PAYE


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 2009) and Revised Pay as you Earn (REPAYE). However, those who qualify for IBR 2009 or REPAYE may not be eligible for PAYE. There is also a “grey 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 using both PAYE and IBR. You may be able to consolidate these “grey zone” loans into a federal Direct Consolidation Loan, which then would qualify for repayment under PAYE.


Calculating Your Payment Due Under PAYE

Your payment due using PAYE is 10% of your Discretionary Income, a government measure based on poverty guidelines.

Officially, your Discretionary Income is the difference between your taxable income 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 2017 Discretionary Income for a family size of one and a taxable income of $75,000:

Discretionary Income = $75,000 – (1.5 × 12,060) = $56,910

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

PAYE = 0.10 × $56,910 = $5,691 per year or $474 per month

This calculation reflects your MINIMUM monthly payment due under PAYE. You can always pay more if it makes 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 = $75,000, Your family size = 1, and your PAYE payment due = $474 per month
  • Each month, $999 of interest accumulates on your principal.  Your payment covers $474 of that, thus your loan balance grows by $525/mo the first 12 months of repayment.

Payment #

Loan Principal

Interest Accumulation per month

Payment per month

Unpaid Interest Accrual Balance

1

$200,000

$999

$474

$525

2

$200,000

$999

$474

$1,050

3

$200,000

$999

$474

$1,575

4

$200,000

$999

$474

$2,100

5

$200,000

$999

$474

$2,625

6

$200,000

$999

$474

$3,150

7

$200,000

$999

$474

$3,675

8

$200,000

$999

$474

$4,200

9

$200,000

$999

$474

$4,725

10

$200,000

$999

$474

$5,250

11

$200,000

$999

$474

$5,775

12

$200,000

$999

$474

$6,300


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 Planning page for more information.  To simulate the full impact of unpaid interest accrual and to plan for forgiveness, try the VIN Foundation Student Loan Repayment Simulator.


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