What is Pay As You Earn Student Loan Repayment?
The Pay As You Earn (or PAYE) student loan repayment program was passed in December of 2012, and is President Obama’s spin on income driven repayment. Understanding that student borrowers faced significant challenges once they entered repayment, the President used PAYE to improve on the preexisting Income Based Repayment in several different ways.
Although it has rather strict qualification standards (only the classes of 2012 and later qualify), PAYE is a terrific option for those who can use it.
How it Works
Pay As You Earn is just like Income Based Repayment in how your monthly payments are calculated. Monthly payments under PAYE are 10% of your discretionary income, which is the difference between your adjusted gross income and 150% of the poverty line in your area.
Again, poverty guidelines are set by the Department of Health and Human Services, and are updated annually. You can look up the poverty line in your area here.
Like IBR, PAYE has an interest subsidy component and forgiveness of any remaining balances after 20 years of qualifying payments. But, remember that any amount forgiven is taxable as income unless under the public service loan forgiveness program. If you’re counting on forgiveness outside of PSLF, it’s best to plan for the resulting tax bill.