From losing a job, to experiencing a medical emergency, to deciding to go back to school, there are many situations in which you might find yourself short on the money you need to pay your student loan bill.
Because of this, both private and public student loan providers offer qualified loan holders with the option to defer student loans for a period of time. In other words, you could have the option to pause payments until you’re back on your feet.
Still, student loan deferment is not exactly a simple solution. Knowing if it’s the right time to defer loans, based on your particular situation, can help you make the best decision for your finances.
What is student loan deferment?
As the U.S. Department of Education explains, a deferment to your student loans is “a period during which repayment of the principal and interest of your loan is temporarily delayed.”
During a period of deferment, you do not need to pay anything on your loan. There is typically an agreement on the length of time allowed to defer depending on the program.
For certain situations, the government will pay the interest on your Federal Perkins Loan, Direct Subsidized Loans, and/or Subsidized Federal Loans. If you have an unsubsidized student loan such as a PLUS loan, you will be responsible for your interest. If you do not make any payment towards that amount, the interest will be capitalized, or added to the total principal of the loan.
In most cases, you will need to fill out a form for and/or submit paperwork to your loan servicer in order to defer student loans.
In the case of a re-enrollment in school, you should also speak with a financial aid representative who can help make sure deferment for both your public and private loans goes through.
If your loan came through the federal government, log in to My Federal Student Aid to find the name of your servicer. If your loan is private, your job is even easier: call up the company through which your loan was financed.
Don’t know who your student loan servicer is? Here’s how to track them down.
Pros and cons of student loan deferment
Having your student loan deferred may seem like a blessing, especially if you are living paycheck to paycheck.
Deferring your student loans in extreme cases of hardship can help you pay other immediate bills, such as rent and electricity. And for those volunteering their time or serving in the military, not having a student loan payment can help them give back to their community without an additional burden on their mind.
However, there are also drawbacks to student loan deferment, particularly if your student loans are not subsidized by the federal government. The interest will continue to accumulate on these loans at the regular rate and be added to the total of the loan.
For example, say the principal balance on your 10-year PLUS loan is $20,000 with a 4.8% interest rate. Applying for a 6-month deferment will save you a significant amount in payments in the short-term.
But if you look closely at the math, you will see that you will have incurred $473.42 worth of interest and the new amount owed on your loan is $20,473.42!
That extra $473.10 means extending the amount of time it will take you to pay the principal. And if your ultimate goal is to conquer those student loans, adding additional time and money to your payoff plan is definitely not going to help.
Also consider that student loans in deferment can make you temporarily ineligible for certain student loan forgiveness programs, such as the Public Service Loan Forgiveness.
With this program, for instance, you must make 120 consistent payments to qualify. If you defer the loan for say, three months, those three non-payments would not count towards the 120, even if you are still working for a qualified non-profit.
When to defer your student loan
Unfortunately, there is no right or wrong reason for when to defer your student loans. For some situations, such as if you are returning to school, joining the Peace Corps, or taking care of a child between enrollment in school, your deferment may be an absolute lifesaver and totally necessary to get by.
On the other hand, if you are applying for a deferment because of a hardship, but you are still able to pay something, you may benefit from paying at least the interest on your loan each month to stop the interest from being added to the total of the loan.
Alternatives to student loan deferment
There are several ways you can reduce your student loan burden without having to apply for a deferment.
The first is to go straight to your lender and try to work out a repayment plan. Lenders would rather see some of the money come back to them than none of it, so they may be willing to reduce your payments or enroll you in an income-based repayment plan.
Similarly, the federal government offers many income-based repayment plans that reduce your payments according to how much you earn.
Your employer may also have a program to help you out or even pay off your loans. Check with your supervisor and/or HR department to find out what programs might be offered.
Finally, refinancing your student loans may be a way to help reduce your payments and, potentially, the total interest you pay.
Making the deferment decision
Student loan deferments give borrowers in a financial crisis a temporary break from the pressures of loan payments. In some cases, it makes sense to apply for a deferral – but there are also alternatives that may better fit your particular situation.
The best thing to do is talk to your servicer or provider and go over your options to keep yourself in the best financial situation possible.
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