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Partial Financial Trouble: How It Can Lower Your Student Loans

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Please note that the U.S. government has stopped repayment of most federal student loans due to the impact of the coronavirus outbreak. View our Student Loan Hero Coronavirus Information Center for more news and details.
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When your income doesn’t keep up with your bills, paying off your student loans can quickly become stressful. The good news? There are federal government means-tested repayment plans, and you just need to prove you have “partial financial difficulties” to qualify.

While what qualifies as hardship depends on a few factors, partial financial hardship can potentially reduce your monthly debt burden. Here are some key topics we’ll cover:

If you ever look at your student loans compared to your income and think 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 a prerequisite for eligibility for two means-tested repayment plans offered by the federal government: Income-Based Repayment (IBR) and Pay As You Earn (PAYE).

Demonstrating partial financial difficulties is a prerequisite for eligibility for these programs, which means you must be prepared to prove that your salary or income is not sufficient to cover your bills. However, if your loans default, you won’t be eligible right away.

Qualifications

  • To qualify for IBR, the annual amount owed 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 where you live.
  • For the PAYE plan, the amount on your loans must be greater than 10% of your AGI and 150% of the poverty line for your family size in the state where you live.

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

A difference between the plans is the percentage difference between your AGI and your amount owed based on the plan you select.

Fifteen percent is the typical requirement for IBR unless you are a new borrower on or after July 1, 2014 – then it is 10%, similar to the 10% requirement for PAYE. If you can demonstrate partial financial difficulties and enroll in one of these programs, you can reduce your loans to more manageable payments.

This may bring some relief, because if you enter into an income-driven amortization plan, your payments are no longer calculated based on standard 10-year amortization plans, but based on a percentage of your income and family size.

However, keep in mind that your payments may change over the life of the loan. All means-tested repayment plans can go down (for example, you lose your job) or increase (you get an increase) as your family size or income changes.

PAYE IBR
● Your monthly payments are capped at 10% of your discretionary income.
● Your loans may be eligible for waiver after 20 years.
● You are only eligible for PAYE if you first borrowed your loans on or after October 1, 2007. In addition, you must have received a payout on or after October 1, 2011.
● Your monthly payments can be as much as 10% to 15% of your discretionary income, depending on when you took out your loan.
● Forgiveness can take 20 to 25 years.
● Your monthly payment and remission period depends on whether you took out the loans before or after 1 July 2014.

If you think you are a candidate to claim Partial Financial Difficulty and enroll in PAYE or IBR, please use a Partial Financial Difficulty Calculator to see if you qualify.

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

If your income is too high to qualify for any of these plans, these calculators will tell you.

Before you start applying for either plan, it’s a smart idea to contact your student loan lender or administrator to ask them about both plans. They may be able to tell you what you qualify for and what best suits your financial situation. They can also help you apply, or you can do it yourself here.

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

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

When it comes to reporting partial financial difficulties 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 loans, but there are two cases where these programs are not the best option:

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

As previously mentioned, private student loans are not eligible for federal student loan benefits. However, you should still contact 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 ask for forgiveness when you qualify. That’s because the reduced payments can leave you paying only interest for years, and you may have to pay federal taxes on any amount forgiven, according to the Federal Student Aid Office. If you want to pay off loans quickly, this may not be the best route.

Refinance your student loans is another option to reduce your payments. Refinancing is taking out a new private loan to pay off your current private student loans and/or federal loans. The target? To get a lower interest rate.

A lower interest rate ensures that more money goes into your balance instead of interest. But if you want to refinance to pay off your loans faster, you should either choose a shorter repayment term or a long repayment term with the obligation to pay more than you owe each month.

The disadvantage? Your federal loans lose federal protection, such as income-driven repayment plans. But don’t let that be a non-starter – it’s just another thing to watch out for before taking out a refinanced loan.

Maya Dollarhide contributed to this report.

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