Student Loan Deferment 101: What is it and how does it affect you?

Repaying your student loans can turn into a challenge when you are facing other major life changes. People who want to go back to school might temporarily need to lower how many hours they work a week. College grads who are going through a divorce or have recently lost a job might face economic hardships that make regular student loan payments difficult to keep up.

Student loan deferment is an option that is meant to help people avoid further financial trouble by working out an agreement with their lender. Deferring your loan allows you to temporarily halt having to make payments, but doing so should only happen with the awareness that this can potentially make your loans cost more to pay off in the end.

How Does Student Loan Deferment Work?

The coronavirus has shined a spotlight on student loan deferment. The CARES Act, that was passed in the early months of the pandemic, allows for borrowers to temporarily stop making payments on student loans that are owned by the U.S. Department of Education without having interest accrue. This provision lasts through September 30, 2020, and some people are calling for it to be extended.

It is important to understand that unsubsidized student loan deferments can accrue interest during the time that you are not making payments. You can also request a deferment outside of the current CARES Act time frame.

When Are Student Loans Automatically Deferred?

Your student loans might be automatically deferred if you decide to return to college on at least a half time basis. Most students have their loans deferred for six months after they dis-enroll or graduate from an educational program. This is meant to give people time to develop an income that helps them avoid hardships while paying off their loans.

Who Else is Eligible for Deferment?

There are also certain situations that make you eligible to apply for student loan deferment. You can do so if you decide to participate in a graduate fellowship program or certain types of rehabilitation training. People with active-duty military status, or who have recently come off of active duty, might ask for deferment while they transition to a different lifestyle. Peace Corps members are eligible to apply, and you can request a deferred payment schedule during periods of unemployment.

What Are the Benefits for Deferring Loan Payments?

It is generally considered best to request a deferment rather than defaulting on your student loan. This is because not paying your student loans can affect your credit score. You may also face consequences such as wage garnishment in certain situations. The biggest benefit of deferring your loan payments is being able to avoid these penalties, but it can also mean accruing several months of unpaid interest.

Are There Other Options Available?

There are several other options that you can explore to help decide if a deferment is right for your situation. Forbearance is an option that is similar to deferments. The main difference with forbearance is that interest always accrues during the time that you skip payments. This is true even for subsidized loans.

Income-driven repayment plans are another option that people tend to explore before they apply for deferment or forbearance. These plans are offered for federal loans, and your income is used to calculate how much you pay. On these subsidized loans, the interest rate is sometimes waived if your monthly payments will not be enough to cover the cost.

Student loan agreements should be honored, and borrowers are fortunate to have options to help them manage the payments during periods of financial hardship. For example, right now with the coronavirus causing high unemployment rates, student loan payments have been suspended. Keep in mind, however, that removing the burden created by high-interest rates makes a huge difference in how well borrowers can pay off their loans. 

While deferments and other payment options help out today, we still need a better way to handle loan payments in the future. Working together to get zero interest federal loans for students gives everyone more room to achieve their dreams.