Ibrahim Gardner
The US Department of Education offers several student loan forgiveness options, including the Pay As You Earn (PAYE) repayment plan. PAYE is a federal student loan repayment plan that was signed into law in 2012 to reduce monthly payments. Under PAYE, monthly federal student loan payments are set at 10% of an individual's discretionary income. While PAYE can help lower monthly payments, it may not be the best option for everyone, as it has specific eligibility requirements and potential drawbacks, such as a marriage penalty. It's important to carefully consider the pros and cons of PAYE and explore other repayment and forgiveness options to make an informed decision.
| Characteristics | Values |
|---|---|
| Loan forgiveness time | 20 or 25 years |
| Payment cap | 10%-20% of discretionary income |
| Loan type | Federal Direct Loans |
| Loan balance forgiveness | Remaining balance forgiven after 20 or 25 years of payments |
| Qualifying payments | 120 payments |
| Payment status | Consecutive payments not required |
| Payment adjustment | Payments adjusted annually |
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What You'll Learn
PAYE limits capitalized interest to 10% of your balance
PAYE, or Pay As You Earn, is an income-driven repayment plan for federal student loans. It is unique in that it requires a partial financial hardship to qualify. This is generally true if your total federal student loan debt is higher than your annual discretionary income.
PAYE does not simply waive the interest above the cap. Instead, it stays as accrued interest, as opposed to being added to the principal. If you refinance privately, all accrued interest will capitalize, and there will be zero savings from the capitalization cap in PAYE.
PAYE is one of the best income-driven repayment options due to its low monthly payment calculation, interest subsidy, 10% cap on interest capitalization, and 20-year forgiveness period. However, the problem with PAYE is qualifying. The plan is only available to more recent borrowers, basically the class of 2012 and later.
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Only Direct Loan Program loans are eligible for PAYE
The Pay As You Earn (PAYE) plan is a federal student loan relief program that was signed into law in 2012. It is an income-driven repayment plan that allows borrowers to cap their monthly federal student loan payments at 10% of their discretionary income. This means that payments are based on income rather than the amount owed.
PAYE is only available for federal Direct Loans. This includes Direct Subsidized, Unsubsidized Loans, and Direct Plus Loans for graduates and professionals. Private Loans and Parent Plus Loans do not qualify for the PAYE plan. To qualify for PAYE, borrowers must demonstrate partial financial hardship and meet two guidelines: they must have received a direct loan on or after October 1, 2007, with no outstanding federal loans at that time, and they must have received a direct loan disbursement on or after October 1, 2011.
Borrowers who have federal student loans other than Direct Loans, such as Federal Family Education Loans (FFEL) or Perkins Loans, may be able to qualify for PAYE by consolidating their loans into a new federal Direct Consolidation Loan. It is important to note that refinancing federal student loans can be risky, as borrowers will lose access to income-driven repayment and other federal loan programs and protections.
PAYE is just one of several income-driven repayment plans offered by the federal government. Other plans include the Revised Pay As You Earn (REPAYE) plan, Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). These plans may be better suited for some borrowers, depending on their financial situation and loan type.
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Loan forgiveness timelines are set to shorten
The US Department of Education announced several changes and updates in April 2022 that will bring borrowers closer to forgiveness under IDR plans. The department will do a one-time adjustment to count any month spent in repayment, some deferment periods (before 2013), and some forbearance periods toward loan forgiveness. These changes mean that some borrowers will receive additional years of credit toward loan forgiveness.
For instance, loans that have been in repayment for more than 20 or 25 years may immediately qualify for forgiveness. The department will continue to discharge loans as borrowers reach the required number of months for forgiveness. All other borrowers will see their loan accounts updated in 2024.
The Biden administration has also updated key deadlines and the overall timeline for borrowers seeking student loan forgiveness under a one-time IDR account adjustment. The IDR Account Adjustment was implemented to address ongoing issues with federal Income-Driven Repayment (IDR) plans. Under the initiative, the Education Department will apply retroactive credit toward a borrower’s 20- or 25-year student loan forgiveness term, even if they are not currently in an IDR plan. Prior loan periods that can count include any past period of repayment on any type of federal loan under any type of repayment plan, along with many prior periods of deferments and forbearance.
In February 2024, certain student loan borrowers who have spent a decade in repayment will get their federal student loan debt forgiven under the US Department of Education's new repayment program, called the Saving on a Valuable Education, or SAVE, plan. To qualify for the aid, borrowers will need to have taken out $12,000 or less and be enrolled in the SAVE plan.
It is important to note that only federal Direct Loans can be forgiven through PSLF. If you have other federal student loans, such as Federal Family Education Loans (FFEL) or Perkins Loans, you may be able to qualify for PSLF by consolidating them into a new federal Direct Consolidation Loan.
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The Department of Education will do a one-time adjustment
On April 19, 2022, the Department of Education (ED) announced changes to bring borrowers closer to forgiveness under IDR plans. The ED will perform a one-time adjustment to count any months spent in repayment, some deferment periods (before 2013), and some forbearance periods toward loan forgiveness. This adjustment will provide additional years of credit toward loan forgiveness for certain borrowers. Loans in repayment for over 20 or 25 years may immediately qualify for forgiveness.
The one-time IDR adjustment applies only to federal student loans managed by the ED. Borrowers with Direct Loans or federally-managed FFELP loans will automatically benefit from the adjustment without needing to take any action. Any ED-held loans with at least 20 or 25 years of repayment time will be automatically forgiven, even if they are not currently on an IDR plan.
The Public Service Loan Forgiveness (PSLF) program offers forgiveness for federal Direct Loans. Federal Family Education Loans (FFEL) or Perkins Loans may qualify for PSLF through consolidation into a new federal Direct Consolidation Loan. The PSLF Help Tool tracks progress toward the required 120 qualifying payments, which need not be consecutive. Paused payments count toward PSLF if all other qualifications are met.
The Pay As You Earn (PAYE) repayment plan is a federal student loan program that limits monthly payments to 10% of discretionary income. It forgives any remaining loan balance after 20 years of payments, regardless of the federal loan type. PAYE requires a partial financial hardship to qualify, typically when total federal student loan debt exceeds annual discretionary income. This plan is distinct from other income-driven repayment plans like SAVE, Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).
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Only federal Direct Loans can be forgiven through PSLF
The Public Service Loan Forgiveness (PSLF) program is a federal program that forgives student loan balances after 10 years' worth of monthly payments (120 payments) while working for the government or a nonprofit organization. PSLF is only available for federal Direct Loans. If you have other federal student loans, such as Federal Family Education Loans (FFEL) or Perkins Loans, you may qualify for PSLF by consolidating them into a new federal Direct Consolidation Loan.
It's important to note that PSLF eligibility depends more on your employer than on the type of work you do. Qualifying employers include government organizations at any level, AmeriCorps, the Peace Corps, and certain nonprofit and religious organizations. To qualify for PSLF, you must work full-time for one of these employers, which amounts to at least 30 hours per week. If you work part-time for two qualifying employers and your total weekly hours are at least 30, you may still be eligible.
To keep track of your progress toward PSLF, use the PSLF Help Tool provided by the U.S. Department of Education. This tool helps you determine your next steps and documents your qualifying employment and monthly payments. It's important to save your digital receipts or monthly statements for every payment, as some borrowers have reported discrepancies between their records and their servicers' payment tallies.
In addition to PSLF, there are income-driven repayment (IDR) plans that can lead to loan forgiveness after 20 or 25 years of payments. These plans cap monthly payments at a percentage of your income and may result in forgiveness of any remaining balance. IDR plans are available for most federal student loans, including Direct Loans and federally-managed FFELP loans.
It's worth noting that refinancing federal student loans can be risky, as it may result in losing access to income-driven repayment plans and other federal loan programs and protections. It's always a good idea to carefully consider your options and understand the potential consequences before making any decisions regarding student loan repayment and forgiveness.
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Frequently asked questions
PAYE is a federal student loan repayment plan that was signed into law on December 21, 2012, to reduce monthly payments. Under PAYE, monthly federal student loan payments are 10% of one's discretionary income.
PAYE limits capitalized interest to 10% of your balance. It also forgives any remaining balance on your loans after 20 years of payment, regardless of the type of federal loans you have.
There is a marriage penalty attached to this program. If the borrower is married and files federal taxes jointly, the spouse’s income is included in calculating the income-based payment. This may result in higher income tax liability.
