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Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
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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.
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:
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.
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.
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.
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.
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.
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.
