Is Pay As You Earn (PAYE) Worth It?
December 18, 2019
The cost of college is soaring, and debt-bearing students of all ages like the idea of being able to make payments on an affordable plan that fits their income, particularly in those first post-college years where money might be hard to come by.
"Pay as you earn." It sounds simple enough, right? Fresh out of college, when your student loans are mind-bogglingly high and your earning potential is at its lowest, you pay only as much as you can bear.
After you've tucked yourself into a studio and bought enough ramen to get through the winter of course.
And what better time to start a program like this? The price of college has never been quite so high, and the job market is still in recovery mode. If only it were just that simple...
# Brief History
Signed into law by President Obama on December 21, 2012, Pay As You Earn (PAYE) is one of the biggest steps President Obama has taken to address the bubbling student debt crisis. Obama can't take all the credit (or blame) for the plan, since it's a revised version of the Income-Based Repayment plan (IBR), which was originally set in motion during George W. Bush's second term.
Recently the law came back into the headlines when Obama made an executive order to extend PAYE to—and stay with me here—anyone who took out federal student loans before October 2007 and anyone who stopped borrowing by October 2011. These folks had previously been excluded, and there had been a minor outcry about those dates being arbitrary and unfair.
# Quick Stats
37 million Americans are currently shouldering student loan debt.
There are currently 1.6 million borrowers signed up for PAYE.
Last year PAYE enrollment grew nearly 40 percent.
It's estimated that Obama's extension will make 5 million new people eligible for PAYE.
# The Basics
PAYE caps monthly payments at 10 percent of a borrower’s "discretionary income" for 20 years.
"Discretionary income" is defined as income that exceeds 150 percent of the federal poverty level. This means that currently anything over about $1,480 a month would be fair game.
After 20 years of making payments the rest of your student loans are—voilà—forgiven. However any forgiven amount can be taxed as income.
To qualify for the plan you have to demonstrate "partial financial hardship." According to the White House, most Americans with student loan debt qualify.
People who borrowed after October 2007 have been able to sign up since the law was passed in 2012. However those who borrowed before October 2007 will likely have to wait until late 2015 for Obama's executive order to take effect.
For the time being, people who borrowed before 2007 who can demonstrate partial financial hardship can sign up for IBR, which caps payments at 15% of an individual's disposable income and forgives the debt after 25 years of payments.
# What the Supporters Say
People like this plan for all the reasons you think they would. The cost of college is soaring, and debt-bearing students of all ages like the idea of being able to make payments on an affordable plan that fits their income, particularly in those first post-college years where money might be hard to come by.
In President Obama's words, “Lower tax bills for millionaires or lower student loan bills for the middle class? This should be a no-brainer."
That "middle class" part is key, since most economists agree that a thriving, Playstation 4-purchasing, Saturday night restaurant-eating middle class is key to a thriving economy.
Homes are important too. They particularly like the idea of college graduates buying houses (that they can afford) to help the real estate market, but it's hard to buy a house when everything you make is going towards college payments.
# What the Critics Say
First of all there's Obama's "no brainer" comment. Republicans feel that wealthy Americans already bear an unfair amount of the tax burden, and PAYE is another log on the fire. They're also not huge on the President sidestepping them to push the extension through.
There's been dissent on both sides of the aisle. Pretty much everyone agrees the plan will be a bust unless more people enroll. From the numbers above, you'll notice that only a small fraction of student loan bearers have enrolled in the program. Loan services like Sallie Mae, which handles 40 percent of all federal student loans, have been accused of steering students away from the plan since it has the potential to hurt their bottom line.
The White House has acknowledged this and has a few plans for the future, including amping up PAYE's public relations outreach by partnering with Intuit, makers of TurboTax, and H&R Block during tax season. The Department of Education has also threatened to penalize loan servicers who are willfully unhelpful.
Critics have also pointed out that PAYE is only beneficial to a small percentage of borrowers. Students who borrowed huge and earned very little out of college would likely do well on the plan, but most of the time borrowers who can afford to make standard payments on their loan are better off in the long run due to the interest.
# Further Reading
This is simplified breakdown of the complicated debate swirling around PAYE. For great further-in-depth reading, check out the great pieces below:
Anna Bahr of The New York Times breaks down which borrowers stand to benefit the most form PAYE, and which borrowers don't.
Anya Kamenetz of NPR explores why so few borrowers are currently involved in PAYE.
Shahien Nasiripour and Joy Resmovits of The Huffington Post investigates why Sallie Mae might be steering borrowers away from PAYE and IBR.
Derek Thompson of The Atlantic explores the assumption that student loans are hurting the housing markets recovery.
# Further Resources
Learn which federal plan is right for you using the Department of Education's Repayment Estimator.
Compare plans side-by-side and learn if you're eligible on the Department of Educations' Income-Drive Plans page.
Bahr, Anna. "Obama’s Move to Help Students Is Not as Forgiving as It Seems." The New York Times. The New York Times, 23 June 2014. Web. 8 July 2014.
Kamenetz, Anya. "The One Thing Obama Didn't Say About Student Loan Repayment." NPR. NPR, 9 June 2014. Web. 8 July 2014.
Nasiripour, Shahien. "Sallie Mae Lags In Student Debt Relief Amid Ongoing Federal Probes." The Huffington Post. TheHuffingtonPost.com, 3 Sept. 2013. Web. 8 July 2014.
Thompson, Derek. "Are Student Loans Really Killing the Housing Market?." The Atlantic. Atlantic Media Company, 14 May 2014. Web. 8 July 2014.
Zezima, Katie. "Obama extends caps on student loan payments to about 5 million people." Washington Post. The Washington Post, 9 June 2014. Web. 8 July 2014.
"Pay As You Earn Repayment (PAYE) - Financial Aid Fact Sheets." American Association of Medical Colleges, n.d. Web. 8 July 2014.