Partial Financial Hardship (And How It Can Lower Your Student Loan Payments)

When your income doesn’t keep pace with your bills, it can quickly become stressful to pay your student loans. The good news? There are income-driven repayment plans from the federal government, and you just need to prove you have “partial financial hardship” to be eligible.

Though what qualifies as hardship will depend on a few factors, partial financial hardship could potentially reduce your monthly debt load. Here are some key topics we’ll cover:

Defining partial financial hardship

If you ever look at your student loan payments compared to your income and feel that the balance is insurmountable, you’re not alone. In fact, this is when the phrase “partial financial hardship” comes into play.

Partial financial hardship is an eligibility requirement for two income-driven repayment plans offered by the federal government: Income-Based Repayment (IBR) and Pay As You Earn (PAYE).

Demonstrating partial financial hardship is an eligibility requirement for these programs, which means you need to be prepared to prove that your paycheck or income isn’t enough to cover your bills. If your loans are in default, however, you will not qualify, right off the bat.

Qualifications

• To qualify for IBR, the annual amount due on your loans must exceed 15% of the difference between your adjusted gross income and 150% of the poverty line for your family size in the state that you live in.
• For the PAYE plan, the amount on your loans must exceed 10% of your AGI and 150% of the poverty line for your family size in the state where you reside.

Only federal loan holders are eligible. If you have private student loans, check out the section on refinancing to lower your monthly payments.

Partial financial hardship and your student loan payments

One distinction between the plans is the percentage difference between your AGI and your amount due based on the plan that you select.

Fifteen percent is the typical requirement for IBR, unless you are a new borrower on or after July 1, 2014 — then it’s 10%, similar to the 10% requirement for PAYE. Being able to prove partial financial hardship and enroll in either of these programs could help you lower your loans into more manageable payments.

This could bring some relief, because taking on an income-driven repayment plan means your payments will no longer be calculated based on standard 10-year repayment plans, but rather based on a percentage of your income and family size.

However, be prepared for your payments to change over the life of the loan. All income-driven repayment plans may show a decrease (you lose your job, for example) or increase (you get a raise) if your family size or income changes.

Before you begin to apply for either plan, it’s a smart idea to contact your student loan provider or servicer to ask them about both plans. They may be able to tell you what you qualify for and which might be best for your financial situation. They can also help you apply, or you can do so on your own here.

If your federal student loans are not all Direct, don’t panic — you still may be able to qualify. FFEL loans can also be included in these plans, as long as they’re not in default and/or are not a Federal PLUS loan made to a parent borrower. FFEL loans are eligible for a PAYE plan if they are a part of a Direct Consolidation Loan.

Partial financial hardship vs. refinancing

There are a few ways to go about lowering your student loan payments. Claiming partial financial hardship means lower loan payments and perhaps eligibility for forgiveness. Refinancing your student loans could also reduce your payments, through a lower interest rate or longer term. Both routes can help you manage your monthly payments.

When it comes to either declaring partial financial hardship or refinancing your student loans, you may want to consider your financial goals. Income-driven repayment plans can ease the burden of high monthly student loan payments, but there are two instances when these programs are not the best option:

• When you have only private student loans.
• If your main goal is to pay your student loans off faster.

As previously mentioned, private student loans aren’t eligible for any federal student loan benefits. However, you should still reach out to your private lenders directly to see if they offer repayment plans based on income or other situational factors.

Income-driven repayment plans can keep you in debt longer if you don’t apply for forgiveness when eligible. That’s because the lowered payments could have you only paying on interest for years, and you might have to pay federal taxes on any amount that is forgiven, according to the Federal Student Aid Office. If you want to pay loans off fast, this may not be the best route.

Refinancing your student loans is another option for cutting your payments down. Refinancing is the act of taking out a new, private loan to pay off your current private student loans and/or federal loans. The goal? To get a lower interest rate.

A lower interest rate enables more money to go to your balance rather than interest. But if you want to refinance to pay your loans off faster, you will need to either choose a shorter repayment term or a long repayment term with a commitment to pay more than you owe each month.

The downside? Your federal loans will lose federal protections, such as income-driven repayment plans. But don’t let that be a non-starter — it’s just something else to be aware of before you close on a refinanced loan.