Are you struggling to pay back your student loans? You’re not alone. Forty-eight million Americans have federal student loan debt totaling $1.6 trillion.
The good news is that student loan assistance options make paying back your loan more affordable. The PAYE repayment plan can drastically reduce monthly payments for eligible borrowers, and some participants can qualify for loan forgiveness after 20 years.
In this article, the second in our multi-part Student Loan Repayment blog series, debt resolution attorney and owner of Ciment Law Firm, PLLC, THE Debt Defenders, Daniel Ciment, explains how PAYE works. Call us at (833) 779-9993 to schedule a free consultation to explore your options and determine if PAYE is right for you.
What is PAYE?
Short for “pay as you earn,” PAYE is a student loan repayment plan designed to reduce the amount of your monthly payments. Instead of paying a fixed loan amount based on your loan principal and interest, PAYE limits your monthly payments to 10% of your discretionary income.
Referred to as income-driven repayment (IDR), PAYE keeps loan payments affordable, allowing borrowers to climb out from crippling student loan debt.
What You Need to Know about PAYE
Because there are several different programs available offering assistance for educational loans, the options for student loan borrowers can get overwhelming.
To avoid some of the confusion from similar programs, here’s what you need to know about PAYE:
- PAYE can make student loan payments more affordable. Your loan payments are capped at 10% of your discretionary income, so you don’t have to decide between eating dinner or paying your student loan.
- PAYE is a long-term plan. While other income-driven repayment plans provide temporary relief, such as deference or a pause on payments (referred to as forbearance), PAYE offers long-term assistance for as long as you are eligible for the program.
Further, because PAYE carries a 20-year term, you will accrue more interest than a standard plan, which has a ten to twelve-year term. As a result, your total amount paid over the life of the loan could be higher.
- PAYE is not a loan rehabilitation program. If you’ve defaulted on your loan and are trying to get it back on track, there are other options besides PAYE.
- You have to reapply each year. Because eligibility is based on your income, you must reapply each year to confirm that you are still qualified. As your income goes up or down, your payment will also be adjusted.
- Your spouse’s income may be included in your income calculation. If you are married and file taxes jointly, your spouse’s income could affect the amount of your discretionary income, which could spike your payment obligation.
PAYE Loan Forgiveness
Many borrowers turn to PAYE to reduce their monthly student loan payments, but another benefit can be even more compelling.
If you have made continuous payments and kept your loan in good standing, you can have any remaining balance erased at the end of 20 years. The federal government forgives the loan, and you are free from making future payments.
The debt is gone for good, whether you have remaining loan balances totaling $10k or $100k.
There is one caveat to loan forgiveness to keep in mind: the amount of the loan that’s forgiven gets added to your taxable income, so you could end up with a tax bill from Uncle Sam to offset the windfall.
For example, if the amount of student loan forgiven is $10,000 and you pay 18% in taxes, you would have to pay $1,800 back to the government when you file your taxes. Still, that’s better than being on the hook for the entire $10,000 balance!
How Discretionary Income is Calculated
Borrowers under the PAYE program can reduce their monthly payments to a mere 10% of their discretionary income, but how is “discretionary income” calculated?
Discretionary income is based on your adjusted gross income, which is essentially your taxable income after adjusting for 401k contributions, pre-tax healthcare costs, and other pre-tax expenses.
From there, you will subtract 150% of the federal poverty line for Texas from your adjusted gross income. This number changes yearly and is also based on the size of your household.
PAYE Eligibility Requirements
To be eligible for PAYE, you must meet the following requirements:
- Your loan must be federally backed (private loans are not eligible)
- You cannot be in default on your loan
- You have to demonstrate financial hardship (your payments exceed 10% of your discretionary income)
- Your loan must have been taken out after October 1, 2007
- You must have received a loan disbursement after October 1, 2011
The Bottom Line
If your income is limited and you’re struggling to meet your payment obligations, having your loan recalculated based on your income could give you some financial breathing room.
For further information about PAYE and other programs in Texas, contact a student loan assistance lawyer at Ciment Law Firm, PLLC, THE Debt Defenders, at (833) 779-9993 today or fill out our online form.
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