Pay as You Earn
Failure to repay your student loan not only affects your credit score, it can also get you trapped in the cycle of debt and even affect your ability to pay for necessities. It is important that you select the right repayment plan for your student loan; one that allows you to pay back the borrowed amount in small, affordable monthly payments.
You will be presented with a number of options when you will make your choice of repayment plan, such as:
- Standard repayment plan
- Pay-as-you-earn plan
- Income-sensitive plans
- Income-driven plans
- Graduated repayment plan
- Extended repayment plan
Pay as You Earn Repayment Plan
Pay-as-you-earn or PAYE repayment plan was introduced by the Obama government in 2011. This repayment plan was an initiative to help 1.6 million students who are dealing with student loan debt. Under this repayment plan, the borrower can pay back their loan in flexible monthly payments. The amount of payment is decided depending on the borrower’s income and family size.
What Types of Student Loans are Eligible for PAYE?
The following types of loans are considered eligible for PAYE repayment plan.
- Direct loans, both subsidized and unsubsidized
- Direct PLUS loans taken out graduates and professional students
- Direct consolidation loans taken out by students’ parents (these must not include any PLUS loan)
In addition to this, the following types of loan can be considered eligible if they are consolidated into a Direct loan.
- Federal Stafford loan, both subsidized and unsubsidized
- FFEL PLUS loans taken out by graduates and professional students
- Federal Perkins loans
- FFEL consolidation loan take out by parents, these must not include any PLUS loans
Are There Any Other Eligibility Requirements?
Since PAYE is a highly flexible repayment plan, it’s offered only to those borrowers who otherwise won’t be able to pay back their student loan. As a result, all applicants are required to fulfill the following eligibility requirements.
- Loan debt must be high relative to the borrower’s income.
- There should be no significant outstanding balance on an FFEL or Direct loan as of October 1st, 2007.
- There should be no significant outstanding balance on an FFEL or a Direct loan when the borrower took out a new FFEL or Direct loan on or after October 1st, 2007.
- The borrower must have received the loan amount on or after October 1st, 2011, under a Direct PLUS or Direct subsidized or unsubsidized or a Direct consolidation loan program.
How Does the Repayment Work?
Under PAYE repayment plan, the monthly payments are capped at 10 percent of the discretionary income of the borrower. The amount of monthly installments also depends on the family size of the borrower, their income, and their state of residency.
After 20 years of qualifying loan repayments, the remaining principal amount and interest is forgiven under the PAYE repayment plan. For borrowers who are working at a public service organization, the outstanding balance is forgiven after 10 years of qualifying payments.
What are the Benefits of PAYE Plan?
The benefits of PAYE plan are quite obvious. The repayment plan allows low-income borrowers to pay back the borrowed amount in affordable monthly payments. This is a great opportunity for individuals who earn very little and are required to take care of their dependents as well. The repayment plan takes the borrowers family size and their monthly income and allows them to pay back the loan in a manner that’s affordable to them.
Also, after 20 years of timely payments, the remaining amount is forgiven. The government offers partial subsidy on unpaid interest as well. However, since the repayment term is longer as compared to other repayment plans, the borrower is required to pay a higher amount overall.