUM monthly payment due under PAYE. You can always pay more if you can afford it. However, depending on your situation, it may not make financial sense to do so.

To remain in PAYE you must provide yearly documentation of your income. If you fail to provide timely documentation, your payment will revert to the standard 10-year repayment amount due when you entered repayment and any unpaid interest will be capitalized at a maximum of 10% of your starting repayment balance (see table and discussion below).

Monthly payments due under PAYE are often less than the interest that accrues each month. This is called negative amortization. With a low enough income (ie. during an internship, residency or leave of absence, etc), it is possible to have a monthly payment equal to zero. These zero amount payments still count towards the 240 monthly payments due before forgiveness.

With negative amortization, you may have principal and unpaid interest amounts remaining after 240 monthly payments over 20 years under PAYE. If that is the case, any remaining debt is forgiven or “canceled” and treated as taxable income. The taxable amount will depend on the amount forgiven and your marginal income tax rate during the year of forgiveness.

Interest Accumulation and Unpaid Interest Accrual example for one year of repayment using PAYE:

  • Your starting federal loan repayment balance = $200,000 @ 6%
  • Your income = $70,000, Your family size = 1, and your PAYE payment due = $436 per month

Payment #

Loan Principal

Interest Accumulation per month

Payment per month

Unpaid Interest Accrual Balance

1

$200,000

$999

$436

$563

2

$200,000

$999

$436

$1,126

3

$200,000

$999

$436

$1,690

4

$200,000

$999

$436

$2,253

5

$200,000

$999

$436

$2,816

6

$200,000

$999

$436

$3,379

7

$200,000

$999

$436

$3,943

8

$200,000

$999

$436

$4,506

9

$200,000

$999

$436

$5,069

10

$200,000

$999

$436

$5,632

11

$200,000

$999

$436

$6,196

12

$200,000

$999

$436

$6,759

Generally speaking, paying more than the minimum amount due under PAYE will result in higher total repayment costs. If you are not able to pay your loans off in full prior to forgiveness, you’ll usually end up paying more in total than if you pay the minimum and save for the potential tax on forgiveness due after you reach the maximum repayment period. The more loan balance that you can push into forgiveness, the more you’ll reduce your total repayment costs, as long as you plan and save for the anticipated tax on canceled amounts. See the Forgiveness FAQ for more information.


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