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student loan deferement

How Deferment and Forbearance Affect Your Student Loans

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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 making student loan payments toward your repayment plan 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.

Student loan payments can be deferred for a number of reasons, depending on the lender. Deferment options could include:

  • In-school deferment: You are enrolled at least half-time in an eligible school
  • Unemployment deferment: You are unemployed (lasting up to three years)
  • Economic hardship deferment: During periods of economic hardship (lasting up to three years)
  • Full-time military service: During active duty and the first 13 months after concluding military operations
  • Grace Period: In the first six to nine months following your graduation
  • If you are a volunteer with the Peace Corps

Learn more about deferment and forbearance of Federal Student Loans

How Student Loan Deferment Affects Interest Accrual and Your Repayment Plan

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.

Subsidized Federal Student Loans

If you have a federal Perkins loan, or a subsidized Stafford or direct loan, the Department of Education pays the interest on your federal 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 federal government.

Unsubsidized Federal Student Loans

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.

Private Student Loans

Each private loan servicer is different, so it is important to reach out to learn how interest will accrue during deferment.

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 Student Loan Forbearance?

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.

What are the types of student loan forbearance?

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 on your student loan debt 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 program or internship
  • You owe 20% or more of your gross monthly 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)

Student loan forbearance and the COVID-19 pandemic

On March 27, 2020, Congress passed, and the president signed into law, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provides for the below relief measures for federal student loan borrowers through Sept. 30, 2020:

  • Suspend loan and interest payments
  • Stop collections on defaulted loans
  • Set interest rates to 0% for a period of 60 days

On Aug. 8, 2020, President Trump directed the US Department of Education to continue to suspend loan payments, stop collections, and waive interest on ED-held student loans until Dec. 31, 2020 due to the continued national emergency.

If you have a private student loan you will want to reach out to your loan servicer about their loan repayment options during COVID-19.

Can I Skip Just One Payment with My Student Loan?

While student loan deferment and forbearance should be considered short-term solutions if you are out of repayment options 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 score.

Read more Repaying Your Earnest Student Loan

What is the Financial Impact of Student Loan Deferment?

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 total loan balance.  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.

Consider Refinancing Your Student Loans

If you are struggling to make payments on your student loans, lower your monthly payment through refinancing could be another solution. Refinancing is revising the interest rate of your loan (or consolidated loans) to a new rate and monthly payment. This is a popular option for college graduates because they may not have received a great interest rate when applying for their student loans.

If you are utilizing any of the benefits offered to federal borrowers you will need to weigh the pros and cons of consolidating and refinancing with a private lender.

Conquer your student debt. Refinance now.

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Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.