Deferring student loan repayments may be available to qualifying unemployed individuals. The deferment and repayment options available (or not available) to individuals can depend on the type of loan held (federal student loans vs. privately held loans).
Many unemployed Americans struggle with figuring out how to make ends meet—from paying monthly bills to handling long-term debt. Some may need temporary financial relief from outstanding student loan debts, while seeking new employment.
Fortunately, there are programs available to eligible people who need assistance during a financial hardship, such as unemployment benefits.
For some unemployed individuals with federal student loans, one option is the Unemployment Deferment program offered by the US government.
Unemployment Deferment is a program run by the US Department of Education that allows eligible federal loan borrowers—who are out of work or cannot find full-time employment—to postpone payments on existing educational debts owed to the American government.
Below is an overview of the federal student loan Unemployment Deferment program—including, who qualifies for unemployment deferment on student loans, how the application process works, and how long repayment postponements can last.
Additionally, there’s an overview of alternatives to the federal Unemployment Deferment program (including how private student loans may be impacted by a change in employment status).
While this piece is in no way comprehensive, and everybody’s financial situation is different, hopefully there is enough information here to help start your research into the options that may be available to you.
What is Unemployment Deferment?
For anyone who has federal student loans, student loan deferment is a program offered by the federal government that allows eligible borrowers to put student loan payments on hold for a predetermined period.
In other words, the government is essentially pausing student loan payments for a set amount of time while the borrower finds a job.
Unemployment Deferment is awarded to those eligible federal student loan borrowers who are seeking unemployment benefits or who are unable to find full-time work.
Eligible applicants can pause payments on federal student loans for 36 consecutive months of deferment, assuming that they continue to meet all requirements.
It’s important to note that in most cases, interest will continue accruing during any deferment period. In practice, this means that the balance owed on outstanding loans would keep growing.
So, over the life of the loan, a short-term savings (aka deferring repayment) could mean owing more in the end. Generally, however, interest won’t accrue on federal subsidized loans.
If a federal student loan and borrower qualify for deferment and the loan will continue to accrue interest, the borrower can choose between two ways to pay back that interest.
First, they could make interest-only payments while that interest is accruing.
Or, they could opt to let the interest accumulate (without making payments) during the deferment period, adding whatever accrues to the total balance owed.
If a borrower decides to forgo interest-only payments and allow interest charges to rack up on an unsubsidized loan, that interest is added onto the total balance of the student loans, which is a process called “capitalization.” (Unpaid interest, however, is never capitalized on Perkins Loans).
In addition to having a larger loan amount due down the line, future interest is calculated on top of the new balance.
Therefore, borrowers paying interest on top of interest, potentially resulting in higher monthly payments than before the deferment..
What Types of Student Loans Are Eligible for Unemployment Deferment?
Federal student loan unemployment deferment is available to Direct Loan, FFEL Program loans, and Perkins Loan borrowers. Even though this is a federal program, not all federal loans may qualify. Here are a few examples of loans that may qualify.
• National Direct Student Loans (NDSL Loans)
• Federal Family Education Loans (FEEL Loans)
• Federal Stafford Loans
• Federal Perkins Loans
• Federal Supplemental Loans for Students (SLS Loans)
• Federal PLUS Loans
• Federal Consolidation Loans
• National Defense Student Loans
It’s important to note that if a borrower received federal student loans before July 1, 1993, they may qualify for other deferments.
Private loans from private lenders will not qualify for the federal Unemployment Deferment program. However, some lenders may provide economic hardship programs for borrowers.
Borrowers can contact their loan servicer for details on the hardship repayment or deferment programs they may offer.
Who is Eligible for Unemployment Deferment?
Deferring payments on federal student loans is not automatic—even if a borrower has already qualified for another federal program, like Pandemic Unemployment Assistance.
Borrowers first need to apply with supporting documentation to determine if they’ll be eligible for a student loan unemployment deferral.
Generally, an applicant can qualify either by providing proof of eligibility to receive employment benefits or by demonstrating that a diligent search for full-time employment is underway.
In the second case, certifying that one has registered with an employment agency (whether privately owned or state run) can help show that an active search for work is being carried out.
Applicants seeking unemployment deferment under the searching full-time employment category may receive a deferment period for only six months.
If the applicant needs to extend deferment past six months, a new application certifying that they’ve made at least six attempts to find full-time employment is required. It’s important to note, though, that the deferment period cannot exceed three years.
If the eligibility requirements get met, it’s likely an applicant could qualify for the federal student loan unemployment deferment program.
To pursue this deferral, applicants must first fill out the Unemployment Deferment Request form —answering questions about their job search, current unemployment benefits, and understanding of what loan deferment entails.
What About Private Student Loan Deferment?
Although private lenders aren’t legally required to offer unemployment deferment options, some do.
For instance, SoFi offers an Unemployment Protection Program, which lets eligible borrowers pause their payments for up to 12 months due to unemployment, as long as their loans are in good standing.
But, it’s worth keeping in mind that, similar to federal student loan Unemployment Deferment, private loans typically still accrue interest during the approved deferment period (even refinanced student loans with lenders who honor grace periods).
In other words, the total student loan balance would continue to grow even while payments are suspended.
Over the life of the loan, this could add to what the borrower owes overall. Some private lenders, including SoFi, allow borrowers to make interest-only payments during a forbearance to help avoid interest capitalization.
Even with the accrual of interest and limited options, deferment is typically preferable to defaulting on student loans.
Borrowers with private student loans may wish to contact their lender to learn if special deferment or repayment options are available to borrowers who find themselves unemployed
Advantages and Disadvantages of Unemployment Deferment
So, what are the potential pros and cons of pursuing an unemployment deferment on student loans?
Below is a discussion of some of the advantages and disadvantages that borrowers may want to think over:
For borrowers in need of financial relief, student loan unemployment deferment can help temporarily lower monthly expenses.
This can be especially helpful if an unemployed borrower would otherwise run the risk of student loan default.
Defaulting on loans can cause a negative ding to one’s credit history, complicating an individual’s ability to pursue mortgage or other loans in the future.
And, with student loans, simply not paying does not erase the amount owed or the interest that can keep accruing.
If a borrower has only subsidized student loans, then the unemployment deferment program will come at no additional cost.
Whether a borrower has been laid off due to an economic downturn or they have recently graduated and are struggling to find employment, unemployed deferment is one way to help ease the financial pressure of repaying student debt in the short term.
And, while it’s completely fine to apply for a deferral, borrowers are typically expected to use the approved deferment period to find a new job; some unemployment protection programs from private lenders even have stipulations to that effect.
In the case of having unsubsidized federal student loans, taking a deferment will increase the total amount owed on the loan. Even if a borrower decides to make interest-only payments, they’re not not chipping away at the principal amount.
If interest payments are not made, the total value of those unpaid interest payments would then be tacked on to the loan balance at the end of the deferment period.
So, in this case, the deferred interest would grow the total loan amount—how much money the borrower owes overall on their student debt.
Simply put, unemployed student loan borrowers may want to weigh whether the short-term savings tied to reduced or suspended loan payments are worth owing more money on those loans later on.
When a borrower does eventually find employment and the deferment ends, the future payments on their student loan payments may be higher each month—to cover the increase in interest.
For someone who is just adjusting to a new job, higher loan payments may come as a shock and could be hard to budget for.
Understanding the long-term implications of applying for student loan unemployment deferment can help individuals to decide whether this sort of program is the right for the current and future financial situations.
Alternatives to Unemployment Deferment
For federal student loan borrowers who don’t qualify for the Unemployment Deferment program, there may be some alternatives.
Forbearance and income-driven repayment plans are two potential options:
Similar to deferment, federal or private loan forbearance temporarily suspends or reduces loan payments.
However, while principal payments are postponed, interest will continue to accrue, no matter what type of loans. To see if you qualify, contact your loan servicer.
Because forbearance does not suspend the accrual of interest on a student loan, other options, such as income-driven repayment, could also be considered.
Income-driven repayment plans calculate loan payments based on a borrower’s current income and family size. They also, typically, stretch the loan repayments over 20 or more years.
There are four different types of income-driven repayment plans run by the US government:
• Revised Pay As You Earn Repayment Plan (REPAYE Plan)
• Income-Based Repayment Plan (IBR Plan)
• Pay As You Earn Repayment Plan (PAYE Plan)
• Income-Contingent Repayment Plan (ICR Plan)
Although this type of plan may trim monthly loan payments once approved, it could cost borrowers more in interest over the life of the loan.
So, once a borrower’s financial or employment situation improves, they may want to switch to an alternative repayment plan.
Public Service Loan Forgiveness (PSLF) Program
Having been employed in certain public sector jobs may also qualify some borrowers for student loan forgiveness.
By definition, loan forgiveness means that the remaining amount owed is, well, forgiven—the borrower is no longer bound to pay it back.
Eligible federal student loan borrowers who’ve completed 10 years of employment with a qualifying job—such as, a public school teacher, some non-profit employees, Americorps recipient, or government worker—might be eligible for the PSLF program.
If you think you may qualify for the federal forgiveness program, and your goal is to lower your monthly payments, you may still want to switch to an income-driven repayment plan while the PSLF application is being reviewed in order to lower monthly payments.
Student Loan Refinancing
After exhausting federal program options, or if none are quite the right fit, borrowers with federal or private student loans may want to look into student loan refinancing.
Refinancing student loans could help well-qualified borrowers either get a lower monthly payment or help reduce the total interest paid over the life of the loan.
But, it’s important to note that by refinancing federal student loans with a private lender, borrowers forfeit all baked-in benefits and protections such as federal Unemployment Deferment, PSLF, and income-driven repayment.
It’s also worth mentioning that lenders that offer refinancing options usually look at applicants’ qualifying financial attributes—including employment status, credit history, and income. So, refinancing student loans is not necessarily available to all who apply.
There are numerous student loan repayment options for borrowers who qualify—spanning deferment, income-driven repayment (federal loans), federal student loan forgiveness programs, and student loan refinancing. Some are specifically designed for unemployed people, while others are not.
One good place to start is by calling your loan provider to review all options that you may qualify for.
SoFi Student Loan Refinance
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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