Pay As You Earn (PAYE)
First available to borrowers in 2012, PAYE is a federal income-driven repayment plan that is available to a specific population of U.S. student loan borrowers. Payments are based on your income and are made for a maximum of 240 monthly payments over 20 years. Any amounts remaining after 240 monthly payments are forgiven.
Three factors determine your eligibility to repay under PAYE:
- New borrower: You must be a new borrower as of October 1, 2007 and must have received at least one Federal Direct Loan disbursed after October 1, 2011. You are a new borrower if you have never received a loan prior to October 1, 2007, or you have paid in full any federal loan balances received prior to receiving a new loan after October 1, 2007.
- Loan types: Only Federal Direct loans qualify for PAYE. Other federal loan types (Stafford, FFEL, Federal Perkins and Health Professions Student Loans) disbursed after October 1, 2007 are eligible if consolidated into a Direct Consolidation loan. Check STUDENTAID.GOV to confirm your loan types. Upload your Student Aid Data File into the VIN Foundation My Student Loans tool to check your PAYE eligibility status.
- Partial financial hardship: If the payments due under PAYE are less than the payments that would be due under a standard 10-year repayment plan, you have a partial financial hardship (PFH). A rule of thumb: If your debt exceeds your income, you likely demonstrate a PFH under PAYE.
Calculating Your Payment Due Under PAYE
Your payment due using PAYE is 10% of your Discretionary Income, a government measure based on poverty guidelines.
Officially, your Discretionary Income is the difference between your taxable income and 150 percent of the HHS Poverty Guideline amount for your family size and state. Written as a formula:
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Discretionary Income = Your Income – (150% × HHS federal poverty guidelines)
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Let’s use the above formula to calculate your 2022 Discretionary Income for a family size of one and a taxable income of $99,000:
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Discretionary Income = $99,000 – (1.5 × 13,590) = $78,615
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Your monthly payment due under PAYE is 10% of your Discretionary Income divided by twelve:
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PAYE = 0.10 × $78,615 = $7,862 per year or $655 per month
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This calculation reflects your MINIMUM monthly payment due under PAYE. You can always pay more if it makes financial sense to do so.
To remain in PAYE you must provide yearly documentation of your income. If you fail to provide timely documentation, your payment will revert to the standard 10-year repayment amount due when you entered repayment and any unpaid interest will be capitalized at a maximum of 10% of your starting repayment balance (see table and discussion below).
Monthly payments for veterinarians using PAYE are often less than the interest that accrues each month. This is called negative amortization. With a low enough income (ie. during an internship, residency, or leave of absence, etc), it is possible to have a monthly payment equal to zero. These zero-amount payments still count towards the 240 monthly payments due before forgiveness.
With negative amortization, you may have principal and unpaid interest amounts remaining after 240 monthly payments over 20 years under PAYE. If that is the case, any remaining debt is forgiven or “canceled” and treated as taxable income. The taxable amount will depend on the amount forgiven and your marginal income tax rate during the year of forgiveness. Use the VIN Foundation Student Loan Repayment Simulator to see if/when you will have unpaid interest and whether or not you may reach student loan forgiveness.
Here is a link to a recent 2022 graduate veterinarians student loan repayment simulation that will show how PAYE, unpaid interest, and forgiveness can work: https://www.vin.com/studentdebtcenter/default.aspx?pid=14352&id=7578014#JD8EtiCxFqXaPYP8BhPRIQ==
- Starting federal loan repayment balance = $210,000 @ 5.75%
- Income = $98,000, Family size = 1, and your PAYE payment due = $647 per month
- In the first year, $1,006 of interest accumulates each month. Your payment covers $647 of that. Your loan balance grows by $359/mo in the first 12 months of repayment.
- Your principal balance remains the same since unpaid interest is not added to the principal during an income-driven repayment plan
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Payment #
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Loan Principal
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Interest Accumulation per month
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Payment per month
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Unpaid Interest Accrual Balance
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1
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$200,000
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$1,006
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$647
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$359
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2
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$200,000
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$1,006
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$647
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$718
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3
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$200,000
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$1,006
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$647
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$1,077
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4
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$200,000
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$1,006
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$647
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$1,436
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5
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$200,000
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$1,006
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$647
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$1,795
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6
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$200,000
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$1,006
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$647
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$2,154
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7
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$200,000
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$1,006
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$647
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$2,513
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8
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$200,000
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$1,006
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$647
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$2,872
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9
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$200,000
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$1,006
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$647
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$3,231
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10
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$200,000
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$1,006
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$647
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$3,590
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11
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$200,000
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$1,006
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$647
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$3,949
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12
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$200,000
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$1,006
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$647
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$4,308
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Generally speaking, paying more than the minimum amount due under PAYE will result in higher total repayment costs if you are projected to reach forgiveness (as shown in the example simulation). If you are not able to pay your loans off in full prior to forgiveness, you’ll usually end up paying more in total than if you pay the minimum and save for the potential tax on forgiveness due after you reach the maximum repayment period. The more loan balance that you can push into forgiveness, the more you’ll reduce your total repayment costs, as long as you plan and save for the anticipated tax on canceled amounts. See the Forgiveness Planning page for more information. To simulate the full impact of unpaid interest accrual and to plan for forgiveness, try the VIN Foundation Student Loan Repayment Simulator.