What happens when an employee with a loan takes a leave of absence? It depends on the type of leave. There are different rules for a normal leave of absence versus military leave.

When it is a non-military leave, the plan may suspend loan payments for up to one year while the employee is out on leave. However, the plan cannot extend the loan beyond the loan’s maximum repayment period (typically five years). Once an employee returns to work, they must make additional payments to make sure that the loan is repaid within the five-year period by either re-amortizing the existing loan to increase the payments or by keeping the payments the same and making a catch-up payment for the missed payments during the leave of absence.

In a military leave of absence, the loan payments can be suspended during the employee’s active duty and upon the employee’s return, the loan payments can be extended for the length of the absence. In this case, the employee must repay the loan within five years from the date of the loan plus the period of military service.

The following examples show the difference in how to treat different leave of absence.

Non-military leave Military leave
Employee takes a five-year loan on 7/1/21 and takes a six month leave on 1/1/22 The loan payments can be suspended for 6 months and the loan must by paid off by 6/30/26 The loan payments can be suspended for 6 months and the loan payoff date is extended to 12/31/26
Employee takes a five-year loan on 7/1/21 and takes a one year leave on 1/1/22 The loan payments can be suspended for one year and the loan must by paid off by 6/30/26 The loan payments can be suspended for one year and the loan payoff date is extended to 6/30/27
Employee takes a five-year loan on 7/1/21 and takes a two year leave on 1/1/22 The loan payments can be suspended only for one year and the loan must by paid off by 6/30/26 The loan payments can be suspended for two years and the loan payoff date is extended to 6/30/28

Rules regarding the leave of absence for loan repayments can be complex. Please contact us if you have any questions.