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Managing student loan payments can feel like a part-time job. It can be even more overwhelming if you’re experiencing financial trouble, whether that’s due to a job layoff, caring for a family member, or for another reason.

The good news is there are options available to those going through a rough financial patch, including the Economic Hardship Deferment program. But even then, it can be difficult to navigate all of the information on which deferment program you may be eligible to apply for based on the reason for your hardship and the type of student loans you have. So that’s what we’re going to discuss today.

Economic Hardship Deferment, also known as student loan financial hardship, is a program offered in certain cases on federal student loans for borrowers who are eligible and having an exceedingly difficult time making their student loan payments for financial reasons.

Below, we’ll discuss the Economic Hardship Deferment program and what it means for you and your loans, who qualifies to make a hardship claim for student loans, how to apply for the program, and whether it’s the right path for you. We’ll also cover alternatives to Economic Hardship Deferment.

What Is Economic Hardship Deferment?

Student loan deferment allows you to reduce or pause your student loan payments for a designated period of time. An Economic Hardship Deferment is awarded to those who are facing serious financial trouble, as determined by factors such as monthly income and family size.

Those approved for the program can take up to 36 consecutive months of deferment so long as they still meet the qualifications. All participants (except those in the Peace Corps) need to reapply each year.

An important distinction to understand is whether your loans will qualify for a deferment period where interest will accrue, or one where interest does not accrue. Generally, loans that are subsidized will not accrue interest during deferment, whereas an unsubsidized loan will.

In the event your loan qualifies for deferment but will continue to accrue interest, you’ll usually have two options: Make interest-only payments on the loan, or allow interest charges to rack up.

When you allow interest charges to accumulate on an unsubsidized loan, that interest will be tallied up and added to the balance of the loan at the end of the period. This is a process called “capitalization.”

Not only will you have a new, larger balance to pay off, but any future interest payments will be calculated on top of the new, higher balance, meaning you’re paying interest on top of interest. All else equal, the result is that your monthly payments will likely be even higher than they are now.

Which Loans Qualify for Economic Hardship Deferment?

This is a federal loan program, and not all federal loans qualify. Here are a few examples of loans that may qualify (and check the link below for a full, updated list of eligible loans):

•  National Direct Student Loans (NDSL Loans)

•  Federal Family Education Loans (FEEL Loans)

•  Federal Stafford Loans

•  Federal Perkins Loans

•  Federal Supplemental Loans for Students (SLS Loans)

•  Federal PLUS Loans

•  Federal Consolidation Loans

•  National Defense Student Loans

The Economic Hardship Deferment program is typically available for loans borrowed on or after July 1, 1993.

The Economic Hardship Deferment program is only available for federal student loans, so private loans borrowed through independent financial institutions won’t qualify. However, some private lenders offer their own hardship programs. If your lender offers such a program, they will have their own unique qualifications and application process.

It certainly doesn’t hurt to ask if you are in a difficult financial situation. Remember, lenders don’t want you to default on your loans, and are often willing to work with borrowers to find some sort of solution. With both federal and private loans, never hesitate to call the lender, discuss your situation, and explore options.

Who Qualifies for Economic Hardship Deferment?

To make a hardship claim for student loans, you will have to fill out paperwork and provide documentation proving that you are experiencing financial hardship. Some of the eligibility criteria for an Economic Hardship Deferment will depend on your income, family size, and the poverty income guidelines for your family size in the state where you live (150% of the state poverty level or less). It will also depend on what percentage your student loan payment is of your monthly adjusted gross income.

To qualify for Economic Hardship Deferment, you will need to provide personal information such as your name, Social Security number, and address. You’ll also need to know what type of loan you are requesting economic hardship deferment for.

Here are some examples of what you may need to prove to the loan servicer evaluating your eligibility for deferment:

  1. You’ve already been granted Economic Hardship Deferment on loans made under another federal student loan program.

  2. You’re receiving payments under a federal or state public assistance program during the time in which you request your loan deferment. Examples of such programs include Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), Food Stamps/Supplemental Nutrition Assistance Program (SNAP), or other forms of state assistance.

  3. You are serving as a Peace Corp volunteer.

  4. You work full-time (30 hours per week) and your monthly income does not exceed 150% of the poverty guideline for your family size and state.

Here’s how to tell if you meet this last guideline: First, determine your family size. This includes you, your spouse, any children who receive more than half of their support from you, any unborn children who are to be born during the deferment period, and anyone else living with you for whom you provide at least half of their support.

Next, find your family size on the following table, and compare it to your annual income (divide by 12 to get your average monthly income).

These figures are from 2023 and are subject to change annually.

You are likely to qualify for the student loan financial hardship program as long as you meet one of these prerequisites. If that is the case, and you would like to pursue the option, contact your lender or student loan servicer. Tell them you would like to apply for Economic Hardship Deferment. At this point, they typically ask you a series of questions and have you fill out an Economic Hardship Deferment Request form.

Pros and Cons of Economic Hardship Deferment

Pros

For someone who is in desperate need of reprieve from their student loan payments, the program can be a godsend. You may want to consider taking advantage of this program if the alternative is defaulting on student loans, which can have a long-lasting, detrimental effect on your credit score and history.

If your loans are subsidized, there is no cost to taking an Economic Hardship Deferment.

Periods of deferment are provided to borrowers who need time to find a job, increase their income, or recover from the many myriad of life events that could leave someone in a place of need. There is no shame in this, whatsoever, but it’s a great idea to use the deferment period to work on rebuilding.

Cons

With unsubsidized loans, taking a period of deferment will make the loans in question cost more over time. Even if you make interest payments during your deferment, you aren’t chipping away at the principal, and so all of those payments are essentially a wash. If you don’t make interest payments, the total value of those unpaid interest payments will be slapped on top of the loan balance, increasing your loan balance and the amount you’ll owe in interest, over time.

When the period of deferment ends, your monthly payment will likely be higher than it is now, which may be difficult for someone who is already experiencing financial hardship. Use the program if you need it, but know it can come with some costs in the long term.

It is also extremely difficult to qualify for Economic Hardship Deferment. The program utilizes stringent criteria to determine eligibility with income review using poverty level guidelines as noted above. (For example, a single person working full-time and earning $20,000 per year and living in California who is not already on food stamps or other forms of government assistance would probably not qualify for Economic Hardship Deferment.) This makes the program unavailable to many people who are legitimately having difficulty making their loan payments.

Alternatives to Economic Hardship Deferment

Forbearance

If you do not qualify for Economic Hardship Deferment, an option is to request forbearance. Forbearance is similar to deferment, though interest accrues in all cases, and periods of forbearance generally do not exceed 12 months (and could be shorter). You’ll need to check with your loan servicer to see if you qualify.

Income Driven Repayment Plans

There are four income-driven repayment plans, including the latest SAVE plan, that help make student loan payments more affordable by reducing them to a percentage of your discretionary income. SAVE, for example, caps your payments at 5% to 10% of your income, depending on the types of loans you have. Under other plans, your payments may be capped at anywhere from 10% to 20% of your income.

IDR plans also stretch your repayment timeline out up to 25 years. If you have any debt left over after than, it’s forgiven (though it may be subject to income taxes).

Though your monthly payments will be lower, which provides some immediate relief, you will pay significantly more in interest over time. It is possible to switch to an alternative repayment plan and back again if your financial situation improves.

Public Student Loan Forgiveness (PSLF) Program

With 10 years of on-time payments at a qualifying job (like a government worker, a teacher, a doctor, or nurse at a qualifying facility), it is possible to have student loans forgiven with the PSLF program. If you go this route, you’ll usually want to switch to an income-driven repayment plan.

Student Loan Refinancing

Another option to consider for both your federal and private student loans is student loan refinancing. Refinancing is the process of switching out your loan or multiple loans with one new loan at an (ideally) lower rate of interest.

The lower rate of interest could save you money on interest payments over the life of the loan. Use a student loan refinancing calculator to see how lower interest rates affect your monthly payments.

It’s important to know that if you refinance federal loans with a private lender, you will lose access to federal student loan programs such as Economic Hardship Deferment or PSLF.

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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For retirees on a fixed income, inflation can have a significant influence on their ability to maintain their budget. That’s because as inflation rises over time, that fixed income will lose value.

That could mean that retirees need to scale back their spending or even make drastic changes to ensure that they don’t run out of money. The average rate of inflation was 8% in 2022, the highest inflation rate in 40 years. By January 2024, the inflation rate had dropped to 3.1%.

When it comes to their retirement money, 90% of Americans ages 60 to 65 say inflation is their biggest concern, according to a 2023 survey by Nationwide. However, by planning ahead, it is possible to minimize some of the impact of inflation on your nest egg.

Read on to learn more about inflation and retirement and what you can do to help protect your savings.

What Is Inflation?

Inflation is the rate at which prices of goods and services increase in an economy over a period of time. This can include daily costs of living such as gas for your car, groceries, home expenses, medical care, and transportation. Inflation may occur in specific segments of the economy or across all segments at once.

There are multiple causes for inflation but economists typically recognize that inflation occurs when demand for goods and services exceeds supply. In an expanding economy where more consumers are spending more money, there tends to be higher demand for products or services which can exceed its supply, putting upward pressure on prices.

When inflation increases, the purchasing power of money, or its value, decreases. This means as the price of things in the economy goes up, the number of units of goods or services consumers can buy goes down.

How does inflation affect retirement? When purchasing power declines, the value of your savings and investments goes down. While the dollar amount does not change, the amount of goods or services those dollars can buy falls. In retirement, inflation can be especially harmful, since retirees typically don’t have an income that goes up over time.

Concerns about inflation and retirement may even push back the age at which some people think they can afford to retire.

5 Ways that Could Potentially Minimize the Impact of Inflation on Retirement

While inflation can seem like a challenging or even scary part of retirement, there are several investment opportunities that may help you maintain purchasing power and reduce the risk of inflation.

1. Invest in the Stock Market

Investing in stocks is one way to potentially fight inflation. A diversified portfolio that includes equities may generate long-term returns that are higher than long-term inflation. While past performance does not guarantee future returns, over the past 10 years, the average annualized return for the S&P 500 has been 12.39%. Even when inflation is factored in, investors still have substantial returns when investing in stocks. When adjusted for inflation, the average annualized return over the past 10 years is 9.48%.

However, stocks are risk assets, which means they are sensitive to market volatility. These price swings may not feel comfortable to investors who are in retirement so retirees tend to allocate a smaller portion of their portfolio to stocks to help manage market risk.

How much you may decide to allocate to stocks depends on a number of factors such as your risk tolerance and other sources of income.

2. Use Tax-Advantaged Retirement Vehicles

To maximize the amount of savings you have by the time you reach retirement, start investing as early as you can in young adulthood in retirement accounts such as employer-sponsored 401(k)s or Individual Retirement Accounts (IRA). The more time your money has to grow, the better.

With 401(k)s and traditional IRAs, the money in them grows tax-deferred; you pay income tax on withdrawals in retirement, when you might be in a lower tax bracket than you were during your working years.

Another option is a Roth IRA. With this type of IRA, you pay taxes on the money you contribute, and then you can withdraw it tax-free in retirement.

Recommended: How to Open an IRA: 5-Step Guide for Beginners

3. Do Not Over-Allocate Long-Term Investments With a Low Rate of Return

Risk averse investors may be tempted to keep their nest egg invested in securities that are not subject to major price swings, or even to keep their money in a savings account. However, theoretically, the lower the risk investors take, the lower the reward may be. When factoring in fees and inflation, ultra-conservative investments may only break even or perhaps lose value over time.

While they offer a guaranteed return, high-yield savings accounts, for example, typically don’t earn enough interest to beat inflation in the long run. Since savings account rates are not higher than inflation rates, the buying power of your savings will continue to decline. That’s particularly important for retirees who are often living off their savings and investments, rather than off of an income that rises with inflation.

Because of this, retirees may want to consider keeping a portion of their investments in the stock market.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

4. Make Sure You Understand Inflation-Protected Securities

Treasury inflation-protected securities or TIPS, which are backed by the federal government, are designed to help protect investments against inflation. The principal value of the investment increases when inflation goes up and if there’s deflation, the principal adjusts lower per the Consumer Price Index.

However, for some investors, TIPS may have disadvantages. TIPS typically pay lower interest rates than other government or corporate securities. That generally makes them less than ideal for individuals like retirees who are looking for investment income. Also, unless inflation is quite high, and unless they are held for the long-term, TIPS may not offer much inflation-protection. There are also potential tax consequences to consider when the bonds are sold or reach maturity.

Finally, because they are more sensitive to interest rate fluctuation than other bonds, if an investor sells TIPS before they reach maturity, that individual could potentially lose money depending on the interest rates at the time.

Be sure to carefully weigh all the pros and cons of TIPS to decide if they make sense for your portfolio.

5. Buy Real Estate or Invest in REITs

Retirees may also consider investing in real assets. Real estate is typically an inflation hedge because it holds intrinsic value. During periods of inflation, real estate may not only be able to preserve its value, but it might also increase in value. One of the daily costs impacted by inflation is the cost of housing.

That’s why rental income from real estate historically has kept up with inflation. Investing in real estate investment trusts (REITs), may be another way for retirees to diversify their investment portfolio, reduce volatility, and add to their fixed-income. Just be sure to understand the potential risks involved in these investments.

Inflation Calculator for Retirement

It’s important to factor inflation into your plans as you’re saving for retirement. One way to do that is using a retirement calculator, like this one from the Department of Labor, which accounts for how inflation will impact your purchasing power in the future. That calculator uses a 3% inflation rate for retirement planning, but inflation fluctuates and could be higher or lower in any given year.

The Takeaway

While inflation can have an impact on a retirement portfolio, there are ways to protect the purchasing power of your money over time. Allocating a portion of your portfolio to stocks and other investments aimed at minimizing the impact of inflation may help.

Another way to curb the impact of inflation during retirement is to reduce expenses, which allows the money that you have to go further.

And starting to save for retirement as early as possible could help you accrue the compounded returns necessary to counteract rising prices in the future.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

Is inflation good or bad for retirees?

A small amount of inflation each year is a normal part of the economic cycle. But over time, inflation eats away at the value of the dollar and purchasing power of your nest egg is diminished. This can have a negative effect on a retirement investment portfolio or savings.

How can I protect my retirement savings from inflation?

There are several Investing strategies you can use to protect retirement savings from inflation. These include diversifying your portfolio with inflation hedges including TIPS (treasury inflation-protected securities) and investments that typically provide a high rate of return. It’s important to keep saving for retirement even if you don’t have a 401(k).

Does your pension increase with inflation?

Some pensions have a cost of living adjustment on their monthly payments, so they increase over time. However, this is not the case for all pensions. When inflation increases this can affect your benefits.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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