Economic hardship can happen to anyone. You may lose your job, get into a car accident, or need to pay a sizable medical bill. These struggles mean you could have a hard time paying your rent and other bills, including your student loans.
It is crucial not to ignore your student loans. If you do not pay your monthly bill or talk to your lending agency, you may default on the loan. It will then be sent to a collections agency, and they could take you to court. Instead, check on your potential options to pause payments or have some of the loan forgiven.
A straightforward method for temporarily stopping payments on your student loans is an economic hardship deferment. This allows you to stop making monthly payments on the principal of your loan and sometimes even interest. Although interest still accrues, the deferment will give you a temporary financial break, so that you can get back on your feet.
Can I Apply for Economic Hardship Deferment on Any Student Loan?
Many people take advantage of economic hardship deferment to prevent defaulting on their student loans. To know if you qualify, you will need to speak to your loan servicer. Federal student loans and private student loans may have different requirements, considering private loan contracts can be stricter.
Most private student loans will continue to accrue interest while you are in the deferment period. While you won’t have to make payments toward the principal of your loan, you may have to continue paying toward the interest. Some federal loans allow you to avoid accruing interest during the deferment period, which can save you hundreds or thousands of dollars over time.
For federal loans, economic hardship that is not related to unemployment is typically considered:
- Serving in the Peace Corps.
- Receiving public assistance like Temporary Assistance for Needy Families (TANF) or Supplemental Security Income (SSI).
- Medical internship or residency.
Federal loans that qualify for economic hardship deferment, and do not require you to pay interest during the deferment period, include:
- Direct subsidized loans.
- Subsidized Stafford loans.
- Federal Perkins loans.
- The part of direct consolidated loans that is subsidized.
- The part of the Federal Family Education Loan (FFEL) consolidation loans that is subsidized.
There are several other types of federal student loans that allow you to set up economic hardship deferment, but continue accruing interest during the deferment period.
While your federal loan is in deferment, you have two options: pay the interest as it accrues, so you are paying less each month, or stop paying the interest as well. However, if you choose the latter option, any accrued interest will be added to your loan’s original principal, increasing the overall amount you owe.
Loans that continue to accrue interest are:
- Direct unsubsidized loans.
- Unsubsidized Stafford loans.
- Direct PLUS loans for parents or graduate students.
- FFEL PLUS loans.
- The unsubsidized part of FFEL loans.
- The unsubsidized part of direct consolidation loans.
How Do I Apply for Economic Hardship Deferment?
Economic hardship deferments are not automatic. You must contact your loan servicer and ask for an application. Your loan only goes into deferment automatically if you are in the military, in graduate school, or enrolled in college or professional school at least half-time.
If you are unemployed and struggling to find employment, there is a specific form of deferment called unemployment deferment request. This form of deferment provides borrowers up to three years to find a full-time job. Other types of financial struggles may fall under the economic hardship deferment.
Your loan servicer may not offer deferment for economic hardship. Instead, they may point you toward forbearance, which is similar in many ways. However, forbearance periods do not last as long as deferment.
With other lenders, you may not qualify for a deferment, but you may be eligible for forbearance or vice versa. Your qualification for either program may depend on your ability to pay anything toward your loan’s interest or principal, the severity of your financial situation, and your personal responsibilities, like raising dependent children.
To defer your federal student loans:
- Go to the United States Department of Education (DOE) website and look for the deferment application for your specific loan. There is no universal application for Perkins loans.
- Know that the economic hardship deferment can last between one and three years, and the DOA will assess the period for which you qualify.
- Be aware that past-due payments may not qualify for economic hardship deferment, depending on your loan type.
While your application for economic hardship deferment is under review, you should continue making monthly payments, if possible. If you can pay only the interest, work with your loan servicer to do this.
Lenders want to work with you, but they need to know that you are a responsible borrower and are working with them in good faith. Continuing payments that you can afford will help keep your loan in good standing. Your loan servicer will let you know when your application has been submitted, and when you are allowed to stop making payments.
If you need to defer your private student loan, the details and length of deferment may vary depending on the terms in your contract. Speak with your loan servicer for more information. If you have any delinquent payments on your loan, you will likely need to pay those and may have to make monthly interest-only payments on your loan during your deferment period.
If you are unable to defer your private student loans, you may need to rely on the shorter forbearance period instead.
Economic Hardship Deferment Is One Temporary Solution
For those who feel that defaulting on your loan is the only option for managing the debt, economic hardship deferment is a better approach because it will not hurt your credit rating. However, deferment may not be a good option if:
- You need to postpone payment for longer than one year and feel that you will need to reapply several times for deferment.
- You are not willing to increase the total amount you owe on an unsubsidized loan, as it will continue to accrue interest.
- You are not willing to pay for deferment, as private student loans may have a fee associated with this service.
Many people with student loans apply for either forbearance or deferment at some point due to financial struggles. While your loan is deferred, try to put the money you would otherwise spend on your student loans into a savings account. You may need to spend this on your own debts or personal finances, but putting aside as much money as possible can help you start making payments on your loan after the deferment period ends.
If you are not able to save money during the deferment period, ask your loan servicer about other options, like loan forgiveness or income-driven payments. Many federal student loans offer these options to help graduates navigate the complex job market and still keep a balanced budget.