Written By Meagan McGuire, ChFC®, CSLP®
The administrative forbearance via the CARES Act is set to expire on 12/31/2020 meaning federal student loan payments are set to resume August 30, 2023, unless courts rule on student loan relief lawsuits sooner. But what if you’re still unemployed?
Not to worry, you have options!
Request unemployment deferment
One route is to seek unemployment deferment on your student loans. Deferment is a temporary postponement of payment on a loan. It’s allowed under certain conditions and during which time interest generally doesn’t accrue on Subsidized Loans and Federal Perkins Loans.
All other federal student loans that are deferred will continue to accrue interest. Any unpaid interest that accrued during the deferment period may be added to the principal balance (capitalized) of the loans once re-entering repayment.
Deferment isn’t automatic — you’ll need to submit a request to your student loan servicer, often on a form. You must also provide your student loan servicer with documentation to show that you meet the eligibility requirements for the deferment.
Deferment could be a good option for very brief periods of unemployment or income uncertainty. But I’d encourage you to look into other temporary relief options, such as the benefits of an income-driven repayment (IDR) plan.
Utilize an Income-Driven Repayment Plan
A second route — and my preferred route for borrowers — is applying for an IDR plan or recalculate your payment if you’re already on one. This can reduce your payment down to as low as $0/month.
This route can be better than deferment for three big reasons:
- If you’re working toward longer-term loan forgiveness, these $0 payments still count toward your forgiveness timeline.
- Income-driven plans have interest subsidies that waive your accrued interest in full or ½ for up to three years, and/or waives ½ of accrued interest on your unsubsidized loans for the life of the repayment term on REPAYE. This approach could keep your balance from growing as fast as it would in deferment.
- If you’re already on an IDR plan, interest will accumulate on unsubsidized loans in deferment and then capitalize on the principal when you re-enter repayment.
Income-driven repayment plans keep your payment proportionate to your income over time at either 10, 15, or 20% of your discretionary income. Each plan has a maximum repayment period of either 20 or 25 years of repayment where whatever balance is left over at that point, is forgiven.
You can use our IDR calculator to determine which plan makes the most sense for you (even if for just the short-term).
How to apply for IDR or recalculate your payment
You’ll want to start by submitting an application for an IDR plan and choosing your respective application (i.e. a new applicant, recertifying, recalculating, or switching).
When applying for a new plan or recalculating your payment, your servicer will verify your income by linking back to your most recently filed tax return within the last two years. If it doesn’t link, it’ll ask if you’ve filed a tax return in the last two years. If so, you’ll be asked:
“Has your income significantly decreased since you filed your last federal income tax return? For example, have you lost your job, or experienced a drop in income?”
If you're still currently unemployed, you’d say “Yes” to this question.
Next, you’ll be asked if you have taxable income, which it defines as:
“… income from employment, unemployment income, dividend income, interest income, tips, or alimony. Does not include untaxed income such as Supplemental Security Income, child support, or federal or state public assistance.”
If you don’t, your payment will be calculated as $0 per month unless you’re married and apply for REPAYE (and your spouse has an income).
Avoiding default
Default is definitely not the answer. If you can honestly and legally get your monthly payment down to $0, due to your income level or loss of your job — OR even through deferment — do it.
Don’t wreck your credit by ignoring your loans. Federal loans don’t go away. Having your federal loans in default can and will come back to haunt you in the form of wage and tax return garnishment.
Plus, the high fees and interest tacked onto them at the collections company will balloon your balance, setting you back even more when you’re ready to face them again.
Thankfully, federal loans can bring some relief in a time like this so you can focus on yourself, your family, and the rest of your financial obligations.
Let us know how else we can help: You can reach us through our contact form.
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