Repayment Options, Pt. 4: Pay as You Earn Income-Driven Plan

Now that you know all about income-driven plans and how to calculate discretionary income, we begin the deep dive into each of the available plans.  We begin with the PAYE plan — Pay As You Earn 

1. Percentage of discretionary income owed
Under the PAYE plan, 10% of your discretionary income is owed.  However, if 10% of your discretionary income is greater than what you would have paid under the 10-year Standard Repayment Plan, you are ineligible for PAYE plan.  This means you must show partial financial hardship to enroll in PAYE

2. Eligible loans

Any Direct Loan made to an eligible borrower is eligible for the PAYE Program except for: (1) a defaulted loan, (2) a Direct PLUS Loan or Federal PLUS Loan made to a parent borrower, (3) or a Direct Consolidation Loan or Federal Consolidation Loan that repaid a Direct PLUS Loan or Federal PLUS Loan made to a parent borrower.
Perkins and FFEL loans are eligible if consolidated into a Direct Loan.  However, take care not to consolidate a Parent loan along with them.  Consolidating a Parent loan taints the entire consolidation and makes it ineligible.
3. Eligible borrowers
To qualify for the PAYE Plan you must also be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.  In other words, to be a new borrower you had to have no outstanding Direct Loan or FFEL Program loan balance as of October 1, 2007.

4. Forgiveness opportunities
Regardless of your employment, after 20 years on the PAYE plan, your remaining balance will be forgiven.  Usually this means 20 years of payments but, according to Studentaid.ed.gov, “periods of economic hardship deferment, periods of repayment under certain other repayment plans, and periods when your required payment is zero will count toward your total repayment period.”

If you are eligible for Public Service Loan Forgiveness (which PAYE is a qualified plan for), your loans could be forgiven after 120 payments or 10 years.

5. How the plan handles spousal income

If you and your spouse file taxes as married filing separately, your servicer will only count your income when calculating your monthly payment.  If you are married filing jointly, both of you and your spouses income will be used in calculating monthly payments. 

6. Interest benefits

If you have as Direct Subsidized loan or a consolidated loan with a subsidized portion, you may be eligible for some interest benefits for the first three years you are enrolled in the PAYE program.  In particular, if your monthly payments do not cover the accrued interest, the Department of Education will waive the remaining interest, meaning the interest will not accumulate.
Disclaimer: This blog post is not legal advice and does not create an attorney-client relationship between the reader and Maurer Law LLC.  Seek legal advice if you have particular questions about your student loans.

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