If you have a cosigner you will be hurting their credit if you aren’t able to make the payments. That alone could be reason enough to pursue PAYE, to make sure your parents don’t get hurt by your loans.
An Example
Let’s say Steven borrows $50,000 at 8 percent APR to pursue a Bachelor’s degree in Psychology then earns close to the national annual mean wage as a Community Health worker- $38,180.
After taxes, Steven is left with $28,635 per year or $2,386.25 per month. On the standard ten-year timeline, his monthly payment would average $606.64, more than 25 percent of his take-home pay.
With PAYE, Steven’s payments would be limited to 10 percent of his discretionary income. Better yet, his entire balance would be forgiven after twenty years of timely payments. That goes even more for someone who had 100k in student loan debt.
How to Qualify for PAYE
A complex set of requirements obfuscates what it actually takes to qualify for any type of student loan forgiveness, especially PAYE. Here are some basic guidelines that can help you decide if you qualify:
Guidelines
- The monthly payment you would make under the PAYE or IBR plan (based on your income and family size) is less than what you would pay under the Standard Repayment Plan with a 10-year repayment period
- Your federal student loan debt is higher than your discretionary income or represents a significant portion of your annual income
- You’re a new borrower as of October 1, 2007, and you have received a disbursement of a Direct Loan on or after October 1, 2011
- You borrowed money in the form of federal student loans.
Applicable Loans
Pay As You Earn is eligible for the vast majority of federal loans. In fact, the only type of federal loans not eligible for PAYE are Direct PLUS Loans made to parents and Direct Consolidation Loans that repaid PLUS Loans made to parents.
You can also apply PAYE to consolidated loans, as long as they weren’t turned over to a private lender.
Please note that only federal student loans can be repaid under the income-driven plans. Private student loans are not eligible for any type of loan forgiveness and you may need to look at how to get a loan from a bank to refinance these private loans.
To qualify, your loan must also be in good standing and not in default.
Who Can Benefit from PAYE?
The following checklist can help you determine if PAYE is something you, yourself, should look into:
When to Consider PAYE
- You borrowed the full amount: If you borrowed the full freight of the cost of your education and plan to pursue a low-paying career
- 20 years makes sense: If you don’t mind paying monthly payments on your student loans for 20 years.
- Payments are too high: If your normal monthly payment (without using PAYE) represents a large portion of your future take-home pay
- You need it to stay afloat: If you’re struggling to make student loan payments each month
When Not to Consider PAYE
- Your monthly income disqualifies you: If the amount you would pay with PAYE is more than the standard ten-year repayment plan
- You don’t want to pay student loans for 20 years: If you would rather suffer up front to get out of debt sooner
- You hope to earn more money in the future: If you would rather pay down your loans as much as possible now and enjoy the benefits later.
The Bottom Line
While over 40 million Americans now deal with some level of student loan debt, the PAYE program – and other income-driven loan forgiveness programs – were created to ease the burden for individuals who meet certain income guidelines.
If you want to learn more about how you can qualify, compare your financial situation to the guidelines created by StudentAid.gov.
And if your income disqualifies you, you can also consider refinancing your federal and private student loans with a lender that offers better terms and a lower interest rate.
Student loans cannot be discharged in bankruptcy, but they can be forgiven if you opt for a government-sponsored loan forgiveness program and follow the prompts. It’s up to you to decide if it’s worth it.
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About the Author
Jeff Rose, CFP® is a Certified Financial Planner™, founder of Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.