If you’re facing student loan debt, adding those monthly payments into your budget can be overwhelming—and for some, it can be a serious struggle to meet the monthly minimum on loan payments.
Of course, to simply stop making payments is pretty much the worst thing you can do. Before you go that route, there are several other options to consider—and the sooner you move to get back on track, the better.
One of the more popular alternatives for federal student loans—chosen by thousands of borrowers each year—is to just press pause by requesting deferment or forbearance . But that postponement isn’t necessarily the best choice for everyone.
The appeal is obvious—both deferment and forbearance offer a chance to catch your breath and protect your credit when you feel as though you’re drowning in debt. A recent Brookings Institution analysis found that nearly 40% of borrowers could be in default on their student loans by 2023.
The main difference is that with a student loan deferment, you may not have to pay the interest that accrues on certain types of federal loans during the deferment period. With a forbearance, no matter what type of loan you have, eventually you’ll be responsible for paying the interest that accrues.
Either way, the relief is only temporary: Unless you’re deferring your student loans because you are going back to school, enrolled at least half-time, there are limits on how long you can postpone paying your federal student loans. And in the meantime, there could be consequences to your current and future finances.
For example, when the loan is in deferment or forbearance, interest may accumulate on your loan balance and capitalize on the principal at the end of the deferment or forbearance period. This could ultimately mean paying more in interest over the life of the loan, which could take away from money you’d rather put toward a car or house.
How Does Student Loan Deferment or Forbearance Affect Your Credit
A number of factors determine your FICO® credit score , including payment history, how much you owe, how long you’ve had your debts, what your credit mix looks like and how much new credit you’ve asked for lately. Each factor is weighted differently, with payment history being the most important, making up about 35% of your FICO Score.
Though your loan status will be noted on a credit report , putting your federal student loan into deferment or forbearance shouldn’t directly affect your credit score, unless you miss a payment before your deferral or forbearance is granted.
But your total debt load likely will be reflected on your credit report—and if you aren’t paying it down, it could keep your score lower than you’d like. Just as defaulting can crash your credit, making monthly payments can help you build a positive credit history.
And your credit score isn’t the only thing new lenders look at when they’re deciding if you pass muster. Though education debt may be viewed more favorably than, say, credit card debt, because it can be regarded as an “investment” in your overall earning potential and comes with a lower interest rate that credit card debt, it still affects your debt-to-income ratio (DTI).
And that might determine if a lender will approve your application for a car loan or mortgage, if the jewelry store will sell you that engagement ring on an installment plan, or if a management company will rent you your dream apartment. A lender wants to see that you’re bringing in enough cash to cover your debt payments—hence, looking at your DTI for a sense of how much you’re earning versus paying out to existing debt.
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What Are Some Other Alternatives?
Deferment is better than defaulting on your student debt—by a wide margin. But it’s a short-term solution.
Are you certain you’ll be better prepared to make the same payments in six months or a year—even three years? If you expect your economic prospects to improve in a relatively short period, a temporary delay could be the way to go.
A better option may be to check on your eligibility for one of several federal loan repayment programs, such as income-driven repayment . Income-driven repayment plans allow you to pay 10%, 15%, or 20% of your discretionary income to your loans—depending on which specific plan you chose. While this generally means extending your loan term and therefore paying more interest over the life of the loan, it also can lower your monthly payments and make them more manageable.
You also might be able to improve your interest rate—and, therefore, your long-term cost—by consolidating and refinancing all your federal and private student loans into one loan with one payment.
If you haven’t yet missed a beat as a borrower—if you’ve graduated, have a job and still have a solid credit and financial background—you may be able to qualify for a new student loan at a lower rate. Depending on how you restructure your debt, refinancing could help you pay off your student loans at an even faster pace than you planned.
Can Refinancing Affect Your Credit Report?
Every person’s credit story is different, so it’s hard to say exactly how any change might affect it. On the one hand, refinancing your student loans might help get you out of debt sooner, which could lower your overall debt, thus helping your credit score.
Similarly, if you’re currently struggling to make student loan payments on time (which could hinder your score), and refinancing allows you to make on-time payments each month, that could also help your score.
Ultimately, refinancing could have a different impact on every financial situation and credit history. And there are few better recipes for credit report improvement than diligently making your debt repayments on time.
That being said, here are a few other things that may help if you’re considering refinancing:
• Not waiting until you’re in default to shop for a refinancing loan. If you’re in default when you apply to refinance, it will likely make it more difficult for you to get a refinanced loan with a competitive interest rate
• Reviewing your credit report for errors—and speaking up if there is any misinformation on your report
• When looking into pre-qualify, you may want to be sure the lender will only do a soft credit inquiry to determine if you prequalify (which won’t affect your score)
• Making payments on your current loans until your new loan is in place. And once you start paying your refinanced loan, it’s just as important that you stay up to date on your payments. Some lenders offer hardship assistance in certain circumstances—if you lose your job, for example.
Every lender has its own criteria for determining which borrowers it will do business with. If you opt to check your rates, SoFi will conduct a soft credit pull* to determine the rates and terms for which you qualify and show those to you upfront. The process is done online and takes just a couple of minutes.
If you decide to refinance with SoFi, in addition to potentially getting a lower interest rate, you can take advantage of other perks, including complimentary career counseling.
And if you should hit hard times financially while you’re paying back your SoFi student loan, you may qualify for the Unemployment Protection Program. If approved, SoFi can put your loans into forbearance, suspending your monthly payments for up to a year over the life of the loan.
But remember: The goal of refinancing is to get back on track and then stay on track. That’s a key way you can help build a solid credit record that will make borrowing easier and less expensive in the future.
*To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. 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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s