What to Do About Student Loans if You Get Laid Off
Getting laid off can send your finances into a tailspin, especially if the pink slip comes without much notice. Whether you are facing temporary unemployment, or are having trouble finding a full-time position for a while, it’s important to think about how you will handle your student loans during this period so that you don’t go into default.
While it’s certainly scary to suddenly be without a job, layoffs are pretty common. According to the Bureau of Labor Statistics, every year about 21 million Americans lose their jobs due to layoffs and discharges.
If you recently got laid off and are suddenly scrambling to pay your bills, you may wish to consider income-driven repayment plans for your federal student loans or student loan forbearance. Loan forbearance allows the borrower to temporarily stop making payments, or at least reduce the payment amount for a specific timeframe, and can apply under many circumstances, not just unemployment.
For most federal student loans, if you don’t make a payment in more than 270 days , you will be considered in default. Defaulting on a student loan can impact your credit score, but it can also result in other problems, including losing your eligibility for deferment , forbearance, and other federal repayment options.
Keep in mind that after getting laid off, you may also be able to file for unemployment. The process varies by state, but these benefits might also help alleviate some monthly payment concerns, or at least make it a little easier to pay some amount of your student loan payments in case you aren’t granted forbearance.
What is Student Loan Forbearance?
There are two different types of forbearance: general and mandatory . General forbearance means that your loan servicer will review your application and approve or deny the request. Sometimes a general forbearance is called a discretionary forbearance for this reason.
Forbearance temporarily allows you to stop making your federal student loan payments, or at least reduces the amount you have to pay for a certain period of time. In order to request a general forbearance and get approved, you must meet certain requirements—usually, if you are unable to make monthly loan payments because of financial difficulties, medical expenses, or a change in employment, including getting laid off.
Once granted, a period of general forbearance will last for no more than 12 months . If you’re still experiencing hardship when your loan forbearance expires, you can request another. Perkins Loans, which are no longer available, have a cumulative limit on general forbearance of three years , while most other Direct Loans do not. However, your loan servicer is allowed to set a limit on the maximum amount of time you can get a general forbearance.
A mandatory forbearance means your loan servicer is required to grant the forbearance. This is if you are applying under special circumstances, such as serving in AmeriCorps, certain job types such as medical internships and teaching, or if you are facing economic hardship, like if payments on your loans are greater than 20% of your gross monthly income .
To apply for federal student loan forbearance, you’ll want to contact your loan servicer directly. You’ll likely have to provide documentation, such as paperwork from your previous employer showing you were laid off. Keep in mind that during forbearance, you will still be responsible for paying interest that accumulates during the time period—unless you have subsidized loan, such as subsidized Direct (aka Stafford) Loans.
The less interest you let grow while your loans are in forbearance, the less interest may compound on top of your principal loan balance. If it’s affordable, making small payments that only cover the interest while your loans are in forbearance can benefit you in the long run.
Income-Driven Repayment During Unemployment
If you’re eligible, switching to an income-driven repayment plan is another option for what to do about your student loans if you get laid off.
Because these plans calculate how much you pay each month based on your discretionary income, if your income suddenly becomes $0, your monthly payment could be as low as $0. Enrolling in an income-driven repayment plan has some benefits over choosing student loan forbearance or deferment.
Because income-driven repayment plans count toward loan forgiveness, your remaining student debt may be forgiven after 20 or 25 years of qualifying on-time payments, depending on the plan. Keep in mind that specifically to qualify for the Public Service Loan Forgiveness program, you need to make 120 qualifying monthly payments while on an income-driven repayment plan.
If you just got laid off, chances are now isn’t a great time for you to think about refinancing. Whether you opt to defer your loans or to take advantage of an income-driven repayment plan after getting laid off, your first priority needs to be maintaining your financial health.
However, once you’re back on your feet, crushing it at a new job, and enjoying a nice pay bump, maybe you’ll want to consider refinancing your student loans. Refinancing your federal or private loans with a private lender can help potentially lower your interest rate or lower your monthly payments. If you refinance for a lower interest rate, you may spend less on interest over the life of the loan.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s Website on credit .