Question about Significant Rent Increase and Section 8

[Brian Marcy]

I own a duplex as an owner/occupier and rent out the other side.  I inherited my tenants from the last owner who did not raise rent in 4 years.  In that time there has been significant development in the neighborhood with new restaurants, condos, and a major expansion of a university's local campus.  Demand for housing has gone way up and prices have predictably risen as well.  

I recently applied to have the Section 8 rent brought up to reflect the current market.  My request was on the absolute bottom of current rates but still represents a 37% increase for my tenants, which has gone over exactly as expected.  I'm sure I can get the price from new tenants without government assistance, but there's a good possibility they will be students so I will have to account for higher vacancy rates.  The difference of about $3000 per year seems to justify that to me if my current tenants can't make the new rate work.

This is my first rental so I'm looking for insight from some of the more experienced members here on Bigger Pockets.  Would you work with the current long term tenants to adjust more gradually, let them walk and find somebody new, or do some third option I am not seeing?  It sounds like they need to agree to the new rate before Section 8 will determine the contribution split between the state and the tenants, so I'm not sure how much of an increase this represents for them.  Any insight on how that might be determined would be appreciated as well.