How Is Pay As You Earn (PAYE) Calculated?

There are about 44.7 million Americans with a student loan debt in the U.S. At this rate, it is common for the average American to still be paying loans incurred during college years after graduating. The good news is several repayment plans, such as the PAYE plan, help ease the repayment. One question, though, “how is Pay As You Earn (PAYE) calculated?”

What Is PAYE?

Before talking about PAYE calculation, it is good to know what PAYE is and how it works. PAYE stands for Pay As You Earn, a repayment plan where the payment for your loan is income-driven. With PAYE, your monthly payments for student loans are limited to only 10% of your discretionary income. However, the payment amount will not go over the 10-year standard repayment amount.

How Does PAYE Plan Work?

Based on the PAYE plan, you will be paying your students loans by 10% of your discretionary income. You have to continue repaying your loan through this for 20 years, making sure that you keep it up as per the agreement. After 20 years, any remaining student loan balance will be forgiven. Keep in mind to update your household and financial information every year to ensure your PAYE plan repayments are correct.

Are You Eligible for PAYE?

PAYE is not for everyone. You need to meet several requirements to be eligible for this repayment plan. One such condition is you must be a newer borrower. Other eligibility requirements for the PAYE plan include having eligible student loans and the ability to show you are having financial hardship.

How to Calculate Discretionary Income for PAYE?

What is discretionary income? According to Federal Student Aid, discretionary income is the difference between 100% of the poverty benchmark and your yearly income. The benchmark refers to the poverty index in your state, which depends on your family size. Knowing your discretionary income is vital to know the answer to the question, “How is Pay As You Earn calculated?”

Your monthly PAYE repayment will depend on your annual income and family size. This is based on the time when you first started repaying through PAYE. This provision also applies if you have low enough earnings that upon calculation, your monthly payment amount is less than what you would have paid per the 10-year Standard Repayment Plan. What happens if your wages increase and your monthly payment is more than what you pay per the 10-year Plan?

In that case, you will still be in the PAYE plan. However, the payment is no longer based on your discretionary income. Your monthly payment will now be predicated on the amount stated on the 10-year Standard Repayment Plan. In other words, it will now be based on what you owe the first time you started repaying your student loan under the PAYE plan. The good thing is the monthly payment will not go over the amount in the 10-year Plan even if your earnings rise continuously.

Wrapping Up

How is PAYE calculated? First, find out the poverty benchmark in your state and your family size. Use this to determine your discretionary income. Once you have found your yearly income, calculate 10% of this amount. The answer to this is your PAYE plan payment. If not through this method, you may use a PAYE plan calculator like this to determine your PAYE monthly payment.

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