What Is Student Loan Deferment?

What Is Student Loan Deferment?

A student loan deferment lets you stop making payments on your loan or reduce the amount you pay for up to three years, in most cases. During the deferment period, no interest accrues on federally subsidized loans because the government picks up the interest payments. But interest on unsubsidized loans does accrue and is added to the amount due at the end of the deferment period.

Deferment is considered a temporary measure. If you foresee that you’ll be unable to resume your student loan payments in three years or less, you should consider an income-driven repayment (IDR) plan instead. The information in this article is based on the usual principles of student loan deferment, not the special regulations around the COVID-19 pandemic.

Should You Defer Your Student Loan Payments?

When deciding whether to pursue student loan deferment, you should ask yourself the following questions:

• Are my loans subsidized federal or Perkins loans? Interest on federally subsidized loans and Perkins loans does not accrue during the deferment period. If your loans are unsubsidized federal loans or private loans, interest will likely accrue unless you pay it while in deferment.
• Can I afford to make a reduced loan payment? If you can’t pay anything, deferment may provide some breathing room until you can restart payments. If what you need is a long-term lower payment, an IBR plan may make more sense.
• Will I be able to restart payments on my student loans soon? If you can, deferment may be a good way to get over a temporary financial bump in the road. If you don’t see any way to make payments down the road, deferment is not a good option.

Qualifying for a Student Loan Deferment

You can’t simply stop making payments on your student loans and declare yourself in deferment. You must qualify, which involves working with your loan servicer or lender and, in most cases, making an application. Your loan servicer or lender will process your application, let you know if more information is needed, and tell you whether you qualify. It’s important that you continue to make timely payments on your loans while you await a decision. Failure to do so could ultimately result in loan default and a serious blow to your credit score.

Federal Student Loan Deferment

Most federal student loan deferments require that you apply. One type, known as In-School Deferment, is automatic if you are enrolled at least half-time. If you believe you qualify for a deferment based on the other categories listed below, you will need to apply. To do that, go to the U.S. Department of Education Federal Student Aid Repayment Forms website, click on Deferment, and retrieve an application for the type of deferment for which you believe you qualify.

Private Student Loan Deferment

To defer a private student loan, you’ll need to contact your lender. Many offer some form of deferment or relief if you are enrolled in school, serving in the military, or unemployed. Some also provide deferment for economic hardship. As with unsubsidized federal loans, in most cases, any deferment of a private loan comes with accrued interest that will capitalize at the end of the deferment period. You can escape this by paying the interest as it accrues.

Types of Federal Student Loan Deferment

The following deferment types apply to federal student loans. As noted, some private lenders also offer payment relief, but the types, rules, and requirements vary by lender.

In-School Student Deferment

This is the only automatic deferment offered by the federal government, and it comes with the requirement that you are attending school at least half-time. If you have a subsidized or unsubsidized Direct or federal Stafford student loan, or if you are a graduate or professional student with a Direct PLUS or FFEL PLUS loan, your loan will remain on pause until six months after you graduate or leave school. All others with PLUS loans must begin repaying as soon as they leave school. If you don’t receive an automatic deferment, ask your school’s admissions office to send your enrollment information to your loan servicer.

In-School Parent Deferment

If you are a parent who took out a Direct PLUS or FFEL PLUS loan, and the student for whom you took out the loan is enrolled at least half-time, you are also eligible for deferment, but you must request it. Your deferment comes with the same six-month grace period afforded to students mentioned above. There is no time limit for either type of in-school deferment.

Unemployment Deferment

You may request deferment for up to three years if you become unemployed or are unable to find a full-time job. To qualify you must be either receiving unemployment benefits or seeking full-time work by registering with an employment agency. You must also reapply for this deferment every six months.

Economic Hardship Deferment

Economic hardship deferment is available for up to three years if you are currently receiving state or federal assistance, including through the Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF). The same applies if your monthly income is less than 150% of your state’s poverty guidelines. You must reapply for this deferment every 12 months.

Peace Corps Deferment

A deferment of up to three years is also available if you are serving in the Peace Corps. Although Peace Corps service is considered an economic hardship, it does not require you to reapply during the deferment period.

Military Deferment

Active duty military service in connection with a war, military operation, or national emergency can qualify you for student loan deferment, as well. This can include a 13-month grace period following the end of your service or until you return to school on at least a half-time basis.

Cancer Treatment Deferment

If you have cancer, you can request deferment of your student loan debt during treatment and for six months following the conclusion of treatment.

Other Deferment Options

If you don’t qualify for one of the types of deferment just listed, you still may qualify for one of the following:

• Graduate fellowship deferment if you are enrolled in an approved program.
• Rehabilitation training deferment if you are enrolled in an approved rehabilitation training program for people with disabilities.
• Perkins loan forgiveness deferment if you received a Perkins loan and are working toward the cancellation of that loan.
• Additional/enhanced deferment options if you have a pre-July 1, 1993, Direct or FFEL Program loan. Contact your loan servicer for details.

How Student Loan Interest Is Calculated

The way interest on student loans is calculated is slightly different from how it’s calculated on most other loans. With student loans, interest accrues daily but is not compounded (added to the balance). Instead, your monthly payment includes the interest for that month and a portion of the principal.

Here’s an example of how it works:

• Loan total: $20,000
• APR = 7%
• Daily interest rate (APR divided by 365) = .07/365 = 0.00019 or 0.019%
• Daily interest amount (balance times daily interest rate) = $20,000 x 0.019% = $3.80

As you make payments on your loan, the balance goes down, as does the daily interest amount. But when your loan is in deferment, the daily interest amount remains the same until you begin repaying the loan since the interest is not capitalized (added to the loan) until the end of the deferment period.

The Cost of Deferment

If you have private or unsubsidized federal student loans, deferment can be costly. That’s because, unlike subsidized loans, interest on these loans accrues during the deferment period and is capitalized (added to the outstanding balance) at the end of deferment. That increases the amount you owe once you begin repayment, as well as the total you will pay over the life of the loan.

Let’s say, for example, you take out a $20,000 student loan and finance it for 10 years at an annual interest rate of 7%. The table below shows the amounts you would pay based on four different scenarios: (1) paid as agreed; (2) subsidized with 36 months of interest-free deferment; (3) unsubsidized with a 36-month deferment but paying interest during deferment; (4) unsubsidized with a 36-month deferment and paying no interest during deferment.

*Amounts rounded to the nearest dollar for clarity.

As the table above illustrates, taking a three-year deferment on an unsubsidized loan and paying no interest during the deferment period (scenario 4) results in a larger loan to pay off ($24,161 vs. $20,000) when repayment begins. The nearly $50 increase in monthly payments plus the extra interest adds nearly $6,000 to the total you pay over the life of the loan.

Alternatives to Deferment

Depending on your circumstances, two alternatives to student loan deferment might be worth considering:

Forbearance

If you don’t qualify for deferment, forbearance may be an option, provided you qualify. The main difference between deferment and forbearance is that interest always accrues with forbearance and is added to your loan at the end of the deferment period unless you pay it as it accrues. (Scenarios 3 and 4 above illustrate what happens to any loan in forbearance.)

Income-Driven Repayment (IDR)

If you expect your financial problems to last more than three years, an income-driven repayment (IDR) plan may be best for you. IDR plans determine your monthly payments based on your income and family size.

IDR plans can offer payments as low as $0 per month and even provide loan forgiveness if your loan isn’t paid off after 20 to 25 years. Many income-driven plans waive interest for up to three years if your payments don’t cover accrued interest. IDRs do extend the time you will be paying on your loan, so your total interest payments over time will likely be more than with deferment.

One big caveat: IDRs are only available to pay off federal student loans. This is an important reason you should avoid mixing federal and private loans into a single consolidated loan. Doing so will remove IDR eligibility from the federal loan portion of your combined debt.

The Bottom Line

Student loan deferment makes the most sense if you have subsidized federal or Perkins loans since interest does not accrue on them. Forbearance should only be considered if you don’t qualify for deferment. Remember that deferment and forbearance are for short-term financial difficulty. Income-driven repayment (IDR) is a better option if your financial problems will last more than three years and you are repaying federal student loan debt. In all cases, make sure you contact your loan servicer immediately if you have trouble making your student loan payments.