Figuring out how to navigate your student loan debt is like trying to figure out what to eat for lunch when you’re already hangry. (anger induced by hunger).
There are so many different options, that it leaves you (or at least, me) feeling like sticking my head under a rug and sobbing. (I get dramatic when I’m hungry). And to make matters worse, each student loan option is needlessly complicated. Its like trying to order a basic meal (a #1– a plain hamburger with fries and a Diet Coke) and then having your waiter assault you with sundry of questions. Well do you want special sauce with that? Do you want onions? What about grilled onions? Lettuce? Tomato? What about trying something crazy on it, like pineapple? Jalapeno? And before you know it, you’ve collapsed on the ground, too hungry to make any decisions. In each of the federal student loan forgiveness options, you have to follow the rules with precision in order to have your loans forgiven. So, first, you have to know what those rules are before you can make a decision. But the rules can be hard to understand. And your hungry. And understanding things when your hungry is hard. So, in our student loans simplified series, we are breaking down each of the federal student loan repayment options in bite sized pieces to help you understand and make the best decision for you.
Who’s hungry?
PAYE is a student loan forgiveness plan that requires you to pay 10% of your discretionary income for 20 years. Like all of the other federal student loan forgiveness programs, you have to make sure that you follow the rules exactly in order to qualify. All of the federal student loan forgiveness programs are needlessly complicated– PAYE is no different. So here we are breaking down PAYE into small bite size parts to make it more simple. Simple is good.
(Curious about our personal student loan repayment plan? Read about it here.)
Under PAYE you will pay 10% of your discretionary income for 20 years.
Discretionary income is calculated by your Adjusted Gross Income (you can calculate your AGI here) minus 150% of the state poverty guideline and family size.
You will be hit with a big tax bill the year your student loans are forgiven.
You are taxed on whatever balance is forgiven as if you earned that amount as income the year your loans are forgiven. For example, say you make all of the qualifying payments for 20 years. Then, the year your loans are forgiven you have an outstanding balance of $150k. That $150k is added to whatever your income is and you will be taxed in that tax bracket. Accordingly, you will need to start saving up for that tax bill well in advance (usually when you sign up for the program at the outset).
To qualify for PAYE, you cannot have any federal student loans prior to October 1, 2007.
That means that if you took out ANY federal student loans before October 1, 2007, you will not be eligible for PAYE. But, you still have other repayment options, such as REPAYE, PSLF, or refinancing and paying off your student loans.
To qualify for PAYE, you must have received a Direct Student Loan after October 1, 2011.
And on that same note, only Direct Subsidized, Unsubsidized, and Graduate PLUS loans qualify for PAYE.
TIP: If you have other federal student loans, you can consolidate them into one federal direct student loan to get them to qualify for PAYE. BUT the condolidated loan(s) cannot include Direct or FFEL loans made before October 1, 2007.
PAYE, just like the other student loan forgiveness plans, is subject to change before your loans are actually forgiven.
Just like President Obama was able to instate PAYE without Congress, any future president can take PAYE away or change its terms so that it is not favorable to you. Unlike most everything else the government does, changing student loan forgiveness programs does NOT take an act of Congress. This should give you pause.
If your income increases above “partial financial hardship” you will owe the amount you would owe under a standard repayment plan.
In order to qualify for PAYE, you must demonstrate “partial financial hardship” each year. If your income increases beyond partial financial hardship, instead of paying 10% of your income, you will pay whatever you would pay under the Standard Repayment Plan (the 10 year pay off plan). This could end up being a very expensive option, as the principal balance of your loan will have ballooned depending on how many years you have been in repayment.
If you are married and your spouse earns more money than you, then you should file your taxes separately.
The benefit of filing separately is that the payments you make each month will be based on your income. If you file separately, you only have to count your OWN income. For example, if you are a public school teacher and your spouse is a doctor, your spouse’s income will NOT factor into what you owe for your student loans. Thus, your monthly student loan payment will be much lower since you do not have to include your spouse’s income. Note that this option is NOT available under REPAYE. REPAYE requires you to report both spouse’s income regardless of how you file taxes.
Weigh the pros and cons of PAYE versus REPAYE if you qualify for PAYE.
At first glance, it might seem like PAYE is a better option than REPAYE for those who qualify for PAYE. But make sure you are crunching the numbers. For some people, the interest subsidy available under REPAYE makes it a cheaper option than PAYE. If you need help calculating which option makes more sense (cents) for you, use this FREE student loan debt calculator— it will crunch the numbers for you to help you find the cheapest option.
Examples of a good candidates for PAYE:
- a recent graduate who has $100k of student loan debt and earns $35k a year (not in public service)
- a public service worker who is going for PSLF, whose spouse has a high income.
And there you have it. Understanding your student loan options does not have to be complicated. Read our other posts in the student loans simplified series to help you better understand your options:
- EVERYTHING YOU NEED TO KNOW ABOUT IBR
- EVERYTHING YOU NEED TO KNOW ABOUT REPAYE
- EVERYTHING YOU NEED TO KNOW ABOUT PSLF
Are you using PAYE? What have you liked/disliked about it?
Hi there! I’m Amber! And welcome to the Deeply in Debt blog where we’re offering simple solutions for big debt.
I became a widow during my daughter’s sophomore year in college. Anything out there to help with loan forgiveness for widows?
Hi Andrea! I’m so sorry for your loss. Are they your student loans? Or your daughters?
Thank you. They are my daughter’s student loans.
Are they parent plus loans? If so, she can sign up for income contingent repayment until she can start making higher payments (she can refinance or switch to the 10 year standard repayment) if she doesn’t have any parent plus loans, she can likely choose any of the other income driven repayment plans (ibr, PAYE, or repaye, which are all more generous than icr)