Student loan deferment: What is it and what are your options?

It's important to understand how student loan deferment works before determining if it's the right step for you. (iStock)

Paying off student loans can become a major financial burden, especially if you want to return to school, volunteer or facing economic hardship. If you want to temporarily pause your payments, student loan deferment makes that possible.

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Deferring your loans isn't always an option and in some cases, it can make repayment take longer and cost more. But there are times when it makes sense. It's important to understand how student loan deferment works so you can determine if your situation warrants it or if there's another repayment strategy that might be a better fit.

What is student loan deferment?

Student loan deferment allows you to stop making payments on your loans for a limited time. Unfortunately, interest continues accruing on unsubsidized student loans while they're deferred -- so your loan balance will grow unless you only defer Direct Subsidized or Perkins Loans.

STUDENT LOAN OPTIONS FOR US MILITARY MEMBERS, VETERANS

If you have federal student loans, they'll generally be deferred automatically if you're enrolled at least half time in an eligible college or career school, as well as for six months after enrollment ends. You can also apply for federal student loan deferment, usually for a maximum three-year period, if:

  • You enroll in an approved graduate fellowship program or rehabilitation training program.
  • You're unemployed or can't find full-time work.
  • You're serving in the Peace Corps.
  • You're experiencing economic hardship.
  • You're currently on active duty or were recently on active duty military service in connection with a war, military operation, or national emergency.

Some private lenders also allow you to pause payments but under more limited circumstances. However, there are no subsidized private loans so your private loan balance always grows as interest accrues during periods of nonpayment.

Should you defer student loans?

Deferment can make loan repayment much more expensive if you defer any unsubsidized federal or private student loan. Pausing payments for months or years means you'll accrue lots of unpaid interest. When you start paying again, the unpaid interest is capitalized -- or added onto the balance due so you have to pay interest on a higher loan balance going forward.

Still, deferring your loans is better than defaulting or missing payments and it may become necessary if you lost your job or want to return to school and can't afford to make monthly payments. Of course, if you're deferring only subsidized loans, you won't have to worry about interest going unpaid.

THESE COMPANIES OFFER STUDENT LOAN REPAYMENT BENEFITS

What other options do you have?

Forbearance also allows you to pause payments, but differs from deferment for federal loans because interest always accrues during forbearance periods even for subsidized loans. While forbearance can be more expensive, you have more options to pause payments this way. In fact, federal loan servicers must put loans into forbearance upon your request if you meet requirements such as serving in a medical residency program or facing loan payments exceeding 20 percent of income.

Income-driven repayment plans are also an alternative to deferment for federal loans. These plans cap monthly loan payment as a percentage of income. With a low enough income, monthly payments could be $0. Interest is typically waived on subsidized federal loans if your monthly payments on an income-driven plan don't cover it. And after 20 or 25 years of payments, depending on your plan, any remaining loan balance is forgiven.

For private loans, there's no real distinction between forbearance and deferment since none are subsidized. And income-based plans also aren't available. If you're struggling to pay private loans, you may have the option to refinance them. If you can lower your interest rate or extend your time to repay, refinancing reduces your monthly payment -- although total repayment costs will often be higher.

While federal loans can also be refinanced, doing so means giving up borrower protections such as access to income-driven payment plans or loan forgiveness. Most borrowers find it's best to avoid refinancing federal loans for that reason.

WHY YOU SHOULDN'T REDUCE STUDENT LOAN PAYMENTS

How can you defer student loans?

If your federal loans qualify for automatic deferment while in school, you don't have to do anything. You'll be notified when your deferment ends after you're no longer enrolled so you can begin making payments. To request deferment after graduation, send a request to your loan servicer along with any documentation required to show you qualify. Forms to request deferment can be found on the Department of Education's website.

For private lenders, the process for deferring payments or putting loans into forbearance varies. You can often elect in-school deferment when first borrowing. And you should call your loan servicer if you're having difficulty with payments after graduation to find out what your options are for putting loans into deferment or forbearance to get temporary financial relief.