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If you’ve lost your job, you may be able to defer your student loan payments. The unemployment deferment and repayment options available can depend on the type of loans you have.

For instance, if you have federal student loans, one option is the Unemployment Deferment program offered by the government. Unemployment Deferment is a program run by the Department of Education that allows eligible federal loan borrowers who are out of work or cannot find full-time employment to postpone payments on existing educational debts.

Read on to learn how the Unemployment Deferment program works, plus other alternatives, including deferment opportunities for private student loans.

What is Unemployment Deferment?

For anyone who has federal student loans, student loan deferment allows eligible borrowers to put student loan payments on hold for a predetermined period.

Unemployment Deferment is awarded to eligible federal student loan borrowers who are seeking unemployment benefits or who are unable to find full-time work.

Those who qualify can temporarily pause putting money toward student loans for up to three years for federal loans, assuming that they continue to meet all the requirements.

It’s important to note that if you have unsubsidized loans or Direct PLUS loans, interest will continue accruing during any deferment period. This means the balance owed on outstanding loans would keep growing. So, over the life of the loan, a short-term savings from deferring repayment could mean owing more in the end.

In general, interest won’t accrue on federal subsidized loans.

If you qualify for deferment and your loan continues to accrue interest, you can choose between two ways to pay back the interest. First, you could make interest-only payments. Or, you could let the interest accumulate during the deferment, adding whatever accrues to the total balance owed.

Currently, if a borrower decides to forgo interest-only payments and allow interest charges to rack up on an unsubsidized loan, that interest is added onto the total balance of the student loans, which is a process called “capitalization.”

In addition to having a larger loan amount due down the line, future interest is calculated on top of the new balance. Therefore, borrowers pay interest on top of interest, potentially resulting in higher monthly payments than before the deferment.

However, thanks to new regulations that begin in July 2023, this kind of interest capitalization on federal student loans will be eliminated.

What Types of Student Loans Are Eligible for Unemployment Deferment?

If you’re unemployed with student loans, federal student loan unemployment deferment is available for Direct Loans, FFEL Program loans, and Perkins Loans. Here are a few specific examples of loans that may qualify.

•   Direct Loans

•   Family Education Loans (FEEL Loans)

•   Stafford Loans

•   Perkins Loans

•   PLUS Loans

•   Direct Consolidation Loans

In addition, if a borrower received federal student loans before July 1, 1993, they may qualify for other deferments.

Private loans from private lenders are not eligible for the federal Unemployment Deferment program. However, some lenders may provide economic hardship programs for borrowers.

Borrowers can contact their loan servicer for details on any hardship repayment or deferment programs they may offer.

Who is Eligible for Unemployment Deferment?

Deferring payments on federal student loans isn’t automatic.

Borrowers first need to apply with supporting documentation to determine if they’ll be eligible for a student loan unemployment deferral.

Generally, an applicant can qualify either by providing proof of eligibility to receive employment benefits or by demonstrating that a diligent search for full-time employment is underway.

In the second case, certifying that you’re registered with an employment agency (whether privately owned or state run) can help show that an active search for work is being carried out.

Applicants seeking unemployment deferment under the searching full-time employment category may receive a deferment period for only six months.

If you need to extend the deferment past that time, you’ll have to submit a new application certifying that you’ve made at least six attempts to find full-time employment. The deferment period cannot exceed three years.

To pursue unemployment deferral, you must first fill out the unemployment deferment form at StudentAid.gov — answering questions about your job search, current unemployment benefits, and understanding of what loan deferment entails.

What About Private Student Loan Deferment?

Although private lenders aren’t legally required to offer unemployment deferment options, some do.

But, it’s worth keeping in mind that, similar to federal student loan Unemployment Deferment, private loans typically still accrue interest during the approved deferment period (even refinanced student loans with lenders who honor grace periods).

In other words, the total student loan balance would continue to grow even while payments are suspended. This is one of the basics of student loans.

Over the life of the loan, this could add to what the borrower owes overall. Some private lenders allow borrowers to make interest-only payments during a forbearance to help avoid interest capitalization.

Even with the accrual of interest and limited options, deferment is preferable to defaulting on student loans.

Borrowers with private student loans can contact their lender to learn if special deferment is available for those who are unemployed. This private student loans guide may also be helpful.

Advantages and Disadvantages of Unemployment Deferment

So, what are the potential pros and cons of pursuing an unemployment deferment on student loans?

These are some of the advantages and disadvantages you may want to think over:

Advantages

Whether a borrower has been laid off due to an economic downturn or they have recently graduated and are struggling to find employment, unemployed deferment is one way to help ease the financial pressure of repaying student debt in the short term.

For borrowers in need of financial relief, student loan unemployment deferment can help temporarily lower monthly expenses. This can be especially helpful if an unemployed borrower would otherwise run the risk of student loan default.

Defaulting on loans can have a negative impact on your credit history, complicating your ability to pursue mortgage or other loans in the future.

And, with student loans, simply not paying them does not erase the amount owed or the interest that can keep accruing.

If a borrower has only subsidized student loans, the unemployment deferment program comes at no additional cost because interest does not accrue.

And, while it’s completely fine to apply for a deferral, borrowers are typically expected to use the approved deferment period to find a new job; some unemployment protection programs from private lenders even have stipulations to that effect.

Disadvantages

In the case of unsubsidized federal student loans, taking a deferment will increase the total amount owed on the loan. And even if a borrower decides to make interest-only payments, they’re not not chipping away at the principal amount.

Unemployed student loan borrowers may want to weigh whether the short-term savings tied to reduced or suspended loan payments are worth owing more money on those loans later on.

When a borrower does eventually find employment and the deferment ends, the future payments on their student loan payments may be higher each month—to cover the additional accrued interest.

For someone who is just adjusting to a new job, higher loan payments may come as a shock and could be hard to budget for.

Understanding the long-term implications of applying for student loan unemployment deferment can help borrowers to decide whether this sort of program is the right for the current and future financial situations.

Alternatives to Unemployment Deferment

For federal student loan borrowers who don’t qualify for the Unemployment Deferment program, there may be other ways to handle student loans during a job loss.

Forbearance and income-driven repayment plans are two potential options:

Forbearance

Similar to deferment, federal or private loan forbearance temporarily suspends or reduces loan payments.

However, while principal payments are postponed, interest will continue to accrue, no matter what type of loans you have. To see if you qualify, contact your loan servicer.

Because forbearance does not suspend the accrual of interest on a student loan, it can make sense to consider other options, such as income-driven repayment.

Income-Driven Repayment

Income-driven repayment plans calculate loan payments based on a borrower’s current income and family size. They also, typically, stretch the loan repayments over 20 or more years.

There are four different types of income-driven repayment plans run by the US government:

•   Revised Pay As You Earn Repayment Plan (REPAYE Plan)

•   Income-Based Repayment Plan (IBR Plan)

•   Pay As You Earn Repayment Plan (PAYE Plan)

•   Income-Contingent Repayment Plan (ICR Plan)

Although this type of plan may trim monthly loan payments, it could cost borrowers more in interest over the life of the loan.

So, once your financial or employment situation improves, you may want to switch to an alternative repayment plan.

Public Service Loan Forgiveness (PSLF) Program

Having been previously employed in certain public sector jobs may also qualify some borrowers for student loan forgiveness if unemployed.

By definition, loan forgiveness means that the remaining amount owed is, well, forgiven—the borrower is no longer bound to pay it back.

Eligible federal student loan borrowers who’ve completed 10 years of employment with a qualifying job—such as, a public school teacher, some non-profit employees, Americorps recipient, or government worker—might be eligible for the PSLF program.

If you think you may qualify for the federal forgiveness program, and your goal is to lower your monthly payments, you may still want to switch to an income-driven repayment plan while the PSLF application is being reviewed in order to lower your monthly payments.

Student Loan Refinancing

After exhausting federal program options, or if none are quite the right fit, borrowers with federal or private student loans may want to look into refinancing student loans.

When you refinance student loans, you replace your loans with one new private loan. One of the advantages of refinancing student loans is that qualified borrowers may either get a lower monthly payment or help reduce the total interest paid over the life of the loan. Note: You may pay more interest over the life of the loan if you refinance with an extended term.

But it’s important to be aware that by refinancing federal student loans with a private lender, borrowers give up benefits and protections such as federal Unemployment Deferment, PSLF, and income-driven repayment.

Lenders that offer refinancing options usually look at applicants’ qualifying financial attributes—including employment status, credit history, and income. So, refinancing student loans is not necessarily available to all who apply.

The Takeaway

There are numerous possible student loan repayment options for unemployed borrowers who qualify, including deferment, income-driven repayment, federal student loan forgiveness programs, and student loan refinancing. One good place to start is by calling your loan provider to review all options you may qualify for.

If you decide that refinancing your student loans makes sense for your situation, SoFi offers loans with a low fixed or variable rate and no fees. By filling out a simple application, you can find out if you qualify in just two minutes.

Check your student loan refinancing rate today with SoFi.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

The average cost of medical school is $230,296 in total, according to the Education Data Initiative. The yearly cost currently sits at $57,574, and we’re seeing an increase of $1,030 each year.

If you are currently pursuing or already in medical school, the expense is not something to be taken lightly. Almost 70 percent of medical students rely on student loans to help pay for medical school, and the average medical student graduates with just over $250,000 in total student loan debt (this includes debt from their undergraduate degree).

The average physician salary ranges from $194,000 to $250,000, with some specialties making close to $800,000 per year. While these numbers are well above the national average mean wage of $61,900 per year, paying for medical school and paying off medical school student loans is still no easy feat.

How to Pay for Medical School

With the average cost of medical school being well above six figures, finding a way to pay for it is one of the biggest hurdles future medical students face. By being proactive about finding ways to pay for medical school, you may be able to reduce your overall student debt load and save thousands of dollars in interest.

Scholarships

Scholarships aren’t always easy to get at the graduate level, but it’s not impossible. Some schools offer merit-based scholarships to incoming medical students who show exceptional academic capabilities and have a unique life experience. Students can also look into more individualized scholarships geared toward their location, specific area of study, or previous work experience.

Scholarships are offered by colleges and universities, businesses, local organizations, churches, and more. While it may take some time to find scholarships you qualify for and apply for them, the end result could save you thousands in medical school tuition expenses.

Military Service

Some medical professionals choose to obtain their medical degree by participating in a military physician program. The qualifications and commitment for each program vary, and the separate branches of the military, including the Army National Guard and Coast Guard, have different options.

The two options for medical students in the military are the Health Professions Scholarship Program and Uniformed Services University of Health Sciences. Both programs pay for the cost of medical school but require a service commitment once the student graduates.

Federal Financial Aid

The first step in getting federal student loans is to complete the Free Application for Student Aid (FAFSA®). Students can check with the medical school they plan to attend to get filing date requirements and information on institutional financial aid (aid given by the school).

There are three types of federal student aid:

•  Grants: Grants, such as the Pell Grant, do not have to be paid back unless the student withdraws from school and owes a refund. Grants are needs-based and the maximum amount for the 2023-2024 academic school year is $7,395.

•  Work-Study: Federal work-study jobs are needs-based and help students earn money to pay for school through part-time employment. A bonus for medical students is that the work often is tied to community service or may be related to the student’s course of study, so this type of job may be more interesting and manageable than some others.

•  Federal Loans: A student who borrowed money as an undergraduate and demonstrated financial need may have been awarded a Federal Direct Subsidized Loan to help cover school costs. Those loans are not available to students in graduate and professional school programs. However, medical students are eligible for other types of federal loans. They may receive a Direct Unsubsidized Loan, which is not based on financial need, or a Direct PLUS Loan, which, unlike other federal loans, will require a credit check.

Recommended: Comparing Subsidized vs. Unsubsidized Student Loans

Private Student Loans

Private student loans are usually used once federal student loans have been exhausted. Based on federal loan limits and the cost of medical schools, medical students may need additional funding. Certain private student loan lenders, including SoFi, allow borrowing up to 100% of the cost of attendance.

To get a private loan with a competitive interest rate, a borrower generally needs to have a strong credit profile and a low debt-to-income ratio. If a borrower doesn’t meet these qualifications, they may want to consider using a cosigner to qualify for a better rate.

Have a Budget Plan in Place

Finding the right resources to pay for medical school is important, but learning to live within a budget can also keep down the inevitable debt. Students who start with a spending plan as undergraduates may have it easier; they can probably modify what they’ve already been doing to work in medical school. But, it’s never too late to start budgeting.

Recommended: How to Create a Budget in 6 Steps

Once a student determines how much will be coming in from various sources (work, family, loans, scholarships, etc.), the next step is to list what will be going out for tuition and fees, housing, food, transportation, and other costs.

Next, it’s a good idea to see where you can cut back on spending. Is there inexpensive public transportation available? Will there be roommates to split rent and utility bills? Other ideas to reduce expenses include meal planning and cooking at home, canceling subscription services, buying in bulk, and working out at home.

By living on a budget while in school, throughout residency, and for your first few years as an attending physician, you can take out less in loans, pay off your student loans quicker, and set yourself up for financial success down the line.

How to Pay Off Medical School Debt

It’s no secret that physicians have the potential to earn a higher-than-average salary once they finish their residency and start practicing. Here are the average annual salaries of a variety of medical specialties:

•  Plastic Surgery: $619,000

•  Cardiology: $507,000

•  Radiology: $483,000

•  Anesthesiology: $448,000

•  General Surgery: $412,000

•  Emergency Medicine: $352,000

•  Ob/Gyn: $337,000

•  Family Medicine: $255,000

•  Pediatrics: $251,000

However, these are not earned until both medical school and residency (typically four years) are completed. Luckily, there are medical school loan repayment strategies that can be used without waiting for a big payday.

Loan Forgiveness and Repayment Through Service

There are several student loan forgiveness programs for physicians with student debt. Some are government-sponsored (federal and state), and some are private programs.

Benefits vary, but generally, participants provide service for two to four years (depending on the number of years they receive support) in exchange for repayment of student loans and possibly a stipend for living expenses.

One of the most common programs is the federal Public Service Loan Forgiveness (PSLF) program, which was designed to encourage students to enter full-time public service jobs.

While the program isn’t specifically aimed at medical students, it could help those who choose to forgo the promise of a big salary in exchange for the reward of working for a government or not-for-profit organization.

Eligible borrowers could receive forgiveness of the remaining balance of their federal direct loans after making 120 qualifying payments while employed by certain public service employers.

Another program is the National Health Service Corps (NHSC) Students to Service Loan Repayment Program , which provides loan repayment assistance in return for at least three years of service at an NHSC-approved site in a designated Health Professional Shortage Area. Students who are in their last year of medical or dental school may be eligible.

Federal Repayment Programs

There are several student loan repayment plans for federal student loan borrowers. Some are based on graduated payments that start low and increase over time, and they are designed to ensure the loans will be repaid after a designated period. Others, such as income-based repayment, are based on a percentage of discretionary income and family size.

Federal Loan Consolidation

A Direct Consolidation Loan allows borrowers to combine multiple federal education loans into one loan with a single monthly payment.

Consolidation also can give borrowers access to additional loan repayment plans and forgiveness programs. But there is a downside: The interest rate on the new loan will be a weighted average of prior loan rates (rounded up to the nearest one-eighth of a percentage), not necessarily a new lower rate.

If the monthly payment is lower, it’s probably because the loan term is longer, which means the borrower is paying more interest over time. Also, federal loan consolidation is only for federal loans—the borrower can’t include private student loans. The borrower does, however, keep federal protections and benefits with a Direct Consolidation Loan.

Private Student Loan Refinancing

With student loan refinancing, one or more student loans are combined into one new loan with one new payment, with a new and possibly lower interest rate.

Advantages of a student loan refinance include a possible lower monthly payment, but borrowers should be sure they are prepared to give up federal benefits that are no longer accessible if you refinance, including access to income-driven repayment plans and loan forgiveness. Note: You may pay more interest over the life of the loan if you refinance with an extended term.

Refinancing generally works best for borrowers who have improved their financial situation after graduation with a good job and solid credit profile.

The Takeaway

Medical school is an expensive endeavor, with the average cost being more than $200,000. Many students rely on savings, grants, scholarships, and student loans to pay for their medical education.

When it comes time to pay off those loans, there are many options new graduates can consider. These include federal repayment plans, student loan forgiveness, federal loan consolidation, and student loan refinancing. Those who opt to refinance to a possibly lower rate, though, must be aware that they will lose access to federal protections and benefits.

If you do choose to refinance your student loans, consider SoFi. It takes just two minutes to check your rate and your credit will not be impacted when you prequalify.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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The U.S. Navy offers service members a proud and venerable tradition, having patrolled the seas since its inception in 1775.

Almost 250 years later, the Navy still offers its sailors a remarkable life experience, a chance to serve the country, and a host of benefits that make life somewhat easier for military personnel.

One perk that may appeal to Navy members is the Navy Loan Repayment Program, the cornerstone of the service’s student loan relief and forgiveness efforts.

The Navy Loan Repayment Program can pay up to $65,000 toward a service member’s student loans. That makes it well worth a closer look for Navy members looking for help paying down their college loan debt.

Who Qualifies for the Navy Program?

The Navy Loan Repayment Program is designed to pay up to $65,000 of federally guaranteed student loans for Navy personnel who qualify. The program is offered to members of the service’s Delayed Entry Program who eventually enlist in the Navy full time.

The Delayed Entry Program, also known as the Delayed Enlistment Program or inactive reserves, is meant to provide an onboarding experience before official enlistment. In the case of the Navy, a future sailor who signs on to delayed entry agrees to report for active duty in the next year. Currently, delayed-entry members can remain on inactive duty for 365 days. At that point, they must enlist for active duty in the Navy to receive student loan aid.

The Delayed Entry Program is only one hurdle Navy members must clear before becoming eligible for the loan repayment program. Service members must also meet the following criteria.

•   They must be “first time” military service members (meaning applicants have never served in the U.S. military before).

•   They must have a high school diploma.

•   They must have achieved a minimum score of 50 on the Armed Forces Qualification Test, which the Navy uses to measure a potential sailor’s IQ and aptitude. A test score of 35 will get an applicant into the Navy, but a higher score of 50 is needed to qualify for the loan repayment program.

•   They must have a student loan that is not in default.

How Navy Student Loan Repayment Works

Through the program, the Navy will pay 33.3% of a service member’s outstanding loan balance or $1,500 — whichever is higher — for each year of naval service, up to three years. If the student loan balance falls below the 33.3% threshold and the borrower is in good standing with the Navy, the Navy will pay the remaining student loan balance in full.

Only specific federal student loans qualify for the loan repayment program. They are as follows:

Stafford Loans, subsidized or unsubsidized. Also known as Direct Stafford Loans, these low-interest loans are made to qualified borrowers for tuition and other college expenses. The funds come directly from the U.S. Department of Education.

Federal PLUS Loans. Otherwise known as Direct PLUS Loans, these loans are offered by the U.S. government to undergraduate and graduate students to cover tuition and college costs. In many cases, Direct PLUS Loans offer funds to college students to cover expenses not covered by other financial aid programs.

Consolidation Loans. Consolidation loans bundle multiple federal loans into a single loan, streamlining the repayment process.

Perkins Loans. Perkins Loans are low-interest loans geared toward college students (both undergraduate and graduate) who demonstrate financial need. Congress stopped making Perkins student loans in 2018, but naval personnel may still have outstanding Perkins loan debt and thus are eligible for help from the Navy Loan Repayment Program.

A future Navy member may apply for the loan repayment program early in the service enrollment process. A Navy applicant is given the option to enroll in the program at the Military Entrance Processing Stations.

MEPS, the stations funded by the U.S. Department of Defense to enroll military service members, handle their applications and assess their physical, mental, and emotional health to see if they’re fit for military service.

For student loan relief purposes, the Navy recruiter on hand (also known as the MEPS classifier) will process all of a Navy recruit’s paperwork, including loan repayment application documents, and submit them for processing.

What Documents Do You Need To Apply?

All documents are available at the MEPS recruiting center or through specific U.S. government websites. You will need all of the following documents to apply:

•   A copy of the Loan Repayment Program Worksheet.

•   A copy of the Navy Enlistment Guarantee. The Navy Loan Repayment Program must be noted as a guarantee on the document.

•   A copy of the Statement of Understanding.

•   A copy of the Future Sailor’s National Student Loan Data System printout (available at the Department of Education’s website. When filing the data system form, the applicant will be assigned a PIN. By and large, it’s the same pin assigned to a financial aid applicant on the Free Application for Federal Student Aid. If the applicant doesn’t have a FAFSA® PIN, one will be assigned).

•   A copy of the Personalized Recruiting for Immediate and Delayed Enlistment.

•   A copy of DD Form 2475, Annual Application for Student Loan Repayment, completed by the student loan lender.

•   A copy of the lender’s promissory note for each Parent PLUS Loan, which clearly designates the student dependent on the note.

If you’re already serving in the military or served, Public Service Loan Forgiveness is a great option. The program is for those working for a qualified government organization (municipal, state, or federal) or many nonprofit organizations.

Filling Out the Loan Repayment Form

The key document when applying for the Navy Loan Repayment Program is DD Form 2475, which is broken down into four sections.

Section 1 is completed and approved by the recruiting officer (i.e., the verifying official). The section includes the naval office address and contact information so the lending institution can forward the proper paperwork. If the section is blank, the lender is under no obligation to complete the form. Basically, Section 1 includes the recruiter’s name and signature and the date.

Section 2 includes the applicant’s name, address, telephone number, email address, and Social Security number. This section is completed by the service member/applicant.

Section 3 includes the student loan data (including the borrower’s name, the loan amount, outstanding balance, the original date of the promissory note, the loan holder address, email and phone number, and the loan application number). The section also includes a box noting whether the student loan is in default or not, and asks for the name and address of the financial institution where the loan aid is to be sent.

Section 4 is a grid where more information on the loan can be included to expedite processing. Sections 3 and 4 are filled out by the student loan lending institution.

The Navy mandates that Form 2475 be completed, signed, and transmitted to the lending institution within 60 days of the recruit’s arrival in the Delayed Enlistment Program.

If the recruit/applicant doesn’t know his or her current student loan servicer, the U.S. Department of Education can lend a hand by phone or online.

Important Things to Know

Loan repayment program applicants may want to know several key features and rules governing the Navy student loan program.

Payment dates. Annual loan relief payments are issued to the service member on the original enlistment day during the first, second, and third year of enlistment in the Navy.

Payments are taxable. Any payments made by the Navy to the service member are taxed, as the Internal Revenue Service deems loan relief as taxable income in the year the money is paid out. Expect to have between 25% and 33% of the payment withheld in both federal and state taxes (the amount depends on the state where the applicant resides).

Lenders only. The Navy will not refund any loan amount that is paid out by other parties (aside from the qualified student loan lenders).

If a Navy recruit has any questions about the loan repayment program, the Navy urges him or her to contact the loan repayment manager at Naval Command. The manager is directly responsible for managing the loan program.

Contact the manager at:

Navy Recruiting Command
Attn: LRP
5722 Integrity Drive, Building 784
Millington, TN 38054

Email: [email protected]

Other Ways to Repay Student Loans

Former students who are on the fence about a military commitment or who may be struggling to make student loan payments, have alternatives to military-supported repayment.

One is student loan refinancing with a lender like SoFi®. Someone with a combination of private and federal student loans can refinance both types into one single loan with one monthly payment.

While there are many advantages to refinancing student loans, there are disadvantages, as well. If you are thinking of taking advantage of federal benefits like income-driven repayment or Public Service Loan Forgiveness, refinancing may not be right for you because you’ll lose your eligibility for federal programs.

Borrowers who do not plan on using federal benefits and choose to refinance may qualify for a lower interest rate or lower monthly payments. They’ll have only one payment a month and may be able to either lengthen or shorten the term. Note: You may pay more interest over the life of the loan if you refinance with an extended term.

SoFi offers an easy online application, no fees, and competitive rates. It takes just two minutes to see if you prequalify and checking your rate will not affect your credit score.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Filing for bankruptcy can be a chance to eliminate a great deal of financial stress, put an end to collection calls and letters, and provide an opportunity to remake your financial life. Even so, declaring bankruptcy is not something you should take lightly.

While bankruptcy can, in some cases, reduce or eliminate your debts, it can also have serious consequences, including long-term damage to your credit score. That, in turn, can hamper your ability to obtain new lines or credit, and even make it difficult to get a job or rent an apartment.

As you think about filing for bankruptcy, here are some things to consider.

What Does it Mean to File Bankruptcy?

For individuals, there are two main kinds of bankruptcy:

•   Chapter 7 Also known as “liquidation bankruptcy,” this is bankruptcy in its most basic form. With this type of bankruptcy, your nonexempt possessions, such as homes and cars, are sold to repay existing debts. After this, many (if not all) of your debts are canceled outright in a four- to six-month process.

•   Chapter 13 Also known as a “reorganization bankruptcy,” this is a court-approved plan in which you use your income to make payments on your debts over a three- to five-year period. Some of your debts may also be discharged.

The main difference between the two options is that Chapter 7 allows the debtor to eliminate all dischargeable unsecured debt, whereas Chapter 13 allows for payments to be made on those debts.

You may be prevented from filing for Chapter 7 bankruptcy if you earn enough income to repay your debts in a Chapter 13 bankruptcy plan. On the other hand, you may not qualify for Chapter 13 bankruptcy if your debts are too high or your income too low.

If you have substantial equity in your home, you could potentially lose your home if you file for Chapter 7. If you file for Chapter 13, you can keep your home and pay off any mortgage arrears through your repayment plan.

Chapter 13 bankruptcy stays on your credit report for seven years, while Chapter 7 bankruptcy stays on the report for 10 years.

Some debts, like child support obligations, alimony, student loans, and some tax obligations, cannot be wiped out in either type of bankruptcy.

Also keep in mind that bankruptcy won’t relieve you of your obligation to pay your mortgage, though it might make your mortgage payments easier to make by getting rid of other debts.

When To Consider Bankruptcy as a Solution

Life circumstances and financial situations can vary significantly from person to person, so there is no hard and fast rule for when to declare bankruptcy.

However, you may want to start by asking yourself the following questions:

•   Are you unclear on exactly how much you currently owe?

•   Are you only able to make minimum payments on your credit cards?

•   Are you getting calls from debt collectors?

•   Does the idea of solving your financial problems make you feel hopeless, out of control, or scared?

•   Are you using your credit card to pay for necessities?

•   Are you thinking about debt consolidation?

If you answered yes to two or more of these questions, you may want to at the very least give your financial situation more thought and attention.

You may also want to start doing some research (or, if possible, speak with a consumer law attorney) to see if your debt qualifies for bankruptcy, as well as how filing for bankruptcy would affect your life and financial situation.

Alternatives to Bankruptcy

While bankruptcy can sometimes be the best way to get out from under crushing financial burdens, it is not the only way. There are alternatives that can often reduce your debt obligations without some of the negative consequences of bankruptcy. Here are a few you may want to consider.

Credit Counseling

A counselor or counseling service specializing in helping people with debt problems might be able to come up with a solution that has not occurred to you, such as a modified payment plan or debt consolidation.

According to the Federal Trade Commission, you’ll want to look for a nonprofit credit counseling program, such as those offered by universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service. You can also find a nonprofit agency that offers bankruptcy counseling through the National Foundation for Credit Counseling .

Keep in mind that not all not all nonprofit organizations offer free services, so it’s a good idea to do your research before you sign up for any type of credit counseling services.

Negotiating with your Creditors

Creditors would often rather settle a debt with you than have it discharged in bankruptcy. Debt settlement is an agreement between you and your creditors that you will pay a lump sum, possibly far below what you owe, in order to settle the matter.

But it may not be quite as lovely as it sounds. The creditors take a loss, and likely so will your credit score. You’ll also still need to pay taxes on the forgiven amount, because it will be considered revenue (money you’re getting back).

There are debt settlement companies out there to help you negotiate with creditors, but not all are created equal — some of them charge steep fees and can’t guarantee they will get you the settlement that makes the most sense for you.

It’s a good idea to carefully vet any debt settlement company you are considering working with.

Recommended: Credit Card Debt Forgiveness: How Does It Work?

Cutting Back on Expenses

You may want to give some deep thought to the way you live and currently spend your money. Your lifestyle and financial habits may be what inched you toward bankruptcy in the first place. A good way to start is to set up a personal budget, which involves looking at what’s coming in and what’s going out each month, and then looking for places to trim spending.

Even small steps, like making your own lunch, walking instead of burning gas, keeping the heat or air conditioning use to a minimum, and brewing your own coffee could help you free up money that can go toward paying your debt.

While it can be tough to live on a budget at first, with time, you may find yourself becoming more solvent and less burdened.

Debt Consolidation

With debt consolidation, you roll all your debts into one new loan account, preferably with a lower interest rate. This can enable you to pay off your past-due amounts and make one monthly payment going forward.

Having just one payment may make it easier to manage your existing debt, and could possibly save you on interest as well.

Refinancing or Modifying Your Mortgage

If your credit is still good enough, you may be able to refinance your mortgage to a new rate that could get your monthly payment low enough that it saves you from bankruptcy.

If you’re not able to refinance at a lower rate, you may be able to qualify for a mortgage modification. A mortgage loan modification is a change in your loan terms that could reduce your monthly payment.

If your lender allows it, it could involve extending the number of years you have to repay the loan, reducing your interest rate, and/or forbearing (or reducing) your principal balance.

You’ll want to keep in mind, however, that if you receive a loan modification and you still can’t make the payments, you could be at risk of losing your home

The Takeaway

If you have large debts that you can’t repay, are behind in your mortgage payments and in danger of foreclosure, and/or are being harassed by bill collectors, declaring bankruptcy might be a good solution.

Bankruptcy can help you get out from under crushing debt. The process involves either liquidating (or selling off) your assets to pay your debts or adhering to a court-ordered repayment plan.

However, bankruptcy comes with consequences. The information stays on your credit report for seven to 10 years. It can also make it difficult to get credit, buy a home, or sometimes get a job.

Before considering bankruptcy, you may want to first explore other debt management options.

If you’re looking for a better way to manage your spending and saving, SoFi can help. With a SoFi Checking and Savings account, you can easily see your weekly spending on your dashboard in the app. This can help you stay on top of your spending, and make sure you are staying on track with your budget. With SoFi, you’ll also earn a competitive annual percentage yield (APY) and won’t pay any account fees.

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