What Is a Partial Financial Hardship for Student Loans?

A Partial Financial Hardship (PFH) is a status for federal student loan borrowers whose financial situation makes it difficult to afford standard loan payments. This status is determined when a borrower’s required payment under an Income-Driven Repayment (IDR) plan is less than their payment under a standard 10-year plan. PFH status allows borrowers to access repayment benefits that adjust monthly payments based on their ability to pay.

Understanding the Definition

This calculation hinges on a borrower’s discretionary income, which is the portion of their adjusted gross income (AGI) exceeding a certain percentage of the federal poverty line for their family size. For most IDR plans, discretionary income is calculated as the difference between a borrower’s AGI and 150% of the federal poverty guideline for their family size and state of residence.

For example, if a borrower’s AGI is $40,000 and the federal poverty guideline for their family size is $20,000, their discretionary income would be calculated by subtracting 150% of $20,000 ($30,000) from their AGI, resulting in $10,000. Family size includes the borrower, their spouse if they file taxes jointly, and any dependents claimed on their federal income tax return.

Loan Programs Where PFH Applies

Partial Financial Hardship applies to federal student loans. Eligible types include Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans. Loans from the Federal Family Education Loan (FFEL) Program, such as FFEL Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans, can also qualify if consolidated into a Direct Consolidation Loan. This consolidation process converts older FFEL loans into a Direct Loan, making them eligible for income-driven repayment plans and PFH benefits.

Private student loans are not eligible for PFH determination or federal income-driven repayment plans, as they are issued by private lenders. Federal Perkins Loans are not eligible for income-driven repayment plans unless consolidated into a Direct Consolidation Loan.

How Partial Financial Hardship is Used

A Partial Financial Hardship determination is a prerequisite for enrolling in several Income-Driven Repayment (IDR) plans. These plans, such as the Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Revised Pay As You Earn (REPAYE) plans, cap monthly payments at an affordable percentage of a borrower’s discretionary income. For instance, under the PAYE plan, monthly payments are generally 10% of discretionary income, while under the IBR plan, they are 10% or 15% depending on when the borrower received their first loan. The REPAYE plan sets payments at 10% of discretionary income for all borrowers.

When a borrower is determined to have a Partial Financial Hardship, their monthly payment under these IDR plans will be lower than what they would pay under a standard 10-year repayment plan. An additional benefit of these plans is the potential for interest subsidies, where the government may pay a portion of accrued interest, preventing the loan balance from growing rapidly. After a specified repayment period, typically 20 or 25 years depending on the plan and loan type, any remaining loan balance may be forgiven, though the forgiven amount could be considered taxable income.

Steps to Apply for Partial Financial Hardship

Applying for an Income-Driven Repayment (IDR) plan, which includes the Partial Financial Hardship determination, begins by submitting an Income-Driven Repayment Plan Request. This can be done online through StudentAid.gov or by completing a paper form and sending it to your loan servicer. The application requires financial information to assess eligibility and calculate your monthly payment.

Borrowers need to provide documentation of their income, such as federal income tax returns from the most recent tax year. If income has significantly changed since the last tax return, or if no tax return was filed, alternative documentation like pay stubs, an employer letter, or unemployment benefits statements can be provided. Information regarding family size, including dependents, must also be accurately reported. Your loan servicer will then use this information to determine your eligibility and calculate your new monthly payment.

Managing Partial Financial Hardship Status

After approval for an Income-Driven Repayment plan based on a Partial Financial Hardship determination, borrowers must fulfill ongoing requirements to maintain eligibility and benefits. The primary requirement is the annual recertification of income and family size. Your loan servicer will send a notice when it is time to recertify, usually 60 to 90 days before the annual deadline.

Failure to recertify on time can have consequences, including the recalculation of monthly payments to a higher amount, potentially based on the standard repayment plan, and the capitalization of any unpaid interest. This means accrued interest could be added to the principal balance, increasing the total amount owed. Changes in income or family size throughout the year can also affect a borrower’s Partial Financial Hardship status and monthly payment amount. Borrowers should update their loan servicer promptly if these changes occur.