You’re thinking about going back to graduate school or have already committed to a graduate school program. First, congratulations on your decision to advance your education; many graduate school programs give potential students the specialization necessary to get ahead in their careers.
Still, no matter how good a graduate school’s potential return on investment, it requires careful financial consideration to make sure you don’t end up with more student debt than you planned for. And that means not only having a plan for graduate school loans but knowing what to do with any existing undergraduate student loans.
How are you going to afford the loans you already have while pursuing a graduate school degree? You’ve likely heard the term “deferment” before. You know that it’s a feature of some student loans that many grad students use but maybe aren’t sure what that means for your monthly payments, the interest that accrues on your loans, and how it much it could cost you over the life of your loan.
For the most part, this depends on what type of loan(s) you have (federal versus private) and whether you’re in forbearance or deferment. Below, we’ll discuss how to defer student loans when going back to school, answer the question, “does interest occur during deferment?” and offer some tips and alternatives when it comes to student loan deferment.
Forbearance vs Deferment
First, let’s get the terminology straight: A grace period is the time between graduating from school (undergrad or graduate school) and when you must begin making payments on student loans—typically six months for most federal student loans.
There are many ways to qualify for deferment , including being enrolled in school at least half-time or serving in the military or Peace Corps. Forbearance is typically used by people who are facing temporary financial hardship but who don’t qualify for deferment. (For example, if you’re going back to grad school, you’d typically qualify for deferment, but if you need to pause your loan payments while dealing with medical expenses, you’d ask for forbearance.)
Forbearance and deferment allow you to postpone student loan payments during times when you aren’t able to afford them. Through student loan forbearance and deferment, you don’t risk missing a payment due to an inability to pay, which can negatively impact your credit score. The rules of use regarding these features will vary, but as a baseline minimum deferment and forbearance exist to help prevent your loans from going into default.
Can You Defer Student Loans When Going Back to School?
A first step is to identify whether your existing undergraduate student loans are federal loans, private loans, or some combination of the two. Whether you can defer and the treatment of the interest during the deferment period will depend on who issued the loan, and in some cases, when the loan was issued.
Next, you’ll want to do some research as to whether your loans qualify for deferment and how interest will be handled during deferment. In certain circumstances, federal loans allow for deferment for students in qualifying grad school programs enrolled at least half-time.
For more information on whether you qualify for deferment, check out the government student aid office website . With private loans, check directly with the lender.
Does Interest Accrue During Deferment?
The majority of loan types accrue interest during periods of deferment. Though you’ll want to check directly with your loan servicer(s), subsidized federal student loans generally don’t accrue interest during deferment periods, and all other loan types—both unsubsidized federal and most private loans—do.
During deferment, you are generally not responsible for paying interest on:
• Direct Subsidized Loans
• Subsidized Federal Stafford Loans
• Federal Perkins Loans
• The subsidized portion of Direct Consolidation Loans
• The subsidized portion of FFEL Consolidation Loans
During deferment, you are generally responsible for paying interest on:
• Direct Unsubsidized Loans
• Unsubsidized Federal Loans Stafford Loans
• Direct PLUS Loans
• Federal Family Education Loans (FFEL) Plus Loans
• The unsubsidized portion of Direct Consolidation Loans
• The unsubsidized portion of FFEL Consolidation Loans
• Private loans (but check with the loan provider for more details)
The reality that most loans accrue interest during deferment is something for a potential graduate student to take quite seriously, as it can add a significant amount of money onto the principal balance of the loan. Accrued interest is essentially added to the principal loan balance at the end of the deferment period, which is called capitalization.
If you pursue deferment on unsubsidized loans as a way to manage costs while enrolled in grad school, it’s a good idea to at least consider making interest-only payments. While this can be difficult for students to do, it could save you from ballooning the amount of total interest that they owe on their undergraduate loans—especially considering you likely taking out graduate school loans as well.
How to Defer Student Loans While in Grad School
With federal student loans, you would request an in-school deferment through your loan servicer. They will likely require you to fill out a form and provide some documentation to support your request. While you wait for approval, you’re going to want to continue to pay your student loans.
For private loans, you’ll need to check directly with the bank or lender to inquire about their own rules around student loan deferment. Because each lender makes the terms of their loans, there’s no universal way to know whether your loans qualify for deferment. Historically, private loans have not offered the option for deferment, but this is changing as financial services firms compete for business.
Non-Deferment Options for Lowering Monthly Payments
Some graduate students might want to consider switching, even temporarily, to an income-driven repayment plan while in school.
(This is only an option for federal student loans.) Because your monthly payment is tied to income, which may be low for a graduate student enrolled full-time, it can be an effective way to lower the amount of interest accrued during deferment.
This way, you’ll be making small payments toward your loans and avoid interest capitalization. Income-driven repayment plans stretch a borrower’s payments over 20 or 25 years, at which point the loans are forgiven. After you graduate, you can always switch the student loan repayment plan back to the standard, 10-year repayment plan.
While borrowers can pay less each month using one of these plans, they’ll generally pay significantly more in total interest over the duration of the longer loan. Another word of caution: the balance of the loans that are forgiven are generally taxed as ordinary income.
(If you are planning to have your loans forgiven through Public Service Loan Forgiveness (PSLF), you would use an income-driven repayment plan anyway. Through PSLF, you do not have to pay taxes on the forgiven amount.)
Another way to potentially lower your monthly payments without deferring your loans (and accruing interest during that deferment period) is by refinancing your student loans. Through the process of refinancing, a new lender pays off your loans (both federal and private) with a new loan, ideally at 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, play around with SoFi’s student loan calculator.
When you refinance your loans, it is important to understand that you will lose access to federal loan programs such as Public Service Loan Forgiveness and deferment or forbearance. (Although some refinancing companies might offer some options for deferment/forbearance, so be sure to ask.)
If you are thinking about refinancing your loans, it is a good idea to start thinking about it before you enter graduate school, so you can have a clear picture of what your debt might look like. Companies that offer student loan refinancing typically require that you meet their eligibility criteria, which could include that you are in good financial standing by having good credit, a strong history of making debt payments on time, and a steady income—among other factors.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice about bankruptcy.
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