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Everything You Need to Know About Student Loan Deferment

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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?

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 may include:

  • In-school deferment: Your enrollment status is at least half-time in an eligible school
  • Graduate fellow deferment: You are enrolled in an approved graduate fellowship program
  • 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 period1: In the first six to nine months following your graduation
  • Cancer treatment deferment: During your treatment and for the six-month period after your treatment ends
  • Parent PLUS borrower deferment: For parents who took out a Direct PLUS Loan on behalf of a student who is enrolled at least half-time in an eligible college or career school
  • Rehabilitation Training deferment: You are enrolled in an approved training program that provides vocational, mental health, or drug or alcohol abuse rehabilitation treatment.
  • If you are a volunteer with the Peace Corps

How student loan deferment affects your payment 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. Generally, you are responsible for paying the interest that accrues on these loans during the deferment period.

While your loan is in deferment, you have the option of paying the interest as it accrues. Alternatively, you can wait for the interest to accrue and be “capitalized,” or added to your loan’s principal balance when the deferment period ends. If you choose to capitalize the interest, your total repayment amount may be higher over the life of the loan.

Private student loans

Each private student 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.

Alternatives to student loan deferment

If student loan deferment isn’t an option, there are other ways to postpone your payments, or at the very least, make them more manageable. Income-driven repayment plans, student loan consolidation, and refinancing2 are three possible options to consider. The option that may work best for you depends on the type of student loan debt you have and your individual financial situation.

Income-driven repayment plans

If you qualify for an income-driven repayment plan, you may be able to reduce your monthly federal student loan payments to as low as $0. Income-driven repayment plans base your monthly payments on your income and the size of your family. So if you’re having trouble making your student loan payments for some reason — if you become ill or unemployed or your family grows, for example — it’s worth checking to see if you qualify for an income-driven repayment plan.

You’ll need to apply to see if you’re eligible. To qualify, you must be a borrower in good standing. If your loans are in default, you aren’t eligible for an income-driven repayment plan.

Income-driven repayment is a loan program that’s only available with federal student loans. Generally, your monthly payment is based on your discretionary income — money left over after paying basic expenses, such as housing, utilities, food, and transportation. You must show that your income is so low that making your student loan payments creates a “hardship”; typically, when your monthly student loan payment is more than 20% of your monthly discretionary income. Under an income-driven repayment plan, you may not have a monthly payment at all depending on your income and family size.

Income-driven repayment plans allow you to pay off your student loans over 20 to 25 years. That means your monthly payment (if you have one) will be lower, but keep in mind, you’ll also pay more in interest. There are multiple plans to choose from based on your individual financial situation and student loan type.

One significant perk of income-driven repayment plans is that any outstanding balance is forgiven when the 20- to 25-year repayment period has ended. However, you must make all of your payments on time over the years, and you’ll owe income taxes on any amount forgiven.

Student loan consolidation

Consolidating multiple student loans can help simplify your finances and make it easier to manage your payments. Student loan consolidation means combining your loans into one. Consolidation is only applicable to federal student loans. The process of “consolidating” your private loans is called “refinancing” (more on this below), and there are a few key differences between the two.

When you consolidate your federal student loans, they’ll be combined into a loan called a Direct Consolidation loan. The federal government will issue you a new loan and pay off the old ones, and you’ll make payments on the new loan. The upside is you’ll have just one payment every month, and you may be able to make your monthly payments more affordable by extending the repayment term from 10 years to 20 or 25 years.

On the other hand, consolidating won’t save you money over the life of the loan. By taking longer to pay off your federal student debt, you’ll end up making additional monthly payments and paying more in interest. You may also miss out on borrower protections such as interest rate discounts or, if you’re eligible, the Public Service Loan Forgiveness (PSLF) program. Losing these benefits could increase your student loan repayment costs.

Student loan refinancing

If you’re struggling to make your student loan payments due to high interest rates, consider refinancing. This option is generally available for borrowers who have student loans through a private lender, but you can refinance federal loans as well. By refinancing, you may be able to get a lower interest rate, reduce your monthly payment, or both.

When you refinance your student loans, you’ll apply for a loan with a new lender. During the application process, the lender will look at your financial record (including your credit score, employment history, income, and education) and any other outstanding debts you may have, such as credit cards. This information will help the lender determine the interest rate you’ll pay on the loan.

Borrowers with good or excellent credit (typically a score of 690 or higher), along with stable employment and income generally qualify for the lowest interest rates. If you don’t meet these criteria, consider getting a cosigner to help you qualify. If your application is approved, the new lender will pay off your old loan with your existing lender, and you’ll start making payments on the new loan.

Ideally, you’ll refinance your private student loans3 at a lower interest rate, potentially saving you on the amount of interest you’ll pay over the life of the loan. You may choose a longer repayment term, which will mean lower payments, but it may also mean you’ll pay more interest. Or you could opt to pay off your loan off faster, which means you’ll likely pay less in interest, but your monthly payments will be higher.

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 will allow you to stop making payments (or make reduced payments) on your loan for a period of up to a year. Generally, forbearance is most common with federal student loans. Private lenders may grant forbearance in some circumstances, however, rules vary among student loan servicers.

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 can decide whether or not to grant forbearance – for example, if you are experiencing financial hardship or an unexpected change in employment that prevents you from making your student loan payments, you may apply for a 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
  • Owing 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)4, which provided 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 Donald 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.

President Joe Biden has implemented student loan relief measures five times since taking office. Most recently, he extended the pause on student loan payments until January 2023.

In addition, some student debt will be canceled for federal borrowers. Specifically, $10,000 in student loan debt will be forgiven for some borrowers; $20,000 will be forgiven for eligible Pell grant recipients. To qualify for student loan debt forgiveness, borrowers must earn less than $125,000 for an individual, or $250,000 annually for a married couple.

Additional borrowers have benefited from student loan debt cancellation during President Biden’s term. For instance, thousands of eligible borrowers in the PSLF program have benefited from student loan forgiveness.

Federal student loan borrowers can learn more about college debt repayment plans and how to restart payments if and when the pause ends at studentaid.gov. 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.

How do I request a student loan deferment?

Typically, borrowers must apply to defer payments on their student loans. Requesting a student loan deferment usually means completing some paperwork with your loan servicer. Whether you’re requesting a deferment for a federal or private student loan, you’ll need to provide your lender with documentation that you’re eligible for a deferment, such as proof of unemployment benefits.
If you qualify, your lender has to grant you the deferment. You should continue making payments as usual until your request is approved.

Can I skip just one student loan payment?

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. For example, Earnest clients have the option to skip a payment5 once every 12 months, as long as their loan is in good standing and they’ve made at least six months of on-time payments in a row. 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.

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.

See how much you could save with Earnest

If you’re having trouble making your student loan payments, you may be able to get a brief reprieve through deferment or forbearance, where you won’t have to make payments for a period of time. However, these options have very specific eligibility requirements, and there are potential negative impacts to your personal finances, so you might consider applying for an income-driven repayment plan, or consolidating or refinancing your student loans instead.

If you decide to refinance, you may be able to save money with a lower interest rate or monthly payment, or both. Earnest offers some of the lowest rates around, starting at just 3.24% APR for a fixed-rate loan, and 1.89% for a variable rate loan (includes 0.25% auto pay discount)6.

See your potential savings with Earnest7. Check your rate today. It takes just two minutes, and won’t impact your credit score.

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.

1 Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.

2 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.

3 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-driven Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.

4 AN UPDATED NOTE FOR BORROWERS WITH FEDERAL STUDENT LOANS:
On August 24, 2022, the U.S. Department of Education announced an extension of the federal student loan payment pause through December 31, 2022 along with additional information on debt cancellation. We want Earnest customers to explore all their options before applying to refinance their federal student loans. Refinancing a federal student loan with a private lender means you will no longer have access to benefits of your federal loans, including the temporary 0% interest rate and suspension of payments effective through December 31, 2022 on federally held loans, the debt cancellation announced by ED on August 24, 2022, the Public Service Loan Forgiveness Limited Waiver Option available through October 31 2022, or any other relief measures implemented for federal loans to address the COVID-19 crisis. Please carefully review your current and potential benefits with your federal loan servicer, including loan forgiveness options such as Public Service Loan Forgiveness and Income-Driven Repayment, before refinancing.

5 Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.

6 You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.

7 Loan Eligibility criteria: Your debt is from paying for education at a Title IV accredited school. The debt is from your education or your child’s. The debt you’re refinancing is for a completed degree or one that will be completed at the end of this semester. You are currently the primary borrower on the student loans you would like to refinance, and you will remain the primary borrower after refinancing. You must reside in the District of Columbia or one of the 48 states Earnest Operations LLC is authorized to lend in (all but Kentucky and Nevada). This is strictly a student loan refinance product. There is no opportunity to borrow more than your outstanding qualifying student loan amount. You must be the age of majority in your state or older at the time you apply, as well as be a United States citizen or Permanent Resident Alien without conditions. Refinancing is subject to credit qualifications. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX.

Earnest Loans are made by Earnest Operations LLC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit www.earnest.com/licenses for a full list of licensed states. For California residents: Loans will be arranged or made pursuant to a California Financing Law License.

Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.

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