Overview
The Pay As You Earn (PAYE) Income-Driven Repayment (IDR) plan was once the best option for higher-earning physicians. However, the last day to enroll in PAYE was June 30, 2024.
For many new doctors with higher incomes, PAYE provided the lowest monthly student loan payment.
New Income-Based Repayment (IBR) now offers the same benefits as PAYE and is expected to become the preferred repayment plan for higher-earning physicians. The key requirement is that your loans must have been taken out on or after July 1, 2014 to qualify for New IBR.
Note: There is another plan available called Old IBR for loans taken out before July 1, 2014, but it follows a different set of rules.
Today, New IBR is likely to provide the lowest monthly payments for newly practicing doctors with higher incomes.
Let’s dive into how PAYE is calculated.
Overview
The Pay As You Earn (PAYE) Income-Driven Repayment (IDR) plan was once the best option for higher-earning physicians. However, the last day to enroll in PAYE was June 30, 2024.
For many new doctors with higher incomes, PAYE provided the lowest monthly student loan payment.
New Income-Based Repayment (IBR) now offers the same benefits as PAYE and is expected to become the preferred repayment plan for higher-earning physicians. The key requirement is that your loans must have been taken out on or after July 1, 2014 to qualify for New IBR.
Note: There is another plan available called Old IBR for loans taken out before July 1, 2014, but it follows a different set of rules.
Today, New IBR is likely to provide the lowest monthly payments for newly practicing doctors with higher incomes.
Let’s dive into how PAYE is calculated.
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Subscribe to The Dream Bigger – Physician Edition Newsetter
A weekly newsletter designed for early-career physicians and anyone looking to enhance their financial well-being.
Discover helpful tips, strategies, and insights to dream bigger and take control of your financial future. 🥼
Get student loan updates, money-saving tips, and financial strategies – all delivered to your inbox.
Pay As You Earn (PAYE)
Pay As You Earn (PAYE) was an Income-Driven Repayment (IDR) plan that determines your monthly student loan payment based on your income and family size, unlike the 10-Year Standard Repayment plan, which calculates payments based on your loan balance and interest rate.
For higher-earning physicians, the Pay As You Earn (PAYE) plan has historically been the preferred option. However, after July 1, 2024, new borrowers will no longer be able to enroll in PAYE, making IBR the go-to repayment plan.
Why was PAYE beneficial?
It features a payment cap — a limit on the maximum amount you will pay each month. This cap is especially valuable for high-earning physicians pursuing Public Service Loan Forgiveness (PSLF), as it helps keep monthly payments low, maximizing the amount forgiven after 120 qualifying payments.
Rule of thumb: If you’re single or married filing separately and your current income, or future income if you are in training is expected to exceed $100,000 of your student loan balance, PAYE and IBR are likely your best option due to this payment cap.
Pay As You Earn (PAYE)
Pay As You Earn (PAYE) was an Income-Driven Repayment (IDR) plan that determines your monthly student loan payment based on your income and family size, unlike the 10-Year Standard Repayment plan, which calculates payments based on your loan balance and interest rate.
For higher-earning physicians, the Pay As You Earn (PAYE) plan has historically been the preferred option. However, after July 1, 2024, new borrowers will no longer be able to enroll in PAYE, making IBR the go-to repayment plan.
Why was PAYE beneficial?
It features a payment cap — a limit on the maximum amount you will pay each month. This cap is especially valuable for high-earning physicians pursuing Public Service Loan Forgiveness (PSLF), as it helps keep monthly payments low, maximizing the amount forgiven after 120 qualifying payments.
Rule of thumb: If you’re single or married filing separately and your current income, or future income if you are in training is expected to exceed $100,000 of your student loan balance, PAYE and IBR are likely your best option due to this payment cap.
☁️ Poverty Line Deduction: 150%
☁️ Payment & Timeline:
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-
Undergraduate and Graduate Loans: 10% of your discretionary income for 20 years
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☁️ Payment Cap: Yes, the 10-Year Standard Repayment Plan
☁️ Excludes Spouse’s Income if Filing Taxes Married Filing Separately: Yes
☁️ Interest Subsidy: No
☁️ Poverty Line Deduction: 150%
☁️ Payment & Timeline:
-
Undergraduate and Graduate Loans: 10% of your discretionary income for 20 years
☁️ Payment Cap: Yes, the 10-Year Standard Repayment Plan
☁️ Excludes Spouse’s Income if Filing Taxes Married Filing Separately: Yes
☁️ Interest Subsidy: No
☁️ The following Direct Federal Loans qualify for PAYE:
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Subsidized Direct Loans
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Unsubsidized Direct Loans
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Direct Grad PLUS Loans
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Direct Consolidation Loans
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☁️ However, the following types of loans do not qualify for PAYE:
-
-
Parent PLUS Loans
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FFEL (Federal Family Education Loan) Loans
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Direct Loans in Default
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Private Student Loans
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It’s worth noting that Parent PLUS Loans can also qualify through the Double-Consolidation Loophole, involving two separate consolidations. If you are a Parent PLUS loan borrower, it is highly recommended to consult with someone who specializes in student loan planning.
Partial Financial Hardship was a requirement for PAYE eligibility and is determined by your income-to-debt ratio. To qualify, your monthly PAYE payment must be lower than the monthly payment under the 10-Year Standard Repayment plan. It was important for residents to enroll in PAYE BEFORE their income increases as an attending, as failure to do so may make them ineligible to enroll in PAYE.
☁️ The following Direct Federal Loans qualify for PAYE:
-
Subsidized Direct Loans
-
Unsubsidized Direct Loans
-
Direct Grad PLUS Loans
-
Direct Consolidation Loans
☁️ However, the following types of loans do not qualify for PAYE:
-
Parent PLUS Loans
-
FFEL (Federal Family Education Loan) Loans
-
Direct Loans in Default
-
Private Student Loans
It’s worth noting that Parent PLUS Loans can also qualify through the Double-Consolidation Loophole, involving two separate consolidations. If you are a Parent PLUS loan borrower, it is highly recommended to consult with someone who specializes in student loan planning.
Partial Financial Hardship was a requirement for PAYE eligibility and is determined by your income-to-debt ratio. To qualify, your monthly PAYE payment must be lower than the monthly payment under the 10-Year Standard Repayment plan. It was important for residents to enroll in PAYE BEFORE their income increases as an attending, as failure to do so may make them ineligible to enroll in PAYE.
Just as the standard deduction reduces your taxable income when filing your taxes, the poverty line deduction can lower your monthly student loan payment under Income-Driven Repayment (IDR) plans.
The Department of Education wants to make sure you can cover your basic necessities, so they let you set aside a portion of your income with the intent of covering those expenses. The remaining balance is then used to determine your income for an IDR plan.
The Family Size Factor is calculated by multiplying the Poverty Guideline by 150%. This resulting value is then subtracted from your income to determine your discretionary income, which is used in the calculation of your monthly student loan payment.
Just as the standard deduction reduces your taxable income when filing your taxes, the poverty line deduction can lower your monthly student loan payment under Income-Driven Repayment (IDR) plans.
The Department of Education wants to make sure you can cover your basic necessities, so they let you set aside a portion of your income with the intent of covering those expenses. The remaining balance is then used to determine your income for an IDR plan.
The Family Size Factor is calculated by multiplying the Poverty Guideline by 150%. This resulting value is then subtracted from your income to determine your discretionary income, which is used in the calculation of your monthly student loan payment.
PAYE – Payment & Timeline
Pay As You Earn (PAYE) plan:
-
-
PAYE: You pay 10% of your discretionary income for undergraduate and graduate loans, with a repayment term of 20 years. After 20 years, any remaining balance is forgiven, but this forgiveness may be taxable.
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While the PAYE plan offers forgiveness after 20 years, those working for a non-profit or a 501(c)(3) hospital can qualify for Public Service Loan Forgiveness (PSLF). This program allows for loan forgiveness after just 10 years of payments — tax-free.
Since many physicians will pay off their loans before reaching the 20-year mark, PSLF is an attractive option for eligible borrowers.
PAYE – Payment & Timeline
Pay As You Earn (PAYE) plan:
-
PAYE: You pay 10% of your discretionary income for undergraduate and graduate loans, with a repayment term of 20 years. After 20 years, any remaining balance is forgiven, but this forgiveness may be taxable.
While the PAYE plan offers forgiveness after 20 years, those working for a non-profit or a 501(c)(3) hospital can qualify for Public Service Loan Forgiveness (PSLF). This program allows for loan forgiveness after just 10 years of payments — tax-free.
Since many physicians will pay off their loans before reaching the 20-year mark, PSLF is an attractive option for eligible borrowers.
PAYE – Payment Cap
The Payment Cap is the maximum monthly payment under Income-Driven Repayment plans, specifically for PAYE and IBR. This cap is especially beneficial for higher-earning physicians.
For example, if you have a $260,000 student loan balance at a 6.8% interest rate, your monthly payment under the 10-Year Standard Repayment Plan would be $2,992. By enrolling in PAYE and IBR, you ensure that your monthly payment never exceeds this amount.
In contrast, the Saving on a Valuable Education (SAVE) Income-Driven Repayment plan does not have a payment cap, meaning your monthly payments could be significantly higher, particularly if you’re a high-earning physician.
Rule of thumb: If you’re single or married filing separately and your current income, or future income if you are in training is expected to exceed $100,000 of your student loan balance, PAYE and IBR are likely your best option due to this payment cap.
PAYE – Payment Cap
The Payment Cap is the maximum monthly payment under Income-Driven Repayment plans, specifically for PAYE and IBR. This cap is especially beneficial for higher-earning physicians.
For example, if you have a $260,000 student loan balance at a 6.8% interest rate, your monthly payment under the 10-Year Standard Repayment Plan would be $2,992. By enrolling in PAYE and IBR, you ensure that your monthly payment never exceeds this amount.
In contrast, the Saving on a Valuable Education (SAVE) Income-Driven Repayment plan does not have a payment cap, meaning your monthly payments could be significantly higher, particularly if you’re a high-earning physician.
Rule of thumb: If you’re single or married filing separately and your current income, or future income if you are in training is expected to exceed $100,000 of your student loan balance, PAYE and IBR are likely your best option due to this payment cap.
If you’re enrolled in PAYE, you can choose to file your taxes separately from your partner, which is a strategy many physicians use to reduce their monthly payments.
When filing Married Filing Separately (MFS), you cannot claim any dependents that someone else has already claimed. This opens up various planning opportunities.
Filing as Married Filing Jointly (MFJ) provides a straightforward calculation for family size. However, if you opt for MFS to lower your student loan payments, it’s crucial that the spouse with the student loans claims the dependents. Otherwise, you might end up paying more on your loans.
For example, consider a family of four where Spouse 1 has $260,000 in student loans, and Spouse 2 has none. If they file MFS, it’s beneficial for Spouse 1 to claim the children. Under the Income-Driven Repayment plan, a larger family size leads to a lower monthly payment.
If Spouse 2 claims the kids, Spouse 1’s family size is 1, resulting in a deduction of $22,590 for their student loan payment under IBR. However, if Spouse 1 claims the kids, their family size increases to 3 (excluding Spouse 1), yielding a deduction of $38,730. This switch can save Spouse 1 about $135 per month, or $1,620 per year!
If you find yourself in this situation, it’s wise to consult a financial professional specializing in student loans, as this strategy is often misunderstood by many tax professionals.
If you’re enrolled in PAYE, you can choose to file your taxes separately from your partner, which is a strategy many physicians use to reduce their monthly payments.
When filing Married Filing Separately (MFS), you cannot claim any dependents that someone else has already claimed. This opens up various planning opportunities.
Filing as Married Filing Jointly (MFJ) provides a straightforward calculation for family size. However, if you opt for MFS to lower your student loan payments, it’s crucial that the spouse with the student loans claims the dependents. Otherwise, you might end up paying more on your loans.
For example, consider a family of four where Spouse 1 has $260,000 in student loans, and Spouse 2 has none. If they file MFS, it’s beneficial for Spouse 1 to claim the children. Under the Income-Driven Repayment plan, a larger family size leads to a lower monthly payment.
If Spouse 2 claims the kids, Spouse 1’s family size is 1, resulting in a deduction of $22,590 for their student loan payment under IBR. However, if Spouse 1 claims the kids, their family size increases to 3 (excluding Spouse 1), yielding a deduction of $38,730. This switch can save Spouse 1 about $135 per month, or $1,620 per year!
If you find yourself in this situation, it’s wise to consult a financial professional specializing in student loans, as this strategy is often misunderstood by many tax professionals.
PAYE – Interest Rate Subsidy
Interest Rate Subsidies: PAYE and IBR vs. SAVE
Unlike PAYE and IBR, the SAVE offers a 100% interest rate subsidy. This feature often makes SAVE the preferred choice for early-career physicians and those still in training.
Under the SAVE plan, if your monthly payment doesn’t cover the full interest owed, the remaining unpaid interest is completely forgiven.
For instance, if your calculated payment under SAVE is $300 but the actual interest is $1,000, the $700 difference is fully forgiven. This forgiven interest does not add to your student loan balance, keeping it stable even if your payment is less than what you owe.
This feature is particularly beneficial for physicians who are not pursuing Public Service Loan Forgiveness (PSLF) and for those in training. The key advantage is that unpaid interest does not increase your loan balance, allowing you to pay less toward your student loans without worrying about accruing additional interest.
Important Note: In contrast, if you are enrolled in PAYE or IBR and have a shortfall (like the $700 in our example), that amount accumulates on your student loan balance, increasing the total amount you owe. However, if you are pursuing PSLF, this is less of a concern since your full remaining balance is forgiven tax-free after 120 qualifying payments.
PAYE – Interest Rate Subsidy
Interest Rate Subsidies: PAYE and IBR vs. SAVE
Unlike PAYE and IBR, the SAVE offers a 100% interest rate subsidy. This feature often makes SAVE the preferred choice for early-career physicians and those still in training.
Under the SAVE plan, if your monthly payment doesn’t cover the full interest owed, the remaining unpaid interest is completely forgiven.
For instance, if your calculated payment under SAVE is $300 but the actual interest is $1,000, the $700 difference is fully forgiven. This forgiven interest does not add to your student loan balance, keeping it stable even if your payment is less than what you owe.
This feature is particularly beneficial for physicians who are not pursuing Public Service Loan Forgiveness (PSLF) and for those in training. The key advantage is that unpaid interest does not increase your loan balance, allowing you to pay less toward your student loans without worrying about accruing additional interest.
Important Note: In contrast, if you are enrolled in PAYE or IBR and have a shortfall (like the $700 in our example), that amount accumulates on your student loan balance, increasing the total amount you owe. However, if you are pursuing PSLF, this is less of a concern since your full remaining balance is forgiven tax-free after 120 qualifying payments.
PAYE – Calculating Your Monthly Payment
PAYE – Calculating Your Monthly Payment
PAYE – How to Calculate Income
On an Income-Driven Repayment (IDR) plan, your monthly student loan payment is determined by your income and family size.
In simple terms: the higher your income, the larger your monthly payment; the lower your income, the smaller your monthly payment.
You have two ways to calculate your income for an IDR Plan: Adjusted Gross Income (AGI) or an Alternative Documentation of Income, usually your paystub.
Way 1: Adjusted Gross Income (AGI)
Your AGI, found on line 11 of IRS Form 1040 from your prior year’s tax return, is any income earned in the prior year minus specific eligible deductions. Examples of income include job earnings, self-employment income, dividends, and interest.
Having a tax return on file is required to use AGI to calculate your monthly student loan payment.
Important Note for MS4s!
Even if you had no income during medical school, e-Filing a tax return in your MS4 year showing as little as $1 of income is a elite student loan planning strategy. This often enables tou to qualify for $0/month student loan payments intern year!
For married individuals, the household income is taken into account when calculating payments. You might consider filing taxes as Married Filing Separately (MFS) to potentially lower your student loan payments. However, it’s essential to carefully weigh the pros and cons of this strategy before proceeding.
Click here to learn more about this strategy.
Way 2: Alternative Documentation of Income
If you didn’t file a tax return, you’ll need to use Alternative Documentation of Income, usually a paystub, to certify your income. Your paystub serves as the basis for extrapolating your income for a full year, determining the income used in calculating your monthly student loan payment. As a PGY1, if your salary is $60,000, this amount becomes the cornerstone for your student loan payment calculation in an IDR plan.
PAYE – How to Calculate Income
On an Income-Driven Repayment (IDR) plan, your monthly student loan payment is determined by your income and family size.
In simple terms: the higher your income, the larger your monthly payment; the lower your income, the smaller your monthly payment.
You have two ways to calculate your income for an IDR Plan: Adjusted Gross Income (AGI) or an Alternative Documentation of Income, usually your paystub.
Way 1: Adjusted Gross Income (AGI)
Your AGI, found on line 11 of IRS Form 1040 from your prior year’s tax return, is any income earned in the prior year minus specific eligible deductions. Examples of income include job earnings, self-employment income, dividends, and interest.
Having a tax return on file is required to use AGI to calculate your monthly student loan payment.
Important Note for MS4s!
Even if you had no income during medical school, e-Filing a tax return in your MS4 year showing as little as $1 of income is a elite student loan planning strategy. This often enables tou to qualify for $0/month student loan payments intern year!
For married individuals, the household income is taken into account when calculating payments. You might consider filing taxes as Married Filing Separately (MFS) to potentially lower your student loan payments. However, it’s essential to carefully weigh the pros and cons of this strategy before proceeding.
Click here to learn more about this strategy.
Way 2: Alternative Documentation of Income
If you didn’t file a tax return, you’ll need to use Alternative Documentation of Income, usually a paystub, to certify your income. Your paystub serves as the basis for extrapolating your income for a full year, determining the income used in calculating your monthly student loan payment. As a PGY1, if your salary is $60,000, this amount becomes the cornerstone for your student loan payment calculation in an IDR plan.
PAYE – How to Determine Your Family Size
On an Income-Driven Repayment (IDR) plan, your monthly student loan payment is calculated based on your income and family size.
In simple terms: the bigger your family, the smaller your monthly student loan payment; the smaller your family, the bigger your monthly student loan payment.
Your family size for the purposes of Income-Driven Repayment plans includes: You, your spouse, any dependents/family that receives more than half of their support from you. Additionally, any unborn children also count when calculating your family size.
PAYE – How to Determine Your Family Size
On an Income-Driven Repayment (IDR) plan, your monthly student loan payment is calculated based on your income and family size.
In simple terms: the bigger your family, the smaller your monthly student loan payment; the smaller your family, the bigger your monthly student loan payment.
Your family size for the purposes of Income-Driven Repayment plans includes: You, your spouse, any dependents/family that receives more than half of their support from you. Additionally, any unborn children also count when calculating your family size.
PAYE Example
Introducing Dr. Don!
Dr. Don’s Details:
-
-
Loan Balance: $260,000
-
Average Interest Rate: 6.8%
-
Income (PGY1): $60,000
-
Family Size: 1
-
Dr. Don, a recent medical school graduate, was initially burdened with a monthly student loan payment of $2,992 under the 10-Year Standard Repayment plan, considering his $260,000 loan balance and a 6.8% interest rate.
In search of a more manageable option, Dr. Don explored PAYE.
Considering his income ($60,000) and family size (1), his PAYE payment significantly dropped to $312/month, leading to substantial savings of $2,680/month!
As a reminder, the $318/month payment under PAYE may not reduce Dr. Don’s student loan balance, and any unpaid interest accumulates on his $260,000 student loan balance.
Note: If Dr. Don lives in Alaska or Hawaii, he will use a different family size factor, which will affect his payment calculation.
PAYE Example
Introducing Dr. Don!
Dr. Don’s Details:
-
-
Loan Balance: $260,000
-
Average Interest Rate: 6.8%
-
Income (PGY1): $60,000
-
Family Size: 1
-
Dr. Don, a recent medical school graduate, was initially burdened with a monthly student loan payment of $2,992 under the 10-Year Standard Repayment plan, considering his $260,000 loan balance and a 6.8% interest rate.
In search of a more manageable option, Dr. Don explored PAYE.
Considering his income ($60,000) and family size (1), his PAYE payment significantly dropped to $312/month, leading to substantial savings of $2,680/month!
As a reminder, the $318/month payment under PAYE may not reduce Dr. Don’s student loan balance, and any unpaid interest accumulates on his $260,000 student loan balance.
Note: If Dr. Don lives in Alaska or Hawaii, he will use a different family size factor, which will affect his payment calculation.
Conclusion
Pay As You Earn (PAYE) offered a flexible way to manage your student loan payments based on your income and family size.
Understanding how PAYE worked, including the potential for $0 payments early in your career and the significance of tax filing strategies, helped many borrowers navigate their repayment journey more effectively.
If you’re seeking similar benefits and are eligible, New IBR now offers the same advantages as PAYE.
Consider consulting a financial professional specializing in tax management and student loan planning to tailor your repayment strategy to your unique situation and goals.
If you’re looking for a personalized plan, our team is here to help!
Disclosure: This content is for informational purposes only and does not constitute personalized financial advice. We recommend consulting with your tax and financial professional for tailored guidance.
Conclusion
Pay As You Earn (PAYE) offered a flexible way to manage your student loan payments based on your income and family size.
Understanding how PAYE worked, including the potential for $0 payments early in your career and the significance of tax filing strategies, helped many borrowers navigate their repayment journey more effectively.
If you’re seeking similar benefits and are eligible, New IBR now offers the same advantages as PAYE.
Consider consulting a financial professional specializing in tax management and student loan planning to tailor your repayment strategy to your unique situation and goals.
If you’re looking for a personalized plan, our team is here to help!
Disclosure: This content is for informational purposes only and does not constitute personalized financial advice. We recommend consulting with your tax and financial professional for tailored guidance.
Start Dreaming Bigger,
Finally Take Control of Your Student Loans!
Start Dreaming Bigger,
Finally Take Control of Your Student Loans!
It All Begins with a Diagnosis…
At Dream Bigger Financial, we’re dedicated to setting early-career physicians on the right financial treatment plan.
With a comprehensive diagnosis, we guide you towards financial peace of mind, ensuring you can be your best self for your loved ones and patients.
Considering financial planning?
We’re currently accepting new patients!
If you prefer self-diagnosing,
join us on social media!
We regularly share tips and tricks on lowering taxes, managing student loans, saving for retirement, and guiding you to live your best financial life.
Michael Putterman, CFP®
☁ Virtually serving clients nationwide ☁
It All Begins with a Diagnosis…
At Dream Bigger Financial, we’re dedicated to setting early-career physicians on the right financial treatment plan.
With a comprehensive diagnosis, we guide you towards financial peace of mind, ensuring you can be your best self for your loved ones and patients.
Considering financial planning?
We’re currently accepting new patients!
If you prefer self-diagnosing,
join us on social media!
We regularly share tips and tricks on lowering taxes, managing student loans, saving for retirement, and guiding you to live your best financial life.
Michael Putterman, CFP®
☁ Virtually serving clients nationwide ☁