When you’re unemployed, it’s hard enough getting out of bed in the morning, let alone searching for a job. Add to that the stress of dealing with your student loans and it’s a wonder you can get out of bed at all. Student loan debt and unemployment is not a fun combination.
We wish we could snap our fingers and make your student loans disappear when you can’t pay them (and even when you can). Instead, we’ll have to settle by giving you some advice on how to deal with them while you’re unemployed.
Before we go into it, the first thing you should do when unemployed is apply for unemployment benefits, if you’re eligible. Any income is a step in the right direction when you have bills you need to pay. Look up your state’s unemployment requirements to see if you’re eligible and how much you can get.
After that, you need to make sure your budget is in order and you're still handling your student loan debt.
Here's our advice that will hopefully get you on the right path so you can focus on your job search.
Special Student Loan Programs Due To The Coronavirus
First, before we dive into the long-term options for dealing with your student loans, it's important that we cover the basics of your options if you're reading this anywhere between March and September 2020. Due to the coronavirus, there are a lot of special programs for your student loans which will ease the burden of being unemployed.
If you have Federal Direct student loans, your loans are:
- Automatically placed in forbearance until September 30, 2020. This means no payments will be due.
- Interest will be set to 0% until September 30 2020. This means your loans won't grow!
Basically, if you're unemployed right now and have Federal Direct Loans, you don't need to do anything except take care of yourself and figure out how to get back to work.
However, you still need to navigate private student loans and non-Federally held loans like FFEL or Perkins loans. Plus, you might want to make plans for what to do after September as well.
What If I Ignore My Student Loans?
Please don't. This is the worst thing you can do - even if you're unemployed.
If you ignore your student loans, you might feel better for a while (there’s nothing like a little act of rebellion to fire yourself up), but it can severely affect your credit in the long-run.
- After 90 days of not paying, your loans will become delinquent, the delinquency will be reported to the credit agencies, and you may start seeing late fees. You may also hear from your servicer more often.
- After 270 days of not paying, your loans will enter into default. This is where the real harm happens. In default, your entire balance becomes due and you will no longer be eligible for federal programs like deferment and other repayment plans.
For a more in-depth look at what happens when you don’t pay, read this article.
What Do I Do With My Loans While I’m Unemployed?
You’re going to want to talk to your servicer, but it’s a good idea to come to that conversation prepared. Being familiar with your options ahead of time will help you choose the right one for your situation
If you don't know what your options are, you're not going to know what to ask for when you talk to your loan servicer or if you do it yourself.
Specifically, if you call your loan servicer and say you can't pay your loans because you're unemployed, they may offer you and option like a deferment or forbearance. But that might not be the best option (in fact, it's not).
In fact, the best option for your loans (if you're eligible) is to apply for an income-driven repayment plan. If you're unemployed, your monthly student loan payment could legally be $0 per month.
Think of this order when seeking help:
- Income-Driven Repayment
Repayment Plan Options
Brace yourself. The following repayment plans can get confusing. We broke down the types of repayment plans, but this is not a comprehensive guide. The U.S. Department of Education has a handy calculator tool that lets you see payment estimates for each plan based on your specific loans.
We suggest checking that out to get an idea of what your payments will look like for the different plans. But even though the numbers may look good, the other terms may not, so take a look at the following information to get a feel for the payment plans.
However, if you're unemployed, income-driven repayment is going to be the plan you want to ask for. The reason? Income-driven repayment plans include loan forgiveness, so if you experience years of low income, your loans will eventually be forgiven. Second, income-driven repayment plans count towards Public Service Loan Forgiveness. So, if you become employed in public service in the next few months, you can start working towards loan forgiveness as well.
Income-driven repayment (IDR) plans base your payment amount on your income and family-size. Then after 20–25 years of payments, any remaining balance will be forgiven. When you’re unemployed, you might be able to score a $0 payment, but don’t let that excite you too much.
There are a couple things you should consider before jumping into an IDR plan. Anytime you increase your loan term, you’ll pay more in interest over the life of the loan.
If you make enough money down the road to pay off your total loan balance before your loans would be forgiven, you will end up paying more because of interest in the IDR than you would have in the Standard 10-year plan.
Income-driven plans require annual paperwork as well. Since payments are based on your income, you are expected to report your income to the Department of Education each year. If you miss the deadline, your loans will go back to a Standard plan and all accrued interest will be tacked onto your loan balance.
If you choose to enroll in one of the available IDR plans, we suggest keeping track of recertification deadlines yourself. We also recommend paying more than the minimum payment whenever you can.
The quicker you pay it off, the less interest you pay on it and — surprise — the sooner you can stop paying.
Here are some of the income-driven repayment options, with some basic pros and cons:
Income-based repayment (IBR)
Payments are never higher than the Standard repayment amount. Only plan available to both Direct Loans and FFEL loans.
Pay more overall if you pay off the loan within the loan term.
Income-contingent repayment (ICR)
Only plan available to parent PLUS loan borrowers,
Payments have no cap, even if they go above the Standard repayment amount. Longest loan term at 25 years.
Pay As You Earn (PAYE)
Payments are never higher than Standard repayment amount. Shortest loan term at 20 years.
Only available for loans taken out in a certain time period.
Revised Pay As You Earn (REPAYE)
No income requirements.
Payments have no cap, even if they go above the Standard repayment amounnt. Only plan that uses your spouses info even if taxes were filed separately.
If you’re already on an income-driven repayment plan when you become unemployed, submit a new application to recalculate your payment with your unemployment income, no matter when your next recertification deadline is.
This is also helpful because your new payment (as low as $0) will alst for 12 months until you have to re-certify again. So, if you do find employment in 2-3 months, you can enjoy your $0 payment for the remaining 9 months to help you get back on your feet financially.
Important Tips: On the application, make sure to specify that you are submitting the document early so your servicer will recalculate your payment immediately. You should also consider submitting your application using the "alternative method" so that it uses your current income (of being unemployed), versus using your prior year tax return - which will likely have an income and require a payment you may not be able to afford.
This option simply extends the time frame you have to pay off your loans, thus lowering payment amounts. Remember that the longer the loan term, the more you pay in interest.
To limit how much you spend overall, we suggest either paying more than the minimum payment whenever you can or switching to another plan when you can afford it. You can switch from this plan to another at any time. The same goes for the next plan.
This option starts your payments off small and they grow over time — usually every two years. Similar to the Standard repayment plan, you’ll make payments for 10 years. After a few years, you’ll be paying more than you would have on the Standard plan, to make up for smaller payments at the beginning, and you’ll pay much more in interest over the life of the loan.
Delaying Payment Through Deferment
For federal loans, if you’d rather not change your repayment plan, you can choose to delay your payments through forbearance or deferment.
You can get an unemployment deferment for up to 36 months, but you must re-certify your unemployment status every six months. This can be helpful if you're still unemployed at the end of the 6 month period of deferred payments.
You also have responsibilities under this deferment. You must be diligently seeking but unable to find full-time employment in any field or at any salary or responsibility level even if you are not eligible for unemployment benefits (or if your eligibility expired). You must also be registered with a public or private employment agency if there is one within 50 miles of your permanent or temporary address.
Finally, if you are requesting an extension of your current unemployment deferment, and you are not providing documentation of your eligibility for unemployment benefits, you must certify that you have made at least 6 diligent attempts to find employment on the most recent 6 months.
It's important to note that interest will still accrue while your loans are in deferment, in general. But currently, student loan interest is waived for the duration of the Emergency Declaration.
As you can see, this option isn't as good as changing your repayment plan to an income-driven plan. It provides the same result ($0 payment), but it requires more work, and you have to resume your old payments when the deferment is over.
Finally, you can always request a forbearance. This should be a last resort, and doesn't make sense for most borrowers. However, it's the easy way to stop payments immediately.
A forbearance can be used if you've exhausted your unemployment and financial hardship deferments.
Forbearance stops your loan payments, but interest on your loan will still accrue.
We don't recommend forbearance because you're best served by simply using an income-driven repayment plan. However, you should know the option exists in case your loan servicer recommends it (so you can say no and choose something better).
Options For Private Loans
Private student loans don't typically offer many options if you're unemployed. It usually is some variation of a forbearance. Most lenders also put caps on the amount of forbearance they will give to a borrower.
And remember, interest still accrues on your loans even if you're not making payments. So your loan will be much larger after the forbearance is over.
Ascent: Ascent student loans offers a Natural Disaster/Declared Emergency forbearance that allows you to postpone payments on your Ascent loans for up to 3 months in the event a natural disaster, local or national emergency, or military mobilization is declared by the appropriate governing agency.
Citizens Bank: For borrowers in repayment you can request a hardship forbearance by calling your lender.
College Ave: College Ave may offer an extension of the grace period for up to an additional six months following separation from school, and up to 12 months of hardship forbearance over the life of the loan. When needed, forbearance is usually applied in 3- or 6-month increments, before re-evaluating with the borrower to determine on-going need.
CommonBond: CommonBond offers up to 24 months of forbearance for student loan borrowers.
Discover: Discover offers a discretionary hardship forbearance. Borrowers must call and ask for it.
Earnest: Earnest offers borrowers the option to skip one payment every 12 months, with prior approval. Earnest also offers a forbearance option and a rate reduction program. The rate reduction program provides an interest rate reduction for 6-months, which lowers the payment.
Wells Fargo: Wells Fargo offers various options if you are having trouble making payments – a loan modification program, which temporarily or permanently lowers payments, short-term payment relief for two months, or a forbearance. Call 1-800-658-3567 for more information.
Being unemployed is challenging enough without having to deal with your student loans as well. But being armed with the information about what's available can help you make better decisions around unemployment and student loan debt.
The worst thing you can do is simply ignore your student loans - there are options for help. You just need to take action.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.