- Student loan deferment allows borrowers to temporarily pause their loan repayments in specific situations.
- Deferment is only for a set period of time and is not indefinite.
- There are several types of deferment, but the most common are in-school, economic hardship, and military deferment.
- For subsidized loans, the goverment pays the interest during the deferement period.
- For unsubsidized loans, the interest is added to your loan once the deferment period ends.
- Deferment may end up costing you more, particularly with unsubsidized loans.
- Getting financial counseling and assistance might help you create a personalized debt repayment plan.
Managing student loans can be overwhelming, especially when life throws unexpected challenges your way. One option for borrowers facing financial strain is student loan deferment.
But what exactly is deferment, and how does it work? In this article, we’ll break down what you need to know about student loan deferment, including its purpose, types, costs, and alternatives. Understanding this process might help you make informed decisions about your financial future.
What is Student Loan Deferment?
Student loan deferment may be a valuable option for borrowers who are struggling to make their monthly payments due to specific life circumstances. It allows you to temporarily pause your payments to provide relief during times of financial difficulty or other qualifying situations. Deferment can be a useful tool, but it's important to understand how it works and the potential long-term effects it can have on your loan balance.
Definition and Purpose
Student loan deferment is a temporary pause on loan payments. It gives borrowers relief from making monthly payments without the risk of default. Deferment is designed for those who are unable to make their payments due to certain qualifying circumstances, such as economic hardship, school enrollment, or military service. During deferment, you won’t be required to make payments, and in some cases, interest may not accrue on your loan.[1]
The key purpose of deferment is to help borrowers avoid defaulting on their loans while they navigate a challenging financial period or focus on other priorities, such as education or service. This flexibility can prevent borrowers from damaging their credit and facing the penalties associated with missed payments.
Length of Deferment
The length of deferment varies depending on the reason for deferment and the loan type. In-school deferment typically lasts as long as you remain enrolled at least half-time. Once you leave school or drop below half-time, a grace period may begin before payments are due again. Economic hardship deferment is generally available for up to three years, depending on your financial circumstances.
It’s important to know that deferment is not indefinite. Once the deferment period ends, you will need to start making payments again. Failing to do so could lead to loan delinquency or default, which can have long-term consequences on your credit and financial health.
Common Types of Federal Student Loan Deferment
There are several types of deferment options available for federal student loans, each designed for different situations. Here are the most common types.
Economic Hardship Deferment
This type of deferment is available for borrowers who are struggling financially and meet specific criteria. To qualify, your income must be below a certain threshold, or you must be receiving public assistance. You may also qualify if your monthly income is less than 150% of the federal poverty guidelines for your family size and state.[1] Economic hardship deferment typically lasts for up to three years.
In-School Deferment
As long as you are enrolled at least half-time in a qualifying college or university, you are eligible for in-school deferment. This option is automatic for many federal loans, meaning there's no need to apply as long as the school reports your enrollment status to your loan servicer. Once you graduate or drop below half-time enrollment, a six-month grace period typically begins before you must resume payments. For private loans, in-school deferment policies vary by lender. Unlike federal loans, private lenders may require you to apply for deferment, and not all offer this option. If your lender does provide in-school deferment, check the specific terms, as interest may continue to accrue even while payments are deferred.
Military Service Deferment
Borrowers who are on active duty in the U.S. Armed Forces, particularly during war, military operations, or national emergencies, may qualify for deferment. This type of deferment can last throughout the duration of your service and for an additional 13 months after your active duty ends. It’s a way to provide financial relief while you focus on serving your country.
The Cost of Deferment
Deferment might be a helpful financial tool in certain situations, but it's not without its costs. Understanding the financial implications of deferment is essential for making an informed decision.
Interest accrual During Deferment
Interest accrual varies depending on the type of loan you have. For subsidized federal loans, the government pays the interest during deferment, so your loan balance remains the same. For unsubsidized loans and PLUS loans, interest continues to accrue even though you are not making payments. Once the deferment period ends, any accrued interest is added to your loan balance (this is called capitalization). That means you’ll owe more than you did before the deferment began.
For private loans, interest accrual during deferment also depends on your lender's specific policies. Most private lenders do not offer subsidized options, so interest typically continues to accrue on your balance during deferment. Once deferment ends, any unpaid interest is often capitalized, which can increase your overall loan balance.
Financial Implications and Long-Term Effects
Deferment can provide short-term relief, but it may increase the total amount you owe in the long run. This is particularly true if you have unsubsidized loans, where interest accrues during deferment. Capitalized interest may lead to larger monthly payments once the deferment period is over. It can extend the overall life of your loan. That means not only do you pay more, but you also pay for longer.
All of these factors add up, and you're likely to end up paying more than you would have without the deferment. That might make it harder to make your payments or cause financial strain in the future. It’s essential to weigh these potential downsides before opting for deferment, especially if you have an unsubsidized loan.
Student Loan Deferment vs. Forbearance
Deferment and forbearance are both options for pausing student loan payments, but they operate differently and come with distinct pros and cons. Deferment is typically for borrowers facing specific life situations, such as being in school, serving in the military, or experiencing financial hardship. Depending on your loan type, interest may or may not accrue. Forbearance is generally available for borrowers who don’t qualify for deferment but still need temporary relief. However, interest always accrues during forbearance, regardless of the loan type.[2]
Alternatives to Student Loan Deferment
If you’re not sure that deferment is the right choice, consider exploring other options for managing your student loans.
Income-Driven Repayment (IDR) Plans
Income-driven repayment plans allow you to adjust monthly payments based on your income and family size.[3] These plans help provide more affordable payments and offer a long-term solution for borrowers with limited income.
Loan Consolidation and Refinancing
Loan consolidation and refinancing are two slightly different options that might be a good alternative to student loan deferment. Loan consolidation allows you to combine multiple federal loans into one, simplifying your payments.[4] Refinancing allows you to combine federal and private loans into one and might potentially lower your interest rate. Refinancing is typically only available through private lenders and may not include the same protections as federal loans.
Seeking Financial Counseling and Assistance
If you’re struggling to repay student loans, speaking with a financial counselor might help with understanding your options. They're trained to walk you through the process and help you choose options that make sense for your specific situation.
