Next on the docket is PAYE (Pay-As-You-Earn)!

Pay-As-You-Earn is great for new borrowers who qualify: you pay 10% of your discretionary for up to 20 years, and then your remaining balances is forgiven. As of now, the forgiven amount is considered to be taxable income. However, people on this payment plan may also qualify for Public Service Loan Forgiveness if they work in a public service job. In order to qualify for PAYE, you must meet the following requirements per studentaid.ed.gov:

“For Pay As You Earn, you also must be a new borrower as of Oct. 1, 2007,

and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You are a new borrower if you had no outstanding balance on a Direct

Loan or FFEL Program loan when you received a Direct Loan or FFEL Program loan on or after Oct. 1, 2007.”

The following loans are eligible for PAYE:

*Direct Subsidized Loans

*Direct Unsubsidized Loans

*Direct Plus Loans made to graduate or professional students

*Direct Consolidation Loans that did not repay any PLUS loans made to parents

The following loans are eligible for PAYE only if they are consolidated into a Direct Consolidation Loan:

*Subsidized and Unsubsidized Federal Stafford Loans (from FFEL program)

*FFEL Consolidation Loans that did not repay any PLUS loans made to parents

*Federal Perkins Loans

The following loans are NOT eligible for PAYE:

*Direct Consolidation Loans that repaid PLUS loans made to parents

*FFEL PLUS loans made to parents

*FFEL Consolidation Loans that repaid PLUS loans made to parents

As with IBR, PAYE has the following benefits:

1.     Have your own income alone count towards PAYE, or include your spouse’s income. If you file your taxes married filing separately, only your income will be used to calculate your monthly payment. You will likely lose out on some tax benefits if you file separately instead of married filing jointly.

2.     You can always pay more than your monthly payment if you want to pay the loan down more quickly.

3.     The government will pay the interest on your subsidized loans for up to three consecutive years if your payments do not cover interest.

4.     You may also qualify for Public Service Loan Forgiveness while under PAYE.

5.     If you are unemployed or have a very low income, your PAYE monthly payment may be calculated at $0.00. These “payments” still count towards the 20 years of payments until forgiveness.

Let’s use the repayment calculator at https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

See how this payment plan can work. With a Direct Unsubsidized loan balance of $100,000.00 and an interest rate of 6.8%, a single person with an AGI of $45,000.00 would have a Standard payment of $1,151.00 per month.

*Under IBR, payments would start at $344.00 per month, and the estimated total paid is $218, 372.00. The forgiveness is $37, 066.00. If we figure a 20% tax on the forgiveness amount ($7,413.20), the total amount one would pay is $225,785.20.

*Under PAYE, payments would start at $229.00 per month, and the estimated total paid is $100, 298.00. The projected forgiveness is $135, 702.00. If we estimate a 30% tax on this forgiveness amount ($30,089.40), the total amount one would pay is $130,387.40.

Assuming that one is not also doing PSLF, one could save almost $100,000.00 by going on PAYE rather than IBR. Does this sound strange? It is…because interest. The monthly payments that many people on IBR and PAYE have don’t begin to cover interest.

Not everyone qualifies for PAYE, but the Obama Administration wants to expand this program to include more people. See: http://askheatherjarvis.com/blog/expanding-pay-as-you-earn-by-negotiated-rulemaking