When you’re enrolled in school, it can be easy to forget that you have student loans. But technically you are in a deferment period for your loans—and for most loans (with the exception of subsidized loans) interest is accruing even though you’re not making payments.
Typically you will be required to start repayment when your grace period ends. However, there are also cases when student loan deferment is a short-term solution for postponing payments until you are able to make them regularly again.
What is student loan deferment?
A deferment is a period of time when you won’t be required to make payments on the principal and interest of your student loan.
Loans can be deferred for a number of reasons including when:
- You are enrolled at least half-time in school
- You are unemployed (up to three years)
- During periods of economic hardship (up to three years)
- If you serve in the Peace Corps
- During active military duty and the first 13 months after concluding active duty
- In the first six to nine months following your graduation
Student loan deferments may be granted for either federal or private student loans, but there are some differences between how deferred loans are handled when it comes to the accrual of interest.
If you have a federal Perkins loan, or a subsidized Stafford or direct loan, the government pays the interest on your loan throughout your deferment. At the end of your deferment, you will owe the same amount of money as you did at the beginning of it, as any interest that accrued in that time will have been covered by the government.
If you have an unsubsidized federal Stafford loan or a Direct PLUS loan, the government will not pay your interest during your deferment or forbearance.
You can choose to pay only the interest during your deferment to avoid it being added to your principal balance, or you can allow it to accrue and pay it off later with the rest of your loan. Be aware, though, that if you don’t pay any interest during your deferment period, you will likely have to pay more in the future after your interest has been added to your principal.
What is forbearance of student loans?
Forbearance is similar to deferment, but it covers students who do not qualify for a deferment period (see the bullets above for qualifying circumstances).
If you’re granted forbearance, your lender (either private or federal) will allow you to stop making payments (or make reduced payments) on your loan for a period of up to a year.
During this time, for either a federal or private loan, interest will continue to accrue, and it will be added to your principal.
There are two types of forbearance:
- Discretionary: Your lender will be allowed to decide whether or not to grant forbearance. For example, if you are experiencing financial hardship and/or illness, you may apply for discretionary forbearance.
- Mandatory: Your lender will be required to allow a forbearance period if you meet the necessary requirements.
Situations in which you might qualify for mandatory forbearance include but are not limited to:
- Going into a medical or dental residency or internship.
- You owe 20% or more of your total monthly gross income in student loans.
- Participating in a teaching service that qualifies for teacher loan forgiveness.
- Being a member of the National Guard and being activated by your state’s governor (if you aren’t eligible for deferment for your military status).
Can I skip just one payment with my student loan?
While student loan deferment and forbearance should be considered short-term solutions for you over the life of your loan, you may need an even shorter term solution—like skipping one month when things get tight in your budget. In this case, you should contact your loan service provider to see what options you may have. If you do not make arrangements and miss a monthly payment, your lender could mark your loan as delinquent. That could hurt your credit.
What is the financial impact?
When you defer your subsidized student loans, the main financial impact is that you’re pushing back the date when you’ll be finished paying your loans. When you defer unsubsidized loans or take forbearance, you’ll be adding to your overall bill with additional accrued interest—that means not only are you pushing back your finish date, you’re also adding to your overall balance.
If your goal is to pay off your loans as fast as possible, use your option for student loan deferment or forbearance sparingly or not at all.