The IRS allows hardship withdrawals for “an immediate and heavy financial need.” In some circumstances, you could use your 401(k) hardship withdrawal to pay for college tuition. Medical expenses or an imminent home foreclosure also usually qualify. However, you can't take a hardship withdrawal to repay student loans.
Those who qualify for a hardship deferment include people receiving certain types of federal or state aid and anyone volunteering in the Peace Corps, said higher education expert Mark Kantrowitz. With both a hardship and an unemployment deferment, interest generally doesn't accrue on undergraduate subsidized loans.
That means you can't take out $1,100 for a $1,000 repair job. You are also not able to rely on a hardship withdrawal if you have alternative funding sources available. This could include your personal savings, insurance, liquidation of unnecessary assets or a 401(k) loan.
The administrator will likely require you to provide evidence of the hardship, such as medical bills or a notice of eviction.
Although a financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee, certain expenses do not qualify. For example, For example, expenses for the purchase of a boat or television would generally not qualify for a hardship distribution.
Submit supporting documentation.
Provide supporting documents along with your hardship letter to help prove the legitimacy of your claim. Depending on your situation, you might submit documents such as an unemployment notice, medical bills, military orders or a divorce decree.
Hardship personal loans are a type of personal loan designed to help borrowers overcome financial difficulties. You may face financial difficulty for a number of reasons, such as a medical emergency, car repairs, or a job loss. Hardship personal loan programs are offered by many small banks and local credit unions.
If you work full time for a government or nonprofit organization, you may qualify for forgiveness of the entire remaining balance of your Direct Loans after you've made 120 qualifying payments—i.e., 10 years of payments. To benefit from PSLF, you need to repay your federal student loans under an IDR plan.
Forbearance is usually a temporary postponement of payments. The borrower may alternatively request an extension of time allowed for making payments or the acceptance of smaller payments than were previously scheduled. Unlike deferment, interest continues to accrue during any period of forbearance.
You may need to share proof of the hardship event and show that you don't have insurance or other assets and can't qualify for a loan before you receive the hardship withdrawal. Your employer may also want to verify that you can't cover the hardship by stopping your 401(k) contributions.
Under the new rules related to the SECURE 2.0 Act of 2022, employees may state they had emergency expenses that merit a hardship withdrawal. Beginning in 2024, they can take up to $1,000 per year for emergency expenses without incurring the usual 10% early withdrawal penalty.
Disadvantages of a Hardship Withdrawal
The amount that is withdrawn cannot be repaid back into the plan. Hardship withdrawals are subject to income tax and will be reported on the individual's taxable income for the year.
However, the CARES Act did not address millions of student loan borrowers with federal loans that are not owned by the U.S. government as well as loans made by private lenders.
What student loans are not eligible for forgiveness? Private student loans, by definition, are private and are not eligible to be forgiven. These are loans the borrower owes to student loan providers and not the federal government.
If you're in a short-term financial bind, you may qualify for a deferment or a forbearance. With either of these options, you can temporarily suspend your payments. But keep in mind that forbearance and deferment have pros and cons. Student loan payments have restarted, and regular interest rates have resumed.
Student loan cancellation programs
Perkins loan cancellation. Borrowers with federal Perkins loans can have up to 100% of their loans canceled if they work in a public service job for five years. In many cases, approved borrowers will see a percentage of their loans discharged incrementally for each year worked.
The remaining unpaid balance of loans is forgiven after 25 years. Income-Based Repayment (IBR)—Depending on when you first took out loans (before or on or after July 1, 2014), payments are generally 10% or 15% of the borrower's discretionary income, but never more than the 10-year Standard repayment plan amount.
Key takeaways
A 401(k) loan may be a better option than a traditional hardship withdrawal, if it's available. In most cases, loans are an option only for active employees. If you opt for a 401(k) loan or withdrawal, take steps to keep your retirement savings on track so you don't set yourself back.
Hardship loans come in the form of a lump sum of money as opposed to a line of credit, like a credit card. This type of debt can be unsecured or secured, though most lenders only offer unsecured loans.
A hardship withdrawal isn't a loan and doesn't require you to pay back the amount you withdrew from your account. You'll pay income taxes when making a hardship withdrawal and potentially the 10% early withdrawal fee if you withdraw before age 59½.
That is, you are not required to provide your employer with documentation attesting to your hardship. You will want to keep documentation or bills proving the hardship, however.
I am writing this letter to request assistance with my personal loan during a time of financial hardship. Approximately two weeks ago, I was let go from my job due to company-wide layoffs. As a result, I have been unable to continue making regular payments on my loan.
A financial hardship letter is a document in which you can detail your financial situation for your lender in hopes of getting a payment extension or reduction. This letter should explain your current financial situation and why you're unable to make payments.