With federal student loans, you already know the best part about having them: repayment plans based on your income.
Those repayment plans are clutch. Especially when you have six-figure student loan debt and are still trying to figure out this whole adult thing.
Here’s the thing about those plans: you’re not guaranteed access to them.
You have to meet certain requirements.
One of those requirements (at least for the PAYE, and IBR plans) is that you have a partial financial hardship.
TL;DR: You have a partial financial hardship when you would pay more under the Standard Plan than you would under the PAYE or IBR plan.
In this post, I’ll go over what a partial financial hardship is and how you can prove that you have one.
What is a Partial Financial Hardship For Student Loans
A partial financial hardship is a formula used to determine your eligibility for the Pay As You Earn and the Income-Based Repayment plans.
For the PAYE plan, you have a partial financial hardship if your annual payments under the 10-year Standard Repayment plan exceed 10% of the difference between your adjusted gross income (AGI) and 150% of the poverty line for your family size.
The poverty guidelines are set each year by the US Department of Health & Human Services. Your loan servicer will use these guidelines, your family size, and the AGI from your most recent tax return to determine your discretionary income, and, in turn, your monthly payment amount.
The same formula is used to determine a partial financial hardship under the IBR plan for new borrowers.
There are two IBR plans. One for new loan borrowers and the regular IBR plan. You’re considered a new borrower if you had no outstanding balance on an FFEL loan or Direct Loan on July 1, 2014, or if you have no outstanding balance on the date you get a new Direct Loan after July 1, 2014.
The formula changes if you choose the regular IBR plan.
Under that plan, you have a partial financial hardship if your annual payments under the Standard plan exceed 15% of the difference between your AGI and 150% of the poverty line for your family size.
Basically, under both the PAYE and IBR plans, you have a partial financial hardship if you would have a lower annual amount due under one of those plans than you would under the Standard Plan.
Further reading: Why IBR is the Right Repayment Plan For You
The Easy Way to Determine if You Have a Partial Financial Hardship
Did all that math make your head spin?
Instead of doing the math ourselves, let’s use a tool created by the Department of Education to do the work for us.
You can easily determine if you have a partial financial hardship by using the Repayment Estimator at studentloans.gov.
Once logged in, the Repayment Estimator will take the loan balance for your federal loans, interest rate, state of residence, family size, and AGI from your most recent tax return to determine your payment amount under the various repayment plans.
Further reading: How AGI Affects Student Loan Payments
Using that information, you can quickly compare your student loan payments under the Standard plan and the IBR or PAYE plans.
Again, if your student loan payment is lower under the IBR or PAYE plan than it would be under the Standard Plan, you’re good. You have a partial financial hardship.
1. What loans are eligible for the REPAYE, PAYE, and IBR for new borrower’s plans?
Only Direct Loans are eligible for these plans. This includes Direct Consolidation Loans and Direct Plus loans. It does not include Perkins Loans, Direct Parent Plus Loans, Direct Parent Plus Consolidation Loan, or any other consolidation loan that consolidated a Parent Plus Loan.
Further Reading: The 2 Best Options for Parent Plus Loan Forgiveness
2. What loans are eligible for the IBR plan?
Direct Loans and loans made under the Family Federal Education Loan (FFEL loans) program are eligible for the IBR plan. You cannot pay Perkins Loans or any other loan that involves a Parent Plus loan under the IBR plan.
3. What income-driven repayment plans are Parent Plus Loans eligible for?
The income-contingent repayment plan is the only IDR plan that Parent Plus loans are eligible for. And even then, you may have to consolidate to make your loan eligible for the ICR plan.
Further reading: Marriage and Student Loans: Why You Should Avoid the ICR plan
4. Are the REPAYE, IBR, and ICR plans eligible plans for the Public Service Loan Forgiveness program?
Yes. Each of those plans qualifies for the PSLF program.
5. What happens if you no longer have a partial financial hardship?
For starters, you can stay in the IBR or PAYE plan if you no longer have a PFH. But if you exit either one of those plans, you can’t return until you have a partial financial hardship again.
Another thing that happens when you no longer have a partial financial hardship is that the accrued interest on your loans is capitalized. That said, under the PAYE plan, capitalization of interest is capped at 10% of your original loan balance.
Further reading: The Affect of Capitalized Interest on a Student Loan
So you know, you can always move over to the REPAYE plan (assuming you have eligible loans). The REPAYE plan does not have a partial financial hardship eligibility requirement.