Pay As You Earn – known by its acronym PAYE – is one of multiple IDR plans available to federal borrowers. Read on to learn more.
Published August 23, 2023
9 min readThere are pros and cons to every plan in the federal government’s Income-driven Repayment (IDR) program. Selecting the right plan for your unique financial needs requires research, careful attention to details, and staying up-to-date on the latest federal student loan policy news. Pay As You Earn – known by its acronym PAYE – is one of the multiple IDR plans for federal borrowers.
New changes to Income-Driven Repayment (IDR) plans are being implemented as of July 2023. Those looking to enroll in a IDR plan may want to learn more about the newest IDR plan, Saving on A Valuable Education (SAVE), which offers the lowest monthly payments and quickest path to forgiveness.
Pay As You Earn may be the best IDR plan for candidates with a high debt compared to their income, as monthly payments are low and will never exceed the Standard Repayment Plan. However, those with this high debt-to-income ratio should also read up on the new SAVE plan, which has an even lower monthly payment calculation.
Monthly payments under PAYE are generally calculated at 10% of your discretionary income. Since your income, family size, and location can change over the life of the loan, so too can your discretionary income calculation. PAYE includes a built-in safeguard against your monthly payment increasing by too high a margin, as the monthly payment can never exceed what you would pay under the 10-year Standard Repayment Plan.
It’s important to note that your discretionary income is calculated differently under the different IDR plans. Under PAYE, it is the difference between your annual income and 150% of the poverty guideline for your family size and state of residence (with Alaska and Hawaii differing from the 48 contiguous states and DC). The poverty guidelines are maintained by the US Department of Health and Human Services at aspe.hhs.gov/poverty-guidelines.
Student loan forgiveness is available under all current IDR plans. Under PAYE, you must make timely payments and remain enrolled in the plan for 20 years to have your remaining balance forgiven. With PAYE, you are also eligible for Public Service Loan Forgiveness (PSLF)1 which can shorten your forgiveness period to just 10 years.
In order to initially qualify for the plan, the calculated monthly payment under PAYE must be less than what you would pay under the Standard Repayment Plan (which is a 10-year fixed period). Generally, you’ll meet this requirement if your student loan debt represents a significant portion of your annual income.
Types of eligible loans
Many federal loans are eligible for PAYE. Note that if you have FFEL Program loans and wish to enroll in IDR, PAYE is your only option unless you consolidate.
For eligible federal borrowers, past periods of repayment, deferment, and forbearance could now count toward IDR forgiveness with this one-time payment count adjustment. Some borrowers will need to apply for a Direct Consolidation Loan by the end of 2023 to get the full benefits of this program. Schedule a consultation to learn if you may qualify.
One of the most important things to keep in mind about IBR – or any IDR plan – is the need to recertify your plan each year (whether or not anything that might impact your payment has changed). This must be done annually with your loan servicer to remain eligible for the payment plan and eventual forgiveness (either through IDR or PSLF).
To recertify, you will submit what seems like a new application for IBR. Within the application form, there will be an entry for the reason you’re submitting, where you should specify that you are documenting your income for the annual recertification.
As previously noted, under PAYE, your monthly payment amount will initially be based on your income and family size, and at any time when your income is low enough that your payment is less than what you would pay on the Standard Repayment Plan.
If your family size, location, or income changes mid-year, you can also recertify before the annual date by submitting updated information and asking your servicer to recalculate your payment. This can benefit you by reducing your payment appropriately—if you have a baby, lose your job or take a pay cut, or make a change that impacts your discretionary income.
If your income ever increases to the point that your income-driven monthly payment would exceed the amount you would have paid on the Standard Repayment Plan, you’ll remain on the PAYE plan, but the amount will revert to the fixed payment you would have made on the Standard Plan (based on the loan amount you owed when you first enrolled). If your income or family circumstances change again, you have the opportunity to recertify and your servicer will recalculate your payment to once again be based on your income.
Outside of the annual recertification, this midyear reporting is not required — if any of these items change and you do not wish to recalculate your payment immediately, you can wait until the next annual recertification. Just remember that even if nothing changes, you must recertify each year.
Failure to recertify
If you fail to recertify under PAYE, your payment will revert to the Standard Repayment Plan amount (which would likely be higher than you’re used to) plus any unpaid interest would be added to your principal balance, increasing the amount you would pay over time. Essentially, you would have a higher monthly payment as well as a higher loan balance, and you’d now be paying interest on interest. Your loan servicer would also revert your family size to 1, possibly further increasing your payment, and you may lose eligibility to base payments on your income in the future.
So set a calendar reminder and recertify every year. Your loan servicer should also send you an annual reminder.
Loan forgiveness after income changes
Note that if you remain enrolled in PAYE but your payment amount reverts to the Standard Repayment Plan due to an income increase, you still remain eligible for loan forgiveness at the end of the 20-year period as long as all other qualifying factors are met. However, if your income remains high and you are able to meet the 10-year fixed payment requirement, chances are you will have repaid your loan in full before reaching the 20-year mark.
Each IDR plan considers a spouse’s income differently and your monthly payment may change depending on how you file your taxes.
If you and your spouse file separate returns (“married filing separately”), your servicer will only use your individual income to determine your eligibility and monthly payment amount under PAYE. If you file jointly, your joint income will be used. This can increase your payment, especially if your spouse does not have any loans.
If you both have loans
If you and your spouse both have student loans and you are filing jointly, your loan servicer will use the combined income but will adjust your payment amounts proportionally based on each spouse’s share of the total student loan debt. If filing separately, only your individual loan debts will be used. It can be wise to consult a financial expert, as there may be other implications when filing separately or jointly.
Note that you may have to submit additional documentation or authorizations if you live in community property states or if your spouse does not enroll in an IDR plan. Your loan servicer will let you know what information they need.
Income-driven Repayment plans exist to make managing and repaying student loan debt easier, but it may take some fine-print reading and research to ensure you’re choosing the right plan for you. Always consult the Federal Student Aid website for updates, and read up on our other guides in this series on IBR, ICR, and SAVE (formerly REPAYE). Set up a complimentary student loan consultation with one of our student loan specialists who can help you understand all of your student loan repayment and forgiveness options.
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To qualify for PSLF, you must be employed by a U.S. federal, state, local, or tribal government or not-for-profit organization (federal service includes U.S. military service); work full-time for that agency or organization; have Direct Loans (or consolidate other federal student loans into a Direct Loan); repay your loans under an income-driven repayment plan; and make 120 qualifying payments. For full program requirements visit: Federal Student Aid.