4 Things You Need to Know About Deferring Student Loans

Finding a way to pause your student loan payment can be a lifesaver when your financial life goes sideways. And trust me, this can happen to anyone at any time.

For me, the financial roller coaster ride started in June 2010. I was expecting our first child when my husband accepted a job in another state. I'd had to quit my teaching job when we moved, and I knew I was not going to be bringing in a paycheck for at least a year.

On top of this reduction in income, we bought a house in our new city, but it took nearly a year to sell our old house. We were stuck paying two mortgages for 11 months.

Between the two of us, my husband and I also had about $35,000 in outstanding federal student loan debt. To help get a better handle on our monthly budget, we decided to explore the option of deferment until our financial situation became more stable.

What is deferment?

Deferment allows you to pause the monthly payments on your federal student loans for a set period of time. For subsidized loans (these include Federal Perkins loans, Direct Subsidized loans, and Subsidized Federal Stafford loans), interest will not accrue on your loans while they are deferred. Unsubsidized loans, on the other hand, do accrue interest during the deferment period. If you have an unsubsidized loan that you plan to defer, you are allowed to pay the interest to keep it from being capitalized and added to your principal, but it is not a requirement for your deferment.

Deferment can make a huge difference in your bottom line, but it is not necessarily a cure-all to your financial problems. Here is what you need to know about deferring your student loans.

1. You might not be eligible for deferment

When we applied for a deferment of our student loan payments, our first big surprise was the discovery that we were not eligible. Borrowers are eligible for, and have the right to take, deferment in the following circumstances:

  • During at least half-time enrollment in postsecondary school;
  • During full-time enrollment in an approved graduate program;
  • During enrollment in an approved rehabilitation training program if you are disabled;
  • During a period of unemployment (limited to three years);
  • During active duty with the military, or within 13 months of when your active duty occurred;
  • During periods of economic hardship, as defined by federal regulations (also limited to three years).

My husband and I had assumed that going from two family members to three, from two paychecks to one, and from one mortgage to two, was sufficient enough to meet the economic hardship requirements. But federal regulations only allow for economic hardship deferment if you are either on public assistance, or the salary from your full-time employment is no more than 150 percent of the federal poverty guideline for your family size and state. His salary was too high to qualify.

Instead of deferment, we had to apply for a discretionary forbearance, which is the option available to borrowers who aren't eligible for a deferment.

What's the difference between deferment and forbearance?

The biggest difference between the two processes is that interest will accrue on your loans if they go into forbearance, even if your loans are subsidized. This means that unless you pay the interest during the forbearance period, the accrued interest will be capitalized (added to your principal).

In addition, deferments are granted in six-month increments, and you may keep applying for the next six-month increment of deferment as long as you qualify for it. Forbearance, on the other hand, is granted in 12-month increments, and you may only apply for it three times over the life of your loan.

In some situations, forbearance is mandatory, which means your loan servicer must offer forbearance to you. You can receive mandatory forbearance in any of the following situations:

  • During a medical or dental internship or residency program;
  • During economic hardship wherein your total monthly student loan payment is 20 percent or more of your total monthly gross income;
  • During service in a national service program, such as AmeriCorps;
  • You are a teacher who is eligible for teacher loan forgiveness;
  • You meet the eligibility requirements for the U.S. Department of Defense Student Loan Repayment Program;
  • You are a National Guard member who has been activated by a governor, but who is not eligible for a military deferment.

For student loan borrowers who do not meet any of the eligibility requirements for a mandatory forbearance, the only other option is applying for a discretionary forbearance. As the name implies, these are granted to borrowers at their lender's discretion, and generally borrowers apply for them because of financial hardship or illness.

In 2010, my husband and I were granted a discretionary financial hardship forbearance. My unemployment was nominally my choice — although I was actually unemployed because of my baby's insistence on a Virgo birthday that coincided with the beginning of the school year. If I had been unable to find full-time work, that would have potentially made us eligible for a deferment, rather than a discretionary forbearance.

2. Accrued interest can pack a mean punch

Unless you are lucky enough to be eligible to defer a subsidized loan, you are likely going to deal with accrued interest. The problem with accrued interest is that it's like the inverse of compound interest: The interest that you accrue on your student loan is capitalized, which generates even more interest.

For instance, between the two of us, my husband and I paid about 4.5 percent interest on our outstanding $35,000 student loan debt. By putting our loans into forbearance and not paying the accrued interest, we added over $1,600 to the $35,000 principal over 12 months.

Not only does capitalized interest increase the total amount you owe, but it can also potentially increase either your monthly payment or your repayment term.

3. Be prepared for paperwork

Neither deferment nor forbearance is an automatic process, even when they are "mandatory." You will always have to apply for either deferment or forbearance.

If you are applying for deferment, you will need to submit a request to your loan servicer. For deferments while you are enrolled in school at least half-time, you will need to contact your school's financial aid office as well as your loan servicer. This process is relatively simple, but you will need to go through it every six months to maintain your deferment.

For forbearance requests, the paperwork can be a little more onerous. Like deferment, you will need to submit your request to your loan servicer. In some cases, you will need to submit documentation to support your request, especially if you are requesting a discretionary forbearance. For instance, my husband and I were required to prove we were paying two mortgages at once to be granted our forbearance.

4. You must continue paying until your request is granted

After you have made your request for deferment or forbearance, you are required to continue making your monthly payments until your lender informs you that the request has been granted. Generally, this process takes about 10 business days, but it can take as many as 30.

Not making payments during this time can be serious. If you skip a month after submitting your request, and your request is denied, then your lender will consider you delinquent and you risk defaulting.

Both the paperwork and the necessity of continuing payments means that deferment and forbearance are options you have to plan ahead for. If you have a sudden financial downturn with no emergency fund, then you might be scrambling to request a deferment or forbearance, which may not be immediately granted.

Postponing your student loan payments doesn't erase them

Anyone can fall into an untenable financial situation. Your student loan servicer wants to work with you to help you stay afloat, but deferment and forbearance are not instantaneous processes nor are they a given. Putting your student loan payments on hold can help you get back on your feet financially, but you need to be prepared to handle the costs and be ready to get back to paying off your loans as soon as you can.

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