A Guide to Pay As You Earn (PAYE) Student Loan Repayment

Why should you choose PAYE?

Pay As You Earn may be the best IDR plan for candidates with a high debt compared to their income, as monthly payments are low and will never exceed the Standard Repayment Plan. However, those with this high debt-to-income ratio should also read up on the new SAVE plan, which has an even lower monthly payment calculation.

What is your monthly payment under PAYE?

Monthly payments under PAYE are generally calculated at 10% of your discretionary income. Since your income, family size, and location can change over the life of the loan, so too can your discretionary income calculation. PAYE includes a built-in safeguard against your monthly payment increasing by too high a margin, as the monthly payment can never exceed what you would pay under the 10-year Standard Repayment Plan.

How discretionary income is calculated

It’s important to note that your discretionary income is calculated differently under the different IDR plans. Under PAYE, it is the difference between your annual income and 150% of the poverty guideline for your family size and state of residence (with Alaska and Hawaii differing from the 48 contiguous states and DC). The poverty guidelines are maintained by the US Department of Health and Human Services at aspe.hhs.gov/poverty-guidelines.

Recertification and adjusted payment amounts

One of the most important things to keep in mind about IBR – or any IDR plan – is the need to recertify your plan each year (whether or not anything that might impact your payment has changed). This must be done annually with your loan servicer to remain eligible for the payment plan and eventual forgiveness (either through IDR or PSLF).

To recertify, you will submit what seems like a new application for IBR. Within the application form, there will be an entry for the reason you’re submitting, where you should specify that you are documenting your income for the annual recertification.

Reporting changes

As previously noted, under PAYE, your monthly payment amount will initially be based on your income and family size, and at any time when your income is low enough that your payment is less than what you would pay on the Standard Repayment Plan.

If your family size, location, or income changes mid-year, you can also recertify before the annual date by submitting updated information and asking your servicer to recalculate your payment. This can benefit you by reducing your payment appropriately—if you have a baby, lose your job or take a pay cut, or make a change that impacts your discretionary income.

If your income ever increases to the point that your income-driven monthly payment would exceed the amount you would have paid on the Standard Repayment Plan, you’ll remain on the PAYE plan, but the amount will revert to the fixed payment you would have made on the Standard Plan (based on the loan amount you owed when you first enrolled). If your income or family circumstances change again, you have the opportunity to recertify and your servicer will recalculate your payment to once again be based on your income.

Outside of the annual recertification, this midyear reporting is not required — if any of these items change and you do not wish to recalculate your payment immediately, you can wait until the next annual recertification. Just remember that even if nothing changes, you must recertify each year.

Failure to recertify

If you fail to recertify under PAYE, your payment will revert to the Standard Repayment Plan amount (which would likely be higher than you’re used to) plus any unpaid interest would be added to your principal balance, increasing the amount you would pay over time. Essentially, you would have a higher monthly payment as well as a higher loan balance, and you’d now be paying interest on interest. Your loan servicer would also revert your family size to 1, possibly further increasing your payment, and you may lose eligibility to base payments on your income in the future.

So set a calendar reminder and recertify every year. Your loan servicer should also send you an annual reminder.

Loan forgiveness after income changes

Note that if you remain enrolled in PAYE but your payment amount reverts to the Standard Repayment Plan due to an income increase, you still remain eligible for loan forgiveness at the end of the 20-year period as long as all other qualifying factors are met. However, if your income remains high and you are able to meet the 10-year fixed payment requirement, chances are you will have repaid your loan in full before reaching the 20-year mark.