The Obama Pay As You Earn Repayment Plan, often known colloquially as PAYE, is a lesser known but equally beneficial repayment program that was passed by President Obama on December 21st, 2012. This was actually the first piece of legislator that Obama passed solely to assist those with federal student loans.
Currently, PAYE only applies to federal student loans that were disbursed on or after the October 1st, 2007 date. This is unfortunate, since it disqualifies a lot of Americans with federal student loans. You must not have had a balance on a Direct Loan or FFEL loan when you received the loan after October 1st, 2007.
However, later this year, President Obama plans to issue an executive order that extends the application process to loan holders who first began receiving federal student loans prior to that date, meaning that more borrowers will be able to qualify for this great plan.
Keep in mind that, similarly to the Income Based Repayment option, applicants must prove at minimum Partial Financial Hardship as defined by the Department of Education in order to qualify.
The specific, detailed requirements are listed below:
- The only eligible federal loans are Direct Subsidized and Unsubsidized for Undergraduates and Direct Plus for Graduates and Professionals. Direct Plus Loans issued to parents are excluded.
- Applicants must prove Partial Financial Hardship. This includes not just their own income but any family members’ incomes, too.
- You must be a new borrower as of October 1st, 2007, and must have received a disbursement of a Direct Loan on or after October 1st, 2011. You are defined as a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan when you received a Direct Loan or FFEL Program loan on or after that date in 2007.
Approved applicants will soon see their payments capped at 10% of their income that exceeds 150 percent of the federal poverty line. The specifics are detailed in the chart below.
Pay As You Earn (PAYE) Monthly Calculator
Monthly Adjusted Gross Income $4,280
(minus) 150% of Poverty Line (1) – $1,480
Discretionary Income = $2,800
(multiplied by) x.10%
Monthly PAYE Payment $280
(1) Determined annually and based on federal poverty guidelines.
Reduced Term and Student Loan Forgiveness
All of these factors are recalculated annually in order to ensure that every applicant still qualifies. It is a fair and just system that allows the government to keep track of any changes to applicant’s incomes.
If approved, graduates enrolled in the PAYE program are given up to 20 years to repay their debt. After 20 years of monthly payments have been made successfully, any remaining debt is forgiven. However, this remaining debt is still taxable.
PAYE is considered one of the most generous and helpful repayment programs for borrowers.
Watch for These Coming Changes to the PAYE Repayment Plan
As stated above, the President will release an extended order later this year. In addition, his proposed 2015 budget includes the following significant changes to PAYE in the coming year. If Congress approves the changes, the following will occur:
- Obama will eliminate the standard payment cap under the Obama Pay As You Earn plan so that high-income, high-balance borrowers pay an equitable share of their earnings as their income rises.
- There will be a cap on Public Sector Loan Forgiveness (PSLF) for undergraduate students at the aggregate loan limit to protect against institutional practices that may increase student indebtedness.
- The loan period will be extended to 25 years for borrowers with balances above the aggregate loan limit.
- Obama’s order will prevent payments made under non-income driven repayment plans from being applied toward PSLF. This helps to ensure that those students with the greatest need are considered first and have their loans forgiven before anyone else who is in less immediate need.
- There will be a cap on the amount of interest that is permitted to continue growing when a borrower’s monthly payment is not enough to prevent expanding loan balances.
- Payments for married borrowers who file separately on the combined household Adjusted Gross Income will be calculated.
The Obama Pay As You Earn plan is considered to be highly generous, but even still, not every single person who applies will qualify, even with the approved changes in President Obama’s executive order. It does currently restrict benefits against those students with high loan balances and those who choose to pursue a public service career.
Do your research before you apply. If you do not think that it is the best option for you or that you will qualify, you can find details on the other Income Based Repayment Plans by reviewing the information on our website or by contacting us directly.