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Obama Pay As You Earn Repayment Plan (PAYE)

Pay As You Earn, or PAYE, is federal student loan repayment plan that is available to some borrowers with newer federal loans. It caps your monthly federal student loan payment at 10 percent of your discretionary income.

Another repayment program, Income-Based Repayment (IBR), is currently available for all student loan borrowers and caps your monthly payment at 15% of your discretionary income.

For borrowers who qualify for PAYE, monthly loan payments will be two thirds of what they would be under IBR. Additionally, after 20 years of monthly payments, any remaining student loan balance is forgiven.

Qualification Criteria

    • In order to qualify for PAYE, you need to have borrowed your first federal student loan after October 1, 2007, and you need to have borrowed a Direct Loan or a Direct Consolidation Loan after October 1, 2011. You also need to demonstrate partial financial hardship.Once you qualify, you can continue to make payments under the plan even if your hardship no longer applies. An additional benefit of Obama’s Pay As You Earn Plan is that the remaining balance on your loan can be forgiven after 10 or 20 years, depending on certain qualifications. The forgiven amount may be taxed.The Pay As You Earn Plan is one of the flexible repayment options available when you consolidate your student loans. If your payments increase significantly, you can switch only to the Standard Plan to complete the principal payoff of your consolidated loan.

PAYE was specifically geared toward borrowers who graduated in 2012 — which explains the complex eligibility requirements. The grads most likely to take advantage of PAYE are those who started borrowing college loans in 2008 and graduated in 2012, and those who took out loans for grad school later on

 Eligibility

Beyond the eligibility restrictions on the year you borrowed loans, PAYE has two additional requirements:

  • Loan types: In order to repay your student loans on PAYE, they must be federal direct loans. You can consolidate Perkins loans or those made through the Federal Family Education Loan Program to make them qualify for PAYE. Perkins loans have forgiveness options, though, that you’ll lose if you consolidate them.
  • Income guidelines: Like income-based repayment, PAYE requires participants to show a partial financial hardship; your bill on PAYE must be less than what you’d owe on the standard 10-year plan. If you qualify, your monthly payment will be 10% of the difference between your monthly income and 150% of the poverty guideline. If your income goes up, your payment will never be higher than what you’d pay on the standard plan.

PAYE has more restrictive eligibility requirements than income-based repayment and  that the new REPAYE program.(Revised Pay As You Earn) But if you’re a candidate for the PAYE plan, it will give you the lowest monthly payment and some additional benefits.

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