Janice Lozano
When it comes to student loans, deferment can be a helpful option to reduce or postpone payments, especially during internships, law clerkships, fellowships, or residencies. While deferment offers temporary relief, interest continues to accrue, increasing the total loan cost. This is true for unsubsidized loans and certain older federal loans not owned by the government. However, for subsidized federal loans, the government pays the interest during deferment, such as when a student is enrolled at least half-time or in their post-school grace period. Understanding the specifics of your loan type and the implications of deferment is crucial to making informed decisions and effectively managing your student debt.
| Characteristics | Values |
|---|---|
| Interest accrual on deferred student loans | Interest accrues daily on most deferred student loans, starting from the day the loans are disbursed. |
| Interest payment responsibility during deferment | For subsidized federal loans, the government pays the interest during deferment, e.g., while the borrower is enrolled in school or during a grace period. |
| Interest capitalization | Interest may be capitalized after deferment, adding it to the loan principal balance when payments resume. This depends on the loan type and can occur for unsubsidized loans or certain older federal loans. |
| Deferment request process | Borrowers can request a deferment for a specified period, usually requiring enrollment verification. They must continue making payments until the deferment is approved and can re-apply periodically or request early removal. |
| Impact on total loan cost | Accruing interest during deferment increases the total loan cost, and borrowers may end up paying more overall. |
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What You'll Learn
Interest accrual during forbearance
Student loan forbearance is a temporary postponement or reduction of your loan payments due to financial hardship. Interest accrual during forbearance depends on the type of loan you have.
For federal student loans, interest accrues on all loans, including subsidized and unsubsidized loans. However, the interest accrued during forbearance on Direct Loans will not be added to your principal balance. For other federal loans not owned by the Department of Education, the accrued interest may be added to your principal balance.
For private student loans, the terms and conditions of forbearance, including interest accrual, are outlined in your contract and applicable laws. These terms may vary across different private student loan servicers.
It is important to understand that you are responsible for the interest accrued during the forbearance period, regardless of the loan type. You can choose to pay the interest during forbearance or have it added to your loan balance when the forbearance ends.
Subsidized federal student loans, on the other hand, do not accrue interest during deferment. Deferment is a separate option from forbearance and can be discussed with your loan servicer.
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Subsidized vs. unsubsidized loans
The main difference between subsidized and unsubsidized loans is how interest accumulates on them. Direct subsidized loans are need-based loans for undergraduate students. They do not accrue interest while the student is enrolled at least half-time or during deferment periods. On the other hand, interest on direct unsubsidized loans starts accumulating from the date of the first loan disbursement. These loans are available for both undergraduate and graduate students and are not based on financial need.
The interest on unsubsidized loans starts accruing as soon as the funds are received. This means that even during an in-school deferment period, interest will accumulate. The borrower is responsible for this interest and it will be added to the principal amount of the loan if left unpaid.
The amount of money that can be borrowed through each loan type also differs. The limit depends on the year in school and whether the student is a dependent or independent. For subsidized loans, the maximum amount that can be borrowed each academic year also depends on the expected family contribution and the amount of other financial aid received.
Both subsidized and unsubsidized loans are federal student loans offered by the US Department of Education. They require the student to be enrolled at least half-time and offer a six-month grace period before repayment begins.
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Negative amortization
- When the borrower applies for income-driven repayment (IDR) and qualifies for a low monthly payment amount (as low as $5 per month).
- When the borrower has an income-based repayment (IBR) plan, and their payments are not large enough to cover the monthly accruing interest.
- When the borrower is in deferment for an unsubsidized loan. In this case, the interest on the unsubsidized student loan starts to accrue from the moment the loan is disbursed.
The growth in borrowers' student loan balances is not solely due to interest rates but also to design elements of the student loan repayment system, which can drive up the true cost of college. Negative amortization, along with capitalization and the status of borrowers in default, are often overlooked in conversations about interest rates, even though they can accelerate balance growth.
To avoid negative amortization, borrowers should ensure that their monthly payments cover all of the interest due. Making extra payments can help save time and interest over the life of the loan.
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Tax returns
If you have student loans, you may be eligible for tax deductions and credits when filing your tax returns. The student loan interest deduction lets eligible taxpayers deduct a portion of the interest paid on their student loans from their taxable income. This deduction is only for the interest paid and not the total student loan payment. To qualify for the deduction, the interest must be for a qualified student loan, which covers necessary expenses like tuition, books, room, and board during the academic period. Additionally, you must be legally obligated to pay the interest. If you meet the criteria and paid at least $600 in interest, your lender should send you an IRS Form 1098-E, which you can use to claim the deduction when filing your taxes.
It's important to note that not all student loan interest payments will qualify for the deduction, and there may be other eligibility requirements to meet. For example, your modified adjusted gross income (MAGI) must be below a certain threshold to qualify for the full deduction or a partial deduction. You can refer to IRS resources, such as Publication 970, Tax Benefits for Education, and Form 1040 instructions to determine if your expenses qualify for deductions or credits.
In addition to the student loan interest deduction, there are other education tax benefits available, such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC allows taxpayers to reduce their tax bill by up to $2,500 per year per eligible student, and it can be claimed by a student paying their own expenses or by a parent or guardian with an eligible dependent. The LLC offers a credit of up to $2,000 per tax return, which is 20% of the first $10,000 spent on educational expenses.
It's worth mentioning that if your student loan debt is entirely or partially forgiven, the IRS considers this forgiven debt as taxable income. Therefore, it's important to be aware of the potential tax implications and plan accordingly.
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Requesting a deferment
When it comes to managing student loan payments, requesting a deferment can be a helpful option to consider. A deferment allows you to temporarily postpone your loan payments without accruing penalties or damaging your credit score. Here's a step-by-step guide on requesting a deferment for your student loans:
Understanding Deferment Eligibility:
Before requesting a deferment, it's important to understand if you are eligible. Deferments are typically granted under specific circumstances, such as economic hardship, enrolment in a qualified college or university, active military duty, or participation in a graduate fellowship program. Carefully review the eligibility criteria provided by your loan servicer to determine if you qualify for a deferment.
Gather the Necessary Documentation:
Different types of deferments may require specific documentation. For example, if you are requesting an in-school deferment, you will need to provide proof of enrolment or a letter from your school's registrar office. For an economic hardship deferment, you may need to submit financial documents demonstrating your income and expenses. Make sure to review the requirements for your specific type of deferment and gather all the necessary paperwork.
Contact Your Loan Servicer:
Reach out to your student loan servicer, which is the company that handles your loan payments. You can find their contact information on your monthly billing statement or by searching online. Explain your situation and express your desire to request a deferment. They will guide you through the specific process, as it may vary depending on your loan type and servicer.
Complete and Submit the Deferment Request Form:
Your loan servicer will provide you with the appropriate deferment request form. Carefully fill out the form, providing all the required information accurately. Be sure to include any supporting documentation that is necessary for your specific deferment type. Submit the completed form and documentation to your loan servicer by following their specified instructions.
Stay Informed During the Process:
After submitting your deferment request, maintain open communication with your loan servicer. They will review your request and make a decision. Stay in touch to receive updates and clarify any additional requirements or questions they may have. It's important to be responsive during this process to ensure a smooth and timely resolution.
Remember that requesting a deferment is a valid option when you need temporary relief from making student loan payments. By following these steps and working closely with your loan servicer, you can navigate the deferment process effectively and ensure you're taking the necessary steps to manage your student loan debt.
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Frequently asked questions
Yes, interest will continue to accrue on unsubsidized loans during deferment. For subsidized federal loans, the government will pay your interest while your loans are in a deferred status.
A subsidized loan retains its in-school interest subsidy while in deferment. All other loan types will accrue interest daily as per the simple interest formula.
You can request a deferment of up to 48 months for undergraduate and graduate student loans so long as you're enrolled at least half-time. Your school will need to verify your enrollment. You can re-request a deferment every 12 months until you hit your maximum allowed months.
