If you’ve lost your job, you may be able to defer your student loan payments. The unemployment deferment and repayment options available can depend on the type of loans you have.
For instance, if you have federal student loans, one option is the Unemployment Deferment program offered by the government. Unemployment Deferment is a program run by the 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.
Read on to learn how the Unemployment Deferment program works, plus other alternatives, including deferment opportunities for private student loans.
What is Unemployment Deferment?
For anyone who has federal student loans, student loan deferment allows eligible borrowers to put student loan payments on hold for a predetermined period.
Unemployment Deferment is awarded to eligible federal student loan borrowers who are seeking unemployment benefits or who are unable to find full-time work.
Those who qualify can temporarily pause putting money toward student loans for up to three years for federal loans, assuming that they continue to meet all the requirements.
It’s important to note that if you have unsubsidized loans or Direct PLUS loans, interest will continue accruing during any deferment period. This means the balance owed on outstanding loans would keep growing. So, over the life of the loan, a short-term savings from deferring repayment could mean owing more in the end.
In general, interest won’t accrue on federal subsidized loans.
If you qualify for deferment and your loan continues to accrue interest, you can choose between two ways to pay back the interest. First, you could make interest-only payments. Or, you could let the interest accumulate during the deferment, adding whatever accrues to the total balance owed.
Currently, 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.”
In addition to having a larger loan amount due down the line, future interest is calculated on top of the new balance. Therefore, borrowers pay interest on top of interest, potentially resulting in higher monthly payments than before the deferment.
However, thanks to new regulations that begin in July 2023, this kind of interest capitalization on federal student loans will be eliminated.
What Types of Student Loans Are Eligible for Unemployment Deferment?
If you’re unemployed with student loans, federal student loan unemployment deferment is available for Direct Loans, FFEL Program loans, and Perkins Loans. Here are a few specific examples of loans that may qualify.
• Direct Loans
• Family Education Loans (FEEL Loans)
• Stafford Loans
• Perkins Loans
• PLUS Loans
• Direct Consolidation Loans
In addition, if a borrower received federal student loans before July 1, 1993, they may qualify for other deferments.
Private loans from private lenders are not eligible 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 any hardship repayment or deferment programs they may offer.
Who is Eligible for Unemployment Deferment?
Deferring payments on federal student loans isn’t automatic.
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 you’re 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 you need to extend the deferment past that time, you’ll have to submit a new application certifying that you’ve made at least six attempts to find full-time employment. The deferment period cannot exceed three years.
To pursue unemployment deferral, you must first fill out the unemployment deferment form at StudentAid.gov — answering questions about your 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.
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. This is one of the basics of student loans.
Over the life of the loan, this could add to what the borrower owes overall. Some private lenders 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 preferable to defaulting on student loans.
Borrowers with private student loans can contact their lender to learn if special deferment is available for those who are unemployed. This private student loans guide may also be helpful.
Advantages and Disadvantages of Unemployment Deferment
So, what are the potential pros and cons of pursuing an unemployment deferment on student loans?
These are some of the advantages and disadvantages you may want to think over:
Advantages
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.
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 have a negative impact on your credit history, complicating your ability to pursue mortgage or other loans in the future.
And, with student loans, simply not paying them does not erase the amount owed or the interest that can keep accruing.
If a borrower has only subsidized student loans, the unemployment deferment program comes at no additional cost because interest does not accrue.
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.
Disadvantages
In the case of unsubsidized federal student loans, taking a deferment will increase the total amount owed on the loan. And even if a borrower decides to make interest-only payments, they’re not not chipping away at the principal amount.
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 additional accrued 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 borrowers 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 other ways to handle student loans during a job loss.
Forbearance and income-driven repayment plans are two potential options:
Forbearance
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 you have. To see if you qualify, contact your loan servicer.
Because forbearance does not suspend the accrual of interest on a student loan, it can make sense to consider other options, such as income-driven repayment.
Income-Driven Repayment
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, it could cost borrowers more in interest over the life of the loan.
So, once your financial or employment situation improves, you may want to switch to an alternative repayment plan.
Public Service Loan Forgiveness (PSLF) Program
Having been previously employed in certain public sector jobs may also qualify some borrowers for student loan forgiveness if unemployed.
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 your 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 refinancing student loans.
When you refinance student loans, you replace your loans with one new private loan. One of the advantages of refinancing student loans is that qualified borrowers may either get a lower monthly payment or help reduce the total interest paid over the life of the loan. Note: You may pay more interest over the life of the loan if you refinance with an extended term.
But it’s important to be aware that by refinancing federal student loans with a private lender, borrowers give up benefits and protections such as federal Unemployment Deferment, PSLF, and income-driven repayment.
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.
The Takeaway
There are numerous possible student loan repayment options for unemployed borrowers who qualify, including deferment, income-driven repayment, federal student loan forgiveness programs, and student loan refinancing. One good place to start is by calling your loan provider to review all options you may qualify for.
If you decide that refinancing your student loans makes sense for your situation, SoFi offers loans with a low fixed or variable rate and no fees. By filling out a simple application, you can find out if you qualify in just two minutes.
Check your student loan refinancing rate today with SoFi.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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