If you have student debt, but your financial situation is not in good shape, you should consider deferring your student loans. Instead of defaulting, which could badly hurt your credit, you should get your student loans deferred.
In this free student loan resource, we will be exploring the key things to know about deferring your student loans. By the end of reading this resource, you will be versed with the following;
- What is student loans deferment?
- 7 Types of Student loan deferment
- How long are student loans deferred?
- What is the cost of student loan deferment?
- 3 things to consider before you defer your student loans.
- How to defer your student loan?
- 2 Student loans deferment alternatives
What is Student Loans Deferment?
Student loans deferment is the agreement between you (the borrower) and the lender to reduce or postpone repayments of your student loan for a given period (up to 3 years). Depending on the type of student loan you have, both the principal amount and the interest could be deferred.
The interest does not accrue with subsidized student loans since the federal government pays for them during the deferment period. But the interest on unsubsidized student loans accrues in the deferment period. This accrued interest will be added to your principal amount at the end of the deferment period.
For private student loans, you may or may not have the possibility to defer your student loan. Deferment depends on whether the lender accepts it or not. Even if your lender accepts deferment, the interest also accrues during the postponement period.
7 Types of Student loan deferment
Depending on your circumstances, you could qualify for a particular deferment on your federal student loans. There are seven main types of student loans deferment.
1. Economic hardship deferment:
Economic hardship deferment is offered to federal student loan borrowers with low incomes. To qualify for the financial hardship deferment program, you must meet one of the following;
- You are receiving payments under a federal or state public assistance program such as food stamps, welfare, etc.
- You’re currently serving as a peace corps volunteer.
- You work full time, and your monthly income does not exceed the federal minimum wage or 150% of the poverty line for your family size and state.
- Your student loan is not already in default.
2. Unemployment deferment:
If you are underemployed or unemployed, you can qualify for unemployment student loan deferment.
Underemployment means you are working less than 30hrs a week, or you have a full-time job that is suspected to last less than 90 days. While unemployment means you are 100% unemployed.
You have to submit proof of the unemployment benefit you’re receiving. But if you are not receiving any unemployment benefit, you must be registered at an agency helping you find a full-time job.
3. In-school deferment:
In-school deferment is the most popular kind of student loan deferment. With in-school deferment, you’re loan repayment only starts six months after your graduation or after you are no longer in school. So you don’t have to worry about making payments while you are still studying.
In-school deferment is automatic if you are enrolled and attending school at least half-time. But if you have a Direct PLUS or FFEL PLUS loan, you have to request a deferment.
Again depending on the type of federal student loan you have, interest might accrue during the deferment period.
4. Graduate Fellowship Student Loan Deferment:
Graduate fellowship deferment is available to students who are pursuing masters or doctorate degrees. This fellowship program will provide you with financial support to pursue your studies and research. To qualify for this program, you should;
- Be a holder of at least a Bachelor’s degree.
- Be accepted or recommended by an institution of higher education for acceptance into a graduate fellowship program.
- Have an anticipated completion date for your graduate fellowship program.
- Have a full-time fellowship program, and this program must provide you with financial support for at least six months.
- Provide a written statement of your objectives of pursuing your graduate program.
5. Rehabilitation Training Deferment:
If you are undergoing an approved rehabilitation program for drug abuse, alcohol abuse, or mental health, you can qualify for a rehabilitation deferment. During this training period, all of your bills are postponed until the end of the program.
6. Military service and post-active duty student loan deferment:
If you are on active duty in the military in connection with war, national emergency, or military operations, you can apply for a student loan deferment.
Note: If you are in a military service school, you are not eligible for this type of deferment.
7. Cancer Treatment Deferment:
God forbids this. But if you have cancer and are undergoing treatment, you can qualify for this type of deferment. You also get a six-month grace period after finishing your treatment.
How long are student loans deferred?
In general, you can defer your student loan for a period of up to 3 years. But there are certain cases where you get an additional six-month grace.
If you have exhausted the deferment duration and still can’t afford to repay your loan, you could apply for an Income-Driven Repayment plan. This plan sets your monthly payment on your student loan based on your income and family size.
What is the cost of student loan deferment?
Depending on the type of student loan you have, deferment can be costly. For Federal subsidized loans, the government takes care of the interest during the deferment period. It means interest does not accrue at the end of the deferment period.
On the other hand, private and federal unsubsidized student loan deferment is very costly. The interest accrues during the deferment period and is added to the principal amount at the end of the deferment period. This added accrued interest on your principal loan balance increases the interest amount of your student loan when you have to resume payment.
Let’s use the example below where there are no origination fees, just the principal amount and the interest rate.
You have a student loan balance of $40,000 at an Annual Percentage Rate of 4.6%. You go into 2 years of student loan deferment. At the end of the 1st year, your principal balance will be $41,840 (old principal balance + accrued interest(APR)). From the 13th month, the 4.6% interest (APR) is calculated from your new principal balance of $41,840.
So at the end of the 24th month, your new principal balance will be $43,764.64. So after the end of the deferment period, your APR has increased from $1840 to $3764.64.
3 things to consider before you defer your student loans
There are few things you should consider before deferring your student loan. Ignoring these things could negatively impact your finance in the future. These are three questions you must ask yourself.
- Do you know all about the type of student loan you have?
- How long do you need to defer your student loan?
- Will you be able to meet your financial commitments after the deferment period?
Now let’s go through each of these questions to give you more perspective.
1. Do you know all about the type of student loan you have?
Before deferring any student loan, you should know precisely what kind of student loan you have. Some student loans from private lenders can’t be postponed after the grace period. Other private lenders could allow you to defer your payments for a certain period, but the interest accrues during the deferment period.
For unsubsidized federal student loans, you can defer payments if you qualify for one of the deferment types we covered above. But like the private student loans, the interest also accrues during your deferment period.
Subsidized student loans don’t accrue any interest during a deferment since the government pays the interest. So it is essential to know the type of student loan you have.
2. How long do you need to defer your student loan?
It might be tempting to postpone your student loan longer than you should. But remember that you are only delaying the payments. You will still be in debt at the end of the deferment period.
If interest also accrues, you will end up owing more than you should at the end of your student loan deferment. If one year is enough for you to defer your loan, don’t be tempted to go for two years or beyond.
3. Will you be able to meet your financial commitments after the deferment period?
Unless in the case of unemployment, don’t defer the total amount if you can still afford partial or reduced payments on your student loans. It only makes sense to defer payments if you have proper financial planning or strategy in place.
Deferment gives you the ability to restructure your finance and get back on track with your payments. So you can go into a full deferment if you have a sound financial plan in place.
How to defer your student loan?
If you are still in school, deferment is often automatic until the end of your grace period. So you don’t have to worry about applying for student loan deferment.
If you have a private student loan, you should contact your lender and ask if you can apply for deferment. But with federal student loans, you should submit a request to your student loan servicer. Make sure you provide adequate documents to your loan servicer to show your eligibility.
You can access the different types of student loan deferment forms below:
- Economic hardship deferment
- Unemployment deferment
- In-school deferment
- Graduate Fellowship Student Loan Deferment
- Rehabilitation Training Deferment
- Military service and post-active duty student loan deferment
- Cancer Treatment Deferment
2 Student loans deferment alternatives
There are two alternatives to student loan deferment; forbearance and Income-Driven Repayment Plan.
A forbearance is an option that lets you temporarily pause or reduce your monthly student loan payments for no more than 12 months at a time. You can request forbearance as many times as you want, but the interest accrues, and it is added to your principal amount at the end of the forbearance period.
You should contact your lender or loan servicer on the phone and explain why you want to put your payments on hold.
If you have missed out on two payments already, call your servicer or lender on the phone. Don’t rely on emails as they can be overlooked, resulting in default if no one follows up on the emails.
2. Income-Driven Repayment plan:
An Income-Driven Repayment is only available for federal student loans. Your new student loan payments will be based on your income and family size.
Although student loan deferment can relieve you of financial difficulty, it only makes more sense if you have a subsidized student loan. But if you don’t qualify for deferment, consider forbearance if you are in a severe financial crisis.
The income-Driven Repayment plan is suitable if you don’t qualify for deferment but have a monthly income.