You’re out of a job, but not out of student loan payments. What’s next?
Fortunately, most lenders will work with you to help manage your debt. Student loans are probably just one of many concerns you have during a job transition. And you may also be wondering about whether to refinance after the fed cuts rates.
Here are some steps that I suggest to make the transition easier and help you figure out what your options are.
1. Call your lender.
Give your student loan provider a call. It’s important to keep your lender informed, even if you can’t make payments. The last thing you want to do is stop payments without their knowledge—then you run the risk of default, which neither you nor your lender wants.
What if you’ve already missed a payment? If you have federal loans, they’re considered delinquent the day after a missed payment. Stay delinquent for 90 days (three months) and your loan servicers will report the delinquency to the three major credit bureaus. If you pay every month, for instance, it takes only three missed payments before they’re reported to credit. So act quickly.
But don’t panic about default yet. Federal loans go into default when you haven’t paid in 270 days (eight months). Make a plan well before then.
Your lender may be able to temporarily lower or suspend payments while you change your repayment plan. Private lenders, whose loans have different terms than federal loans, can walk you through your options.
2. Get a deferment or forbearance on your loans.
The two most common ways to suspend federal loan payments are through deferment or forbearance.
A deferment is a set amount of time where you don’t make payments on the principal or interest of your loans. If you have a Direct Subsidized Loan, Subsidized Federal Stafford Loan, or a Perkins Loan, the government pays your interest during a deferment. Interest will accrue on any other loan.
You can defer for up to three years during a period of unemployment or underemployment (less than full-time). If you find a part-time job, for instance, you can keep your loans in deferment if you choose.
Consider deferment if:
- Your day-to-day expenses are higher than average—you have children or you’re in a city with a high cost of living, for instance.
- You don’t have savings. Deferment may allow you to build a financial cushion.
- You’re willingly taking a pay cut to go into a new field. It may take you time to become established.
- Your loan doesn’t have a large principal balance (the interest will be lower).
- You have subsidized loans.
A forbearance is similar to a deferment. You won’t make payments during a forbearance, but your loan’s interest will accrue, even on subsidized loans. You can request a discretionary forbearance (granted at the discretion of the lender) based on financial hardship. Be prepared with documentation such as bank statements or proof from your company that you’re no longer employed.
You can get a forbearance for up to 12 months.
Consider forbearance if:
- You expect to find a job quickly (within three to six months).
- You can line up a temporary job while you search for an ideal fit.
- You have financial breathing room, such as a short-term living situation where you don’t have to pay rent.
- You have some savings.
You can also simply lower your monthly payments, if you’ve saved enough to continue paying loans without income for a short time and if you’d rather not accumulate interest.
The easiest way to lower payments is to apply for a repayment plan based on income. Even if you have no income, the amounts will be more flexible than a standard repayment plan. If you need to apply for deferment or forbearance at a later date, you can.
Borrowers don’t get unlimited amounts of deferments and forbearances, however. If you’ve already used both of these options, talk to your lender and see what they recommend.
3. Plan your job search.
Try to estimate how long it might take you to find a new job. This part is tricky. The length of time will vary depending on your field, your location, your skill set, your ability and willingness to relocate, and many other factors. Some factors you can’t control, such as the timing of your job loss.
Then plan how to prioritize your needs. Think of the basics: rent, food, transportation, health insurance.
Research the compensation rates in your field. Depending on the field and the circumstances of your job loss, you may not earn as much as you used to (at least temporarily) even after you find work. An income-based plan such as the Pay-As-You-Earn Repayment Plan might be a good option.
As soon as you find work, consider making small payments again, even if your loans are still under deferment or forbearance. Small payments on an income-contingent plan are better, in the long term, than no payments on a forbearance or deferment. Interest increases whenever you don’t pay.
4. Know your long-term options.
Unemployment for any length of time can strain your finances. Figure out how to manage your student loan payments in the long term.
- Look into loan refinancing or consolidation if you have multiple loans.
- Student loan refinancing programs offer employment assistance and career management counseling. Take advantage of any career assistance programs your lender offers.
- Try including employers who pay back student loans in your job search.
- Use deferment and forbearance sparingly. They aren’t designed to be permanent solutions, but extra space for financial difficulty.
- Once you find work, let your loan provider know. Document everything you can—keep your old pay stubs and any record of unemployment assistance received. The more information you can give your lender, the more likely they are to come up with the best plan for you.
Stay optimistic! A college degree makes you more likely to find employment. Even college coursework, if you don’t have a degree, provides the necessary skills you can show an employer.