You may have seen the word PAYE on your IRP5 payslip or heard it mentioned by your employer, but haven’t any idea of its meaning. All it really means is that you simply are paying the tax you owe to SARS on a monthly basis rather than all directly at the top of the tax year, hence PAYE means ‘Paye As You Earn‘. this is often an honest thing because it saves the taxpayer from having to pay between 18% and 40% of their earnings (the taxable amount) to SARS in cash once a year as a lump sum!
Employers are required to withhold these taxes monthly and pay them over to SARS on the taxpayer’s behalf. they are doing this by consulting the SARS PAYE tables which have different tax rates for workers who are paid weekly, fortnightly or monthly. The PAYE calculated as a result’s supported the employee’s earnings and includes basic salaries, bonuses, fringe benefits and other allowances.
PAYE is calculated monthly and paid to SARS by your employer monthly, albeit you’re paid weekly / fortnightly. When your employer calculates your PAYE, your earnings get multiplied by 52 weeks, 26 weeks or 12 months (depending on how often you get paid) to urge an annual amount, before being applied to the SARS tax tables to calculate annual tax. this is often then divided again by an equivalent work period to urge the monthly PAYE tax which is then withheld, displayed on your IRP5 and paid over to SARS. to figure out your PAYE contribution try our free salary tax calculator.
Direct Plus Loans offered to parents do not qualify for PAYE.
When you got the loan after Oct. 1st, 2007 you must not have had a balance on a Direct Loan or FFEL Loan.
PAYE particularly applies to federal student loans that were disbursed on or after Oct. 1, 2007.
Benefits of PAYE
Pay As You Earn usually difficult to qualify for than other IDR plans, yet it can result in lower monthly payments and extra added benefits. If you are eligible for PAYE, it’s possible the preferred option over IBR.
The primary advantage of PAYE Student Loan is decreased monthly payments. If ,you’re a new graduate with relatively low income and your monthly loan payment is high, PAYE Student Loan may be the best choice if you qualify. PAYE caps your monthly payment at 10% of discretionary income. And it can result in a notable decrease in your monthly payment, even reducing it to $0.
You are eligible for loan forgiveness after a span of 20 years when you qualify for PAYE, as long as you perform all of your payments. This is one of the advantages PAYE allows over IBR since IBR forgiveness is only given after 25 years to loans removed before July 1, 2014.
Public Service Loan Forgiveness (PSLF)
Forgiveness is open after 10 years of qualified payments under PSLF unlike with PAYE and IBR, and any balance forgiven is not regarded taxable income.
Enrolling in PAYE is an excellent option if you’re curious in qualifying for PSLF in the future or now. You will be a move closer to qualifying for PSLF by enrolling in a qualified IDR plan and also decrease your monthly payments as much as possible.
Drawbacks of PAYE
While PAYE may look like an easy choice, the plan does have drawbacks that are necessary to reflect before enrolling.
Tax Implication for Forgiven Loan Balance
If you still owe a balance on your federal student loans after 20 years of qualified repayment under PAYE, you can qualify for loan forgiveness. But, it’s necessary to record that this advantage doesn’t come without financial responsibility: any forgiven number under PAYE is regarded as taxable income by the Internal Revenue Service. Make sure you’re ready to pay a percentage of your forgiven balance on that year’s income taxes before applying for loan forgiveness.
Annual Recalculation and Re-Enrollment
All of the factors involved here are recalculated periodically to decide the fairest repayment number for each applicant. This can result in a lot of paperwork and hassle while it does result in monthly payments that better suit your monthly income.
You have two choices to recertify your PAYE plan: submitting a paper application through the mail or submitting a request electronically via StudentLoans.gov. To make your recertification request, you’ll need your spouse’s information if you’re married, proof of income, your signature, your family size information, and your FSA ID if you intend to use the website of Federal Student Aid.
If you’re interested in PAYE, the advantages have to outweigh the energy and time it takes to continue enrolled and retain your information timely.
You might be debt-free in half the time if you can manage to make your monthly payments under the 10-year Standard Repayment Plan. It will need to get out of debt under a PAYE program. Getting out from under your student debt quicker may be worth it, even if it involves forgoing the forgiveness given by the PAYE program if you can manage it.
By eliminating or reducing your student debt in 10 years rather than 20, you better your financial health and probably will have more benefit when it comes to purchasing a home, taking out a line of credit, and everything that needs a credit check.
Private Student Loan Consolidation
Private student loan consolidation is available through various banks we work with to combine all your student loans into one new loan. Private student loan consolidation requires a good credit score and will often have better rates than the federal student loan.
What Will My Payments Be With PAYE?
Your monthly payments under PAYE are determined by applying your discretionary income. Anything your household makes over 150% of your state’s poverty level is discretionary income. You have to determine your household’s discretionary income to know what your monthly payments would be if you qualify for PAYE.
Remember that your entire household’s income goes into this calculation, not only your own, as state poverty levels are based on household size.
The Sample of monthly payment calculation under PAYE repayment plan:
The sample of monthly payment calculation under PAYE repayment plan:
The 2018 Federal Poverty Guideline for the 48 contiguous United States and D.C. was $16,460 for a household of two.
If you’re in a household of two and living in California, making $36,000 per year as a household (both incomes included), you can find your discretionary income by these steps:
150% of $16,460 (1.5 x 16,460) = $24,690
$24,690 is 150% of your state’s poverty level.
$36,000 – $24,690 = $11,310
$11,310 is your discretionary income.
10% of $11,310 (.10 x 11,310) = $1,131
$1,131 is the amount you owe yearly.
$1,131 divided by 12 = $94.25
$94.25 is your monthly payment.
Trump Proposals for Student Loan Forgiveness
The president who began the PAYE and REPAYE programs are no longer in office. But, these IDR plans have yet to undergo any modifications under the new administration.