Pay As You Earn (PAYE) Guide

Pay As You Earn (PAYE)

Pay As You Earn (PAYE) is one of the several income-driven repayment options for federal student loan borrowers. PAYE offers low monthly payments, capping payments at just 10% of your discretionary income.1

For residents and attending physicians trying to earn forgiveness through Public Service Loan Forgiveness (PSLF), you’ll be happy to learn that PAYE is a qualifying repayment plan option. 

Just keep in mind that the PSLF rejection rate is still absurdly high at 91% as of Q1 2020, according to the Department of Education.2 

The Public Service Loan Forgiveness is a troubled program with approximately 99% of all PSLF applicants having been rejected. New York’s attorney general’s office states, “FedLoan’s alleged failures are “a significant contributor to the shockingly high rate of rejection, adding “FedLoan has failed miserably.”3

 If you’re a doctor pursuing PSLF, have an analysis of your student loans run annually.

Pay As You Earn (PAYE) Guide for Physicians

Pay As You Earn (PAYE) was enacted by the Obama administration through the Health Care and Education Reconciliation Act of 2010, and signed into law by President Barack Obama on December 21, 2021.

As the cost of college continued to increase, so did the average student loan balance and monthly payments. Pay As You Earn (PAYE) was President Obama’s follow through on his promise to provide student loan borrowers with relief on their student loan payments.

At the time, the version of Income-Based Repayment (IBR) capped student loan repayments at 15% of borrowers’ discretionary income. PAYE offered a monthly payment cap of 10% of discretionary income, effectively lowering monthly payments for eligible borrowers by a third

While that might not seem like a big difference for those in residency, it’s a huge difference when you become an attending.

PAYE Plan Eligibility

Pay As You Earn (PAYE) is a very desirable repayment plan option. It allows a physician to keep their monthly payments lower while in residency and fellowship, allowing them to maximize loan forgiveness through PSLF. All that without running into potential problems inherent with Revised Pay As You Earn (REPAYE), such as the marriage penalty.

Unfortunately, there are substantial restrictions on being able to select this repayment plan. You must meet these three criteria:

  1. Your first set of federal student loans must have been disbursed on or after October 1, 2011. If your loans were disbursed to you before this date, PAYE is not available to you.
  2. You must have Direct Loans (Direct Subsidized, Direct Unsubsidized, Direct Grad PLUS, or Direct Consolidation Loans). These are also the loans that qualify for PSLF.
  3. You must demonstrate partial financial hardship. Your monthly payments on PAYE must be less than that of Standard repayment.

If you're loosely spending money while your partner is doing everything they can to save a buck, there's bound to be friction in your relationship.

PAYE Repayment & Term

Pay As You Earn (PAYE) is an income-driven repayment plan that uses a percentage of your “discretionary income” to calculate your monthly payment. In contrast, balanced-based programs (like 10-year Standard) calculate your payments based on your student loan balance and interest rate.

Discretionary income is calculated by taking your Adjusted Gross Income (AGI) and subtracting 150 percent of the annual poverty line for your family size and state. This means that your monthly payments are custom-tailored to your specific needs: income, cost of living, and family size.

PAYE Formula: (AGI – (Poverty Line x 150%) x 10%) / 12

Note: You can visit the Office of the Assistant Secretary for Planning and Evaluation (ASPE) for the U.S. Federal Poverty Guidelines.4

If your monthly payment is less than $5, by the formula, your monthly payment will be zero dollars. If your monthly payment is greater or equal to $5 but less than $10, your monthly payment will be set to $10. Thus your monthly payment will be zero if your AGI is less than 150 percent of the poverty line.

Zero-dollar monthly payments while on PAYE still counts toward Public Service Loan Forgiveness (PSLF), provided you meet all the other PSLF criteria.

If you’re not working in the public interest sector, you can also earn forgiveness with PAYE the long way. The repayment period for PAYE is up to 20 years. If your loans are not paid off within 20 years, any balance remaining will be forgiven —although, as with all income-driven repayment plans, the amount forgiven is treated as taxable income.

Final thoughts

Pay As You Earn (PAYE) is an effective repayment plan for residents and attending physicians. It’s versatile in that it has the potential to lower monthly payments, the ability to earn forgiveness through PSLF, and doesn’t come with a marriage penalty.

The only downside is that it’s not available to most borrowers. Remember, you can never have been disbursed a federal student loan before October 1, 2011. That eliminates many people.

If you have access to PAYE, there’s a good chance you also have the version of Income-Based Repayment (IBR) that causes higher monthly student loan payments, capping monthly payments at 15% of discretionary income.

If you’re a newer borrower and your first federal student loans were issued on or after July 1, 2014, there’s a good chance that you have the latest version of IBR. This version of IBR caps your monthly payments at 10% of your discretionary income, just like PAYE.

Join the webinar

Unfortunately, loan servicers like Navient, Great Lakes, and FedLoan Servicing (PHEAA) don’t provide borrowers with enough information to make educated decisions.. 

If you want to learn more about how to create your student loan strategy, I invite you to join an upcoming webinar. You’ll receive a crash course in student loan management and review a real-life case study. Or you can skip the webinar and schedule a call.

Lastly, I would appreciate it if you answered this five-question survey about your med school loans. It helps my team understand how to help today’s residents and attendings.

 

Upcoming Webinars

Sources:

1) U.S. Department of Education, — https://studentaid.gov/manage-loans/repayment/plans/income-driven

2) U.S. Department of Education, Public Service Loan Forgiveness Data — https://studentaid.gov/data-center/student/loan-forgiveness/pslf-data

3) Market Watch, Andrew Keshner – https://www.marketwatch.com/story/ny-attorney-general-sues-loan-servicer-says-it-failed-miserably-to-process-student-debt-forgiveness-applications-2019-10-03

4) U.S. Department of Health & Human Services, 2020 Poverty Guidelines —https://aspe.hhs.gov/2020-poverty-guidelines

Neither Hornor, Townsend, & Kent, LLC (HTK) nor any of its affiliates offer lending or repayment advice. The views expressed are those of the presenting party and may not express those of HTK or its affiliates. The information presented is for educational purposes only and is derived from sources assumed to be reliable. It is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax obligations. Please contact a qualified professional regarding your individual circumstances.