Unemployed and Struggling with Student Loan Debt? Here's What You Can Do

Student loan payments may hit especially hard if you don’t have full-time employment or regular income. While both unemployment and student loan debt can be difficult to navigate, you can always take control of managing your student loan repayments! Make a plan so you don’t miss payments and default on your student loan. This could hurt your credit score, limit your future repayment options, and cause even more financial hardship.

If you have federal student loans, there are three avenues to explore:

• Deferment

• Forbearance

• Income-driven repayment (IDR) plans

I’m Unemployed. Is It Better To Get Deferment or Forbearance for Student Loans?

Many student loan borrowers who’ve lost their jobs or are facing other financial hardships turn to deferment or forbearance. Both allow borrowers to stop making payments for a period of time, but they differ in eligibility requirements and how interest is treated. 

If you’ve lost your job, you may be eligible for either program. Many borrowers choose to request deferment first because interest does not accrue on subsidized federal loans while in deferment. In contrast, loans in forbearance do continue to accrue interest, which will increase your loan balance in the long run. 

Why You May Want To Consider Changing Your Repayment Plan First

Though deferment and forbearance can be a lifeline for people who’ve lost their jobs, many borrowers first apply for an income-driven repayment plan if they aren’t already on one. This is because you’ll still be required to make your monthly payments until your deferment or forbearance request is approved. 

With the repayment pause coming to an end in fall of 2023, some are anticipating long wait times as federal loan servicers will be helping many borrowers figure out what to do next. An IDR plan may reduce your monthly payments to as little as $0/month, and counts toward any student loan forgiveness programs you may be enrolled in. If you’re already in an IDR plan and your payment amount isn’t affordable during unemployment, forbearance or deferment may provide temporary relief.

Should You Request Unemployment Deferment on Your Student Loans?

Federal student loan deferment allows you to stop paying loans for up to three years, or 36 months. That said, you must renew your eligibility after you’re initially granted deferment — usually once a year. You’ll also have to show the student loan servicer that you meet all eligibility requirements initially. 

There are several types of deferment. Economic hardship deferment and unemployment deferment may apply if you’ve lost your job. StudentAid.gov has a complete list of deferment options.

What Are the Eligibility Criteria for Student Loan Deferment?

Generally, you’ll meet the eligibility requirements for unemployment deferment if you can show that you’re unemployed and looking for work. But deferment isn’t automatic; you must request it from your loan servicer.

If you’re not unemployed but still feel that you can’t make your loan payments, you can request an economic hardship deferment. You’re probably eligible if you’re receiving unemployment benefits or government assistance. You may also qualify if you’re serving in the Peace Corps or working full time but make less than 150% of the poverty guidelines for your family size. 

What Loans Do and Don’t Accrue Interest During Student Loan Deferment?

While your loans are in deferment, interest will not accumulate if you have the following types of federal student loans:

• Direct Subsidized Loans

• Subsidized Federal Stafford Loans

• Federal Perkins Loans

• Any subsidized portion of FFEL Program Consolidation Loans

Interest will accumulate while your loans are in deferment for the following types of loans:

• Direct Unsubsidized Loans

• Unsubsidized Federal Stafford Loans

• Direct PLUS Loans

• The unsubsidized portion of Direct Consolidation Loans and FFEL Program Consolidation Loans

Should You Request Forbearance for Your Student Loans? Eligibility Criteria and Benefits of Forbearance

If you don’t qualify for a deferment, you might be eligible for a forbearance. Forbearance is similar to deferment but has two major differences:

• It’s easier to qualify for forbearance.

• Most federal student loans accrue interest during forbearance. 

There are two types of forbearance: general and mandatory. To be eligible for general forbearance, you must be unable to pay your scheduled monthly loan payments based on either:

• Financial difficulties

• Medical expenses

• Changes in employment, and/or

• Other qualifying reasons (determined by your loan service provider)  

General forbearance is available for Direct Loans, FFEL Program loans, and Perkins Loans. General forbearance periods cannot last more than 12 months. If you’re still experiencing hardship after 12 months, you can apply for more forbearance time. However, there is a maximum of three years (or 36 months) of general forbearance no matter what your circumstances are. 

Mandatory forbearance is available to borrowers in specific circumstances who have either a Direct Loan or a Federal Family Education Loan (FFEL). Perkins Loans aren’t eligible for mandatory forbearance. Several circumstances may qualify borrowers for mandatory forbearance. If your monthly loan payment is more than 20% of your total monthly gross income, you may qualify for forbearance for up to three years. Though, you must reapply annually.

Can You Get Deferment or Forbearance on Private Student Loans? 

Private student loans are not governed by the same rules as federal student aid. Private lenders set their own loan terms, and in general, these lenders don’t offer as many repayment options as the U.S. Department of Education. Many private lenders don't offer deferment or forbearance

If you’ve lost your job and have private student loans, contact your lender as soon as possible to ask about options for individuals experiencing financial hardship. If your private lender is not able to work with you on forbearance or deferment options, consider refinancing your student loans. If you’re chronically unemployed and your student loans and other debts are mounting, you may want to see if filing bankruptcy could give you the financial fresh start you need. More on this below.

Can an Income-Driven Repayment Plan Help You With Your Student Loans if You’re Unemployed? 

With federal student loans, you can enter an income-driven student loan repayment plan (IDR plan) that calculates your monthly payments based on your discretionary income. 

If you’re enrolled in an income-based repayment program, contact your loan servicer to find out if you can change the repayment amount. Even if it takes a little bit of extra paperwork, getting a $0/month payment that counts toward your loan forgiveness program could be a great option for you.

If you have federal student loans and are looking for your loan servicer’s contact information, check out our article: Using the National Student Loan Data System (NSLDS) To Get Your Federal Student Loan Information. 

Can You Use Unemployment Benefits To Make Monthly Payments?

If you’re receiving unemployment benefits, you can use that money to make your student loan payments if it’s financially possible to do so. If you’re in deferment or forbearance and have any disposable income, consider making interest-only payments to continue repaying your loans. This can reduce the amount that you end up owing in the long run.

The Impact of Not Making Interest Payments

It’s important to understand how interest capitalization can increase your loan balance. Here is an example of how it works:

You have a $50,000 student loan balance with an interest rate of 7%. If you’re in forbearance for a year right when your payments become due, $3,500 of interest will accrue over that year of forbearance. If you don’t make any payments during forbearance, that $3,500 will be capitalized (added to your loan balance amount) to create a total balance of $53,500. Then, interest accrues on the higher amount and continues to capitalize. The next year, 7% of $53,500 ($3,745) is added to the loan balance for a total balance of $57,245. Over several years, student loan balances can balloon because of capitalization.

Again, because capitalization can lead to such significant consequences, it’s important to look into all of your repayment options before going into forbearance or deferment.

Can You Use Loan Consolidation To Help Pay Student Loans?

Consolidation merges all of your different federal student loans into one federal student loan with one interest rate. If you’re struggling to make your monthly payments because it’s hard to keep track of all your loans, consolidation can help streamline things. Once consolidated, you’ll just have one loan payment to make.

If you have private student loans, you can’t consolidate your loans through the federal program, but you may be able to refinance your loan.

How Deferment and Forbearance Impact Loan Forgiveness Programs

Certain federal student loan borrowers are eligible for loan forgiveness or cancellation. For example, borrowers working in public service jobs (government or nonprofit) may be eligible for the Public Service Loan Forgiveness (PSLF) program. Under the PSLF program, borrowers make their federal student loan payments for 10 years (120 qualifying payments) under an income-based repayment plan, and then the remaining balance is forgiven. 

Though the federal government has made changes to PSLF and other loan forgiveness and repayment programs in recent years, historically, periods of deferment and forbearance have not counted toward the required 10 years of payments for loan forgiveness. Keep this in mind if you are hoping to have your loan forgiven through PSLF or other programs like Teacher Loan Forgiveness.

Bankruptcy Could Provide a Fresh Start, Especially if You’re Chronically Unemployed

If you’ve been struggling with unemployment for a long time, and it’s not just a temporary situation, you may be eligible to file Chapter 7 bankruptcy to get your federal student loans erased for good. When borrowers take out financial aid in college, most don’t think they’ll end up without work after they graduate or leave school. But many do face this reality. 

Bankruptcy can help you with your student loans if you can prove that repaying your student loans would cause you undue hardship. If you have been unemployed for five of the last 10 years, this is one way you can prove undue hardship. See if you qualify now with our free student loan discharge screener.