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Examining How Student Loan Deferment Works

July 26, 2021 · 6 minute read

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Examining How Student Loan Deferment Works

If you’re struggling under a mountain of student debt, you’re not alone. After all, the average debt load for a recent undergrad is around $30,000.

The worst thing to do when experiencing difficulty repaying student loans is to just stop making payments. If more than 270 days pass on a federal student loan payment, or three months pass on a private student loan payment, they could become one of the millions of student loans in default.

Consequences of Defaulting on Federal Student Loans

And unlike other debt, student loan balances are generally not eligible to be discharged in bankruptcy. Defaulting on your federal student loans can lead to:

•  Immediately owing the entire balance the loan

•  Losing eligibility for forbearance, deferment, or federal repayment plans

•  Losing eligibility for federal student aid

•  Damaging the borrower’s credit score, inhibiting the ability to qualify to purchase a car or a house or qualify for credit cards in the future

•  Withholding of federal benefits and tax refunds

•  Garnishing of wages

•  The loan holder taking the borrower to court

•  Inability to sell or purchase assets such as real estate

•  Withholding of the borrower’s academic transcript until loans are repaid

Consequences of Defaulting on Private Student Loans

The consequences for defaulting on private student loans may vary by lender but could include repercussions similar to federal student loans, and more, including:

•  Seeking repayment from the cosigners of the loan (if there are any cosigners)

•  Calls, letters, and notifications from debt collectors

•  Additional collection charges on the balance of the loan

•  Legal action from the lender, suing the borrower or their cosigner

To avoid these negative consequences, one option for borrowers struggling to pay federal student loans is deferment.

Student loan deferment allows eligible borrowers to temporarily reduce loan payments or pause them. It’s a popular choice: As of the second quarter of 2021, 3.3 million borrowers owing a combined $120 billion had their loans in deferment.

Borrowers who are struggling to afford their monthly student loan payments, may consider looking into student loan deferment. But while it could be a good option for temporary relief, other solutions for reducing payments in the long term may be required.

Who Is Eligible for Student Loan Deferment?

To be granted a deferment on federal loans, borrowers need to meet certain criteria.

You may be eligible if you’re:

•  Enrolled at least part-time in college, graduate school, or a professional school

•  Unable to find a full-time job or are experiencing economic hardship

•  On active military duty serving in relation to war, military operation, or response to a national emergency

•  In the 13-month period following active duty

•  Enrolled in the Peace Corps

•  Taking part in a graduate fellowship program

•  Experiencing a medical hardship

•  Enrolled in an approved rehabilitation program for the disabled

Borrowers who re-enroll in college or career school part-time may find that their federal student loans automatically go into in-school deferment with a notification from their student loan provider.

Loans may also keep accruing interest during deferment—depending on what kind of federal student loans the borrower holds. Borrowers are still responsible for paying interest if they have a:

•  Direct Unsubsidized (Stafford) Loan

•  Direct PLUS Loan

If you don’t pay the interest during the deferment period, the accrued amount is added to your loan principal, which increases what you owe in the end.

Related: Student Loan Deferment in Grad School

To request a deferment, borrowers will need to submit a form to their loan servicer. As a part of the process, it’s likely that they;ll be asked to provide documents to prove eligibility.

What If You Have Private Student Loans?

Private lenders aren’t required to offer deferment options, but some do. For example, some might allow you to temporarily stop making payments if you:

•  Lose your job

•  Experience financial hardship

•  Go back to school

•  Have been accepted into an internship, clerkship, fellowship, or residency program

•  Face high medical expenses

Typically, even while a private student loan is in deferment, the balance will still accrue interest, meaning in the long-term the borrower will pay a larger balancer overall, even after the respite of deferment.

In most cases, even with accrual of interest and limited options, deferment is preferable to defaulting. Borrowers with private loans could contact the lender to ask what options are available.

The Limits of Student Loan Deferment

Keep in mind that deferment is not a panacea. By definition, it’s temporary. Federal student loan borrowers will ultimately need to go back to making payments once they are no longer deferment-eligible. For example, a borrower’s deferral might end if they leave school, even if their ability to pay has not improved.

Federal loans can only be deferred due to unemployment or financial hardship for up to three years. With private loans, there may not be an option to defer at all, and if it is an option, the limit may be no more than a year.

Other Options for Reducing Federal Student Loan Payments

Besides student loan deferment, you have other choices if you can’t afford the total cost of your monthly payments. With federal loans, you can request a forbearance.

Requesting Forbearance for Federal Student Loans

There are two types of forbearance for federal student loan holders: general and mandatory.

General student loan forbearance is sometimes called discretionary forbearance. That means the servicer decides whether or not to grant your request. People can apply for general forbearance if they’re experiencing:

•  Financial problems

•  Medical expenses

•  Employment changes

General forbearance is only available for certain student loan programs, and is only granted for up to 12 months at a time. At that point, you are able to reapply for forbearance if you’re still experiencing difficulty. General forbearance is available for:

•  Direct Loans

•  Federal Family Education Loan (FFEL) Program loans

•  Perkins Loans

Mandatory forbearance means your servicer is required to grant it under certain circumstances. Reasons for mandatory forbearance include:

•  Serving in a medical residency or dental internship

•  The total you owe each month on your student loan is 20% or more of your gross income

•  You’re working in a position for AmeriCorps

•  You’re a teacher that qualifies for teacher student loan forgiveness

•  You’re a National Guard member but don’t qualify for deferment

Similar to general forbearance, mandatory forbearance is granted for up to 12 month periods, and you can reapply after that time. You still have to pay interest on all types of your federal loans while they’re in forbearance.

Income-Driven Repayment Plans

A longer-term solution could be signing up for an income-driven repayment plan.

Borrowers who qualify, may be able to reduce their monthly payment based on their income. Enrolling in an income-driven repayment plan won’t have a negative impact on your credit score or history. However, income-driven plans aren’t always the lowest monthly payment option, so you might want to look at all options before applying to one. On certain income-driven repayment plans, student loan balances can be forgiven after 20 or 25 years, depending on the payment plan that the borrower is eligible for.

Remember, with an income-driven repayment plan, monthly payment is based on the borrower’s total discretionary income. That means if someone changes jobs, or sees a significant increase in their paycheck, they’ll be expected to pay a higher monthly bill on the student loan payment.

Another Option to Consider: Refinancing

Another long-term solution, depending on personal financial circumstances, could be student loan refinancing. Some private lenders can consolidate a borrower’s loans, whether federal or private. Qualifying borrowers may be able to secure a lower interest rate or options to lengthen the term to reduce monthly payments. Note that lengthening the repayment period may lower monthly payments but will generally result in paying more interest over the life of the loan.

Refinancing could be a good option for borrowers with strong credit and a solid income, among other factors. Unlike an income-driven repayment plan, a borrower’s monthly payment wouldn’t change strictly based on their income.

Some may find that they are not able to qualify for student loan refinancing on their own. In that case, some lenders may offer the option to apply for refinancing with a cosigner. A very important note: Refinancing federal student loans eliminates them from any federal borrower protections or payment plans. So, borrowers who are taking advantage of things like income-driven payment plans or deferment generally won’t want to refinance. But for other borrowers, student loan refinancing might be a good long-term solution.

Refinancing your federal and private loans can roll many loans into one new loan with one new rate and new monthly payment. So in addition to potentially saving you money on interest, refinancing could also simplify your repayment process.

If you find a lower rate for student loan refinancing –
SoFi will match it AND give you $100.*

The Takeaway

Deferment allows borrowers with federal student loans to temporarily pause their monthly payments under certain circumstances, such as enrollment in a graduate program. Depending on the type of loan, borrowers may be able to qualify for forbearance, which is another option that allows borrowers to temporarily pause payments on federal student loans, to help those who may be experiencing temporary financial difficulty.

Income-driven repayment plans may be another option for federal student loan borrowers who are experiencing longer-term issues making monthly payments on their student loans. Borrowers who aren’t taking advantage of these federal student loan programs may consider refinancing with a private lender as an option to either potentially secure a lower interest rate or adjust the repayment terms on their loan.

Student loan debt getting you down? Learn more about refinancing student loans with SoFi.

*Guaranteed Rate Match Offer: Your pre-qualified rate, and the rate match program itself, are conditional upon our verification of your application information, including verification of sufficient income to support an ability to repay. Eligible documentation of a competitor’s rate offer, issued within 30 days of your SoFi pre-qualified rate, will be determined at SoFi’s sole discretion and must be for the same loan amount and term. SoFi will only match rate offers for private student loan refinance products. The match will be on the rate, exclusive of all discounts. The $100 Rate Match Bonus is not available to residents of Ohio. To receive the $100 Rate Match Bonus, you must: (1) register and/or apply for a student loan refinance (2) provide documentation of an eligible competitive rate offer; (3) call at (855) 456-SOFI (7634) or chat on SoFi.com and follow the instructions to send in your proof of lower rate; (4) have and provide a valid US bank account to receive bonus; (5) complete Form W-9; (6) and meet SoFi’s underwriting criteria and book a student loan refinance with SoFi. Once conditions are met and the loan has been disbursed, you will receive your Rate Match bonus via automated clearing house (ACH) into your checking account within 30 calendar days. Bonuses that are not redeemed within 180 calendar days of the date they were made available to the recipient may be subject to forfeit. Bonus amounts of $600 or greater in a single calendar year may be reported to the Internal Revenue Service (IRS) as miscellaneous income to the recipient on Form 1099-MISC in the year received as required by applicable law. Recipient is responsible for any applicable federal, state or local taxes associated with receiving the bonus offer; consult your tax advisor to determine applicable tax consequences. Additional terms and conditions may apply. SoFi may discontinue this program at any time.
SoFi Student Loan Refinance
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.

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