The Pay As You Earn Repayment Option, or PAYE as it is called, is the newest repayment option available on Federal Direct Loans and Federal Direct Consolidation Loans only. To be eligible, you must be a new borrower as of October 1, 2007, AND you must have a Direct Loan disbursement after October 1, 2011, AND you must be experiencing a partial financial hardship.
You are a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan as of Oct. 1, 2007, or had no outstanding balance on a Direct Loan or FFEL Program loan when you received a new loan on or after Oct. 1, 2007.
If your payment under PAYE is less than your payment under the Standard (ten-year) Repayment option, then you are experiencing a partial financial hardship.
The Direct Loan disbursement after 10/1/11 can be a Direct Consolidation Loan, but it cannot include a loan borrowed prior to 10/1/07.
The PAYE repayment option limits loan repayments to 10% of Discretionary Income (5% less than IBR). Discretionary Income is the difference between your Adjusted Gross Income and 150% of the poverty guideline amount that corresponds to your family size and the state in which you reside.
Payments are adjusted annually. Any balance remaining at the end of 20 years will be forgiven.
Under PAYE if your monthly payment does not cover the interest that accrues on the loans each month, the Government will pay any unpaid interest on the Subsidized portion of your debt for up to three consecutive years from the date you first entered PAYE. After three years and for all other types of loans the unpaid interest that accrues will be capitalized, i.e., added to the principal balance, when you are no longer eligible for PAYE, but the amount capitalized will not exceed 10% of the amount owed when you first entered PAYE.