Pay As You Earn

Pay As You Earn
Name	Pay As You Earn
Type	Income-driven repayment
Country	United States
Administrator	U.S. Department of Education
Established	2012

Pay As You Earn. It is a federal income-driven repayment plan for student loans in the United States, administered by the U.S. Department of Education. The plan calculates a borrower's monthly payment as 10% of their discretionary income, offering forgiveness of any remaining balance after 20 years of qualifying payments. It was designed to provide more affordable repayment options, particularly for borrowers facing financial hardship or working in public service.

Overview

The plan is a core component of the federal government's efforts to manage student debt in the United States. It is available for eligible loans under the William D. Ford Federal Direct Loan Program, including Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct Consolidation Loans. Key administrative functions are carried out by loan servicers like Nelnet and MOHELA under contract with the department. The calculation of discretionary income is defined relative to the Federal Poverty Guidelines for a borrower's family size and state of residence.

History

The plan was created by an executive action from the Obama administration in 2011 and implemented in 2012. Its development was influenced by earlier income-driven plans like the Income-Based Repayment plan established under the College Cost Reduction and Access Act of 2007. Subsequent legislative changes, including the Bipartisan Student Loan Certainty Act of 2013, affected interest rates for loans entering the program. The plan's framework was later expanded and revised under the Biden administration, leading to the introduction of the new SAVE Plan.

Eligibility and application

Eligibility is restricted to borrowers with a demonstrated "partial financial hardship," a specific calculation comparing standard repayment amounts to income. Only loans originated after a certain date and received by the borrower after a specific date qualify, creating a "new borrower" requirement. Borrowers must submit an application through the Federal Student Aid website, providing documentation of income, often via the Internal Revenue Service Data Retrieval Tool. Married borrowers filing taxes separately may have their spouse's income excluded from the calculation.

Repayment terms

Monthly payments are recalculated annually based on updated income and family size information submitted to the loan servicer. If a borrower's calculated payment is less than the accruing interest, the U.S. Department of Education may subsidize a portion of the unpaid interest for a period. Payments made under the plan count toward the forgiveness milestones under the Public Service Loan Forgiveness program if the borrower is employed by a qualifying employer like the American Red Cross or a state government. After 240 qualifying monthly payments, any remaining loan balance is forgiven, though this amount may be treated as taxable income by the Internal Revenue Service.

Comparison with other repayment plans

Compared to the standard 10-Year Repayment Plan, it typically results in lower monthly payments but a longer repayment period and potentially more interest paid over time. The older Income-Based Repayment plan has a higher income percentage calculation and a longer forgiveness timeline for some borrowers. The newer SAVE Plan, announced by the Biden administration, eliminates the "partial financial hardship" requirement and uses a more generous income exemption. The Income-Contingent Repayment plan is available to a broader set of loan types, including Federal Family Education Loan Program loans consolidated into a Direct Consolidation Loan, but uses a different calculation formula.

Impact and criticism

Proponents, including organizations like the Center for American Progress, argue it has provided crucial relief for millions of borrowers and supported participation in the Public Service Loan Forgiveness program. Critics, such as the Heritage Foundation, contend the plan shifts costs to taxpayers and may contribute to rising college tuition by insulating borrowers from the full cost of loans. Administrative challenges with servicers like the Pennsylvania Higher Education Assistance Agency have led to processing errors and borrower complaints documented by the Consumer Financial Protection Bureau. The potential tax liability upon forgiveness, known as the "tax bomb," has been a persistent concern addressed in legislation like the American Rescue Plan Act of 2021, which provided a temporary waiver.

Category:Student loans in the United States Category:United States federal education legislation