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.
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