Partial financial hardship and how it relates to IBR payment ceilings

Both Income-Based Repayment (IBR) and Pay As You Earn (PAYE) plans have “payment ceilings” based on what a Standard 10-year repayment would be. This keeps your payment at or below this ceiling amount which ensures a certain amount of loans forgiven at the end of the 10-year path for Public Service Loan Forgiveness (PSLF).

For example:

• A single tax-filer with $275,000 of loans at 7.125% would have a Standard 10 Year Repayment of $3,210/month. This amount is the highest someone’s payment would ever go in both IBR and PAYE, regardless of income.
  • • In PAYE and “New IBR”, a single tax-filer would hit this $3,210/month payment at $410,000 of income.
    • In “Old IBR”, a single tax-filer would hit this $3,210/month payment at $281,600 of income. Old IBR has a higher payment-based-on-income, thus having a notably lower income threshold needed to hit this higher payment.
• See another blog post here to read more about the differences between PAYE and IBR.

The ceiling of $3,210/month also acts as a threshold or barrier to entry for new applicants. This is what’s considered a Partial Financial Hardship: income is low enough that your income-driven repayment calculation generates a payment lower than a 10-year plan to qualify.

IBR and PAYE use different calculations to determine Partial Financial Hardship. Even if you are in New IBR (all loans disbursed after July 1, 2014), the IBR plan always uses the 15% discretionary income calculation to determine partial financial hardship.

In the example above, someone with income documentation showing $300,000 of adjusted gross income would be eligible for PAYE and would be paying around $2,300/month.

Someone with $300,000 of adjusted gross income would NOT be eligible for Old IBR or New IBR. $300,000 of income calculates to a $3,440/month payment, higher than a 10-year repayment based on their loan balance, and thus cannot demonstrate a Partial Financial Hardship.

The main observation here is that everyone’s situation is different.

• Loan disbursement dates, balances, and interest rates determine the payment ceiling and Partial Financial Hardship.
  • • If the single borrower had $300,000 of loans instead of $275,000, the payment ceiling would be $3,500/month and they would be able to demonstrate a Partial Financial Hardship in Old IBR
• Spousal income and spousal loan balance are huge considerations and completely change the calculation above
• Community property states use a different calculation for married borrowers filing separately.

Questions about your own situation and loan repayment or forgiveness strategies?

To schedule a no-obligation, introductory conversation with our Financial Advisor specializing in Student Loan Guidance, Kyle Flynn, CSLP, use this link here. Kyle provides financial planning services with a focus on your current financial position and debt management, and he understands the financial path and challenges facing early-career physicians.