If you’re struggling to make your student loan payments, you may want to put your loans into deferment or forbearance. Both student loan deferment and student loan forbearance allow you to temporarily stop making payments on your student loans if you meet eligibility requirements — which are different for each of these options. Our complete guide to loan forbearance and this guide to deferment can help you determine if deferment or forbearance is an option for you.
Putting your loans into deferment or forbearance can provide financial relief if your budget is too tight to make student loan payments. However, it’s important to realize that interest can still accrue on your loans during the period when your payments are suspended.
If you’re in forbearance, interest accrues on all of your loans. If you’re in deferment, interest doesn’t accrue on certain subsidized loans, including Direct Subsidized Loans and Perkins Loans, but interest does accrue on unsubsidized loans.
You don’t have to pay this interest while your loans are in deferment and forbearance and the interest is accruing. But, if you don’t, the unpaid interest can be added to the balance of your loans and can make repayment a lot more expensive.
To understand the added costs, let’s take a look at how interest can affect your loan balance and whether you should pay it while you’re in deferment or forbearance.
Interest adds to your student loan debt
Because your student loans in forbearance continue to accrue interest, you have two choices for dealing with the interest that is charged each month.
Option 1: Pay interest while loans are in forbearance
One option is to pay only the interest as it accrues. As you’ll see below, this is the most cost-effective option and can prevent your total loan balance from ballooning when the forbearance period is over.
Unfortunately, this is not an option for everyone. “This is a cash flow issue for most students and families,” according to Fred Amrein, founder and owner of Amrein Financial. “If a family or student borrowed the money, then they most likely do not have the funds to pay the interest.”
If you borrow because you don’t have extra money to pay for school, even if you wanted to pay the interest, you may simply not have funds available to do so. This would leave you no choice but to opt for option two and allow interest to accrue without paying it.
Option 2: Allow interest to accrue without paying it
The other option is to allow the interest to continue accruing without paying it. If you do this, the interest is capitalized — or rolled into your loan’s principal balance — in almost all circumstances; unpaid interest is not capitalized on Perkins Loans, according to the Department of Education.
If you decide not to make payments toward the accruing interest, it will capitalize at the end of your forbearance period. Our student loan deferment calculator can help you determine the amount of interest that will accrue and capitalize during forbearance.
Let’s look at an example of how making interest payments versus allowing interest to capitalize affects the total cost of your debt:
Say you owe $35,000 in student loans at a 5.70% interest rate and are on the 10-year Standard Repayment Plan. You enter forbearance for one year and pay no interest during that time.
In this case, a total of $1,995 in interest would accrue over the year. This would be added to the $35,000 you originally owed. You’d end the forbearance period with a new loan balance of a little over $36,995 (because interest accrues daily), and going forward, you would pay interest on this higher loan balance. Essentially, you’d pay interest on the interest that built up while you were in school.
Now let’s look at this example again, except let’s assume you make interest payments during forbearance. By paying the $1,995 in interest that accrued during one year of forbearance, you’d prevent it from capitalizing. When your forbearance period ended, you’d still owe $35,000, and the payments and interest you’d make over the next decade would be based on a lower initial loan amount.
This calculator from Granite State Management and Resources shows exactly how this would affect your payments and your total interest costs.
By paying $166 a month in interest while your loans are in forbearance, you would end up paying a total of $638 less in interest over the life of the loan. Your monthly payments would also be $22 lower over the 10-year repayment period.
Should you pay interest on student loans in forbearance?
Because student loan forbearance does not stop interest from accruing on loans, it often makes sense to pay the interest while your loans are in forbearance, if it is feasible financially.
“With interest rates being so low, students are not earning much interest on their savings,” said Peter Bielagus, financial author and speaker. “A great way to ‘save’ money is to stop losing it. Making even just a $10 payment here and there on a student loan with a 5 percent interest rate should be viewed as ‘earning’ 5 percent on that $10.”
Despite the substantial savings and the fact paying interest would prevent you from increasing your student loan debt burden in forbearance, there are a couple situations where paying interest during forbearance doesn’t make sense.
One example is when you’re trying to pay other higher interest debt. “If a student owes $10,000 at 5 percent on a student loan and $3,000 at 18 percent on a credit card, it makes more sense to attack the credit card first,” Bielagus said.
Another situation where it doesn’t make sense to pay interest while you’re in forbearance is when you’re not planning on paying back your loans in full. “If the borrower will qualify for Public Service Loan Forgiveness, it makes no sense to make that interest payment,” Amrein said. It wouldn’t make sense to repay the interest because it doesn’t matter if your loan balance is higher at the end of forbearance. The interest that is tacked on just means more debt will be forgiven after you meet the requirements for loan forgiveness.
If you plan to repay your loans based on an Income-Driven Repayment plan, you may assume it doesn’t make sense to pay interest in forbearance since your monthly payment is capped based on your income — so it might not be higher because of the capitalized interest. However, if your total loan balance is higher and you pay off less of it, a larger amount will be forgiven — and you’ll be hit with a bigger tax bill since you are taxed on the forgiven amount.
If you’re in student loan forbearance, what should you do?
If your loans are in forbearance currently or if you’re thinking about putting your loans into forbearance, you’re not alone. In the third quarter of 2017, 2.6 million student loan borrowers with loans through the Direct Loan program were in forbearance, according to the Department of Education. Students with loans in forbearance collectively owed $105.9 billion in student loan debt in 2017 and accounted for 7 percent of all student loan borrowers.
For the millions of students in forbearance, there is no one right answer to whether to pay interest or not. Ultimately, every borrower’s situation is different.
For many in forbearance, if you can afford to make payments and you’re not going to use Public Service Loan Forgiveness, it makes sense to save yourself hundreds of dollars by paying the interest.
Whether you’ve paid interest during forbearance or not, you could potentially save on your loan by refinancing and reducing your interest rate once you begin repaying your loans.
Refinancing may not make sense for everyone, as private loans don’t offer forbearance or deferment; you could be in financial trouble if you can’t pay your loan again in the future. However, if you are confident you can make your loan payments going forward and want to explore your options, there are a number of choices to refinance your student loans and potentially reduce the total interest you must pay over the life of the loan.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.23% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 6.23%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|