If you’re repaying your student loans, chances are every day feels like a financial hardship.
After all, that’s so much money that could be going to other things, such as savings to buy a house or to retire someday. Maybe you even have to make some tough choices about what you can buy and what you can’t, because you still need to pay your student loans.
If that sounds familiar, take heart. You may be able to qualify for one of four income-driven repayment plans:
- Income-Based Repayment (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE), and
- Income-Contingent Repayment (ICR)
Each program has its own requirements. However, two of the most popular programs — IBR and PAYE — have a particular set of requirements, which includes the three magic words, “partial financial hardship.”
If you’re having a hard time making your monthly student loan payments and think you might qualify for these programs, read on. We’ll tell you everything about the partial financial hardship requirement that you need to know.
What is financial hardship?
It seems like student loans cause everyone a partial financial hardship in some way.
But, (sadly) the government needs to find a way to limit the number of people jumping on board these repayment plans to just those who are really experiencing a student loan financial hardship.
For the PAYE and IBR repayment plans, you need to qualify for a “partial financial hardship,” and of course there’s an official definition. Here it is, according to Federal Student Aid:
For IBR, a circumstance in which 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 Pay As You Earn, a circumstance in which 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.”
Whew. There’s a lot to unpack there. So let’s take it one step at a time.
Annual amount due on your eligible loans…
This is how much you’d pay each year if you stuck with the standard 10-year repayment plan (i.e. the default plan everyone gets put on after graduating). Simply take your current monthly payments, and multiply them by 12.
If you have a spouse, you’ll also include the monthly payments on their eligible loans as well. However, if you file your taxes separately, the government won’t include their student loan payments in the calculation.
It’s important to note that not all federal loans are eligible for PAYE and IBR. We’ll get into which specific federal loans are eligible below as it can get a little wonky. But for now, if you have just federal Direct loans (the most common type), they’re probably eligible to be included in this calculation.
Exceeds 15 percent (or 10 percent) of the difference…
Now we’re getting into the nitty-gritty of whether your payments are too high relative to your income. This “difference” that the statement is referring to actually has a name: discretionary income. It’s the difference between your income and what you need to survive.
IBR requires you to pay a higher fraction of your discretionary income — 15 percent — before qualifying for a partial financial hardship. On the other hand, PAYE only requires you to pay 10 percent of your discretionary income before qualifying for a financial hardship.
According to Lauryn Williams, CFPⓇ and advisor at Student Loan Planner, if you do get to choose your plan there’s definitely a clear winner.
If both [plans] are available to you, you want to choose PAYE. IBR is calculated based on 15% of discretionary income so the payment will always be higher that PAYE, which is 10% of discretionary income.”
However, keep in mind that you might not get a choice in which program to choose depending on whether you meet the other qualifications for each repayment plan.
Adjusted Gross Income (AGI)…
Not all incomes are created equal.
If you’re doing responsible grown-up things like contributing to your retirement account, you’ll have less money to spend on student loan payments.
To even out the playing field a bit, the government uses your AGI instead of your gross income (i.e. your income before you pay taxes and take deductions) when calculating whether you have a student loan financial hardship. You can find your AGI on your most recent copy of your tax return.
Just like with your student loan payments, the government will consider your household income — including that of your spouse — if you file jointly. That’s why some people file separately because the monthly payment amount will be smaller if you’re starting out with a smaller income.
150 percent of the poverty line…
Again, not all incomes are created equal. You need some of your paycheck to buy necessities like housing, food, and heat, especially if you have other people to support.
That’s why the government throws you a bit of a bone again and uses the “150 percent of the poverty line for your family size in the state you live” standard. You can find poverty level guidelines on the U.S. Department of Health & Human Services website. Note that you’ll need to multiply the relevant number by 1.5 in order to get to 150 percent of the poverty guideline.
A $100,000 household income for a single person in San Francisco is a lot different than a $100,000 household income for a single person living in Casper, Wyoming. The problem is that for student loan purposes, the poverty line is the same in both places. Therefore, a payment made on an income driven payment plan would be the same in both places.
Sound confusing enough? You can actually calculate these numbers — and whether you qualify for a partial financial hardship or not — pretty easily yourself with our student loan calculator.
Let’s break down the numbers here with a couple of examples so you know exactly what’s going on in the background.
Scenario 1: The brainy but kind-hearted doctor
In this example, let’s say that Brian attended a pricey private med school and then decided to practice in an area of inner-city Detroit at a low-income clinic.
He has $250,000 of eligible student loans, and his monthly payment under the standard 10-year repayment plan is $2,591. He also earns a gross salary of $100,000 per year and an adjusted gross income (AGI) of $75,000.
According to the poverty guidelines, Brian needs $18,735. Thus, the difference between his adjusted gross income and the poverty guideline is $56,265 ($75,000 – $18,735). This is what the government considers “discretionary income.”
Brian’s annual amount due on his eligible loans is $31,092 ($2,591 per month ✕ 12 months). This translates into 55 percent of his annual discretionary income [($31,092 ÷ $56,265) ✕ 100]. A huge chunk of his paycheck is going to student loans.
Since Brian’s student loan payments make up 55 percent of his discretionary income, he may be able to qualify for either the PAYE or IBR plans. If he is eligible for both, it’d be better to choose the PAYE plan because this will cap his monthly payments at 10 percent of his discretionary income. This means his new monthly payment would be $468.88 [($56,265 ✕ 0.10) ÷ 12] — a much-welcome relief.
Scenario 2: The Thornberrys
In this example, a couple (Marianne and Nigel Thornberry) have three children — Donnie, Eliza, and Debbie. College wasn’t kind to the elder Thornberrys, and they have $50,000 and $25,000 worth of student loans to pay off, respectively. Together, their current monthly student loan payments are $777 under the standard 10-year repayment plan.
The Thornberrys are self-employed through their own wildlife filmmaking busines, and earn a gross income of $80,000 per year together with an AGI of $55,000 per year.
The Thornberrys travel the world together in a mobile bus for their work, but they’re based out of Hawaii. For a five-person family, their poverty guideline is $52,050. This means that their discretionary income is a mere $2,950 per year ($55,000 – $52,050) — not very much.
To make matters worse, they owe $9,324 per year in student loan payments, making this fraction of their budget a jaw-dropping 316 percent of their discretionary income ($9,324 ÷ $2,950). Clearly, they need some help.
Since their current student loan payments are 316 percent of their discretionary income — far and above the 10- or 15 percent needed to qualify — they may be eligible for the PAYE or IBR plans if they meet the other requirements. If they do qualify, their monthly student loan payment would drop to a much more manageable $24.58 per month [($2,950 ✕ 0.1) ÷ 12] under the PAYE plan.
Eligible Loans for PAYE and IBR
Meeting the partial financial hardship requirement is one hurdle you have to jump over before you can get on the PAYE or IBR plans. It’s not the only one, however.
You also need to have the right kind of federal student loans. The following types of loans are eligible loans for both the PAYE and IBR programs:
- Direct loans (both subsidized and unsubsidized)
- Direct PLUS loans made to you, as a graduate student
- Direct consolidation loans, as long as they weren’t used to repay a PLUS parent loan
A few other loan types are also eligible under the IBR plan (but not PAYE). If you have these loans and still want to qualify for PAYE, you can do so by consolidating them into a Direct consolidation loan. These loans are:
- FFEL Stafford loans (both subsidized and unsubsidized)
- FFEL Direct PLUS loans made to you, as a graduate student
- FFEL consolidation loans, as long as they weren’t used to repay a PLUS parent loan
If you have a Perkins loan, it won’t be eligible for either PAYE or IBR unless you consolidate them into a Direct consolidation loan.
Finally, the following types of loans aren’t eligible for PAYE or IBR under any circumstances:
- Direct PLUS loans made to parents
- Direct consolidation loans that were used to repay a PLUS parent loan
- FFEL PLUS loans made to parents
- FFEL consolidation loans that were used to repay a PLUS parent loan
Oh, and one more thing. For PAYE, you’ll also need to be a “new borrower.” In government lingo, this means you can’t have taken out a Direct loan or FFEL loan before October 1, 2007, and you must have taken out at least one Direct loan after October 1, 2011.
Turn your student loan financial hardship into financial stability
Qualifying for a partial financial hardship under the PAYE or IBR plans can be a gamechanger. Because your monthly payments are capped at 10 percent or 15 percent of your discretionary income, if you qualify, your payments could go from being an unmanageable monster to a tame kitten (at least relatively speaking).
It might still be difficult to get ahead if your other expenses are high, for example, due to childcare or private student loan debt. But if at all possible, Williams has one final recommendation.
“While hardships provide a lower student loan payment, they ultimately create space for you to get on more solid financial ground,” she said. “Do not dismiss the opportunity that comes from paying less on your student loan debt. Keep working toward financial stability.”
If all of this sounds complicated, don’t worry. It’s easy to hire us to help figure out your options for getting rid of your student loan debt in a way that works for your financial situation.