'Pay As You Earn' can help indebted graduates
If you鈥檝e graduated and started working, and yet you still feel overwhelmed by your student loan payments, there are ways to lessen the load. Federal student loan borrowers may be eligible for聽a government聽聽that caps聽monthly payment amounts based on聽income.
, or PAYE, is one of the Department of Education鈥檚 income-driven repayment programs. It was passed into law by President Obama in 2012, and limits monthly loan payments to 10% of a borrower鈥檚 discretionary income. It doesn鈥檛 replace the, or IBR,聽program 鈥� which limits monthly payments to 15% of a borrower鈥檚 discretionary income 鈥� because you must have taken out your loan during a specific time period in order to qualify for PAYE.
What you should know
Federal student loan borrowers should understand these key aspects of PAYE:
- Eligibility is partly聽determined by when you received your federal loan. Only those who took out their first federal loan after Sept. 30, 2007, and received disbursement of at least one more federal loan after Sept. 30, 2011, are聽.
- Payments are capped at 10% of your discretionary income. They can never exceed the amount you鈥檇聽be required to pay under a, and are based on income and family size.
- You must reapply through聽your loan servicer annually.聽Because your ability to qualify depends on your income, you must submit tax returns and proof of income to your loan servicer each year.鈥�
- Your balance is forgiven after 20 years of payments.聽The forgiven amount is considered taxable income to you.
- Interest may be capitalized. If your monthly payments under the PAYE program don鈥檛聽cover the interest due, the interest is capitalized, or added to your聽loan balance.
Qualifying loans
Not all federal loans are eligible for income-driven repayment programs, such as IBR, PAYE, and Income-Contingent Repayment, or ICR. This聽聽depicts the types that are.
It鈥檚 important to note that you can聽听辞谤听聽your loans independent from PAYE. Some individuals benefit from聽consolidating their loans and then applying for the program. But remember that聽PAYE is only available for federal loans, so consolidating your loans through a private lender would preclude you from using PAYE. Assess the risks before refinancing with a private loan.
For some borrowers, a new program called REPAYE may be an even better fit, as it has fewer qualifications; it鈥檚 set to launch by the end of 2015.
The bottom line
PAYE and other income-driven repayment programs offer a great way for graduates to get some debt relief in the form of lower monthly student loan payments.
To decide whether the PAYE plan makes sense for you, use the Federal Student Aid聽. To apply, contact your servicer or visit聽.
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