Pay As You Earn is a federal program introduced on December 21, 2012 to keep monthly student loan payments affordable for borrowers with low incomes and high student loan balances. Compared to other plans, Pay As You Earn typically provides the lowest payment. To qualify for Pay As You Earn, borrowers need to show a partial financial hardship.
A partial financial hardship exists when the payment amount on the borrower’s student loans under a Standard (10-Year) Repayment Plan is greater than the amount the borrower would pay on Pay As You Earn. Depending on fluctuations in a borrower’s income from year to year, the Pay As You Earn payment amount could change annually.
If a borrower’s income increases to the level where a partial financial hardship no longer exists, the borrower may still remain in Pay As You Earn. In this case, the borrower’s payment will increase, but the payment will never exceed the amount required on the Standard (10-Year) Repayment Plan.
In order to qualify for Pay As You Earn, a borrower also needs to be a new borrower. This means that the borrower must have started borrowing after October 1, 2007, or had no outstanding balance on any FFEL or Direct loans when he or she borrowed a loan on or after October 1, 2007. Also, the borrower must have received a Direct Loan on or after October 1, 2011.
Loans Eligible for Pay As You Earn
- Direct Subsidized Stafford Loans
- Direct Unsubsidized Stafford Loans
- Direct PLUS Loans for Graduate or Professional Students
- Direct Consolidation Loans (if the loan did not repay any Parent PLUS loans)
Loans Ineligible for Pay As You Earn
- FFEL Loans
- Parent PLUS loans
- Consolidation Loans that repaid Parent PLUS loans
- Private loans
How Pay As You Earn Payments are Calculated
Payments on Pay As You Earn can increase or decrease annually based on changes to a borrower’s income. A borrower is required to recertify his or her income each year to maintain income-based payments.
Pay As You Earn payments are based on the borrower’s discretionary income. Discretionary income is determined by the borrower’s Adjusted Gross Income (AGI) and the poverty guideline for his or her state.
ADJUSTED GROSS INCOME (AGI) – POVERTY GUIDELINE = DISCRETIONARY INCOME
The monthly payment amount under Pay As You Earn will be equal to 10 percent of the borrower’s discretionary income. This is often more affordable than alternative repayment plans. The Pay As You Earn payment will never be greater than the amount required on the Standard (10-Year) Repayment Plan.
Additional Benefits of Pay As You Earn
Beyond providing lower monthly payments, the Pay As You Earn Plan offers a number of other benefits. While enrolled on Pay As You Earn, borrowers with Direct Subsidized loans experience an interest payment benefit. For the first three years after enrolling on Pay As You Earn, if a borrower’s Pay As You Earn payment does not cover the monthly interest that accrues on the loan, the government will waive the unpaid interest on any subsidized loans.
For example, if a borrower’s monthly Pay As You Earn payment is $100 and the loan accrues $200 in interest each month, the government will waive the $100 that accrues above the borrower’s monthly payment. This can help prevent the borrower’s balance from increasing for the first three years on Pay As You Earn.
Furthermore, as long as the borrower can show partial financial hardship, interest that accrues while enrolled on Pay As You Earn will not be capitalized. This can help limit the total cost of the loan. If a borrower no longer shows a partial financial hardship, unpaid interest will capitalize, but only until the loan balance has increased by 10 percent. Once the balance has increased by 10 percent, interest will keep accruing but will not be capitalized.
The Pay As You Earn Plan has a term of 20 years. If a borrower has a loan balance remaining after making 20 years of qualifying payments, that balance will be forgiven.
Estimate your Payment on Pay As You Earn
This chart illustrates an estimate of your monthly payment under Pay As You Earn. You can also use the Department of Education’s Repayment Estimator to calculate your payment on this program.
‘PAY AS YOU EARN’ PAYMENT CHART
Drawbacks of Pay As You Earn
Since the borrower is making reduced monthly payments while on Pay As You Earn, the total amount of interest the borrower will pay over the life of the loan may be greater than under the Standard (10-Year) Repayment Plan.
To maintain Pay As You Earn payments, the borrower must submit annual documentation reflecting income. If a borrower does not submit this documentation on time each year, the loan payment will revert back to the Standard (10-Year) payment amount, and any unpaid interest will be capitalized, increasing the total cost of the loan.
Borrowers who receive loan forgiveness after 20 years on Pay As You Earn may be required to pay income taxes on any forgiven balance. See the IRS website for more information about this topic.