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8 Questions to Ask Yourself Before You Defer Student Loans
The coronavirus relief bill gives those with federal student loans a break from payments until September 30. During this time, all principal and interest payments on most federal student loans are suspended.
This is automatic.
However, the new law does not extend relief to those with private student loans. Some federal borrowers were excluded, too. And with so much economic uncertainty, even those who qualify under the law may continue to face financial hardship beyond the six-month reprieve.
For borrowers concerned about default — now or in the future — deferment might be one option to consider. It suspends payments, but doing so can carry consequences.
During deferment, interest continues to accumulate on certain types of federal loans. This increases the overall cost of the loan. Also, for those seeking federal loan forgiveness, deferment periods usually don’t count toward forgiveness requirements.
Before pursuing deferment, make sure it’s the right option for you. Start by asking yourself these eight questions. And be sure to research the deferment process on the federal student aid website, or by contacting your private lender, so you know exactly what you’re getting into. If you’re not eligible for deferment, you may want to consider forbearance, which is similar but offers less relief from interest. The Department of Education encourages students to explore income-driven repayment plans, too.
No. 1: Are my student loans eligible for deferment?
Borrowers experiencing a financial hardship due to unemployment or reduced wages resulting from the pandemic are eligible for deferment. There are a variety of circumstances in which borrowers can have their federal student loans deferred.
Qualifying life events include:
- Economic hardship deferment
- Graduate fellowship deferment
- In-school deferment
- Military service and post-active duty student deferment
- Parent PLUS borrower deferment
- Rehabilitation training deferment
Private lenders are not required to offer student loan deferment. If you have a private student loan, you will need to contact the lender directly to explore repayment options. Any questions or concerns should always be directed to the servicer of a private loan.
No. 2: Can I afford my student loan payments?
Layoffs and reduced wages will increase as the coronavirus disease continues to disrupt the American economy. Has your employment been affected? If so, it may be difficult to afford the essentials, like rent, utilities, and food — not to mention student loan payments.
Avoid the temptation to ignore student loan payments. This will land you in hot water with late or missed payments. Delinquency or default can negatively impact your credit score. Take control before that occurs.
No. 3: Why can’t I afford my student loan payments?
What is the root cause of your financial hardship? It’s important to understand if the hardship is temporary or the result of underlying financial mismanagement.
Start by creating a budget.
If your income hasn’t changed significantly, take a hard look at your expenses. Notice if anything has changed during this time. If the culprit is overspending, reduce non-essential expenses to reset your budget. This will allow you to reallocate money toward debt payments.
If your hardship is the result of a sudden financial emergency, like unemployment or reduced wages during the global pandemic, then a student loan deferment might be the correct option for your situation.
No. 4: How long do I need?
Deferment is a temporary solution. If you don’t qualify for interest suspension, keep it as short as possible. The longer you wait to resume payments, the more you’ll owe.
No. 5: Will I need an extension after the deferment period ends?
Borrowers who qualify for deferment are allowed to postpone student loan payments for up to three years. In most cases, borrowers cannot request an extension. Once the three years ends, that’s it. It is up to the discretion of the loan servicer to approve further deferment based on extenuating circumstances.
No. 6: Is student loan deferment a better option than forbearance?
Deferment and forbearance allow borrowers to temporarily postpone payments. The main difference between the two is determined by the type of loan held and the way interest is handled.
The greatest advantage of student loan deferment is that for certain federal loans, like subsidized or Perkins loans, interest doesn’t accrue. Once the deferment period ends, borrowers continue payments on the original amount. In contrast, student loans in forbearance continue to accrue interest.
No. 7: What are the negative consequences of deferment?
Before opting for student loan deferment, consider the potential consequences.
It’s a misconception that deferment affects credit score. Deferment may be noted in your credit report, but it doesn’t negatively impact your credit score.
Only late or missed payments are reported to the credit bureaus – meaning borrowers should be careful not to stop payments abruptly. Keep making payments until you’ve received confirmation that deferment has started.
Certain federal student loans, such as unsubsidized or PLUS loans, continue to accrue interest during deferment. This means your loan balance will increase from interest, costing you more in the long run.
No. 8: How do I request a student loan deferment?
Contact your loan servicer to request an administrative deferment and complete the appropriate forms. The Department of Education lists the contact numbers for federal loan servicers here.
Deferment is one way to avoid default on student loans. But it carries consequences, so borrowers should do their research to make sure it’s the right option for their needs.