If you have subsidized loans, the federal government pays your interest costs for you, which prevents your loan from growing during deferment. With unsubsidized debt, you’re responsible for interest costs. You can pay interest costs each month if you choose, and that approach minimizes your total lifetime cost of borrowing. Alternatively, you have the option of adding those interest costs to your loan balance, or “capitalizing” the interest. In that case, your loan balance grows each month.
How Student Loan Deferment Works
Deferments are typically not automatic. Lenders require that you qualify for deferment and submit an application before you stop making payments. In most cases, you submit your request with a form that documents your reason for deferment and provides details about your loan. Some private lenders also allow deferment. So, it’s crucial to contact your lender as soon as you think deferment might make sense for you. Federal student loans have clear rules on eligibility. Federal loans that offer deferment include:
Perkins LoansDirect Subsidized and Unsubsidized LoansPLUS LoansFFEL Loans, including FFEL PLUSDirect and FFEL Consolidation Loans
In limited cases, such as when you enroll at least half-time in an eligible institution, deferment on federal student loans can happen automatically.
Eligibility for Deferment
To qualify for deferment on federal student loans, you need to meet specific criteria. Some common examples of satisfying the requirements include:
Being enrolled in school at least half-time in an eligible institution Being unemployed or experiencing economic hardship (maximum of three years) Active duty service in the military, including the 13-month period following service Participation in approved rehabilitation training programs Participation in an approved graduate fellowship program
Again, check with your loan servicer if you’re facing financial challenges. You might qualify for other forms of assistance. Private student loans may allow some relief, but these programs are much less forgiving than federal loans.
Student Loan Deferment vs. Forbearance
Like deferment, forbearance allows you to suspend or reduce payments for up to 12 months. The CARES Act and executive orders put in place in the spring of 2020 provided student loan relief for all federally-owned student loans, waiving both monthly payments and interest payments, as a form of automatic forbearance through Sept. 30, 2021. Forbearance is easier to qualify for, especially during financial hardship. Your request may be approved based on your monthly payments taking up a significant amount of your income. Unfortunately, interest will continue to be charged on all loans, including subsidized loans, during forbearance.
Alternatives to Student Loan Deferment
If you’re having a hard time making payments, speak with your lender about your options. Deferment is just one of several options, and it might not be the best choice. Other possibilities include:
Income-Driven Repayment Plans
Income-driven repayment plans can also provide some breathing room. Instead of living with the same monthly payment, you can consider stretching out your payments over an extended period and lowering your payments based on your income. If you take that route, remember you might pay more in interest over the life of your loan. However, after 20 to 25 years, your loan balance might be forgiven—it is 10 years if you work in public service. You would typically owe taxes on any forgiven balance, but student loan debt forgiven between 2021 and 2025 is tax-free, due to the American Rescue Plan of 2021. If you’re not sure how forgiveness might affect your taxes, create a strategy with a CPA and financial planner.
Loan Consolidation
Consolidating debts might also result in lower payments, especially if you opt for a longer repayment period. Again, this can result in higher lifetime interest costs.
A Change in Your Payment Due Date
Sometimes, changing the due date of your payment can make things easier. Time the new payment so that you get paid shortly before your payment is due.
Credit Counseling
A certified consumer credit counselor might help you gain control of your debt. If your loans are federal student loans, your odds of getting relief are much better.
