The Catholic University of America

Pay As You Earn

Financial Aid


 

Understanding Loan Repayment and Loan Forgiveness Options

Pay as You Earn (PAYE) is the most recently launched student loan repayment plan for federal student loans. Through this program the amount you pay is based on your income (typically in the 7% - 8% range), and after making 240 on-time payments, any unpaid balance is forgiven. PAYE may also be used to qualify for Public Service Loan Forgiveness after only 120 on-time payments.

 
PAYE is an attractive option for recent graduates for whom federal student loan debt is significantly large relative to a starting salary. Please continue to read the information on this page, and use links that have been provided to fully understand PAYE as well as other options for repayment and forgiveness of federal student loans.
 
Understanding Loan Repayment and Loan Forgiveness Options
 
In the context of federal student loans, forgiveness occurs after making a determined number of qualifying payments, after which any remaining debt is forgiven. To understand loan-forgiveness options, one must first understand loan-repayment options, which fall into two categories: (1) level-pay, and (2) income-based.
 
Loan Repayment Options
 
Level Pay. With the level-pay option, you determine the number of years over which you wish to repay your debt. Then, taking into consideration the interest charged, a monthly payment amount is determined so that after making the determined number of payments, you will have fully repaid your loan. The length of time on which level-pay options are based is up to 25 years.
 
Payments Tied to your Income. With this option, your monthly payment is determined by applying a percentage calculation to your annual income, regardless of the size of your debt. You then make the payments (which change annually based on changes in your income) until a forgiveness threshold is reached. There are three such thresholds: 10 years, 20 years, and 25 years.
 
Formulas for Monthly Payments that are tied to Income
 
For federal student loans there are several formulas that are used to determine the amount of your monthly payment and commonly referred to as: (1) Pay as Your Earn; (2) Income-Based Repayment; and (3) Income-Contingent.
 
Pay As You Earn (PAYE). This option is available only to borrowers of Federal Direct loans who, prior to October 1, 2007, had never received a federal student loan, and who received a loan disbursement after October 1, 2011. The amount of the monthly payment is 10% of the amount of your Adjusted Gross Income that exceeds 150% of poverty level.
 
Income Based Repayment (IBR). This option is available only to all borrowers of federal student loans. The amount of the monthly payment is 15% of the amount of your Adjusted Gross Income that exceeds 150% of poverty level.
 
Income Contingent Repayment (ICR). This option is available only to borrowers of Federal Direct loans and is similar to PAYE, but uses a more complicated formula that more closely approximates a monthly payment that is 20% of the amount of your Adjusted Gross Income that exceeds 150% of poverty level. The payment plan was the first such “income based” repayment plan, and is seldom used anymore. PAYE and IBR are both more advantageous to the vast majority of borrowers and particularly more recent borrower of federal student loans.
 
Forgiveness Thresholds
 
“10 Years” (aka Public Service Loan Forgiveness (PSLF) program). To be eligible, you must be employed full-time Public Service employment and use either the Pay as You Earn (PAYE) program, the Income Based Repayment (IBR) program, or make payments based on a 10-year level pay schedule.  After making 120 qualifying* payments, you are eligible to have unpaid debt forgiven.
 
“20 Years.” To be eligible, you must use the Pay as You Earn (PAYE) program. After making 240 qualifying* payments, you are eligible to have unpaid debt forgiven. Only federal “Direct” loans are eligible for forgiveness.
 
“25 Years.” To be eligible, you may use any of the payment plans that are based on income (PAYE, IBR, and ICR) or make payments based on a 25-year level-pay schedule. After making 300 qualifying* payments, you are eligible to have unpaid federal student loan debt forgiven.
 
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 * A qualifying payment is an on-time payment, must be the full amount of the identified repayment plan, and must be made toward a federal “Direct” loan, except in the case of the 25-year plan.
 
 
Which Plan is Right for You?
 
If you are Committed to Public Service Employment:
 
PAYE or IBR are the best options to consider if your total debt is fairly large compared to your annual income. If your total debt is roughly the same as, or less than, your annual income, your debt likely will be fully paid in less than 10 years using PAYE (or IBR if not eligible for PAYE).
 
If you are not Committed to Public Service Employment:
 
If debt is relatively small, a level-pay plan may be best. The sooner you repay debt, the less amount you pay overall by reducing the amount of time you are paying interest on unpaid debt.
 
If your income is in the “modest” range, and your total debt exceeds your annual income, but the difference is relatively small, a useful strategy may be to use PAYE (or IBR if not eligible for PAYE) for a number of years, then switch to a level-pay plan that is appropriate to your circumstances. Bear in mind, that while using PAYE or IBR, your monthly payment may not be sufficient to fully pay the interest for that month, and the unpaid interest will be added to the principal, resulting in a loan amount that increases, at least for a while.
 
If your total debt exceeds your annual income by a significant amount, PAYE (or IBR if not eligible for PAYE) will allow you to manage your debt and may result in forgiveness of some of your debt after 20 or 25 years. Bear in mind, that while using PAYE or IBR, your monthly payment may not be sufficient to fully pay the interest for that month, and the unpaid interest will be added to the principal, resulting in a loan amount that increases, at least for a while. Even though you may be eligible for loan forgiveness at the end of the 20 or 25 year period, by extending your loan payments this loan, the amount you pay toward your debt may be larger than the amount you would pay if you switch to a level-pay repayment plan that is less than 20 years. Also, it is important to keep in mind that at the present time, debt forgiven at the end of 20 or 25-year periods will be considered taxable income. This is not true for the 10-year Public Service Loan Forgiveness (PSLF) program.
 
It is certainly possible that by using PAYE for 20 years (or IBR for 25 years if you are not eligible for PAYE), will result in the least expensive plan for you. During the 20 or 25 years prior to forgiveness, you debt may increase due to unpaid interest. Also, there may be tax implications for debt that is forgiven.
 
A useful strategy is to begin by determining what will be your 20- or 25-year level-pay monthly payment amount. Use a calculator such as the one at www.finaid.org, and print the amortization schedule. This will allow you to see the amount of interest that you will pay on a monthly basis, your total payments, and the amount of loan that may be forgiven. If your personal circumstances are such that you are unable to make the scheduled payment, you can then use PAYE (or IBR if not eligible for PAYE) to determine your minimum monthly payment but then, as you are able, make additional payments toward the principal, and by doing so, you will mitigate the increase in your loan amount, and perhaps lower the total amount you will pay compared to the amount you will pay if you remained in PAYE or IBR for the duration of the 20- or 25-year repayment period.

 

 

Pay As You Earn Monthly Payment Amounts

Family Size

Family Size

Family Size

Annual Income

1

2

3

$10,000

$0

$0

$0

$15,000

$0

$0

$0

$20,000

$27

$0

$0

$25,000

$69

$19

$0

$30,000

$110

$61

$11

$35,000

$152

$103

$53

$40,000

$194

$144

$95

$45,000

$235

$186

$136

$50,000

$277

$228

$178

$55,000

$319

$269

$220

$60,000

$360

$311

$261

$65,000

$402

$353

$303

 

Use these links for additional discussion of the Pay As You Earn Repayment Plan:

www.IBRinfo.org

http://studentaid.ed.gov/sites/default/files/pay-as-you-earn.pdf

http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn

http://www.whitehouse.gov/the-press-office/2011/10/25/fact-sheet-help-americans-manage-student-loan-debt