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How the federal PAYE Repayment Plan works
Income-driven repayments ideal for graduate student debt and married couples.
It also treats undergrad and graduate debt the same way, unlike some other plans. But you can’t qualify if you took out loans before 2007.
PAYE Repayment Plan at a glance
|Eligible loans||How much you pay||Repayment term||Who it’s best for|
|10% of your discretionary income — never more than what you’d pay on the Standard Repayment Plan||20 years||Single or married borrowers who file taxes separately with a high debt-to-income ratio or who want to qualify for PSLF or Teacher Loan Forgiveness.|
How does the federal PAYE Repayment Plan work?
The PAYE Repayment Plan comes with monthly repayments based on 10% of your discretionary income for 20 years. After the term is up, the Department of Education (DoE) forgives any remaining debt.
You have to update your income and family size each year, even if nothing has changed. If 10% of your discretionary income is worth more than what you’d pay on the Standard Repayment Plan, you’re no longer eligible for the program. Unlike the Revised Pay As You Earn (REPAYE) Plan, the DoE only counts your spouse’s income if you file a joint tax return.
How can I calculate my discretionary income?
Your discretionary income is 150% of the federal poverty guideline for your state and family size subtracted from your pretaxed income. You can find out what your federal poverty guideline is on the Department of Health and Human Services website.
PAYE monthly repayment example
Say you make $40,000 a year, have $100,000 in eligible federal loans at 4.53% APR and live in one of the 48 contiguous states.
Here’s how much you might pay based on the size of your family — even if you get married and file taxes separately.
|Family size||Poverty guideline||Discretionary income||Monthly PAYE repayment|
Even if you get a much, much higher-paying job, you won’t ever pay more than $1,037.83 — what you would owe per month on the Standard Repayment Plan.
Am I eligible for the PAYE Repayment Plan?
You must meet the following requirements to qualify for the PAYE Repayment Plan:
- Eligible federal loans. Most Direct Loans are eligible, as are FFEL Loans that were consolidated with a Direct Consolidation Loan. Parent PLUS Loans aren’t eligible, even with consolidation.
- Repayments lower than the Standard Repayment Plan. Otherwise, there’s no benefit to this program. Generally, you can qualify if your student debt is higher than your discretionary income.
- New borrower. This means your Direct Loans must have been disbursed after September 30, 2011. And you can’t have had any outstanding federal student debt as of October 1, 2007.
Can I qualify for forgiveness on the PAYE Repayment Plan?
You can. In fact, the DoE recommends the PAYE Plan to borrowers who want to enroll in the Public Service Loan Forgiveness (PSLF) program. Borrowers on the PAYE Plan are also eligible for the federal Teacher Loan Forgiveness program and outside loan repayment assistance programs.
Even if you don’t apply for forgiveness, your loans will be forgiven after making 20 years of PAYE repayments. Just keep in mind that the IRS counts any forgiven debt as taxable income.
Pros and cons of the federal PAYE Repayment Plan
The PAYE Plan isn’t right for everyone. Consider these benefits and drawbacks before you sign up:
- Same term for all loans. You won’t have to wait 25 years if you have graduate debt or aren’t considered a new borrower — unlike with the REPAYE and Income-Based Repayment (IBR) Plans.
- Pay no more than the Standard Repayment Plan. This plan caps monthly repayments at what you would have paid on the Standard Repayment Plan.
- Spousal income might not count. As long as you file your taxes separately, your repayments won’t increase simply because you’re married.
- High DTI required. Generally, this plan isn’t worth it if your student debt load is lower than your discretionary income.
- New borrowers only. Direct Loans disbursed before October 1, 2011 are ineligible. And borrowers must not have had any outstanding federal student debt as of October 1, 2007.
- Joint tax returns mean higher repayments. Married couples won’t be able to take advantage of the tax breaks that come with filing jointly unless they’re willing to pay more toward their loans each month.
Is the PAYE Repayment Plan right for me?
You might want to consider a PAYE Repayment Plan in the following situations:
- You’re in a low-paying field. A low income keeps you eligible for this program and your repayments low.
- You’re married. With this plan, your spouse’s income won’t affect your monthly repayments as long as you file your taxes separately.
- You went to graduate school. The DoE forgives grad school loans on the PAYE Plan five years earlier than those on the REPAYE Plan.
- You’re a recent borrower. You can’t qualify for this plan if you had unpaid student debt from before October 1, 2007 or Direct Loans disbursed before October 1, 2011.
How to apply for the PAYE Repayment Plan
If you’re just getting started on your student loan repayments, your servicer should contact you with instructions on how to set up your account and sign up for a plan.
Already paying off your loans? The most straightforward way to switch to the PAYE Plan is through the Federal Student Aid (FSA) website — some servicers might just redirect you there.
After logging in to your account, visit the Repayment and Consolidation tab in the main navigation bar and follow the directions to fill out the Income-Driven Repayment Plan form. If you’re filing a joint tax return with your spouse, they’ll have to cosign the application before you can submit it.
After you submit your application, continue to make repayments according to your current plan until you get confirmation that your plan has been changed.
Do I need to reapply each year?
You don’t have to fill out the entire application each year. But you are required to report your income and family size each year — even if nothing has changed. You can do this in a few minutes on the FSA website by using the IRS Data Retrieval Tool. Otherwise, you’ll need to provide your tax information manually.
3 alternatives to the PAYE Repayment Plan
Not convinced the PAYE Repayment Plan is right for you? Consider one of these plans instead:
- REPAYE Plan. Borrowers with loans that are too old for the PAYE Plan or who expect to make more money in the future might want to consider the REPAYE Plan instead. You can figure out which is best for you with our side-by-side comparison of the REPAYE versus PAYE Plans.
- Income-Contingent Repayment (ICR) Plan. Did you take out a loan to pay for your child’s education? The ICR Plan is the only income-driven repayment plan that Parent PLUS Loans are eligible for — and only if they’re part of a Direct Consolidation Loan.
- Extended Repayment Plan. Don’t want to fill out a form every year? Want more predictable repayments? This plan spreads out repayments over 25 years with the option to pay the same amount each month or have repayments that start low and increase every two years.
Interested in refinancing instead? Compare your options
The PAYE Plan could be a good option if you’re in a low-paying field and are married — or think you might get married soon. It can also help you qualify for PSLF. But you won’t be able to sign up for this plan if you have federal student debt from before 2007.
Check out our guide to student loan repayment plans to see how the PAYE Plan compares to other options.
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