How to Use Partial Financial Hardship to Lower Your Student Loan Payments

partial financial hardship

If I were to ask you the most frustrating thing about student loans, would your monthly payments be the answer?

It can be tough figuring out a way to budget your student loan payments, especially when your income isn’t where you want it to be.

But what if I told you that you might be able to remove worrying about student loan payments from your list? Would you leap at the chance to free up more cash in your account?

Because there’s a chance that you can. Read on to find out how.

What is 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 “partial financial hardship” comes into play.

Note that this is in regards to federal student loans only. If your loans are private, skip to the last section of this article to see what options are available to you.

Partial financial hardship is an eligibility requirement for two income-driven repayment plans: Income-Based Repayment (IBR) and Pay As You Earn (PAYE). Demonstrating partial financial hardship is an eligibility requirement for these programs.

However, the partial financial hardship requirement is different based on the plan. Federal Student Aid describes the partial financial hardship requirement for IBR as:

The annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 15 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live.

For PAYE, the partial financial hardship requirement is as follows:

The annual amount due on your eligible loans, as calculated under a 10-year Standard Repayment Plan, exceeds 10 percent of the difference between your adjusted gross income (AGI) and 150 percent of the poverty line for your family size in the state where you live.

The main distinction between the plans is the percentage difference between your AGI and your amount due based on the Standard Repayment Plan. Fifteen percent is the requirement for IBR, while 10 percent is the requirement for PAYE.

That’s not the only difference between these two plans. It’s important to compare the pros and cons of each income-driven repayment plan. For example:

  • PAYE: Your monthly payments are capped at 10 percent of your discretionary income. Your loans can be eligible for forgiveness after 20 years. However, you’re only eligible for PAYE if you first borrowed your loans on or after October 1, 2007. Additionally, you must have received a disbursement on or after October 1, 2011.
  • IBR: Your monthly payments could be up to 15 percent of your discretionary income. Forgiveness could take up to 25 years.

But first, you need to use a partial financial hardship calculator to see if you qualify.

Use a partial financial hardship calculator to see if you qualify

Being able to demonstrate partial financial hardship can be a game-changer for your finances.

Taking on an income-driven repayment plan means your payments will no longer be calculated based on standard repayment plans. Rather, your payments are based on a percentage of your income.

It’s not enough to just say that you’re struggling to make your payments. As shown in the definitions above, there are real numbers to consider. These numbers determine if you are in a place of partial financial hardship and eligible for IBR or PAYE.

Look at what you owe in total on your loans now or the amount you owed when you initially entered repayment, whichever is greater. Then, plug that number into these partial financial hardship calculators:

If your income is too high to be eligible for either of these plans, these calculators will tell you so. That said, when it’s time to apply formally, you’ll need to do so here.

If your federal student loans aren’t all Direct, then 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.

Should you try to refinance instead?

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.

For starters, private student loans aren’t eligible for any federal student loan benefits, including income-driven repayment plans. However, your private student lender may have other programs to help. Reach out to them directly to see what they offer.

Secondly, 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.

If you have private loans or want to pay your loans off faster, there is another option: refinance your student loans.

Refinancing your student loans 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 just interest. But if you want to refinance to pay your loans off faster, you 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 only downside? Your federal loans will lose federal protections, such as income-driven repayment plans. That doesn’t have to be a non-starter, but it’s something to be aware of before you close on a refinanced loan.

Take control when payments are too high

Managing student loan debt isn’t easy. Problems with handling it continue to arise – nearly 40 percent of student loan borrowers are in default. Don’t let this happen to you.

The sooner you take control, the better your chance of rectifying the situation. That could mean income-driven repayment plans or a student loan refinance. You could even try deferment if necessary. The point is: you have options.

Don’t let these options pass you by – no matter how impossible your situation may seem. Take control of your student loans before they overwhelm you.

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