Student loan deferment: What it is, how it works

Student loan deferment can help you get some breathing room if you can't afford your monthly payments, but it's usually best as a short-term solution. The longer the deferment period, , the more your loan balance can grow, and the longer it can take to become debt-free. Federal subsidized loans and Perkins Loans are the only exception — the government covers all interest that accumulates during periods of deferment.

Here's a guide on how student deferment works and when it might be a good idea to defer your loans.

What is student loan deferment?

Student loan deferment allows you to temporarily pause payments under certain conditions such as unemployment, economic hardship, enrollment in school, and the 6 month grace period after leaving school. During deferment, interest stops accruing on federal subsidized loans, but it continues to accrue on unsubsidized loans and Direct PLUS Loans. Private lenders may also offer deferment options under certain conditions, but rules vary. Interest generally continues to accumulate on private student loans during periods of deferment.

How does interest work?

When you defer student loans, the way interest is handled can vary depending on the type of loan you have:

• If you have subsidized loans: When your loans are in deferment, you won't owe interest on Direct Subsidized Loans, Subsidized Stafford Loans, or Perkins Loans issued by the federal government. You also won't owe interest on the subsidized portion of Direct Consolidation Loans or Federal Family Education Loan (FFEL) Consolidation Loans.
• If you have unsubsidized loans or Direct PLUS Loans: Interest continues to accrue even while your payments are paused. This interest will eventually capitalize and be added onto your loan balance when deferment ends. This means you'll start paying interest on a new, larger loan balance.
• If you have private student loans: Like most federal loans, if you defer a private student loan, interest usually continues to accrue while payments are paused. The interest will eventually get tacked onto your principal loan balance at the end of the deferment, making repayment more costly.

Calculating the added costs of deferment

Deferment can help you manage temporary financial hardship, but unless you have subsidized loans, it’s important to weigh the long-term costs. 

Consider a scenario where you have a $30,000 unsubsidized loan balance with a 6.00% interest rate, and you have 10 years left on the Income-Based-Repayment (IBR) Plan. If you defer your loan for one year, $1,800 in interest will accumulate and be added to your principal balance at the end of the deferral period. This means that when payments start again, your monthly bill will increase by $20 compared to your original monthly payment. In total, you’d pay about $2,000 more to defer payments.

Types of deferment

You must qualify in order to be eligible for deferment of federal student loans. Here are some of the situations when you can become eligible:

• When you're in school: If you're enrolled at least half-time in an eligible school, you can defer loans while completing your coursework and for an additional 6 months after graduating, known as the grace period. In most cases, this deferment is automatic. However, parent PLUS loan borrowers need to request the 6-month grace period deferment.
• Economic hardship: You can qualify for this deferment if you are receiving means-tested benefits, are serving in the Peace Corps, or work full-time but have monthly earnings below 150% of the poverty guidelines given your location and family status, or if your monthly income isn't higher than the minimum wage rate (whichever is greater). Your loans can be deferred due to economic hardship for a maximum of 3 years.
• Unemployment: If you're receiving unemployment benefits while looking for full-time work, you can defer your loan payments for up to 3 years on qualifying federal student loans.
• Medical treatment: If you're undergoing cancer treatment, you can defer payment of loans while being treated and for 6 months after your treatment ends.
• Graduate fellowship: If you're enrolled in a graduate fellowship program, you can defer loan payments while completing the program. Fellowships are programs that provide financial support to grad students completing research. Your fellowship program must be approved to receive the deferment.
• Military service: If you are on active-duty military service, you can have payments deferred if you qualify. You may also be eligible to have payments deferred for 13 months after you complete active-duty service.
• Rehabilitation training: You may qualify for deferment if you're receiving treatment for drug abuse, mental health, or alcohol abuse through an approved rehabilitation program.
• Parents with Direct Plus Loans: Parent PLUS loan borrowers can defer payments while their child attends school at least half-time. Additionally, they can request to delay payments for 6 months after their child graduates or drops below half-time enrollment.

Many private student loan lenders offer deferment or forbearance under similar circumstances, but the rules for when loans can be paused vary by lender and loan type. Contact your lender to find out your options.

Pros and cons of deferment

Pros of deferment

• You can get financial relief during a difficult time: If you're unemployed, going through cancer treatment, or otherwise qualify, you won't have to worry about making student loan payments.
• You can avoid defaulting on your loan: Late payments and defaulting on student loans can damage your credit and have other financial consequences. It's usually better to put your loans into deferment than to default.
• You can focus on other opportunities: It might be difficult for you to pursue a graduate fellowship or to perform military service if you're worried about paying back your loans.

Cons of deferment

• Interest still accrues on most loans: Although you won't see interest charged on certain loans while they're deferred, that's not the case with all loans. If you have unsubsidized loans, PLUS loans, or private student loans, interest will accrue and will be added to your loan balance.
• Your loan balance can grow: If you have paused payments on most loans (other than subsidized loans), the unpaid interest will cause your loan balance to increase. Since you'll owe more, it will be costlier to repay your loans.
• You can only defer loans for a limited time: Depending on the reason for deferment, you may be limited to 3 years or less of paused payments.

Should I defer my loans?

For most federal student loans, you'll be placed on automatic deferment while you're in school and during the six-month grace period after graduating. However, you might also consider requesting a deferment under these circumstances:

• You're facing temporary financial hardship, such as a job loss or unemployment, but you anticipate recovering soon.
• You're returning to school to continue your education and you could use some financial breathing room.
• You're undergoing a significant life change such as military enrollment, serious illness, or major medical treatments.

How to request a deferment

Deferment is automatic in most cases while you're in school at least half-time. But if you want to become eligible for other types of deferment, you'll have to request it. This is true of both federal and private student loans. The Department of Education has forms online you can complete to request deferment. There are different forms depending on your reason for pausing payments.

You'll need to complete the deferment form, provide any requested documentation to show eligibility, and submit this to your student loan servicer. If you have a private loan, you'll need to contact your loan servicer directly to find out the process of submitting a deferment request.

Alternatives to deferment

If you're struggling to make payments, deferment can give you a temporary break, but it's not your only option. Here are some deferment alternatives you can consider:

Apply for forbearance

Forbearance can be easier to qualify for if you have federal student loans.. However, you can only receive a forbearance for 12 months at a time, and there's a cumulative limit of three years. Be aware that interest keeps accruing on all loans in forbearance, including subsidized loans. The main difference between forbearance and deferment is that interest doesn't capitalize after a forbearance period ends. Instead, you'll be responsible for paying accrued interest charges through your normal monthly payments.

Switch to an income-driven repayment plan

If you have federal loans, you can choose an income-driven repayment (IDR) plan that sets payments at a percentage of your income, which may be more affordable. This option benefits borrowers looking for long-term relief who don't expect their financial situation to improve in the foreseeable future. IDR plans include SAVE, PAYE, IBR, and ICR. After 10 to 25 years of on-time payments, you'll have any remaining loan balance forgiven on an income-driven plan (the timeline for forgiveness is dependent on the plan).

Refinance private student loans

Refinancing can allow you to lower your interest rate and change your repayment timeline. This could potentially lower your monthly payments and total costs. Before refinancing, lenders typically require a stable income and a credit score in the mid-to-high 600s; so this option is usually best for borrowers who have improved their financial situation since taking out their loan. Keep in mind, it's best to only refinance private loans. Since you must refinance with a private lender, refinancing federal loans will cause you to give up federal loan benefits, such as income-driven repayment and forgiveness programs.

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