For student loan borrowers who are struggling to make ends meet, there is a possible solution: economic hardship deferment.
Like other forms of deferment and forbearance, economic hardship deferment allows you to pause your loan payments if you meet certain criteria.
One of the Department of Education’s numerous types of deferment, this one is designed for low-income borrowers who need as much as a three-year break from payments. It comes with clear-cut rules for eligibility. If you receive food stamps, for example, you have a shoe in.
Unfortunately, the thresholds for similar relief options from private lenders aren’t always as straightforward.
No matter your lender, here’s how economic hardship deferment works and how you can qualify.
How economic hardship deferment works
If you’ve never filed for economic hardship deferment, it can work out like this: A student loan borrower calls up their loan servicer and says that they’re having trouble making payments and want to know their options.
“Typically, the servicer says they can enter this kind of deferment, and the borrower says, ‘OK, great,'” explained Stanley Tate, a St. Louis-based student loan lawyer. “Then the servicer starts reading a disclosure agreement, and [the borrower will] stop listening because the pain is going away; it doesn’t matter how it’s going way.”
You can have each of your federal loans deferred in this kind of process. This means you could delay payments for a period of time. You can also consolidate your student loans into one, and then defer payments on the new loan.
Private lenders, meanwhile, might offer a blanket, 12-month deferment or forbearance option that covers economic hardship.
Of course, there are pros and cons to deferring student loan payments. On one hand, you might be freed up to pay off more pressing debts. On the other, your student loan debt might accrue interest and grow, making it more burdensome once your deferment ends.
Be aware of those nuts and bolts before you consider applying.
Economic hardship deferment qualifications
The positive of qualifying for economic hardship deferment is that you really only need to meet one of four specific criteria:
- You’ve already received a deferment on another federal loan for the same period.
- You’re receiving federal or state assistance, such as from Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), or Supplemental Nutrition Assistance Program (SNAP).
- You’re serving as a Peace Corps volunteer.
- Your monthly income is less than 150 percent of the poverty guideline for your family size and state of residence.
“With federal loans, everything is protocol,” said Simon Goldenberg, who operates a debt relief law firm in New York and New Jersey. “Some servicers have different interpretations, but the rules are the rules.”
You can find an economic hardship deferment request form on your loan servicer’s website.
As long as your loans are not in default and weren’t disbursed before July 1, 1993, you’ll be eligible to complete the form. It will guide you through the four ways to secure this type of deferment.
When applying, you might need to attach documentation proving you qualify for economic hardship. A Peace Corps volunteer, for example, would need to attach a certificate of their service, showing when their work is taking place.
The first pathway to deferment is the simplest. If you’re granted deferment on one federal loan, it will be granted for all of your federal loans. You’ll still have to apply, but at least you know you’ll be approved.
The monthly income criteria requires the most math on your part. You’ll need to calculate one-twelfth of your annual earnings and, taking into account your family size, show that you’re below the allowed maximum.
To do this, multiply your state’s poverty guideline by 1.5 to find the threshold, then subtract your monthly income from it. Any positive sum means you’re eligible.
A single individual living in New York, for example, would need to have a gross monthly income of less than $2,227.50 to qualify. If that borrower has a child, they would need to earn less than $2,747.50 because the government ups your allowance by $520 per dependent.
Although the economic hardship deferment form might be a simple one, go through it slowly to make sure your information is correct. Mistakes could lead your application to be rejected.
Economic hardship deferment qualifications for private loans
The federal government’s qualifications for economic hardship deferment are black and white, but private lenders’ are pretty murky. The lenders aren’t confined to a single set of rules.
It’s possible, for example, that you could apply for deferment with two private lenders and only be approved by one of them.
“And the one denying it may not be acting unlawfully,” said Goldenberg.
One lender could sympathize with your household’s sudden increase in medical expenses, for example. Another lender could have a cap on the dollar amount of bills it will recognize.
That’s the takeaway: There is no uniform economic hardship deferment application among private lenders. Qualifications vary from one lender to another.
SoFi, for one, offers Unemployment Protection to aid unemployed borrowers who weren’t fired for cause. Education Loan Finance, for another, has no public policy on granting economic stress-related relief, but claims to “work with everyone that has an issue or situation that arises.”
Earnest, another top-rated lender, said on its website that it offers forbearance to “clients who are experiencing a documented and verifiable hardship.” The company laid out the following possible qualifications for forbearance:
- Involuntary decrease in income
- Involuntary loss of employment
- Significant increase in essential costs, such as medical expenses
Expect to be asked for proof of hardship when you apply to delay payments. The lender won’t take your word for it. In the case of being laid off, for example, you might be asked to provide a photocopy of your final paycheck, an official employment termination letter, and the contact information for your ex-boss.
More likely, you’ll be working with a lender who isn’t all that forgiving. In that case, you’ll need to work with your servicer to figure out a plan of action.
If you’re shopping around for student loans, make sure to compare the protections of various private lenders before signing on the dotted line.
Is economic hardship deferment right for you?
About 30 percent of Direct Loans are in forbearance or deferment, according to 2015 research from New America. Of those, 7 percent are in economic hardship deferment.
But deferment isn’t your only option for managing student loans. Low-earning borrowers might qualify for an income-driven repayment plan, which can lower monthly payments.
Because Parent PLUS Loans have fewer options for income-drive repayment, this type of deferment can help parents who need to put payments on hold. Tate had one client apply for and receive economic hardship deferment on a PLUS Loan for one child’s education so that he could afford a younger sibling’s tuition payments.
Before applying for deferment, think through your options. Even if your loans are in deferment, interest might continue to increase your loan balance. So, make sure temporary relief from payments is worth paying off a higher balance in the future.
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