No matter how good a graduate or professional school’s potential return on investment is, climbing that mountain requires careful consideration so that you don’t end up with a heavier student debt burden than you planned for.
That means not only having a plan for graduate school loans but knowing what to do with any existing undergraduate student loans.
Deferring payments may bring temporary relief while pursuing a graduate degree, but loan refinancing or an income-driven repayment plan could bring longer-term help.
Deferment vs. Forbearance
Graduation from undergrad or graduate school is followed by a payment grace period of six months for most federal student loans. But if you hit a snag at some point and can’t afford payments, both deferment and forbearance are designed to allow you to apply to postpone payments.
The main difference: Interest accrues on only some federal student loans during deferment, whereas it accrues on nearly all in forbearance.
Any unpaid interest is capitalized, or added to your loan balance, at the end of the payment pause, increasing the total amount you end up repaying.
Deferment, for up to 12 months at a time, for a maximum of 36 months, may be a better choice than forbearance if:
• You have subsidized federal student loans and
• You’re dealing with substantial financial hardship
If you don’t qualify for deferment and your financial hardship is temporary, forbearance is an option.
If you have private student loans, many lenders will allow you to apply for a payment pause during hardship, too, though the terms and fees may be less borrower-friendly than is the case with federal student loans.
Do I Qualify to Defer My Payments?
For federal student loans, you’ll need to submit a request to your student loan servicer, usually with documentation to show that you meet the eligibility requirements for the deferment. For private student loans, you’ll need to check the rules directly with the lender.
A variety of circumstances may qualify you for deferment. Here are several.
Economic Hardship Deferment
You:
• Are receiving a means-tested benefit, like welfare
• Work full-time but have earnings that are below 150% of the poverty guideline for your family size and state
• Are serving in the Peace Corps
Unemployment Deferment
You receive unemployment benefits or you are unable to find full-time employment.
Graduate Fellowship Deferment
You’re enrolled in a graduate fellowship program that provides financial support while you pursue graduate studies and research.
Military Service and Post-Active Duty Student Deferment
You are on active duty military service in connection with a war, military operation, or national emergency; or you’ve completed active duty service and any grace period.
Rehabilitation Training Deferment
You’re enrolled in an approved program that provides mental health, drug abuse, alcohol abuse, or vocational rehab.
Cancer Treatment Deferment
You may qualify for deferment while undergoing cancer treatment and for six months afterward.
When Interest Accrues in Deferment
If you’re looking into deferment, you’ll want to check how interest would be handled during the payment pause and whether, if unpaid interest is capitalized, you’re prepared to take on a higher overall cost of the loan.
During deferment, you are generally not responsible for paying interest on:
• Federal Perkins Loans
• The subsidized portion of Direct Consolidation Loans
• The subsidized portion of Federal Family Education Loan (FFEL) Program Consolidation Loans
With deferment, you are generally responsible for paying interest on:
• Direct Unsubsidized Loans
• Direct PLUS Loans
• FFEL PLUS Loans
• The unsubsidized portion of Direct Consolidation Loans
• The unsubsidized portion of FFEL Consolidation Loans
• Private student loans (if the lender allows deferment)
If you’re starting graduate or professional school or are in the thick of it, your federal borrowing options are Direct PLUS Loans (commonly called grad PLUS Loans when borrowers are graduate students) and Direct Unsubsidized Loans (also available to undergrads).
As noted above, those loan types accrue interest during a deferment.
Direct loans for graduate students currently carry a 5.28% rate (the rates are set by federal law for each academic year), with a loan fee of 1.057%.
For new graduate PLUS loans, the rate is currently 6.28%, with a loan fee of 4.228%.
Nongovernment lenders may offer private graduate student loans, sometimes with a fixed or variable rate and no loan fee.
Something to chew on: If you pursue deferment on loans in the second category above to manage costs while in grad school, it’s a good idea to at least consider making interest-only payments during the deferment.
Options to Deferment in Grad School
There are at least two other ways, beyond forbearance, to get a handle on student loan payments in grad school.
Income-Driven Repayment
Some graduate students who have federal student loans might want to consider switching, even temporarily, to an income-based repayment plan.
Your monthly payment would be tied to family size and income, which may be low for a graduate student enrolled full time.
The four income-driven repayment plans stretch payments over 20 or 25 years, after which any remaining balance is supposed to be forgiven. After graduation, you could switch the student loan repayment plan back to the standard 10-year plan.
Though borrowers often pay less each month using one of these plans, they’ll generally pay significantly more in total interest over the duration of the drawn-out loan.
In fact, under all of the income-driven repayment plans, your monthly payment may sometimes be less than the amount to cover interest on your loans. That’s called negative amortization; the unpaid interest gets added to the amount you borrowed, and the amount you owe increases.
A little good news: Any student debt that was forgiven used to be taxed as ordinary income, but the 2021 COVID relief package put a stop to that, at least through 2025.
Refinancing
Another way to potentially lower your monthly payments without deferring your loans (and accruing interest) is by refinancing your college loans (different from consolidating federal student loans with a Direct Consolidation Loan, when the rate is determined by the weighted average of the loans, rounded up a hair).
With refinancing, a private lender pays off your loans (both federal and private) with one new loan, ideally with a lower interest rate.
A decrease in an interest rate while maintaining the loan’s duration is a compelling way to both save money each month and over the life of the loan. To understand how a change of even 1% can affect how much interest you’ll pay on a loan over time, you might want to play around with this calculator.
If you refinance federal student loans, it is important to understand that you will lose access to federal programs such as income-driven repayment and loan forgiveness as well as future benefits applicable to federally held loans.
Private lenders may or may not have a deferment option.
Lenders that offer student loan refinancing typically require a good credit history and a steady income, among other factors.
The Takeaway
Student loan deferment before or during grad school could bring temporary relief. It could also add unpaid interest to loans and create a bigger balance to pay off. Those looking to manage payments long term may want to look into alternatives.
One is student loan refinancing. SoFi offers low fixed and variable rates and flexible terms when refinancing private or federal student loans.
And as a SoFi member, you’ll have access to a professional-grade list of benefits.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
CLICK HERE for more information.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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