How to Handle Your Student Loans When You’re Unemployed
Many recent college graduates have found themselves in an unforgiving position. Student loan debt is higher than in any past decade, yet wages for many of the jobs that these graduates are applying for are stagnant. To put it another way, college graduates are paying more than ever for their degrees, but getting less for their hard work. The heavy weight of student loan debt becomes magnified when debtors become unemployed. Failing to pay student loans due to unemployment can lead to student loan default, which can have a wide-reaching detrimental impact on your financial future.
What Happens to Your Student Loans When You’re Unemployed
Unlike other forms of debt, student loans are usually not discharged when you declare bankruptcy. It is technically possible to appeal in bankruptcy court to discharge your student loans on the grounds that repaying them would impose undue financial hardship, but you shouldn’t count on this. If you lose your job, you will most likely still have to do something about your student loans, no matter how long you are jobless.
This doesn’t mean that you’re helpless, though, and there may be repayment options for you that will generally depend on whether you have private or federal loans. If you have federal student loans, you can request that your student loan payments be deferred while you hunt for a job. This unemployment deferment can last up to three years. While your student loans are in deferment, you will not have to make payments on your student loan balance. However, some student loans will still accrue interest during deferment. In particular, unsubsidized student loans and Direct PLUS Loans will continue to accumulate interest during your deferment period, so it’s wise to get back on your feet as quickly as possible. Whenever it’s reasonable for you, try to make some student loan payments while you’re unemployed.
Student Loan Repayment While Unemployed
Even if you are in deferment and you have no required student loan payments, it is still possible to pay down interest as it accumulates. However, if your deferment period has run out, or you require different assistance, there are options available to help you manage student loan debt, even while in between jobs.
Income-Based Repayment Plans
One of the more recent developments in student loan history has been the introduction of income-driven repayment plans. These repayment plans calculate your expected monthly payment according to your income. If your income is low enough (perhaps because of unemployment), then you can even have a student loan payment as low as $0. Income-driven repayment plans will usually take more time to pay down your student loans than standard plans, but they are useful when you’re facing financial hardship.
Student Loan Deferment or Forbearance
You can also have an expected monthly payment of $0 if you apply for deferment or forbearance. Student loan forbearance is similar to deferment, but it is typically at the discretion of your loan servicer except in a few unique cases. As discussed above, unsubsidized loans and direct PLUS loans in deferment will continue to accrue interest. However, interest will accrue on all of your loans under forbearance. Both of these methods should be seen as final options, after all others have been exhausted.
Paying Student Loans if You Plan on Quitting Your Job
Unemployment isn’t always involuntary. Sometimes you need a career shift that makes more sense for you in the long run. If you know ahead of time that you’re going to leave your job and look for another one, then you can prepare in advance to handle your student loans.
Income-Based Repayment Plans
Applications for income-driven repayment plans take time to process, so it’s ideal if you can file ahead of time. However, be aware that your loan servicer may look at your most recent tax filing with the IRS in order to calculate your payment. So if you made a lot of money at the job that you’re about to quit, that could be taken into account if you apply for an income-driven repayment plan, even though you’re about to leave.
Student Loan Forgiveness
When you’re thinking about what kind of career you’d like to have after you quit your current job, keep in mind that some jobs are eligible for student loan forgiveness. High-demand career fields that satisfy a public good of some kind such as working for a non-profit, teaching in public schools, or becoming a nurse can qualify you to have your remaining student loan balance completely forgiven.
Student Loan Refinancing
If you know ahead of time that you’re going to quit your job, or you’re planning on going into a career that will enable you to pay off your student loans much more quickly, then student loan refinancing may be a good option for you. Student loan refinancing will take your current loan balance and calculate an interest rate that may be more beneficial for you. This new interest rate will typically be lower than your previous one, enabling you to pay less on student loans in the long run.