Student loan deferment is one of the many options available to borrowers struggling to manage their student loan debt. It allows for the temporary postponement of student loan payments. However, whether it’s the right solution for your financial situation depends on a variety of factors including your current financial status, the type of loan you have, and your long-term financial goals.

This comprehensive guide will explore what student loan deferment is, how it works, the pros and cons of using this option, and whether it is the best choice for managing your student loans.

Key Takeaways

• Deferment can offer immediate relief for temporary financial hardships, but interest may continue to accrue, especially on unsubsidized loans.
• It can be a useful option for students returning to school or active military personnel.
• Interest accumulation and prolonged loan terms are significant disadvantages, particularly with unsubsidized loans.
• Explore alternatives like income-driven repayment plans, forbearance, and refinancing before deciding to defer your loans.
• Always consider the long-term impact on your loan balance, credit score, and financial goals before choosing deferment.

What is Student Loan Deferment?

Student loan deferment refers to a period in which a borrower is allowed to temporarily stop making payments on their student loans. During deferment, the borrower is not required to make monthly payments, but whether interest accrues depends on the type of loan. Deferment can be a helpful option for borrowers who are facing temporary financial difficulties, such as job loss, economic hardship, or returning to school.

There are two main types of student loans eligible for deferment: federal student loans and private student loans. For federal student loans, deferment is available through specific federal programs and situations. However, private lenders may have their own rules and criteria when it comes to deferment.

In general, deferment provides a temporary solution to borrowers who need to ease the financial burden of making regular payments while they recover financially. Still, it’s important to understand the long-term effects of choosing deferment, especially with regard to interest accumulation and loan term length.

How Does Student Loan Deferment Work?

When you apply for and are approved for student loan deferment, you do not have to make any payments for a specified period. The specific conditions for deferment depend on the type of loan you have (federal or private) and the reason you are applying for it. For example, deferment is typically granted if you meet one of the following conditions:

• Unemployment or Economic Hardship: If you are unemployed or your income is insufficient to meet your living expenses, you may be eligible for a deferment period. The length of deferment can vary but is typically up to 12 months.
• Full-Time Enrollment in School: If you return to school on at least a half-time basis, your loans may qualify for deferment while you’re enrolled.
• Active Military Duty: If you are called to active military duty, deferment may be available for the duration of your service.
• Medical Hardship: Some borrowers experiencing health issues may qualify for deferment due to medical reasons.
• Other Qualifying Situations: There are other situations that may qualify for deferment, such as participating in a rehabilitation program or experiencing a temporary disability.

When you apply for deferment, it is important to continue to track the status of your loan and check whether interest is being added to your balance, especially if you have unsubsidized loans. The interest on subsidized loans is usually covered during deferment, but with unsubsidized loans, the borrower is responsible for paying the interest that accrues during the deferment period.

Pros of Student Loan Deferment

Deferment can offer immediate relief to borrowers who are facing short-term financial difficulties. Here are some of the key advantages of choosing deferment:

• Temporary Relief from Payments
  The most obvious benefit of deferment is the ability to temporarily halt your loan payments. This can free up cash flow to help you cover living expenses, pay for essential bills, or manage other urgent financial responsibilities. Deferment is particularly helpful during situations such as job loss, returning to school, or facing unexpected financial difficulties.
• No Late Fees
  If you are unable to make your monthly payments and you apply for deferment, you can avoid incurring late fees or other penalties associated with missed payments. This can prevent your loan balance from escalating due to late charges.
• Deferment During Enrollment
  If you return to school as a full-time student, you may qualify for deferment, meaning your loan payments are paused while you focus on your education. This is especially helpful for students who want to advance their careers but may not have the financial resources to keep up with student loan payments during their studies.
• Military Deferment
  Active duty military personnel can apply for deferment, which helps alleviate financial pressure during deployment or extended periods of service. In some cases, military personnel may also receive interest-free deferment on their federal student loans.
• Temporary Solution for Temporary Hardship
  Deferment can offer a short-term solution if you are facing a temporary financial hardship. For example, if you’re struggling to find a job after graduation or facing an unexpected medical emergency, you can apply for deferment to delay your payments until you are back on your feet.

Cons of Student Loan Deferment

While deferment can be a useful option in some situations, it’s important to understand the downsides and limitations that come with it:

• Interest Accrual on Unsubsidized Loans
  One of the biggest drawbacks of deferment is that the interest on unsubsidized loans continues to accrue even while your payments are paused. This means that your loan balance will grow during the deferment period, resulting in higher overall debt once your payments resume. With subsidized loans, the government covers the interest during deferment, but this is not the case for unsubsidized loans.
• Prolonged Loan Term
  Deferment can extend the amount of time it takes to pay off your loan, particularly if you defer your payments multiple times over the course of your loan. The longer the loan term, the more interest you will end up paying in the long run. This can significantly increase the total cost of your loan.
• Lack of Progress Toward Loan Repayment
  When you defer your loan payments, you are not making any progress toward paying off your loan balance. While this can provide temporary relief, it can also delay your long-term financial goals and extend the amount of time you are burdened with student loan debt.
• Missed Opportunities for Loan Forgiveness
  If you are on a path to loan forgiveness, particularly through Public Service Loan Forgiveness (PSLF) or other forgiveness programs, deferment can potentially slow down the process. For instance, while your payments are paused during deferment, they may not count toward your required number of qualifying payments for forgiveness programs. This means that the time spent in deferment may not help you reach loan forgiveness goals faster.
• Impact on Credit Score
  Although deferment itself doesn’t directly impact your credit score, missing payments before applying for deferment can result in late payments being reported to credit bureaus. If your loans are reported as late before you receive deferment, it could negatively affect your credit score. Maintaining a positive credit score is important for future financial opportunities, such as qualifying for a mortgage or car loan.

When Should You Consider Deferment?

Deferment may be a helpful option in certain situations, but it should be considered carefully. Here are some scenarios in which deferment could be a viable solution:

• Financial Hardship
  If you are struggling financially, such as being unemployed or dealing with an unexpected medical emergency, deferment can provide the immediate relief you need to get back on your feet.
• Returning to School
  If you’ve decided to further your education and return to school full-time, you may qualify for deferment during your enrollment. This will allow you to focus on your studies without the burden of student loan payments hanging over you.
• Military Service
  Active-duty military personnel often have access to deferment, which can help ease the financial burden while serving.
• Short-Term Financial Setback
  If you’re experiencing a short-term financial setback but expect your situation to improve in the near future, deferment may provide temporary relief without affecting your long-term repayment plan.

Alternatives to Deferment

While deferment can offer relief in some cases, it is not the only option available for managing student loans. Here are some alternatives to consider:

• Income-Driven Repayment Plans
  If you are struggling to make payments due to low income, an income-driven repayment (IDR) plan may be a better alternative. IDR plans base your monthly payments on your income and family size, making them more manageable. Plus, any remaining balance after 20-25 years of qualifying payments may be forgiven.
• Forbearance
  Forbearance is another option for temporarily pausing your loan payments. It is similar to deferment, but typically does not have the same qualifications. Like deferment, forbearance can allow you to stop payments for a short period, but interest will accrue during the forbearance period, particularly for unsubsidized loans.
• Refinancing
  If you’re in good financial standing, refinancing can help lower your interest rate, making your payments more manageable. Refinancing allows you to consolidate your loans with a new private loan, but keep in mind that federal protections such as income-driven repayment plans and loan forgiveness are not available once loans are refinanced.
• Loan Consolidation
  Consolidation combines multiple federal loans into a single loan with one interest rate, simplifying repayment. While consolidation doesn’t reduce your overall debt, it can help you streamline payments.

Deferment and Its Impact on Different Loan Types

The implications of student loan deferment can vary depending on whether you have federal student loans or private student loans. Here’s how deferment works for each loan type:

Federal Student Loans

Federal student loans are often the most flexible when it comes to deferment options. Here’s what you need to know about deferment for federal loans:

• Subsidized Loans:
  With subsidized federal loans, the government covers the interest during the deferment period. This means that while you don’t have to make payments, the total balance of your loan doesn’t increase because of accrued interest during deferment. As long as you qualify for deferment, you can temporarily pause payments without the added financial burden of accumulating interest.
• Unsubsidized Loans:
  For unsubsidized federal loans, interest continues to accrue during the deferment period, even if you’re not required to make payments. If you don’t pay the interest that accrues, it will be capitalized — added to the loan’s principal — when you begin making payments again. This can significantly increase the total amount you’ll owe in the future. For this reason, it’s important to weigh the pros and cons of deferment carefully if you have unsubsidized loans.
• PLUS Loans:
  Parents who borrow through the Federal PLUS Loan program have similar deferment options as student borrowers, but the rules are slightly different. PLUS loans can be deferred while the student is still in school at least half-time, and the government will cover interest on the loan during deferment if it’s a subsidized loan. However, for unsubsidized PLUS loans, the interest continues to accrue, and it’s important for parents to decide whether the temporary relief of deferment is worth the additional cost of accruing interest.
• Eligibility for Federal Deferment:
  The government provides several deferment options for federal loans, including those related to economic hardship, unemployment, or active military service. For example, unemployment deferment allows you to delay payments for up to 36 months if you meet specific criteria (such as being unemployed for a certain period). For active duty military members, deferment can be requested for the duration of military service, and it often comes with no interest accumulation on subsidized loans.

Private Student Loans

Private lenders do not have the same deferment provisions as federal loans. The availability of deferment depends on the terms set by the lender. Some private lenders may offer forbearance or deferment options for borrowers facing financial difficulties, but these options tend to be less flexible than federal loans. Additionally, private loans often carry higher interest rates, and any interest accrued during deferment will likely be capitalized, increasing the overall loan balance.

• Lender-specific Rules: Each private lender has its own deferment or forbearance policies, and the eligibility criteria may be stricter. Typically, private lenders will require borrowers to submit documentation proving financial hardship to qualify for a deferment or forbearance.
• Interest on Private Loans: Unlike federal loans, most private loans will continue to accrue interest during deferment or forbearance, and this interest will likely be capitalized at the end of the deferment period, leading to a higher balance over time. This can be a major drawback if you’re looking for long-term financial relief.

How Deferment Can Affect Your Credit

While deferment doesn’t directly impact your credit score, there are indirect effects to consider. Here’s how deferment can influence your credit:

• Avoiding Late Payments:
  If you’re struggling to make payments and deferment is granted, your loan servicer will not report missed payments or late fees to the credit bureaus, which means that your credit score will not be negatively impacted. This is an advantage if you are on the brink of missing payments and want to avoid further damage to your credit.
• Increased Debt Due to Interest Accumulation:
  While deferment can stop late payments from negatively impacting your credit, interest accumulation can still lead to higher debt over time, which could affect your ability to secure future credit. A higher loan balance can be viewed as a potential risk factor when applying for new credit or loans. Additionally, if you refinance or consolidate your loans in the future, the larger balance could result in higher monthly payments.
• Potential Default Risk:
  While you are not required to make payments during the deferment period, it’s crucial to keep track of when your deferment ends and be prepared to resume payments. Failing to make payments after the deferment period has expired could lead to default, which will negatively affect your credit score and your ability to borrow in the future.

Alternatives to Deferment for Student Loan Debt Relief

Deferment may not always be the best solution for managing student loan debt, especially if the interest on your loans continues to accumulate. Here are some alternatives to consider:

Income-Driven Repayment Plans (IDR)

If you’re experiencing financial hardship but still want to make progress on repaying your loans, an income-driven repayment plan could be a better option. These plans set your monthly payment based on your income and family size, often lowering your payment to a more manageable amount.

• Benefits:
  • Lower payments based on your income.
  • Loan forgiveness after 20-25 years of qualifying payments under some IDR plans.
• Drawbacks:
  • Extended repayment term: It can take longer to pay off your loans, and the interest may still accrue during the extended term.
  • Tax consequences: Any loan balance forgiven under an IDR plan may be considered taxable income, depending on your situation.

Loan Forgiveness Programs

If you work in public service or another qualifying profession, you may be eligible for loan forgiveness. Public Service Loan Forgiveness (PSLF) is one of the most well-known programs that allows borrowers to have their loans forgiven after making 120 qualifying monthly payments while working for a government or nonprofit organization.

• Eligibility:
  • Employment with a government agency, nonprofit, or qualifying public service job.
  • Enrollment in a qualifying repayment plan, such as an income-driven repayment plan.
• Drawbacks:
  • It can take years to qualify for forgiveness.
  • Not all employers or jobs qualify, so it’s important to ensure that your employment is eligible.

Forbearance

Forbearance is similar to deferment in that it allows you to temporarily stop making payments, but the rules are different. Forbearance is usually granted when you are facing temporary financial difficulty but don’t qualify for deferment. Like deferment, interest accrues during forbearance and is often capitalized. However, forbearance may be available even when you don’t meet the specific criteria for deferment.

• Benefits:
  • Temporary relief for borrowers facing short-term difficulties.
  • Available to both federal and private loan borrowers.
• Drawbacks:
  • Interest accrues during the forbearance period.
  • It may not count toward loan forgiveness programs or repayment progress.

The Bottom Line: Is Student Loan Deferment Right for You?

Deferment can be a helpful option for those facing temporary financial difficulties. It allows you to stop making payments for a while, providing short-term relief. However, it’s essential to understand the potential long-term consequences, including accruing interest and extending the repayment period. If you have subsidized loans, deferment may be a better option, as interest is typically covered during the deferment period. But if you have unsubsidized loans, be mindful of the interest that continues to accumulate and increases your debt.

Before deciding to defer your student loans, explore alternatives such as income-driven repayment plans, loan forgiveness, and forbearance to see if they may better suit your needs. Understanding your financial situation and long-term goals will help you make an informed decision about whether deferment is the right choice.

Also Read: What Are Your Options For Dealing With Student Loan Debt?

Conclusion

Student loan deferment can be a helpful tool for borrowers facing temporary financial difficulties, but it’s not without its drawbacks. While it provides short-term relief, it may lead to a longer repayment term and higher overall debt due to accruing interest. As with any financial decision, it’s essential to weigh the pros and cons of deferment against other options like income-driven repayment plans or loan consolidation.

FAQs

1. What is student loan deferment?

Student loan deferment is the temporary postponement of your student loan payments, typically due to financial hardship, returning to school, or serving in the military. The duration and eligibility criteria for deferment vary based on the type of loan and specific circumstances.

2. Do I have to pay interest during deferment?

For subsidized federal loans, the government covers the interest during deferment. However, for unsubsidized loans, the borrower is responsible for paying the interest that accrues, and if not paid, the interest is capitalized, meaning it is added to the loan balance.

3. Can I qualify for deferment if I’m unemployed?

Yes, unemployment is a qualifying condition for deferment. If you are unemployed and meet the specific eligibility criteria, you can apply for deferment, which typically lasts up to 12 months. You may need to provide documentation showing that you are actively seeking employment.

4. What is the difference between deferment and forbearance?

Both deferment and forbearance temporarily pause your loan payments. The main difference is that deferment is often granted for specific qualifying situations (e.g., unemployment, economic hardship), while forbearance may be available for general financial difficulty. Interest continues to accrue in both cases, but it may be capitalized during forbearance.

5. How long can I defer my student loans?

The length of deferment depends on your situation and the type of loan. For example, unemployment deferment may last up to 12 months, and military deferment can last as long as your time in service. However, deferment is usually granted for a limited period, and you may need to reapply after it expires.

6. Will deferment affect my credit score?

Deferment itself does not impact your credit score, as long as you were not already behind on payments before the deferment. However, missing payments before applying for deferment can result in late payment reports, which may negatively affect your credit score.

7. Is deferment the best option for me?

Deferment can be a good option if you are facing short-term financial difficulties. However, it may lead to a longer repayment term and more interest due to the accumulation of interest on unsubsidized loans. Explore other options such as income-driven repayment plans or loan forgiveness to determine the best solution for your situation.