If you’re struggling to keep up with your student loan payments, you’re not alone. About 11 percent of student loan borrowers are 90 days or more behind on their payments, according to the Federal Reserve.
The good news is that the US Department of Education offers several income-based reimbursement plans that could improve your situation, among which the Pay As You Earn Repayment (PAYE) stands out. Without a doubt, it is a plan that is worth reviewing if you feel overwhelmed by the monthly payments of your student loan, and which we are going to talk about in this article. Let us begin!
What exactly is Pay as You Earn?
Pay As You Earn, which roughly translates to “pay as much as you earn,” is a type of income-based repayment plan that aims to make federal student loan payments affordable for eligible borrowers.
Under PAYE, your monthly payment is not determined by the loan balance. Rather, it’s typically capped at 10 percent of your discretionary income, but never higher than the standard 10-year payment amount.. The Department of Education defines discretionary income as the difference between annual income and 150 percent of the poverty benchmark for each state (and based on family size).
With the PAYE plan, the payment term is 20 years. At the end of that period, any outstanding student loan balance may be eligible for forgiveness, as long as you stay current on payments as agreed. If you qualify for forgiveness, be sure to speak with a tax professional, as there’s a chance you’ll need to count the forgiven loan balance as additional income on your tax return.
On the other hand, it is necessary to mention that the monthly payments under the Pay As You Earn may be too small to cover the interest on the loan. When this happens, it is called negative amortization.
However, interest charges are not capitalized, meaning they will be added to the principal loan balance and more interest will be charged, unless you leave the plan or become ineligible due to a change in income. In this case, any unpaid interest you have accrued will only be capitalized up to 10 percent of the loan balance when the plan began. However, if you leave the plan, there is no limit to the compounding of unpaid interest.
How can I be eligible for Pay as You Earn?
Although many people would love to lower their student loan payments, only certain borrowers will qualify for PAYE. If you have a direct loan or a consolidation loan from the FFEL Programyou may be eligible for the plan by meeting the following criteria:
- The amount of your paymentbased on 10 percent of your discretionary income, would be less under PAYE than under the standard 10-year repayment plan.
- You received the federal student loan on or after October 1, 2007 (with at least one direct loan disbursement as of October 1, 2011).
- You were a “new borrower” with no outstanding balances of federal student loans when you received the loan.
Likewise, you must be up to date with your payments when you request the PAYE. In fact, borrowers who are in default don’t qualify for income-based repayment plans.
How do I apply for PAYE?
To fill out an application for Pay As You Earn or any other income-based reimbursement plan, go to the website studentaid.gov. The application is free, but it is possible that private companies contact you offering to help you in the process. Obviously, for a fee.
Now, you will have to finish the application in a single session. If you gather the information you need in advance, it should take about 10 minutes to complete the application process.
The information you need for your application includes:
- Personal information. Like your full name, address, email, phone numbers, the best time to contact you, etc.
- Financial information. You can use an online IRS data retrieval tool to document your income. If you are married, you may also need to include your spouse’s information.
- FSA user. To do this, you must create an accountwith username and password, which will serve as a legal signature.
How to determine if PAYE is right for you
Pay as You Earn may be right for some and not for others. In fact, it has some of the most stringent eligibility requirements of any income-based payment plan. In this order of ideas, you could benefit from PAYE under the following conditions:
- You hope your income will stay low. You must demonstrate partial financial hardship to qualify for the PAYE plan. If your income increases in the future, you may no longer be eligible.
- You are married and you and your partner have income. PAYE gives you the option to file taxes separately and have your student loan payments based solely on your income.
- Your student loans include graduate school debt. After 20 years, student loan balances, both undergraduate and graduate, can be forgiven.
Other ways to lower your student loan payments
Pay as You Earn works well for many borrowers trying to lower their student loan payments. But nevertheless, If you do not qualify for PAYE, or do not think it is the most suitable for your situation, there are other alternatives..
First, There is a chance that you may qualify for different federal student loan repayment plans. Some plans are based on income, such as Revised Pay As You Earnwhile others, like extended payment plans, aren’t based on how much money you make.
You might also consider consolidate your student loans through a private lender. If you qualify for a better interest rate, this option could lower your monthly payments and save you money on interest over the life of the loan.
In exchange, however, you will forgo certain government benefits, such as the aforementioned income-based repayment plans and student loan forgiveness. Therefore, it is essential that you consider both the benefits and the disadvantages before deciding if refinancing is your ideal option.