How Unemployed College Graduates Can Repay Student Loans

Unemployed college graduates with student debt can apply for income-driven repayment or unemployment deferment.
Anna HelhoskiOct 12, 2020

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Well-paid entry-level jobs are scarce, which leaves unemployed college graduates in a precarious position as their student loan debt comes due.

Taylor Cabrera has been job-hunting for months since graduating from the University of Mississippi in spring 2020 with dual bachelor’s degrees in biology and physics, and has moved in with family in Miami. Her only solid job lead so far was a two-week marketing stint that didn’t pan out, though she says she’s feeling good after a recent interview for an entry-level mortgage position.

Despite her challenges, Cabrera says she knows she’s fortunate when it comes to her student loans. Earning hefty scholarships meant she took on $14,000 in debt, about half of what the average undergraduate carries, according to the Institute for College Access and Success.

“It’s pretty good compared to what everybody else has, but it still hurts my soul,” Cabrera says.

Student loan payments typically begin six months after graduation. But those with federal loans like Cabrera have some respite: There’s an automatic, no-interest payment pause, known as forbearance, in place for all borrowers with federal student loans through Jan. 30, 2022.

Private loan borrowers didn’t get the same break. But all borrowers have options to make payments more manageable, whatever their employment status or type of debt they carry.

Employment barriers for recent grads

Leaving college without a job offer isn't uncommon, especially during economic downturns. But the classes of 2020 and 2021 faces unique challenges.

The effects of COVID-19 have hit every industry, says Nicole Smith, research professor and chief economist at Georgetown University’s Center on Education and the Workforce. She adds that outside of telecommunications and tech, very few sectors are hiring right now.

“If you’re looking for a corona-proof job, it doesn't exist,” Smith says.

Positions with titles that include “entry level” or “new grad” dropped 68% year-over-year, according to a June 2020 report by Glassdoor. Graduates with little or no experience are competing with millions of unemployed Americans.

On top of that, new entrants to the workforce can’t access the safety net of unemployment benefits, even as the prospect of student loan payments looms.

Two options for federal student loan borrowers

Until employers start hiring again, recent unemployed college graduates have some options to ease their debt burden.

To manage payments, those without jobs can choose an income-driven repayment plan or an unemployment deferment.

An income-driven repayment plan is your best long-term option. It caps payments at a portion of your income — 10% for example — and extends the repayment term. If you’re unemployed — or underemployed — your payment could be zero. You must contact your student loan servicer to enroll.

If you need short-term relief, unemployment deferment allows you to postpone repayment for up to 36 months in six-month increments. It’s less desirable than income-driven repayment because interest builds and is added to the total debt when repayment begins. To qualify for an unemployment deferment, you'll need to apply with your servicer and prove you're either receiving unemployment benefits or, in the case of recent graduates, seeking full-time work.

Have a plan before payments start

If you’re planning to change your loan payments, do it as soon as possible to keep payments manageable, says Scott Buchanan, executive director of Student Loan Servicing Alliance, a nonprofit trade association representing student loan servicers.

Private student loan borrowers have fewer options to alter or pause payments compared with federal student loan borrowers. You must contact your lender to find out if you qualify for a temporary reduction in the payment amount or to request forbearance.

This article was written by NerdWallet and was originally published by The Associated Press. 

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