Episode Transcript
[00:00:00] Speaker A: In this episode we talk about a term called Partial Financial hardship and why it will be crucial to understand as we navigate changes to income driven plans. Let's get started.
Are your student loan payments or loan balances a major obstacle in your financial life? Then tune in and let's Escape Student Loan Debt hello, my name is Brenton Harrison of Escape Student Loan Debt and your host for the Escape Student Loan Debt podcast that you all had a good holiday. And before we even get started into this week's episode, I want to remind you about a webinar that's upcoming at Escape Student Loan Debt called the State of Student Loans. So we do this ever so regularly when it comes to major updates. When it comes to federal and private student loans, there has been a ton going on as we have covered. So we wanted to make sure that we offered another State of Student Loans webinar. If you're following on screen, you can register at Eventbrite. We'll put the link to registration in the show notes, but it's going to be this coming Tuesday, December 10th at 6:30pm Central Time. We will offer not just the webinar itself, but if you're interested, there will be a Q and A and you can even sign up for an individual consultation at the link that we will put in those show notes. So I highly encourage you all to attend. What we're talking about today is going to be something that we cover in detail in that webinar, but we're going to go way into more depth when it comes to the state of the SAVE plan, the state of income driven repayment plans, public service loan forgiveness, when you're going to have to recalculate your income for these plans, private loans and the like. So I highly encourage you to attend if you are confused about what's going on with student loans right now. Now, the subject of today's episode is partial financial hardship and this is something I'll tell you like for the next few months while we are trying to figure out what the incoming administration is going to do. It's highly likely that several of the episodes that we cover are going to be like smaller detail episodes where there's not a major announce, but it's something that we may have mentioned in the past that is to us maybe a small thing, but we can, or I can I should say there's not a second host to this podcast sometimes overlook the importance of a term that I'm familiar with that the audience may not be. And that's how I feel about the term partial financial hardship. We have mentioned this in passing when it comes to income driven repayment plans that some of these plans require a partial financial hardship and some of the plans do not require a partial financial hardship. But we've never gone into significant detail about what that means. If you're following along on screen, we're actually looking at a description of partial financial hardship from the glossary of studentaid.gov if you go to studentaid.gov, there's a section of the website where it literally any term that you can think of relevant to federal student loans. It has a glossary where it will give you a bite sized definition so you can apply it to your existing knowledge. But as you read, I will say and I quote, partial financial hardship is an eligibility required under the income based repayment and pay as you earn repayment plans is a circumstance in which the annual amount due on your eligible loans as calculated under a 10 year standard plan exceeds 15% for IBR or 10% for pay as you earn of the difference between your adjusted gross income and 150% of the federal poverty line for your family size in the state where you live. End quote. Now that's a lot of student loan speak, but I will break it down to you in I would say simpler detail or what I hope to be simpler detail. A partial financial hardship means that based on the payment plan that you signed up for, let's call it income based repayment. In this example, when your student loan servicer takes all the information that they need to calculate your payment, that would be the adjusted gross income from your previous year's tax return. That would be the number of people in your household. That would also be your student loan balance. The student loan balance is typically not as important when it comes to partial financial hardship. It is incredibly important. They take that information and they calculate both what your payment would be under the income driven repayment plan and also what it would cost to just pay your loans in full within the 10 years under the 10 year standard plan. And if they find out that it would cost you more in terms of your payment to do the income driven repayment plan than it would to just pay off your loans in 10 years, you will not be allowed to make that income driven repayment plan payment. Instead, they would say that you do not have a partial financial hardship and they would set you up for the payment that's needed under the ten year standard plan. Using an actual numerical example, if they calculated your payment under the IDR plan and it said that you had to pay $800 a month, but it would only cost you $600 a month to pay it off. In 10 years, they will just make you pay the $600 a month. And there's a small subset of people that this impacts, but when it impacts them, it's going to be a pretty large impact. And that's why we wanted to have this episode. So let me describe who this person or this avatar might be. I have talked about there being kind of these break even points where you have a decision to make of whether you actually want to pay off your loans in full or aim for student loan forgiveness. And I use rough numbers. There are people who get way deeper into the actual mathematical details of this. But for me, the way I look at it is if you look at your student loan balance balance, and it is less than 100% of your household earnings in a year or less than one times your earnings, it is highly likely that it doesn't make much sense to use an income driven repayment plan unless you are putting off paying your loans while you focus on other debts. So for example, if you have no savings, if you are struggling with credit card debt, if you have something in collections, and by all means you should utilize an income driven repayment plan if it gives you a lower payment while you focus on those debts. But when it comes to the actual student loans themselves, when you owe less than 1 times what you earn each year, it's highly likely that when you do that calculation, there's not a financial benefit just for the student loans to using an income driven repayment plan, you should just pay it off in full. Now the next category are people who owe between one to one and a half times what they make in a yearly basis on their federal student loans. Because when you're in that window, in my opinion, you now have a choice to make based on other circumstances and context that says it could make more sense to aim for forgiveness. It could make more sense to just pay it off at the lowest interest rate possible. If the lowest interest rate's with the federal government, you just pay it off there instead of using IDR plans. If the lowest interest rate is with a private lender, you refinance that loan with a private lender and you pay it off there. And then the third camp are people who owe more than one and a half times what they make in a year on federal student loans. And for those people, it is highly likely that an income driven repayment plan makes sen because it would cost so much to pay the loans off in full that there's probably substantial savings available by just aiming for forgiveness in an income driven repayment plan as opposed to actually paying it off. Now, the interesting thing about the people in that window is they are also the type of people who when they do the calculations under these plans, it's possible that they do not have a partial financial hardship, meaning the payment under the 10 year standard plan is less than what it would be under the income driven repayment plan. And thus there's possibility that they're not allowed to even do certain income driven repayment plan. And I say certain plans because not all of them require a partial financial hardship. The save plan did not require a partial financial hardship. Neither did the revised pay as you earn plan. But the pay as you earn plan and income based repayment both require these hardships. So what we're going to do is take a quick break and after the break, we're going to pull up the calculator for income driven repayment plans. We're going to try to find somebody who might be right on the line of having that hardship or not. And if they don't, we're going to talk about options that are available to them under both pay and income based repayment. This is the Escape Student Loan Debt.
[00:08:06] Speaker B: Podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving home ownership.
[00:08:17] Speaker A: We'll be right back.
Are you interested in learning the tools and techniques we use to get student loans forgiven, reduced, reorganized or expedited? Well, great news. We're currently updating our flagship course, Escape Student Loan Debt to reflect the current changes in the student loan landscape. To stay up to date on the launch of the course and opportunities to sit in on our live recording Sessions. Head to escapestudentloanedebt.com and join our email list Now.
[00:08:49] Speaker B: You're listening to the Escape Student Loan Debt podcast.
[00:08:53] Speaker A: Subscribe now@escapestudentloan debt.com welcome back.
All right, before we get into this calculator, talk about some things. When it pertains to the updates that we've discussed, you know at length when it comes to income driven repayment plans. As a quick refresh, there are two camps of income driven repayment plans. One of those camps are plans that were created by Congress. Those plans are like definitively safe. That would be the old income based repayment and the new income based repayment. Then there's the other camp of plans that were created by the Department of Education that would be pay as you earn income contingent repayment and also revised pay as you earn slash save. The save plan is almost definitively going to be canceled, but there was an interim ruling by the Department of Education that said that for this short period of time before the incoming administration, most likely you are able to sign back up for the pay as you earn plan which was closed. That is important because as compared to the income based repayment plans, specifically the old income based repayment plan pay requires you to pay 5% less of your income towards your loans for a five year shorter time period. It's 20 years instead of 25, 10% of discretionary income instead of 15%. So for this narrow window of time, there may be people who are on the save plan who are trying to figure out whether they should switch because they're going to have to switch. And if they switch, are they going to switch to old income based repayment or are they going to try to get back onto the pay as you earn plan as long as it's open, because it will likely be closed again when the new administration takes control. So what I'm going to do is I'm going to pull up the guide to income driven repayment plans for escape student loan debt. As I've shared, we will update this whenever the save plan is formally canceled or if any rules change. I promise you this is not us just hyping up this guide. The guide's free, so it's not like we get any financial benefit for hyping it up. It's truly just because the calculator is useful. So when we go down here, what I want to do is I want to put in some scenarios where we would have a person who is kind of in that in between category and is trying to decide whether to pay their loans off in full, whether they're going to have a partial financial hardship, whether they're going to use income driven repayment plans, what have you. So let's say that we have a family who has an adjusted gross income of $200,000. We are going to assume that they have a student loan balance of $200,000. So like I said, we're talking about people who have and one and a half times their income in federal student loans. We're going to assume that the interest rate on those loans is 6% and that it is a family of two. Now what I want you to see here on the right hand side and we'll put a link to this guide in the show notes are the payments that they would have to make under the various payment plans that will still be around. So we're going to ignore the save plan undergrad and the grad plan, but we know that the pay as you earn plan will be around. Under that plan, this family would have to pay $1,411 a month towards their student loans. Under the old version of income based repayment, they would have to pay $2,116 a month towards their loans and under the 10 year standard plan have to pay $2,220.41 towards their loans. Now let's think about this conceptually. This is kind of where I was talking about, where you're in this, in between. If we put this family in a situation where they owed less than one times their income, matter of fact, we'll do that. Let's assume that they only owe $100,000 on their student loans. What you will see in that scenario is this payment will recalculate. And it recalculates so that every single payment that you see on the spreadsheet pay as you earn new IBR, old IBR and the 10 year standard plan. They all say that this family would have to pay $1,110.21 a month. Why is that the case? It's because in this scenario, this family doesn't have a partial financial hardship. The payment that they would have to make under the income driven repayment is higher than what they would pay under the 10 year standard plans. So their payment just reverts to the ten year standard plan. So actually what you see in all three scenarios is just the 10 year standard plan payment that's being calculated for all three because of that lack of financial hardship. But when we go to $200,000, this is why I said there's a decision point. Because this person has a partial financial hardship for both plans. Under the pay as you earn, they're paying 14, 11 as compared to the $2,220 a month they would have to pay for the 10 year plan. But under the old IBR plan, while they have a financial hardship, it's literally only like five bucks a month less to do the old IBR versus the ten year standard plan. So this is what I'm talking about where you're in that no man's land where it's like, technically I can pursue forgiveness under this plan, but I'm not really going to get forgiveness because if it takes $2,220 to pay it off in 10 years, if I do $2,116, maybe it takes 10 years and six months. But I'm not going to be paying on these loans for the 25 years that it takes to have my loans forgiven under old ibr. So if I'm in this position, I now have to make a decision and I have to compare things like the interest rate that I have with my federal loans as compared to a private lender. I also would have to consider things like the flexibility that comes with having federal student loans, the ability to put loans in deferment or forbearance. I have to compare things like the public Service Loan forgiveness program. Maybe I wouldn't get it forgiven in 25 years because I'm paying so much, but maybe if I was going to have to pay for 12 years instead of 10, it's still worth staying with public Service loan forgiveness because they would forgive it after 10 years. But there's a decision to be made. So this shows you a partial financial hardship in motion. If you owe less than 1 times what you earn, it is definitely something where it's highly likely that you don't have a partial financial hardship. But one of the benefits that we haven't covered is okay, what happens when I don't have that hardship, but I still have a desire for whatever your reason may be to sign up under the income driven repayment plans. Well, the benefit of still signing up for an income driven repayment plan, if that's the plan you want to use even if you don't have that hardship, is if you don't have it, they will knock down your payment to the 10 year standard plan, but they will still give you a year of credit towards the forgiveness that's required under all of these options. So in the scenarios where we looked at where under pay as you earn under new IBR and old IBR, it just reverts to the 10 year payment. The family in this example, if they still wanted credit towards public service loan forgiveness and they could still get that credit even though they technically don't have a financial hardship, they were kicked off of that payment, but they weren't kicked off of the payment plan. And as we talk about this, there's one last group that I want to discuss and it's those who are trying to decide between pay as you earn and old IBR. Remember that the payment for old IBR is more expensive. It's 15% as compared to 10%. And the metric for partial financial hardship is the payment under the IDR plan has to be less than the payment under the ten year standard plan. So there's another group of people who might be considering signing up for pay as you earn. I actually had this conversation today, but they're saying I don't know that I want to go through all the hoops of signing up for pay as you earn because they're just going to close it again anyways. And what if they make me switch plans or they'll say I don't want to go through the hoops of signing up for pay as you earn because I haven't had to update my income. So I'm still on forbearance for save. I am still making payments when I did make payments for save based off of an income that was from four or five years ago. And if I sign up for pay now, I'm going to have to recalculate my income. It's going to base it off of of my current pay. My payment's going to go way up and I will have missed the opportunity to just continue being on forbearance until they force me into the income based repayment plan. There's a real risk there because not only are the payments under pay as you earn significantly less, but if you wait and just say I don't want to sign up for pay, I'm going to just wait till they force me onto old income based repayment. Now you risk being in a situation where you don't have a financial hardship. So if you go back to the calculator if you're looking on screen, we have have changed these numbers a bit. We have a person who makes $200,000 in a household of two with $175,000 worth of student loans. If you look at the payment plans now, you will see that under the pay as you earn plan their payment would be $1,411 a month. But under the old IBR plan they do not have a partial financial hardship. So the payment that you see listed for the family $1942.86 a month is the same payment that's listed under the ten year standard plan. Which means that not cost themselves an additional $500 and some change more a month by not signing up for pay as you earn and then being forced into old income based repayment plan. But even though pay as you earn requires you to pay for five years less than the old income based repayment plan, that wouldn't even come into play because they don't have a partial financial hardship. So they wouldn't pay for 20 or 25 years, they will pay this loan off in 10 years. So I know that's a lot of numbers to throw around, but there's a lot of numbers that you have to consider in this process, right? You have to make a decision in very short order if you want to take advantage of that window for pay as you earn, or if you're going to wait for old income based repayment, or if you're going to refinance your private student loans altogether. But what I wanted to do in this episode is just familiarize you with the concept of partial financial hardship. We're going to talk about this in greater detail in the Escape Student Loan Debt State of Student Loans webinar. So I hope that you will sign up and that I'll see you next Tuesday. And if you have someone that you know would benefit from that call that you would send the information to them as well. We're doing everything we can to help you get your federal and private student loans forgiven, reduced, reorganized and expedited. And for those who don't sign up, I will see you back right here with another episode in two weeks. Talk to you soon from Escape Student Loan Debt. This was the Escape Student Loan Debt podcast, a show for established professionals whose student loan payments or loan balances are impacting their marriage, their business, their credit, or their dream of achieving homeownership.
