While you’re unemployed, it may be difficult to make ends meet. The bills keep coming, and you may have to keep up with current expenses as well as repay the student loan debt that you took on years ago. It’s always best to continue making payments on a student loan, as you’ll have to pay it off eventually, but that might not be an option during periods of unemployment.
Fortunately, some student loans give you a breather from your loan when things are tight through unemployment deferment, which allows you to temporarily postpone making payments on your student loans while you are unemployed. It's important to evaluate the impacts and process of an unemployment deferment to get the financial reprieve you need while avoiding a default on the loan.
Financial Impacts of Unemployment Deferment
It may seem like you can do no wrong by pausing payments on a student loan. But there are two important outcomes to factor in when considering a deferment:
- Interest may still apply during the deferment. In general, you will be charged interest during a deferment on an unsubsidized loan, such as a Direct Unsubsidized Loan, a Direct Unsubsidized Consolidation Loan, a Direct PLUS Loan, a Federal Unsubsidized Stafford Loan, a Federal PLUS Loan, and portions of certain Federal Consolidation Loans. However, you generally won't be charged interest during a deferment on a subsidized loan, such as a Direct Subsidized Loan, a Direct Subsidized Consolidation Loan, a Federal Subsidized Stafford Loan, a Federal Perkins Loan, or portions of some Federal Consolidation Loans. The finance charges will cause you to pay more over the life of the loan.
- The deferment may not count toward loan forgiveness requirements. This would mean that you would have to resume repayment on the loan to continue making progress toward loan forgiveness.
How Unemployment Deferment Works
Even if you're between jobs, you can't simply stop making payments on your student loan; you risk your loan becoming delinquent, which could send you into default. To start an unemployment deferment (and stop making payments), you’ll need to formally qualify for and apply for the deferment through your student loan servicer—it’s not automatic. Moreover, you'll generally need to submit documentation to the servicer that proves your eligibility for the deferment.
- How "unemployed" is defined: You don’t have to be strictly unemployed to qualify for a deferment. “Unemployment” is triggered by either receiving unemployment benefits or seeking but being unable to find full-time employment, which is defined as working for at least 30 hours per week in a position that is expected to last at least three consecutive months.
- Loan types: Federal student loans, which are generally the most borrower-friendly, offer the best chance for an unemployment deferment. Private lenders might also allow you to postpone payment, but the rules may vary. Contact your loan servicer for complete details.
- Placing an unemployment deferment request: To make it official, apply for a deferment with your student loan servicer (the company that you send payments to each month) on the grounds of being unemployed. You’ll need to fill out the Unemployment Deferment Request form on the U.S. Department of Education website to request that your loans go into deferment.
- Qualifying for a deferment: You’ll need to document your case to qualify. There are two ways to claim that you're eligible: attest that you're eligible for state unemployment benefits or that you're actively seeking work.
- Once approved: Stop making payments once you receive the official word from your student loan servicer. However, you’ll need to stay in contact with your loan servicer.
Abruptly stopping payments on a student loan while unemployed isn't the same thing as getting an unemployment deferment from a loan issuer. While the latter is a valid approach for pausing payments, the former isn't and can result in you defaulting on your loan.
Making Payments on Student Loan Interest
If you have subsidized loans, the interest will be paid for you. However, with unsubsidized loans, you'll either need to pay the interest costs every month or add those interest costs on top of your loan balance (known as capitalizing the interest).
Capitalizing interest costs might seem attractive, as you can deal with it later, but this approach can become expensive. Your monthly payment will actually increase. As a result, you’ll have to pay off what you borrowed as well as the interest that built up during deferment (plus you'll be paying interest on the interest that gets added to your loan).
For this reason, you may prefer to pay interest as it accrues. During an unemployment deferment, you'll generally still have the option to pay your interest costs each month. This would be a smaller payment than your scheduled payment, and it will likely keep your debt from growing.
As an example, let's say you have a $30,000 unsubsidized student loan with 6% interest and received a 12-month deferment that begins when the loan enters repayment. If you were to pay the interest as it accrues, your monthly payment would be $333 over 120 payments. In contrast, if the interest was capitalized at the end, your new loan balance would reflect $1,800 in capitalized interest. Your monthly payment would be a higher $353 a month for 120 months.
Timeframe for an Unemployment Deferment
In general, if you are a Direct Loan or FFEL Program borrower, your deferment will end on the earlier of the date you exhaust your maximum eligibility for the deferment, six months from the deferment start date, or the date you are no longer eligible for the deferment for another reason.
If, however, you have a Perkins Loan, your deferment ends on the earlier of the date you use up your maximum eligibility for the deferment, 12 months from the start date of deferment, or the date when you no longer qualify for the deferment for another reason.
When the deferment period has elapsed, you'll need to reapply to stay in deferment—this isn’t automatic. That means you'll have to again sign documents and attest that you are still either actively seeking employment or receiving state unemployment benefits. If your first loans were made before July 1, 1993, your deferment will last a maximum of two years; otherwise, your deferment can last up to three years.
Perkins Loan borrowers get a six-month post-deferment grace period that starts to count down from the date when you're no longer eligible for the deferment.
Seeking Employment During the Payment Pause
To stay in unemployment deferment, you need to seek work actively. Technically, this is defined as making at least six "diligent" attempts to find work in the past six months. It’s best to keep records of your efforts at finding employment. Unfortunately, you can't just wait for employment that you think is ideal; most lenders require you to take any job you can get, regardless of income or career prospects.
If you're eligible for unemployment benefits from your state, document your eligibility for deferment by showing that you currently receive benefits from your state. A recent unemployment check should serve as sufficient proof. Lenders can always request any additional documentation they feel is necessary, so keep good records on any job interviews, note any employment programs you're participating in, and be prepared to back up any claims you’re making.
Once you’re working again, your deferment should end, and you'll need to start making payments again. Contact your lender and let them know you’re no longer eligible for the deferment. If you're still unable to afford your payments, communicate with your lender before you start missing payments.
Alternatives to Unemployment Deferment
Deferment isn’t your only option for handling student loans during periods when you are unemployed or underemployed. There might be other options, including other types of deferment or adjustments to your loan and payment. Evaluate all of your options, as you might not qualify for a deferment, or you might find that it’s not the right fit.
- Income-driven repayment programs: These plans base your monthly payments on your income and family size and can make repayment more manageable when your earnings are low. You could even wind up paying zero in monthly payments until you’re back on your feet. You'll need to submit the Income-Driven Repayment Plan Request to apply.
- Loan forgiveness: You may qualify to have the balance of your loan forgiven if it has not been paid off after 20 to 25 years. Previously, this could put you on the hook to pay taxes on the forgiven amount, which could be substantial. However, student loan debt forgiven between 2021 and 2025 is tax-free, according to the American Rescue Plan Act of 2021.
- Forbearance: This is another way to stop making payments temporarily, or to make smaller payments. However, you must still pay interest that accrued on the loan. You might be able to qualify for forbearance if deferment is not an option. Submit the General Forbearance Request to apply.
- Additional alternatives: Depending on your situation, you might qualify for other programs. For example, military service or disability might make you eligible for certain benefits.
- Getting another loan: It can be tempting to take out another loan to pay your student loans, but it's risky. You'll only increase your debt burden, and you risk falling into a debt spiral. Communicate with your lender and explain your situation before you go deeper into debt.