Savanna Hoffman
Student loan deferment is a temporary pause on loan payments for specific situations, such as active military service or reenrollment in school. During this period, interest will continue to accrue, increasing the total loan cost. While on deferment, individuals can choose to make extra interest payments to lower the total loan cost. It is important to note that private student loans may or may not offer deferment options, and the rules vary among lenders. Those interested in exploring this option should contact their loan servicer early on to understand the terms and fees associated with postponing payments.
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What You'll Learn
Interest accrual
Yes, you can make voluntary payments towards your student loans even if they are currently in deferment. Deferment is a period when you are not required to make regular payments on your loans, usually due to certain eligible circumstances such as continuing your education, unemployment, or economic hardship. This can be a great strategy to reduce the overall cost of your loan.
Now, let's talk about interest accrual:
When your loans are in deferment, interest will typically continue to accrue, which means the unpaid interest will be added to your principal balance. This can lead to a phenomenon known as "negative amortization," where your loan balance increases over time even if you don't take out any additional loans. Whether interest accrues during deferment depends on the type of student loans you have:
Federal student loans: If you have federal student loans and your deferment is related to enrollment (in school, grace period, or authorized deferment), the government may pay the interest on your behalf during the deferment period. This is applicable to subsidized Direct Loans, Subsidized Federal Stafford Loans, and Federal Perkins Loans. For unsubsidized federal loans, interest will accrue during any type of deferment, including in-school and authorized deferments.
Private student loans: Interest accrual during deferment varies by lender. You should carefully review the terms of your private loan agreement or contact your lender directly to understand their specific policies. Some private lenders may offer interest-only payments during deferment, or they may allow you to capitalize the interest (add it to the principal balance) at the end of the deferment period.
It's important to note that even if interest is not required during the deferment period, you have the option to make payments. Paying at least the accrued interest during deferment can help minimize the growth of your loan balance. This is especially beneficial for unsubsidized federal loans and private loans where the government does not subsidize the interest. Making interest-only payments or even paying a small amount toward the principal can help reduce the overall cost of your loan.
Additionally, some lenders may offer incentives or discounts for making payments during deferment, such as a reduced interest rate or a waiver of certain fees. Check with your loan servicer to understand all your options and the potential impact on your specific loan terms. Remember, even though voluntary payments during deferment are optional, they can be a strategic way to manage your student loan debt and save money in the long run.
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Eligibility for income-driven repayment plans
To be eligible for an Income-Driven Repayment (IDR) plan, you must consolidate your loans into a Direct Consolidation Loan. This includes Federal Family Education Loans (FFEL) and Direct PLUS Loans. Parent PLUS loan borrowers can consolidate their Direct PLUS and FFEL PLUS Loans into a Direct Consolidation Loan, making them eligible for the ICR Plan.
Defaulted loans are not eligible for IDR plans. To apply for an IDR plan, you must provide income information, such as your most recent tax return. If you didn't file taxes, you can submit other income information, such as pay stubs or a letter from your employer. You can also provide consent for secure access to your federal financial information, which is an option within the IDR application.
The Loan Simulator will ask for basic information about your income, family size, tax filing status, and state of residence, and then present different plan options. You will need to recertify your income or family size once per year. However, if you provide consent for secure access to your federal financial information, your IDR plan will be automatically recertified each year. You will be notified of any changes and can always manually recertify if you wish.
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Loan repayment options
Deferment allows you to temporarily reduce or postpone loan payments if you're returning to college, attending graduate school, or entering an internship, law clerkship, fellowship, or residency program. During the deferment period, interest will continue to accrue, increasing the total loan cost.
If you are able to, making extra interest payments during this time can help lower the total loan cost. You can request a deferment of up to 48 months for an undergraduate or graduate student loan, so long as you're enrolled at least half-time. To be approved for deferment, your school must verify your enrollment.
If you are experiencing difficulty making your student loan payments, there are several options available to you. You can download student loan servicing forms to set up auto-debit, apply for a cosigner release, or request a deferment. Servicemembers and their families can also fill out the SCRA benefit form online.
It's important to note that if your deferment request is approved, your loan will return to the repayment option you initially chose (interest, fixed, or deferred). This means that if you were paying interest-only or fixed payments during your studies, you will continue to make those payments throughout the deferment period.
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Deferment approval
Check Your Eligibility:
First, determine if you meet the eligibility requirements for deferment. Various circumstances may qualify you for a deferment, such as economic hardship, unemployment, cancer treatment, graduate fellowship, or military service. Each type of deferment has specific criteria that must be met. For example, to qualify for an economic hardship deferment, you must be facing financial difficulties, such as earning below 150% of the poverty guideline or receiving means-tested benefits.
Gather Supporting Documentation:
Depending on the type of deferment you are applying for, you will need to provide relevant documentation to support your application. This could include medical records, proof of income or unemployment benefits, enrolment verification, or other relevant documents. Ensure you have all the necessary documentation before submitting your request.
Submit a Request to Your Loan Servicer:
Contact your loan servicer to initiate the deferment process. You will need to submit a formal request for deferment, which may involve filling out specific forms or providing additional information. It is important to note that most federal student loan deferments are not automatic, and you must proactively apply for them.
Continue Making Payments Until Approved:
After submitting your deferment application, continue making regular loan payments as scheduled until you receive confirmation that your deferment has been approved. Failing to do so could cause your loan to become delinquent, negatively impacting your credit score. The approval process may take some time, so ensure you stay current on your payments during this interim period.
Understand the Terms of Your Deferment:
Once your deferment is approved, carefully review the terms and conditions. In some cases, the government may cover the interest accrued during the deferment period. However, in other cases, interest will continue to accrue, and you will be responsible for paying it. Understanding these terms is crucial to managing your loan effectively and avoiding capitalization, where accrued interest is added to your loan balance, increasing the total amount owed.
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Forbearance
Unlike deferment, interest does accrue during forbearance on all loans, including federal subsidized loans. However, there are options to manage this interest. You can choose to pay the interest during the forbearance period, or your servicer may add it to the balance of your loans when the forbearance ends. For Direct Loans, interest will not be added to your principal balance. However, for other federal loans not owned by the Department of Education, the accrued interest may be added to your principal balance.
Before requesting forbearance, it is important to consider other repayment options that may be available to you. If you are struggling to afford your payments, you may be able to enrol in a payment plan that lowers your monthly payment. This could be a more favourable option to manage your loan repayments.
While forbearance can provide temporary relief from student loan payments, it is important to understand the potential impact of accruing interest on your overall loan balance. Exploring all available options and discussing your specific circumstances with your loan servicer can help you make an informed decision.
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Frequently asked questions
Yes, you can still make payments towards your student loan while it is deferred. However, you won't be able to sign up for an income-driven repayment plan.
Student loan deferment is a temporary pause on your loan payments in specific situations, such as active military duty or reenrollment in school. You can apply for deferment with your loan servicer and must continue making payments until notified that your request has been approved.
If you have a subsidized loan, you won't be responsible for paying interest during the deferment period. However, if you have an unsubsidized loan, interest will continue to accrue, increasing the overall amount you have to pay.
