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).
| Family Size | Alaska | Hawaii | All Other States |
|---|---|---|---|
| 1 | $18,210 | $16,770 | $14,580 |
| 2 | $24,640 | $22,680 | $19,720 |
| 3 | $31,070 | $28,590 | $24,860 |
| 4 | $37,500 | $34,500 | $30,000 |
| 5 | $43,930 | $40,410 | $35,140 |
| 6 | $50,360 | $46,320 | $40,280 |
| 7 | $56,790 | $52,230 | $45,420 |
| 8 | $63,220 | $58,140 | $50,560 |
| Each additional person, add | $6,430 | $5,910 | $5,140 |
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.
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