Economic Hardship
Definition
Economic hardship refers to a situation where an individual’s financial resources are insufficient to meet basic living expenses, including the ability to repay debts such as student loans.
Detailed Explanation
Economic hardship in the context of student loan debt arises when a borrower’s income is not adequate to cover both their basic necessities and their loan repayments. This can occur due to a variety of reasons such as unemployment, underemployment, medical emergencies, or other financial burdens that dramatically reduce disposable income.
The U.S. government and many private lenders recognize economic hardship and may offer relief options like deferment, forbearance, or income-driven repayment plans that adjust monthly payments based on the borrower’s income and family size.
Under federal student loan guidelines, economic hardship is often quantified by specific eligibility criteria. For example, a borrower might qualify for economic hardship deferment if their income is less than 150% of the poverty guideline for their family size and state. This deferment allows them to temporarily suspend loan payments without accruing interest on subsidized loans during the hardship period.
Example
Jane graduated from college with $30,000 in student loan debt. After working for a year, she lost her job and struggled to find new employment, earning much less than before. Her monthly expenses for rent, food, and utilities consumed most of her new salary, leaving her unable to meet her student loan payments.
Jane applied for and received an economic hardship deferment, which paused her payments until she could find a better-paying job.
Key Articles Related To Economic Hardship
Related Terms
Deferment: A temporary suspension of loan payments allowed under certain conditions like economic hardship.
Financial Hardship: Not having enough income to pay your necessary expenses.
Forbearance: A period during which borrowers are allowed to pause or reduce payments when they cannot make them due to financial difficulties.
Income-Driven Repayment Plan: A student loan repayment plan that sets the monthly payment amount based on the borrower’s income and family size.
Subsidized Loan: A federal student loan for which the government pays the interest while the borrower is in school or during deferment periods.
Economic Hardship FAQ
What qualifies as economic hardship for student loans?
Economic hardship is typically determined by a borrower’s income being below a certain threshold relative to the poverty line, unemployment, or significant changes in financial status.
How do I apply for economic hardship consideration for my student loans?
Contact your loan servicer to apply for economic hardship deferment or forbearance. You will need to provide documentation that demonstrates your financial status, like income verification or unemployment benefits.
Does interest accrue during economic hardship deferment?
Interest does not accrue on subsidized loans during deferment periods, but it continues to accrue on unsubsidized loans.
Can economic hardship deferment affect my credit score?
Potentially. Receiving a deferment or forbearance does not directly affect your credit score, but it may influence future lender decisions if it reflects financial instability.