Pay As You Earn: The True Cost of Student Loan Forgiveness

When you’re struggling under the burden of federal student loans, the possibility of loan forgiveness sounds like a fantasy. But thanks to the expansion of the government’s income-driven student loan repayment plan called Pay As You Earn (PAYE), more borrowers are inching close to student loan forgiveness than ever before.

PAYE was previously only available to people who took out loans after October 2007, but last year, the Department of Education launched the Revised Pay As You Earn (REPAYE) plan, which expanded the program to all eligible borrowers regardless of when their loans were disbursed.

A leg up for those borrowers who have trouble making ends meet, PAYE and REPAYE limit monthly student loan payments to 10% of their discretionary income and, after 20-25 years (10 years if you work in public service), forgives the remaining loan balance.

How Does PAYE Work?

For those who qualify and sign on for PAYE, payments are generally around 10% of your discretionary income. If your income increases and your monthly payments get recalculated, your payments will never exceed what you would be paying under the standard repayment plan, as long as your income is still under the qualifying threshold.

So what’s the catch? For one thing, lower monthly payments will, of course, mean a higher accumulation of interest. And while your loan balance could be eligible to be forgiven in 20 years, that forgiveness in many circumstances is seen as income in the eyes of the IRS.

So if in 20 years you still owe, say, $20,000, even if the total balance is forgiven, you might have to pay taxes on that $20,000 the same year its forgiven.

Am I Eligible for a PAYE Plan?

Not everyone is eligible for the PAYE program. First off, PAYE only works for federal direct loans. And because PAYE was created for those struggling to meet loan payments, PAYE is only available to those who can demonstrate economic hardship. This makes sense, of course, because 10% of a high discretionary income would be a high monthly payment and over the payments of a federal standard plan.

PAYE plans are given to those whose monthly payments are lower than they would be on the standard 10-year payment plan.

Right about now you’re probably thinking, Lower payments and eventual loan forgiveness—where do I sign?

But there’s a catch. There’s almost always a catch.

While the idea of loan forgiveness may sound like the ultimate ‘get out of loan-jail free’ card, income-driven plans like REPAYE, PAYE and their predecessor, Income-Based Repayment (IBR), come with some less-than-obvious costs.

Costs Associated with PAYE and Income-Driven Repayment

In some cases, those costs outweigh the potential benefits—even the benefit of ultimate loan forgiveness. What costs should you be aware of when it comes to income-based repayment plans? Here are the big three:

1. The Straight Costs

Under an income-driven plan, lower student loan payments are primarily a result of lengthening your loan’s term from the standard 10 years to 20 or 25 years, depending on the plan. You still owe the same amount in terms of principal, but you’ll pay it off much more slowly and make a smaller dent—if any dent at all—in the principal with each payment.

In other words, an income-driven plan is a recipe for significantly higher interest costs than you would incur with a 10-year repayment plan. Plus, any loan balance forgiven at the end is taxed as income by the IRS.

How much do these costs matter? Let’s say you’re a single California resident with a $100,000 direct subsidized 10-year loan at a 4% APR, and you make $50,000 per year with a projected 5% annual salary bump.

On the standard repayment plan, you’d spend $121,494 total on principal and interest over 10 years. But on REPAYE, you’d spend $173,225 total—and you’d pay off your loan just a few months shy of the 25-year forgiveness mark.

Of course, your own income and loan details will make a difference in the outcome here, so find out how different repayment plans would affect you, check out our Student Loan Navigator tool, which can help personalize options to your situation.

2. The Surprise Costs (and Administrative Burden)

Under any income-driven repayment plan, you have to “recertify” your income and “family size” annually. Recertification can be a cumbersome process, and if you miss the deadline, which happens over 50% of the time, according to the Department of Education, things can get messy.

For one thing, if your payments are so low they don’t cover your monthly interest cost, the interest builds. Miss the recertification deadline, and you risk having accrued interest capitalized, or added to your loan’s principal.

Paying interest on your interest can cost you thousands more over the life of the loan.

Late recertification can also delay the date your loan is eligible to be forgiven, since you are automatically removed from the plan each time your certification lapses, and then put back on once you’ve completed the process.

Since time spent off the plan doesn’t count toward the 20-year forgiveness requirement, this could mean making some extra monthly payments before forgiveness can occur.

Additionally, if your income steadily increases and you’d like to switch to a standard plan to save money and be done with debt sooner, you may want to think twice. If you leave REPAYE all your accrued interest is capitalized, which means the longer you’ve been using the plan, the more the amount you owe has increased.

3. The Emotional Cost

Imagine for a moment that you do make it to the promised land of student loan forgiveness under an income-based repayment plan.

That means you’ve spent 20 years experiencing some level of financial hardship to make monthly payments toward a balance that might have grown exponentially with each passing year (if your payments were so low they didn’t effect the principal).

In other words, there’s an emotional tax attached, and that’s probably not what you pictured when you signed up.

The more common scenario (and frankly, the more desirable path) is that your financial picture will improve over time—you’ll get job offers, raises, and maybe even an inheritance or a bonus or two. And if that means becoming ineligible for eventual loan forgiveness, you’re probably going to be okay with the trade-off.

The Big Picture

Despite its downsides, an income-based repayment plan can be a useful tool for some borrowers. If you have a large amount of student loan debt, a low-to-modest salary, and, most importantly, don’t anticipate your income increasing much over the next couple of decades, you should give it serious consideration.

If, on the other hand, you expect your salary to moderately increase at some point, an income-driven plan could cost you more money in the long run.

The Main Income-Driven Repayment Options

If PAYE isn’t right for you, there are plenty of other options offered by the federal government or by private lenders. If you have federal loans, there are three other income-driven repayment options:

• Income-contingent repayment (ICR)<, which asks for generally 20% of your discretionary income. Your loans are eligible to be forgiven after 25 years. And just like the PAYE loan forgiveness option, you could be taxed on the amount that’s forgiven. • Revised Pay As You Earn (REPAYE), which takes generally 10% of your discretionary income. There is a forgiveness option after 20 years if you’re paying off your undergrad degree, or 25 years if you’re paying off undergrad and grad school loans. • Income-based repayment (IBR), which takes generally 10% to 15% of your discretionary income. Your loans are forgiven after 20-25 years, though you could get taxed on the amount that’s forgiven. If lowering your monthly loan payments is the goal, but you don't want the costs and headaches associated with REPAYE, consider refinancing your student loans at a lower interest rate instead.

Refinancing can decrease your payments and cut your total interest costs significantly. You can also shorten your payment term to save even more money, and be done with loans that much sooner.

For the borrower who bets on eventual loan forgiveness as a panacea for student loan woes, it’s important to take a hard look at the price of that journey. Because, in the end, loan forgiveness is never free. Get more information on forgiveness and other student loan strategies at SoFi’s student loan help center.

Check out refinancing your student loans with SoFi to see if it is the right decision for you.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.


Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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5 Tips for Getting the Lowest Rate When Refinancing Student Loans

Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner and stress less about student loan debt. Click here to read the other posts in the series—and get all the info you need to make intelligent decisions about your student loans.

Refinancing student loans can feel like serious financial spring-cleaning. But it doesn’t have to. Just consider it life simplification—the kind that can save you money. At SoFi, we’re all about helping you manage your money in ways that work best for you — not for some other guy.

Consolidating multiple student loan balances into one new loan with a low-interest rate and monthly payments designed around your life isn’t a big ask in our world. In fact, it’s an everyday occurrence. And it’s not hard. The key is to strategize.

Getting approved for student loan refinancing isn’t just a matter of submitting an application. You need a game plan —one that will help you become a strong loan candidate, who’ll land a quick “yes” and a lower student loan interest rate. Here’s how to begin.

5 Point Plan for Getting a Low Rate

1. Check your credit.

Although some companies consider your credit score as refinancing criteria, SoFi doesn’t. But we do take a look at your credit report. “A bankruptcy or medical bills that have gone to collections will harm your chances of securing the best student loan interest rate, or even getting approved at all,” says Amanda Wood, Director of Business Development at SoFi, who refinanced through the company.

“But you can improve your credit score by paying off overdue bills, decreasing debt in general, and always paying bills as they’re due.” It will take time for changes to register with credit bureaus, so don’t apply for refinancing until that happens.

See Also: How to Choose Between Variable and Fixed Rate Student Loans

If you have a good history of paying off debt, on the other hand, that will work in your favor. Use annualcreditreport.com to grab a free copy of your report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—to make sure there are no errors. If everything looks good, you’re all set to apply. But if you see inaccurate information on your report, contact each bureau individually and ask them correct it.

As an extra precaution, if you tend to rely a lot on plastic, consider cooling your credit spending for a few months before applying for a new loan. “Alternatively, you can stick with credit cards but make two or three payments each cycle to keep your balances low,” says Wood. “Even if you pay off your cards in full every month, a credit snapshot may catch your balances at their highest points, making you look maxed out. So timing is everything.”

2. Take a hard look at your cost of living.

It’s a fact—some cities are more expensive to live in than others. Plus, some people can’t afford to live alone. Someone renting an apartment in a small Midwestern town, for example, has lower expenses than someone who owns a row home in San Francisco. And cost of living matters a lot to refinancing companies.

To some extent, this is out of your hands; your zip code helps lenders determine your cost of living. But anything you can do to pay down debt and make choices that free up more cash—such as renting a smaller apartment, taking on a roommate, or leasing a cheaper car—can help your case.

(In a city like Manhattan, you probably don’t even need a car.) If you’re planning on relocating to an inexpensive city, for example, consider submitting an application a couple of months after you move in.

How you budget also plays a huge role in loan application acceptance. “If you’ve got ample wiggle room in your cash flow every month, you’re a more appealing candidate than a person who’s scraping his savings to make student loan payments,” says Marcos Fernandez, a Project Marketing Manager at SoFi, who refinanced his loans with the company.

Taking the time to establish your spending may give you a boost with lenders. “It’s very helpful to have a budget in place to determine the maximum amount you can pay toward a loan each month,” says Fernandez.

3. Give lenders a complete history.

Unlike other lenders, SoFi considers things like where you went to school and how you’re doing professionally when we weigh your application. So provide as much information as you can when it comes to your undergrad and grad degrees. “If you’ve studied math, science, business, or engineering at a good school, that may give you an advantage, particularly if you earned an advanced degree,” says Wood.

Additionally, be sure to include all relevant work experience. “The longer you’ve been in the working world, the more knowledge and skills you’ve likely gained,” adds Wood. “This makes you very attractive as an applicant, because you look like someone who will continue to pay the bills.”

If there’s a job offer on the horizon, be sure to submit your offer letter with your application. And if you get a promotion while your application is under review, notify the lender immediately. But if you’re in line for a promotion that will positively affect your paycheck, wait until that’s materialized before you apply.

Related: 10 Questions to Ask When Choosing a Student Loan Refinance Lender

4. Show all your income.

When lenders ask for income information, they mean all of your income, not just job earnings. So remember to list dividends, interest earned, bonuses, and the extra money you make from your side hustle or Airbnb rental property. “The higher your income, the more cash you have to throw at the refinancing equation,” says Fernandez. “It all counts as long as you can prove it.”

So keep those pay stubs, interest statements and tax returns. Also, make sure your driver’s license is current and that your student loan statements are all correct. If you’re self-employed, wait until you’ve filed your taxes to apply for refinancing—it’s the easiest way to prove the previous year’s income.

5. Be flexible.

If you have a number of student loans and you’re not offered the best rate when you apply for refinancing, consider refinancing only a couple of them. You may snag a lower interest rate with a smaller refinance balance. You can always apply for the full balance down the road after you’ve received a raise or moved to a less expensive location.

Being flexible also means you might want to think about asking a friend or relative for help if your application isn’t as strong as you’d like. “Consider adding a co-signer,” suggests Wood. “If you’ve been declined, a co-signer might help you get approved. If you’ve qualified for a loan on your own but the rate isn’t where you want it to be, a co-signer might help you qualify for a better rate.”

The stronger you are as a student loan refinancing candidate, the better your chances of getting the best rate possible. And with a great rate, you might even find yourself with a little extra cash each month— money you can put toward a well-deserved vacation or, even better, becoming a homeowner in the not so distant future.

See if you qualify for student loan refinancing, and then share this article with friends who might benefit from some student loan smarts.



SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

CLICK HERE for more information.


Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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4 Smart Student Loan Repayment Strategies for New Grads

Congrats to the Class of 2016! May your lives after graduation be a reflection of everything you’ve worked so hard for – a successful career, stable finances, and much more. And if you’re one of the 40 million people in the U.S. with student loans, may your student loan repayment strategy help you eliminate that debt efficiently, so you can focus on your life’s journey.

Make no mistake – student loan repayment does require a strategy. Right now, it might seem as simple as picking a repayment plan and writing the first check, but the decisions you make today and during the course of the loan can affect how much interest you pay in the long run. A smart repayment strategy ensures that you don’t spend a penny more than is necessary.

Student loans may be a fact of post-grad life, but you can take four steps to put your repayment strategy on the right track:

1. Know Exactly What You Owe

Chances are you haven’t looked at your loan statements since you signed on the dotted line. So spend time getting reacquainted. Find your federal loans on the National Student Loan Data System (NSLDS) website .

If you’ve got private loans, gather your statements or check with your school’s financial aid administrator. Many private loans are also listed on the Clearinghouse Meteor Network . If necessary, pull your credit report ; all of your loans will be listed there.

Once you’ve tracked everything down, make a list of your loans and their important details—the type (e.g., Direct, PLUS, private), the balances, and the interest rate you’re charged for each. This information is key to intelligent planning.

2. Understand the Grace Period

Some student loans offer a grace period of several months (six, usually) after graduation before you’re required to start making payments. This can come in handy if you haven’t yet found employment or you’re taking a break before entering the working world.

Just remember that the interest clock is usually ticking on most unsubsidized and private loans during this timeframe. Those loans begin to accrue interest the moment they’re disbursed, and will continue to do so throughout the repayment period.

At that point, the accrued interest is capitalized and added to a loan’s principal, which means that you end up paying interest on a larger loan balance. Translation: higher interest cost for you.

Bottom line? Use the grace period if you need it, but consider making at least interest-only payments during this timeframe in order to save money long-range.

3. Do the Math

Most lenders will offer you a choice of repayment plans, allowing flexibility around the length of the repayment term (e.g., 10 years vs. 20 years), which impacts your monthly payment amount and total interest cost. While it might be tempting to choose the option with the lowest monthly payments, the long-term repercussions can be costly.

For example, let’s say you have a $100,000 student loan at a fixed 6.8% interest rate. If you pay it off in 10 years, your monthly payments will be $1,150, and the total interest will be $38,096. If you extend the term to 20 years, your monthly payments will go down to $763 but your total interest will spike to $83,201. If you can afford the higher monthly payments, you can save more than $45,000 in interest with the 10-year plan.

Recommended: Explore our student loan help center for tips, resources, and guides to help you navigate your student loan debt.

However, the most important factor is the ability to pay your monthly student loan bill, because missing or making late payments can have a disastrous effect on your credit. If you need to choose a lower payment option initially, do so.

But when you’re able, switch to a more aggressive plan or keep the longer term but pay more than the minimum each month to accelerate loan repayment. The sooner you do, the less interest you’ll pay and the faster you’ll be done with your loans.

4. Consider Refinancing

One of the best ways to save money on interest is by lowering your interest rate, and the only way to do that is through student loan refinancing. Refinancing typically requires the borrower to have a solid income and a track record of capably handling debt.

So if you’ve landed a great job and have a history of managing loans and credit cards responsibly, lowering your interest rate may be a cost-saving option for you.

Using the above loan example, let’s see what happens if you refinance that loan at a lower rate. By refinancing a $100,000, 6.8%, 10-year term loan to 5%, your payments would go down to $1,060, and your total interest would be $27,278. In other words, refinancing would mean lower monthly payments and a total savings of almost $11,000.

But before refinancing federal student loans, remember that fed loans offer benefits like potential loan forgiveness and income-based repayment plans.

These programs don’t transfer to private lenders, so it’s important to know whether they apply to your situation before refinancing. If you don’t benefit from these programs, and saving money is your priority, refinancing federal loans can be a cost-saving option.

When ready, do the math on refinancing your own loans using our student loan calculator.

Keep Your Eyes on the Prize

Arguably the most important aspect of any student loan repayment strategy is to keep a positive, can-do attitude. When starting out, each monthly payment can feel like a drop in an ocean. But stick with it, increase your payments when possible, and soon you’ll build momentum and experience some satisfying results.

While there’s no one-size-fits-all approach to determining the very best strategy, if you take time to understand all of your repayment options, you can create a course of action that works best for your situation, saves you money over the long term, and works toward paying off loans as efficiently as possible. An effective plan will allow you to focus on what’s really important: life after graduation.

See how SoFi can help you save money by refinancing your student loans.


The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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