Pay as You Earn

What is it?

This is a revision of two previous loan forgiveness programs. Pay As You Earn is a repayment plan for eligible Direct Loans that is designed to limit your required monthly payment to an amount that is affordable based on your income and family size. It shortens the time that all borrowers may be eligible for forgiveness from 25 years to 20 years.

Eligibility Requirements

You must be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You are a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan as of Oct. 1, 2007, or had no outstanding balance on a Direct Loan or FFEL Program loan when you received a new loan on or after Oct. 1, 2007.

You have a partial financial hardship if the monthly amount you would be required to pay on your eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under Pay As You Earn

Loans Eligible for Pay as You Earn

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans made to graduate or professional students
  • Consolidation loans with that did not paid any PLUS loans that were made to parent borrowers

Loans Not Eligible for Pay as You Earn

  • Direct PLUS Loans made to parents
  • Direct Consolidation Loans that repaid PLUS loans (Direct or FFEL) made to parents
  • FFEL Program loans
  • Private education loans

Married Borrowers

If you are married and you and your spouse file a joint federal tax return, and if your spouse also has eligible federal student loans, your spouse's eligible loan debt is taken into account when determining whether you are eligible for Pay As You Earn.

Monthly Payments

Under this plan, your monthly payments are:

  • based on your income and family size;
  • adjusted each year, based on changes to your annual income and family size;
  • usually lower than they are under other plans;
  • never more than the 10-year standard repayment amount; and
  • made over a period of 20 years.

Potential Benefits

LOWER SCHEDULED MONTHLY PAYMENT: Under Pay As You Earn, your monthly payment amount will be less than the amount you would be required to pay under a 10-year Standard Repayment Plan, and may be less than under other repayment plans.

INTEREST PAYMENT BENEFIT: If your monthly Pay As You Earn payment amount does not cover the full amount of interest that accrues on your loans each month, the government will pay your unpaid accrued interest on your Direct Subsidized Loans (and on the subsidized portion of your Direct Consolidation Loans) for up to three consecutive years from the date you begin repaying your loans under Pay As You Earn.

20-YEAR CANCELLATION: If you repay under the Pay As You Earn plan, any remaining balance will be forgiven after 20 years of qualifying repayment.

10-YEAR PUBLIC SERVICE LOAN FORGIVENESS; On-time, full monthly payments you make under Pay As You Earn (or certain other repayment plans) while employed full-time in a public service job will count toward the 120 monthly payments that are required to receive loan forgiveness through the Public Service Loan Forgiveness (PSLF) Program. Through this program, you may be eligible to have the remaining balance of your Direct Loans forgiven after you have made the 120 qualifying payments as described above.

Potential Cons

YOU MAY PAY MORE INTEREST: A reduced monthly payment under Pay As You Earn generally means you'll be repaying your loan for a longer period of time, so you may pay more total interest over the life of the loan than you would under other repayment plans.

YOU MUST SUBMIT ANNUAL DOCUMENTATION: To set your payment amount each year, your loan servicer, the organization that handles billing and other services for your loan, needs updated information about your income and family size. You must provide the documentation or your monthly payment amount will be changed to the amount you would be required to pay under the 10-year Standard Repayment Plan, based on the amount you owed when you began repaying under Pay As You Earn, and will no longer be based on your income.

You may have to pay taxes on any loan amount that is forgiven after 20 years.

Are you eligible for Pay As You Earn? Check out the Pay As You Earn Calculator:  http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn/calculator.