Pay As Your Earn Student Loan Program

The federal government recently stepped in to make paying back your student loans more manageable with a new repayment program: Pay As You Earn (PAYE).
By S.Z. Berg ,

NEW YORK (MainStreet)—The federal government recently stepped in to make paying back your student loans more manageable with a new repayment program: Pay As You Earn (PAYE).

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PAYE is similar to the federal government's Income-Based Repayment (IBR) program, but it has some advantages over an IBR. Both IBR and PAYE are designed for people whose debt is considerable relative to their income. They reduce payments by stretching out the number of years you have to repay your loan. You must prove a "partial financial hardship."

For both repayment programs, the annual amount on your eligible loans is calculated using the 10-year Standard Repayment Plan, and for IBR must exceed 15% -- but for PAYE it's only 10% -- of the difference between your adjusted gross income and 150% of the poverty line in your state for the number of members in your family. The government calculates the amount due under a 10-year Standard Repayment Plan based on whichever is greater: the original amount you owed on your eligible loans or the amount you owe upon selecting one of these plans.

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Repayment amounts for both programs are adjusted annually based on your financial circumstances. Payments for IBR are stretched out over a period of 25 years but only 20 years for PAYE. Remaining payments are forgiven after that time period. IBR requires that you pay 15% of your discretionary income; PAYE requires only 10%. In either case, the monthly amount you must repay under these programs will not exceed that required under the 10-year Standard Repayment Plan, and the government will pick up the interest accrued on your loans each month for up to three consecutive years, if your payment amount doesn't cover it.

Further, if you take a full-time job in a public service organization and make 120 full monthly payments on time, you may become eligible for having the remainder of your balance forgiven through the Public Service Loan Forgiveness Program.

Most major types of federal student loans qualify, but there are exceptions, including the PLUS loans for parents and consolidation loans that repaid

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You should know, however, that with either of these loan pay back programs, you may end up paying more interest over the life of the loan, because you'll likely be repaying your loan over a longer period of time. And if your minimum monthly payment is less than your minimum monthly interest, the interest on your loan will continue to accumulate. (However, you will not have to pay interest on the accumulated interest.) Further, you may have to pay taxes on the loan amount forgiven.

However, there's a big payoff, if you're unemployed or underemployed.

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PLUS loans for parents. In addition, to qualify for PAYE, you must be a new borrower as of October 1, 2007.

On his blog, "The Student Loan Sherpa," Michael P. Lux, who has close to $200,000 in law school debt, notes that those who are unemployed or underemployed, can have no monthly payments during the period of hardship. "Not only would you not be spending a dime on your student loans, but each month you are on the PAYE paying zero dollars, you are one month closer to student loan forgiveness," he said.

The same is true for IBR.

"It doesn't get much better than that," Lux said.

Written by S.Z. Berg, author of College on the Cheap, for MainStreet

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