The federal government offers several types of repayment plans to help ease the pressure on new borrowers. One of these is the program Pay As You Earn or PAYE. If you opt for this program, you’ll only pay 10 percent of your discretionary income each month towards the loan. It’s considered one of the lowest repayment options available.
How Does PAYE Work?
Under PAYE, employers automatically deduct the percentage owed by their employees every pay cycle. The money goes straight to the government, with any excess returning to the borrower. If there is a need for additional payments, the borrower settles it when filing their annual tax return.
The system originated in the U.K. and has been running there since the 1940s. The U.S. only began seeing its advantages in the 2000s, leading to its implementation there.
As PAYE depends on the person’s income, the deduction can increase or decrease depending on what they earn. Even with changes, most plans last up to 20 years.
What is PAYE in Terms of Benefits?
By lowering your monthly payments, you are extending the life of your loan for two decades. While that may not seem ideal, it opens the door to another path. PAYE makes borrowers eligible to qualify for Public Service Loan Forgiveness (PSLF). If they make payments for 20 years, the federal government forgives the remaining balance.
However, borrowers need to understand that they are paying more interest and fees because of the longer protracted period. It’s an option you should take if you believe that loan forgiveness is the best option for your circumstances.
It eases the strain on your wallet but does very little in hitting your loan’s principal. Going for PAYE means you commit to payments for the next 20 years.
Qualifying for PAYE
Only borrowers who got their first federal student loan after October 1, 2007, may qualify for the PAYE program. It must also be a Direct Loan or federal loan. Private loans are not eligible for any of the government repayment programs. Most of those taking advantage of PAYE began college after PAYE’s implementation.
Those who cannot qualify for PAYE have other options like the Revised Pay As You Earn (REPAYE) Plan. It has similar terms to PAYE, with changes depending on whether your loan was for undergraduate or graduate study.
Applying for PAYE
All borrowers can begin applying for any repayment plan through the Student Aid portal. The best move is to review each plan and see if it fits your desires. If you are unsure, calculators can help compute how much you’ll give when you’re under PAYE or the other programs. The process is often quick, with many completing their application in less than ten minutes.
Remember that PAYE is usually a decades-long commitment to paying your student loan. If you believe that you can pay it faster than 20 years, you may not want to go with this option. Weigh each choice carefully.