Into each life, a bit of rain occasionally falls. If you have student loans and your situation is looking more like Hurricane Michael, you might be thinking along the lines of putting them on hold to get a bit of financial relief. However, before you make that decision, it’s a good idea to take a look at the pros and cons of student loan deferment.
What Is a Deferment?
As defined by the US Dept. of Education, a deferment is any period of time during which the repayment of the principal and interest on your student loan is temporarily delayed by mutual agreement between you and your lender.
In other words, under certain circumstances, repayment of your student loan can be suspended for a limited period; such as while you’re back in school or experiencing financial hardship. The exact ramifications will vary according to your lender, the type of deferment you request and whether or not your loan is subsidized.
What’s the Upside?
During the deferment period, you don’t have to pay on the loan—at all (in most cases). Even better, if the Federal Government subsidizes your student loan, you can usually do this without incurring additional interest.
What’s the Downside?
If your loan isn’t subsidized, interest will continue to accrue during the deferment period, the total amount of which will be added to the principal, which will increase the payoff amount of the loan. In some cases, this means you’ll also wind up paying interest on the deferred interest.
To illustrate this, let’s say the outstanding balance on your loan is $20,000 and you have a 4.8 percent interest rate. Yes, applying for a six-month deferment will save you a significant amount of cash in terms of your out-of-pocket payments during that period. However, if you do the math you’ll see those six months of breathing room will cost you $473.42 in additional interest, which means your new loan balance will become $20,473.42.
Further, the time period over which you’ll repay the loan will be extended, so your loan payoff date will be moved farther out into the future.
But wait, there’s more.
That deferment could potentially disqualify you from certain loan forgiveness programs. If the one you’re angling for requires a set number of consistent payments before forgiveness is granted, a deferment will set your count back to zero. If you get a deferment early in, this isn’t much of an issue. But if your program requires, say 120 consistent payments and you ask for a deferment after payment 119, you’ll have to start establishing your consistent payment history all over again.
If financial hardship is the issue, you might see a better result by renegotiating your loan to get a lower payment, rather than seeking a deferment. Yes, this will probably extend the time too, but if you’re close to qualifying for forgiveness, that might not be such a huge issue.
In extreme circumstances, you might also consider working with a company like Freedom Debt Relief to clear up credit card and other unsecured forms of debt, which could leave you in a better position to repay your student loan.
Keep in mind, most student loans can’t be satisfied by debt settlement, nor can they be discharged under bankruptcy protection. However, before you sign up with a debt relief firm, look for background information such as these Freedom Debt Relief reviews to help you be certain you’re working with an effective organization.
In the end, student loan deferment might help you get through an especially difficult financial period without having to also worry about steep student loan payments. But that doesn’t mean the option should be taken lightly.