Partial Financial Hardship: What Is It & How To Calculate It

May 26, 2019 No comments exist

By Joseph Reinke, CFA, Founder of FitBUX

Many people researching income driven repayment plans come across this word termed partial financial hardship.  When you read the government’s definition you can get really confused. Therefore, I wrote this article to clear things up.

I answer the questions below in this article.  However, before continuing I highly suggest reading our income driven repayment plan guide if you have not done so already or join us for our free IDR Webinar.

What Is Partial Financial Hardship?

Partial financial hardship is a formula used by the government to determine your eligibility for the Pay As You Earn (PAYE) and the Income-Based Repayment (IBR) plans. Note: these plans are only applicable to Federal loans, not private loans.  Therefore, if you are using one of these plans do not refinance your Federal loans.

The government’s approach to partial financial hardship is extremely confusing.  Therefore, I’m going to simplify it and walk you through the logic first. Then I’ll show you how to figure out if you’re eligible for PAYE or IBR using our free tool. Hint: the later is much (much) simpler than trying to do the math on your own.

At a high level, you will be eligible for PAYE or IBR if your required monthly payment on these plans is lower than what your required monthly payment would be if you were on a standard 10-year repayment plan. Therefore:

  1. The first thing to do is figure out what your required monthly payment would be under the 10 year standard repayment plan.  If you are already in repayment, you need to figure out what this payment would have been when you first entered repayment.
  2. Then, you need to figure out what that required monthly payment is as a percentage of your discretionary income. Discretionary income is another weird calculation the government does.

For Old IBR, if the required monthly payment on a 10-year plan exceeds 15% of your discretionary income, then you qualify for partial financial hardship.

For PAYE and IBR For New Borrowers, if the required monthly payment on a 10-year plan exceeds 10% of your discretionary income, then you qualify for partial financial hardship.

If you file taxes jointly with a spouse, then this calculation includes your spouses’ Federal student loan payment and income.  If you’d like to read more about filing jointly with your spouse then read our article titled: Student Loans Filing Separately or Jointly.

Confused yet?

Don’t worry.  FitBUX made it easy to figure out using your FitBUX profile and our free IDR tool.  If you haven’t built your profile yet, then you can become a Member of FitBUX for free by clicking the Join Now button at FitBUX.com and completing your profile. This will give you access to tools that help you easily assess if you qualify.

Building your FitBUX profile first is key.  Our IDR tool results will be based on your profile information. Therefore, the results are customized to you!

FitBUX's Income Driven Repayment Tax Savings Solution

Is There An Easy Way To See If I Qualify?

If you want a quick answer just to see if you qualify, yes.  We did all the hard work for you.

In your FitBUX profile, click “My Tools” from the left hand menu. Then select our IDR tool which is labeled “Should I Pay Off My Loans or Use IDR?”.  (For a walkthrough on how to set up this tool, check out the article detailing our income driven repayment calculator.)

When you get to the screen showing the details for the 4 income driven repayment plans (pictured above), you will focus on PAYE and IBR.  These are the plans that partial financial hardship applies to.  REPAYE doesn’t look at partial financial hardship, so you can ignore it here. If you’d like to read more about PAYE vs REPAYE, then check out this article.

Look at the first column labeled “First Payment”.

Now, you can simply compare the monthly payment for PAYE and IBR to the required monthly payment you would have to make on the 10 year standard plan.

If your PAYE or IBR payment is lower than the 10 year standard plan payment, you qualify from a partial financial hardship and are eligible for these IDR plan. If not, you don’t qualify. It’s that simple!

What Can My Income Go Up To Before I No Longer Qualify For Partial Financial Hardship And Can No Longer Be On PAYE or IBR?

Once again, you can use our IDR calculator to answer this question.  On the first screen of that calculator, you can change the adjusted gross income assumption then proceed to the chart comparing the income driven repayment plans.

Keep increasing the Adjusted Gross Income (AGI) upwards until the monthly payment under the column labeled “First Payment” equals the 10 year standard plan payment.  That is your maximum AGI.  Anything higher and you’d no longer qualify for partial financial hardship.  Thus, you would no longer qualify for PAYE or IBR. You can read more about AGI here to understand how it differs from your gross income

If you’d like to read more about student loans and money, check out our blog.  If you’d like to get expert help with student loans, the check out our student loan planner article.

IDR Tax Savings Solution

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