Many people realize that to sign up for Income Based Repayment (IBR) or Pay As You Earn (PAYE), you are required to show a “partial financial hardship”. Meeting the partial financial hardship standard is pretty easy, because you just have to show that your IBR or PAYE payment would be lower than the ten-year standard repayment plan.
Setting aside the technical standard, the rule basically boils down to the following: if the IBR or PAYE math results in lower payments for you, you are allowed to sign up. If you are interested in running the numbers based upon your income, the federal government has a useful calculator.
Things get complicated when you have multiple loans. Do you apply for IBR with each lender? What if one loan servicer has just one small loan? Can you get IBR for you tiny loans or just the big ones?
Today we will be answering those questions and more in the form of a simple example.
Suppose your luck is terrible you have four federal student loans serviced by four different companies. Based upon the standard federal repayment plan, you have to make the following payments:
- Company A: $200 per month
- Company B: $100 per month
- Company C: $50 per month
- Company D: $50 per month
Based upon your monthly income and other bills you find it pretty easy to make the payments to Company C and D, but in total you are expected to pay $400 per month. That $400 in total is just too much to be paying.
You use the federal student loan calculator and find out that based upon your income and family size, your monthly payments can be $80 per month if you sign up for IBR.
Many people worry that their payments with Company A and B would go down to $80 each, but that the payments with Company C and D would stay the same. It helps your payments a bit, but doesn’t make a huge difference.
The good news here is that the $80 that the government decides you can afford means $80 towards all of your federal student loans (Note: private loans are not a part of this process… they don’t even enter in the calculation for how much you can afford). That means that instead of paying $400 per month on your federal student loans, on IBR it gets reduced to $80 total.
What lender gets what?
When you payments are reduced, each lender still gets the same percentage as your original payments on the ten-year plan. Another way of looking at this is each payment drops by the same percent. If you are starting to freak out about the math, it isn’t necessary. Just make sure each company is aware of all the others and they should make the necessary adjustments.
However, if you want to see what the math looks like, we can do that too…
Company A normally got $200 per month out of the $400 total that you paid. 200/400 = .5 Take the .5 that you just calculated and multiple it by your new IBR number, in this case it is $80… 80*.5 = $40 Thus you will owe $40 per month to company A.
Doing the same calculations for the other companies we get $20 per month for Company B, and $10 per month for Company C and Company D.
Thus, your total payment for all four loan servicers is the $80 per month.
Keeping your loan servicers accountable
When you submit IBR or PAYE paperwork, you will learn what your new total monthly payment is. If you add up all of your new payments with all the loan companies and find that you are paying more than that total monthly payment number, it means one of them messed up the math, or isn’t aware of the other companies out there.
Just remember… that IBR or PAYE number is the total… if you are paying more, it means you need to get something fixed.
If you have a question about your individual situation or think the math isn’t adding up, feel free to stop by our student loan forums to discuss your issue.