Partial financial hardship: You have a partial financial hardship when the annual amount due on all of your eligible loans (and, if you are required to provide documentation of your spouse's income, the annual amount due on your spouse's eligible loans) exceeds what you would pay under PAYE or IBR.
The annual amount due is calculated based on the greater of (1) the total amount owed on eligible loans at the time those loans initially entered repayment, or (2) the total amount owed on eligible loans at the time you initially request the PAYE or IBR plan. The annual amount due is calculated using a standard repayment plan with a 10-year repayment period, regardless of loan type. When determining whether you have a partial financial hardship for the PAYE plan, the Department will include any FFEL Program loans that you have into account even though those loans are not eligible to be repaid under the PAYE plan, except for: (1) a FFEL Program loan that is in default, (2) a Federal PLUS Loan made to a parent borrower, or (3) a Federal Consolidation Loan that repaid a Federal or Direct PLUS Loan made to a parent borrower.
Direct Loans include the following types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.
You are a new borrower for the IBR plan if (1) you have no outstanding balance on a Direct Loan or FFEL Program loan as of July 1, 2014 or (2) have no outstanding balance on a Direct Loan or FFEL Program loan when you obtain a new loan on or after July 1, 2014.
You are a new borrower for the PAYE plan if: (1) you have no outstanding balance on a Direct Loan or FFEL Program loan as of October 1, 2007 or have no outstanding balance on a Direct Loan or FFEL Program loan when you obtain a new loan on or after October 1, 2007, and (2) you receive a disbursement of an eligible loan on or after October 1, 2011, or you receive a Direct Consolidation Loan based on an application received on or after October 1, 2011.
Discretionary Income: Your adjusted gross income minus the poverty guidelines for your family size.
Discretionary Income for the:
ICR plan is the amount by which your adjusted gross income exceeds the poverty guideline amount for your state of residence and family size.
IBR, PAYE, & REPAYE plans is the amount by which your adjusted gross income exceeds 150% of the poverty guideline amount.
Family size always includes you and your children (including unborn children who will be born during the year for which you certify your family size), if the children will receive more than half their support from you.
For the PAYE, IBR, and ICR Plans, family size always includes your spouse. For the REPAYE plan, family size includes your spouse unless your spouse's income is excluded from the calculation of your payment amount.
For all plans, family size also includes other people only if they live with you now, receive more than half their support from you now, and will continue to receive this support for the year that you certify your family size. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. Your family size may be different from the number of exemptions you claim for tax purposes.
The poverty guideline amount is the figure for your state and family size from the poverty guidelines published annually by the U.S. Department of Health and Human Services (HHS). If you are not a resident of a state identified in the poverty guidelines, your poverty guideline amount is the amount used for the 48 contiguous states. (https://aspe.hhs.gov/poverty-guidelines)
Example Calculation 1:
Adjusted Gross Income (AGI): $80,000
Status: Single, Poverty Guideline = $12,490
IDR Plan: Old IBR (15% of Discretionary Income)
Discretionary income: $80,000 - (12,490 x 1.5) = $61,265
Monthly Payment: ($61,265 x 15%) / 12 = $765.81
Example Calculation 2:
AGI: His: $65,000, Hers: $90,000 = $155,000
Tax Filing: Married Filing Joint
Status: Married, 2 children = Poverty Guideline: $25,750
IDR Plan: REPAYE (10% of Joint Discretionary Income)
Discretionary income: $155,000 - (25,750 x 1.5) = $116,375
Monthly Payment: ($116,375 x 10%) / 12 = $969.79
Negative amortization is the accrual of outstanding interest of a loan caused by a failure to make payments that cover the interest due. This will likely occur when you have a very high debt to income ratio, meaning your balance is more than your income & your IDR payments are not enough to cover the interest charge per month.
A subsidy on a loan is a a grant or contribution of money granted by the government, or in other words, when the government pays a portion of the unpaid interest for you for a period of time defined by the IDR plan you are under.
Subsidized loan: A federal student loan for which a borrower is not generally responsible for paying the interest while in an in-school, grace*, or deferment period. Includes Direct Subsidized Loans (made through the William D. Ford Federal Direct Loan Program) and Subsidized Federal Stafford Loans (made through the Federal Family Education Loan (FFEL) Program**.)
* Interest will be charged during your grace period, if your loan is first disbursed July 1, 2012 through June 30, 2014.
Unsubsidized loan: A federal student loan for which the borrower is fully responsible for paying the interest regardless of the loan status. Includes Direct Unsubsidized Loans (made through the William D. Ford Federal Direct Loan Program) and Unsubsidized Federal Stafford Loans (made through the Federal Family Education Loan (FFEL) Program*.)
Capitalized Interest (Capitalization): Unpaid interest that has been added to the principal balance of a federal student loan. Future interest is charged on the increased principal balance and this may increase your monthly payment amount and the total amount you repay over the life of the federal student loan.
Annual re-certification of income: To re-certify for your existing income-driven repayment plan you must provide updated information about your income and family size annually.
Meagan Landress, CSLP®
Certified Student Loan Professional™
Financial Coach Meagan