pay the minimum on PAYE

Why Don’t I Qualify for Pay As You Earn?

Michael Lux Blog, Student Loans 0 Comments

In the world of student loans, the very best repayment plan is Pay As You Earn, often abbreviated PAYE.  Not only does PAYE guarantee that your federal loan payments will be less than 10% of your income, but it also qualifies for student loan forgiveness.

Unfortunately, not everyone is able to qualify for the PAYE plan.  Today we will discuss the three most common reasons that disqualify people.

#1 Your income is too high.

Having an income too high for PAYE can be a problem, but many high earners are pleasantly surprised to learn that they qualify.

In order to sign up for PAYE, a borrower must show a “partial financial hardship.”  While this sounds complicated, the standard is pretty easy.  IF PAYE would save you money, you can sign up.  IF PAYE would cost more than the standard 10-year repayment plan, you cannot sign up.

To determine your monthly PAYE payment, just take 10% of your monthly discretionary income.  Full details on discretionary income and this calculation are available here.

#2 Your loan type does not qualify.

Even though not all loans qualify for PAYE, some loans can actually be converted into PAYE eligible loans.  Others, including certain federal loans will never be eligible.

Loans that can be fixed – The bad news is that if you borrowers a Perkins loan or an FFEL graduate plus loan, your loan is not eligible for PAYE.  The good news is that it can be consolidated into a federal direct loan and become eligible.  The key is just to make sure you don’t include any loans that will never be eligible for PAYE.  If you included a loan that is never eligible, your entire consolidated loan loses its eligibility.  This can get pretty complicated quickly, so it is important to talk through these scenarios with your lender when it comes time to consolidate.

Loans that are never eligible – The obvious answer here is private student loans.  IF you have a loan through a private lender, you cannot get PAYE for that loan.  Parent PLUS loans also do not ever qualify for PAYE.

#3 The date of your first loan makes you ineligible.

October 1, 2007, is a significant day when it comes to PAYE.  IF you had existing federal student loans at that time, you cannot sign up for PAYE for any of your loans.  Even if you pay off the old loans that don’t qualify, you still cannot sign up for PAYE.  The only way to have borrowed loans before October 1, 2007, and still be eligible for PAYE is to have paid off the entire old loan before taking out any new PAYE eligible loans.

Getting signed up for PAYE

IF you are still eligible after your income, loan type, and loan age have been considered, you probably want to get signed up for PAYE as soon as possible.  We think that everyone who can sign up should sign up.  Not only is pAYE the best repayment plan, but signing up is actually pretty easy.