If you’re struggling to make your monthly payments, there are options. The best option for you will depend on your income and the type of loan you have. The “partial financial hardship” option is for those who can’t afford their monthly payments but don’t qualify for an economic hardship deferment. This option allows you to temporarily reduce the amount of your monthly payments for up to three years.
You are eligible for partial financial hardship if your monthly payment on your federal student loans is more than 20 percent of your monthly income, or you’re unemployed and don’t expect to be employed at your current job in the next 60 days.
If you’re paying off student loans, every day probably feels like an ordeal. That’s a lot of money that could have been used for other things, like… For example, to save for a house or to retire one day. You may even have to make difficult decisions about what you can and cannot buy because you still have to pay off your student loans. Fortunately, there may be a partial solution to your student loan problems.
If you’re struggling with student debt, don’t get discouraged. You can take advantage of one of four income-contingent installment plans:
- Income-related reimbursement (IRR)
- Continued payment of wages (PAYE)
- Revised Pay As You Earn (REPAYE) programme
- Income-related repayment (IBR)
Each program has its own requirements. However, two of the most popular programs, IBR and PAYE, have a specific set of requirements that include the three magic words partial financial hardship.
If you’re struggling to pay off your student loans and think you might qualify for these programs, read on. We’ll tell you everything you need to know about applying for partial financial hardship.
Student loans seem to cause partial financial hardship for everyone in one way or another.
But (unfortunately) the government needs to find a way to limit the number of people who sign up for these installment plans to those who are really struggling financially with their student loans.
For the PAYE and IBR instalment plans, you need to demonstrate that you are partially in financial difficulty, and of course there is an official definition. Here it is, according to Federal Student Aid:
Partial financial hardship is a condition of eligibility for Income Based Repayment (IBR) and Income Based Repayment (PAYE). This is a situation in which the annual amount owed on your loans, calculated under the standard 10-year repayment plan, exceeds 15% (for IBR) or 10% (for Pay As You Earn) of the difference between your adjusted gross income (AGI) and the 150% poverty level for your family size in the state where you live.
Wow. There’s something here to unpack. So let’s take it one step at a time.
This is the amount you will pay each year if you follow the standard 10-year repayment plan (i.e., the standard plan everyone follows after graduation). Just take your current monthly payments and multiply them by 12.
If you have a spouse, also consider his/her monthly payments for his/her loans. However, if you file your taxes separately, the government will not include your student loan repayments in the calculation.
It is important to note that not all federal loans are eligible for PAYE and IBR. We’ll look at which federal loans you may qualify for below, as it can be a bit confusing. However, if you only have Federal Direct Loans (the most common type), they can probably be included in this calculation.
Now let’s get to the details: Are your payments too high for your income? This difference mentioned in the petition has a name: freely disposable income. This is the difference between your income and what you need to survive.
IBR requires you to pay a higher percentage of your discretionary income – 15% – before you can receive partial financial hardship. PAYE, on the other hand, only requires you to pay 10% of your disposable income before you can get financial assistance.
According to Loreen Williams, CFPⓇ and advisor at Student Loan Planner, if you can still choose a plan, there’s definitely a winner.
If both [plans] are available, select PAYE. IBR is calculated based on 15% of disposable income, so the payment will always be higher than PAYE, which is 10% of disposable income.
However, you may not be able to choose which program you choose depending on whether you meet the other eligibility requirements of each repayment plan.
Not all incomes are equal.
When you do responsible things as an adult, like. B. in a retirement account, you will have less money available to pay off student loans.
To level the playing field a bit, the government uses your AGI instead of your gross income (that’s your income before taxes and deductions) to calculate whether you need a student loan financially. You can find your AGI on the most recent copy of your tax return.
As with student loan repayments, the government will take into account your family income – including your spouse’s – when you file a joint application. That’s why some people apply separately, because the monthly payment is lower if you start with a lower income.
Again: Not all incomes are equal. You will need some of your salary for basic necessities such as housing, food and heating, especially if you have other dependants.
Again, the government throws you a bone and uses the standard of 150% of the poverty line for your family size in the state you live in. The poverty guidelines can be found on the U.S. Department of Health and Human Services website. Note that you must multiply the corresponding figure by 1.5 to get 150% of the poverty line.
A $100,000 income for a single person in San Francisco is very different from a $100,000 income for a single person living in Casper, Wyoming. The problem is that the poverty line for student loans is the same in both places. This means that the payment under the income-based payment plan is the same in both places.
It seems rather confusing? You can calculate these numbers yourself – and determine whether or not you qualify for partial financial aid – with our student loan calculator.
Let’s break down the numbers with a few examples so you know exactly what’s going on behind the scenes.
Get personal advice on student loans
In this example, we assume that Brian took an expensive private medical school course and then decided to practice at a low-income clinic in a Detroit neighborhood.
He has a student loan of $250,000 and his monthly payment at a standard 10-year repayment plan is $2,591. He also receives a gross salary of $100,000 per year and his AGI is $75,000.
According to the 2021 poverty guidelines, Bryan needs $19,320. Thus, the difference between his adjusted gross income and the poverty line is $55,680 ($75,000 – $19,320). This is what the government considers to be freely disposable income.
The annual amount Brian owes on his eligible loans is $31,092 ($2,591 per month ✕ 12 months). This amounts to about 56% of his annual disposable income [($31,092 ÷ $55,680) ✕ 100]. A large part of his salary is spent on paying off his student loans.
As Brian’s student loans make up 56% of his disposable income, he may be eligible for PAYE or IBR plans. If he is eligible for both options, he would be best advised to opt for the PAYE scheme, as in that case his monthly payments will not exceed 10% of his disposable income. That means his new monthly payment will be $464 [($55,680 ✕ 0.10) ÷ 12] – a welcome relief.
In this example, the couple (Marianne and Nigel Thornberry) has three children, Donnie, Eliza and Debbie. The university has not been kind to Thornberry’s seniors, and they must repay $50,000 and $25,000 in student loans, respectively. Together, they now pay $777 monthly for their student loans on a standard 10-year repayment plan.
The Thornberry’s are self-employed and have a gross income of $80,000 per year and their AGI is $55,000 per year.
The Thornberrys travel the world together in a tour bus for their work, but are based in Hawaii. For a family of five, the poverty line in 2021 is $46,560. This means that their disposable income is only $8,440 per year ($55,000 – $46,560) – which is not much.
Worse, they have to pay $9,324 a year in student loans, making this part of their budget more than 110% of their disposable income ($9,324 ÷ $8,440). They obviously need help.
Since their current student loan payments are 110% of their disposable income – much higher than the 10% or 15% required to qualify for a loan – they may be eligible for PAYE or IBR plans if they meet other requirements. If they qualify, their monthly student loan repayment in the PAYE plan drops to $70.33 per month, which is much more affordable [($8,440 ✕ 0.1) ÷ 12].
Meeting the partial financial hardship requirement is a hurdle you must clear before you can switch to PAYE or IBR plans. He’s not alone, though.
You also need to have the right type of federal student loan. The following types of loans are eligible for the PAYE and IBR programs:
- Direct loans (subsidised and non-subsidised)
- PLUS you get to be a graduate student.
- Consolidated Direct Loans if not used to repay the Parent PLUS Loan.
Several other types of credits can also be paid under the IBR plan (but not PAYE). If you have these loans but still want to qualify for PAYE, you can do so by combining them into one direct consolidated loan. This applies to the following FFEL loans:
- Stafford loans (subsidized and unsubsidized).
- The Direct PLUS credits you receive as a graduate student
- Consolidation loans if not used to repay a Parent PLUS loan.
If you have a Perkins loan, it is not covered by PAYE or IBR unless you combine it into a consolidated direct loan.
Finally, the following types of credit cannot be included in PAYE or IBR under any circumstances:
- Direct credits PLUS for parents
- Consolidated direct loans used to repay Parent PLUS loan
- FFEL PLUS loans available to parents.
- FFEL consolidation loans used to repay the Parent PLUS loan.
Oh, and one more thing. PAYE also requires you to be a new borrower. In government jargon, this means that before 1. October 2007 no direct loan or a FFEL loan can be taken out and after 1. October 2011 must take out at least one direct loan.
Being eligible for partial student loan support under PAYE or IBR plans can be a deciding factor. Since your monthly payments are capped at 10-15% of your discretionary income, if you qualify, your payments can go from an unmanageable monster to a tame kitten (at least relatively speaking).
It can still be difficult to make ends meet if your other expenses are high, for example. B. as a result of child care or private student loans. But if possible, Williams has one final recommendation.
While a difficult situation will lower your student loan rate, it will ultimately put you on a firmer financial foundation, she says. Don’t miss the opportunity to pay off your student loan debt. Continue to work towards financial stability.
If this all sounds complicated, don’t worry. It’s easy to call on us to help you explore your options for getting rid of your student loan debt in a way that suits your financial situation.
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Frequently Asked Questions
What is considered a partial financial hardship?
A question that comes up a lot in financial aid is whether or not a student has a “partial financial hardship.” The short answer is that you should consider yourself to have a partial financial hardship if you have little to no cash or assets available to you. If you have a job or are eligible for a loan, you do not automatically have a hardship. It is possible to have a partial financial hardship even if you have a job; however, you must show the college how the job is interfering with your ability to focus on school. If you are a student, there are many websites that can assist you with calculating the financial aid you can receive.
The U.S. Department of Education offers a variety of tools to help students pay for college. The FAFSA (Free Application for Federal Student Aid) is the most common tool used to determine how much aid a student may be eligible to receive. Although every student may have a different answer to this question, it is generally considered to be any of the following:
How do you prove financial hardship for student loans?
One of the key factors in being approved for student loans is to prove that you can afford to repay them. One way to prove financial hardship is to claim that your income is not sufficient to allow you to repay your loans. If your income is less than your expenses, you can claim that the remaining amount is not sufficient to repay your student loans. “The first step in applying for student loans is to apply for a Federal Direct Student Loan.
You may apply for a Direct Student Loan by completing and submitting a Free Application for Federal Student Aid (FAFSA).” The most important thing to remember when trying to prove financial hardship in order to qualify for a lower student loan payment is to be able to back it up. Financial hardship means that your income is not enough to cover all of your living expenses, and it is often one of the first qualifications for loan forgiveness.
However, if you aren’t able to prove that your income is low enough, or that your expenses are high enough, it is unlikely that you will qualify for a more affordable payment plan.
How do you demonstrate financial hardship?
When declaring financial hardship, you typically will have to submit the Free Application for Federal Student Aid (FAFSA). The FAFSA establishes the Expected Family Contribution (EFC), which is the amount of money the government believes that your family is capable of providing towards your college expenses. Students who then want to show that they can only contribute a small amount should submit a request for a calculation of their Partial Financial Hardship (PFC). The PFC is typically used to provide an increase to the student’s EFC to make up for the fact that the family cannot provide the minimum amount. In order to demonstrate financial hardship for FAFSA, you must provide documentation of your income and expenses.
The reason for this is that you want the financial aid office to be sure that you have truly shown that you cannot afford to pay for college without financial aid. You want them to believe that your family has truly limited funds available for your college education. You do not want them to think that your family could be paying for your education themselves.