PAYE Calculator: An Overview
A Pay As You Earn Calculator (commonly called a PAYE Calculator) is a tool that federal student loan borrowers use to organize their finances.
The calculator works for borrowers who have a Pay As You Earn (PAYE) student loan plan. This is a type of income-driven repayment plan where the debtor’s minimum monthly payments are a small fraction of their discretionary income.
What’s more, if you have loan debt after twenty years of making regular payments, the remaining balance will be forgiven.
That pans out to 240 months’ worth of total payments.
PAYE Calculator: How It Works
The PAYE calculator provides you with a breakdown of your student loan repayment schedule under a PAYE plan.
Additionally, a PAYE student calculator also lets you know the amount you can get knocked off your loan amount from student loan forgiveness.
To use this calculator, you’ll need to have the following information:
- The Total Amount Borrowed From The Lender
- The Balance On Your Student Loan
- Your Loan’s Interest Rate
- The Type Of Loan (Federal or Private)
Input the information listed above in the fields to which they correspond. Then, click ‘Calculate’ and the calculator will generate results.
Some people use the PAYE calculator even if they do not have an existing student loan. They do this to get a sense of what a payment plan can look like under a PAYE student loan plan.
That way, they can organize their finances ahead of time.
In such cases, you can use estimated figures to populate the fields – the calculator will produce results.
That said, it’s best to use realistic estimates – in other words, numbers that are as close to the real thing as possible.
In doing so, the results you get will be as accurate as possible.
What PAYE Plans Are
PAYE plans mandate that the debtor puts just 10% of their discretionary income towards their monthly loan payments.
To get that figure, the lender uses your adjusted gross income and subtracts it from 150% of the poverty guidelines.
The U.S Department of Health & Human Services is the one that determines the aid thresholds of people who are financially challenged.
Different from the Public Service Loan Forgiveness, the PAYE is taxable.
This plan is a favorite among borrowers who have a high debt to income ratio. This is because this plan doesn’t put tremendous strain on a borrower’s pocket.
Monthly payments under a PAYE plan are not fixed.
Every month, the government reevaluates the factors that affect how much you put towards your loan payment in a given repayment term.
Family size, state of residence, and annual income changes can either decrease or increase your monthly payments.
For example, if you have just welcomed a newborn into the family, your monthly payments will decrease. However, if you get a significant bonus, those payment amounts will increase.
The government doesn’t take into account your spouse’s income when determining your monthly payments if you file tax returns separately.
But there are other types of student loan repayment programs such as the income-contingent repayment (ICR), the IBR, the REPYE, and others to consider. Let’s dive in.
PAYE Plans vs Other Student Loan Repayment Plans
All income-driven plans share some fundamental similarities. Each of them requires monthly payments within the range of 10-20% of a borrower’s discretionary income.
Additionally, with all of these plans, if you have a student loan balance after 20 or 25 years, it will be forgiven.
The main thing that sets PAYE plans apart from the rest is that the plan restricts the amount of capitalized interest to 10%.
The higher the percentage is on capitalized interest, the more you end up owing on the loan. This is because interest accrues monthly on the balance of the loan. So, the loan terms matter.
PAYE vs REPAYE Plans
A Revised Pay As You Earn (REPAYE) Plan, as the name suggests, bears many similarities to REPAYE plans.
Many people have difficulty understanding the nuances between the two.
In short, a defining trademark that separates both plans is in how a borrower’s monthly payments are calculated.
With PAYE plans, as discussed, if you don’t file taxes jointly with your spouse, their income doesn’t play a role in how much you pay monthly.
REPAYE plans are different.
If you are married, your spouse’s income will be seen as a variable when calculating your monthly loan payments.
In a case where you and your partner are high-income earners, your payments could be higher than what you would pay under a standard repayment plan.
For that reason, it’s common for married borrowers to choose PAYE plans. Usually, a REPAYE plan works out for a borrower who is single.
With that said, you should compare the costs under both plans and choose the right one for your pocket.
PAYE Plans and Eligibility
Before you decide on getting a PAYE plan, you need to remember this: not everyone is eligible for this plan.
Among all income-driven repayment plans, PAYE has the most stringent requirements.
To start with, PAYE plans only accept the following types of direct loans:
- Direct Plus Student Loans
- Direct Consolidation Loans (Parent Plus Loans Do Not Count)
- Direct Subsidized
- Direct Unsubsidized Loans
If your loans are any of the above, to be deemed eligible, you need to be in one of the following situations:
- You were granted a federal loan on or preceding October 1st, 2007, without having any federal loan debt prior to the commencement of that loan.
- You submitted a claim for partial financial hardship
- You received a loan disbursement on or proceeding October 1st, 2011
- You consolidated your student loans on or after October 1st, 2011
Alternative Repayment Options
While PAYE plans are an effective means of organizing student loan repayments, their strict requirements make them difficult to access.
As a result, many student loan borrowers look for other options that will help them to get rid of their student loans.
There are several strategies that a borrower can try to eliminate their debt.
Income-Based Repayment (IBR) or Revised Pay As You Earn (REPAYE) could be additional repayment plans to consider.
Some borrowers incorporate other strategies to help pay off student loans fast.
Here there are below:
Refinancing Student Loans
To engage in student loan refinancing means to clear an existing loan by taking out another loan to pay off the original one. While it may seem counterproductive, there is logic to doing so. A private lender is the one who funds the new loan. The lender offers you a lower interest rate than the one that you had on your original loan.
Both federal and private loans can be refinanced to allow you to group all of your debt under one single loan.
Getting a Reduction in Your Interest Payments
The higher your interest rate, the more you pay back on your student loan. Therefore, a solution to help fight student loan debt is to reduce the amount of interest you pay.
Apart from refinancing, there are other ways to get a reduction in your interest rate. For example, some lenders offer a marginal reduction in your interest rate if you automate your student loan payments from your bank account. Other, more generous lenders, hand out loyalty discounts.
PAYE Calculator: Verdict
In short, a PAYE calculator is a useful tool for PAYE plan borrowers. It helps to organize your student loan repayments ahead of time.
Furthermore, it lets you monitor your contributions during the repayment period.
Moreover, if you are considering switching from a REPAYE plan to a PAYE plan, a PAYE calculator will tell you which plan is better for you.
When combined with other student loan repayment strategies, this calculator will keep you on top of your loan repayments.