Getting higher education is one of the most difficult and expensive personal costs. Many students who wish to study at a university aren’t able to do so, because of their financial condition. However, the US government has always looked after its people, and they never fail to deliver them.
This is why; students can get Pay As You Earn student loans from the federal direct loan programs. It has not only eased pursuing higher education, but monthly payments, which start after your graduation also keeps the worry away from you.
However, it does not guarantee that once you complete your graduation, you will get a high paying job instantly. This is the time when most people start panicking about the repayment of the loan. If you are reading this and find yourself in such a situation, then read further to know how you can get your costs lower and pay according to your ability.
If you took a federal student loan for your education, but you don’t have that well-paying job yet, then you can use Pay As You Earn (PAYE) to pay your federal student loan. Let’s see what is Pay As You Earn student loan and how you can get it. Moreover, we will also see how PAYE will prove to be beneficial for you in the long run and what are its drawbacks.
What is pay as you earn student loans?
When you take a student loan and are unable to pay for it, you can apply for the PAYE repayment plan. It allows you to pay the loan by reducing your monthly payments to 10% of your discretionary income. It means, instead of paying the amount of the standard repayment plan, you will pay only 10% of your discretionary income. Well, if you don’t have any discretionary income, then your monthly payment can be as low as $0. Apart from this, if you are unable to pay the full loan within 20 to 25 years, all your loans will be forgiven.
Who is eligible for PAYE?
Although PAYE eases down loan payment stress, to get it, you will have to fulfill its strict criteria. If you are considering getting one, then read further to see if you are eligible or not.
One of the basic requirements is, you must have borrowed the loan after October 2007. It will indicate that your loan payment deadline according to SLP (Standard Loan Payment) would be Oct 2011. However, if you borrowed it before the date, then you are not eligible for Pay As You Earn student loan.
On the contrary, if you have borrowed after the above-mentioned date, then make sure you have an eligible loan. It means that your loan must be one of the following:
- Subsidized loan
- Unsubsidized loan
- Direct Consolidation Loan
- Direct plus loan
If you fulfill this criterion as well, then you will have to prove that you have a high debt to income ratio and your loan payments are lower than Standard Loan Payments.
Well, if you qualify for the plan, then viola. However, if you don’t, then here we have listed down other payment plans as well that can make your loan payments easier.
Let’s have a look at why Pay As You Earn student loan is better than any other repayment plan and what are some of its drawbacks.
Pros and cons of PAYE
The primary advantage of PAYE is that it caps your monthly payment to 10% of your discretionary income. Moreover, it forgives the loan if the payment is not done by the end of the twentieth year. Other than this, it is the best payment plan if you are a new borrower or have a family to cater to.
If you are married and you haven’t filed for a joint tax return with your spouse, your spouse’s income won’t be affected. Lastly, there are subsidies for accrued loans.
However, if you don’t fulfill the above-mentioned criteria, you cannot apply for the loan. If you look at it in the long term, you would be paying more interest than you would have paid via Standard Loan Payment. Moreover, although your loan is forgiven after twenty years, you will still have to pay taxes for the amount you borrowed.
Other repayment plans
If you don’t qualify for PAYE, then you can look forward to one of these plans.
- Graduate repayment plan
- Extended repayment plan
- Revised pay as you earn plan
- Income-based repayment plan
- Income contingent repayment plan
- Income sensitive repayment plan