Sometimes life can put a dent in your budget, making it harder to pay your everyday living expenses and monthly bills. When faced with the loss of a job, going back to school or sudden unexpected expenses like medical bills or car-repair costs, even the most responsible borrowers can find themselves struggling to make their student loan payments.
If you ever find yourself in this situation, the main thing is not to let your student loan payments overwhelm you; don’t just ignore your student loan bills as you try to get back on your financial feet—every missed payment could be another blemish on your credit report. Miss enough payments, and you could go into default.
Default is serious. Besides the damage it does to your credit report, which can take years to repair, having a defaulted student loan could keep you from being able to borrow any other money, whether it’s for a new car, a home or another semester at school. If you default on a federal student loan, the government can even decide to garnish your wages.
But by being proactive and talking to your lender, you may be able to give your budget a little breathing room. Your federal student loans come with repayment plans and deferment and forbearance benefits that could help you when you’re having trouble making your monthly payments.
Income-sensitive, extended, and graduated repayment plans might be able to lower your monthly payments on your federal student loans. If you’re still having trouble meeting your monthly payment amount, deferment and forbearance periods may allow you to temporarily postpone your monthly student loan payments altogether without defaulting or affecting your credit rating.
To help make sure you know the payment postponement options you have available to you for those times when you’re finding it hard to meet your student loan payments, NextStudent, a leading Phoenix-based education funding company, offers this guide to deferment and forbearance.
Deferment
Deferment allows you to temporarily stop making payments on your student loans. You must contact your lender to request a deferment, and you may need to fill out a deferment request form.
You may be able to request a deferment on your federal student loans (including Perkins loans, subsidized and unsubsidized Stafford loans, Grad PLUS loans, and consolidation loans) or on your parent PLUS loans if you are:
* Enrolled in school at least half time
* Unemployed
* Experiencing economic hardship
* In the military and have been deployed
If you’re enrolled at least half-time in an eligible undergraduate, graduate or professional degree program, you can request an in-school deferment on your federal student loans. You’ll need to provide proof of enrollment each semester.
You may also request a deferment in cases of unemployment, financial hardship, or military deployment, for up to a year at a time, up to a total of three years over the life of the loan.
Some private student loans may also allow you to defer payments while you’re in school at least half time, deployed for military service, or having financial difficulties. You need to contact your private student loan lender.
Interest Charges on Loans in Deferment
Interest does not stop accruing while you’re in deferment. However, when you’re in deferment, you’ll only be responsible for the interest charges on your unsubsidized loans. For subsidized loans (which include Perkins loans and subsidized Stafford loans), any interest that accrues during a deferment period is paid by the government.
On your unsubsidized loans, even when you’re not required to make any payments while you’re in deferment, interest continues to accrue, and the unpaid interest will be added to your principal loan balance for you to repay once you go back into repayment.
When you defer a Federal Consolidation Loan, the government will pay the interest on that portion of your consolidation loan that was originally a Perkins loan, subsidized Stafford loan, or other subsidized federal student loan. You’ll only be responsible for paying the interest on that portion of a consolidation loan that was originally a PLUS loan, Grad PLUS loan, unsubsidized Stafford loan, or other unsubsidized federal education loan.
You can always choose to make interest payments during deferment in order to avoid having any accrued interest added to your principal loan balance.
Forbearance
Forbearance allows you to temporarily reduce or postpone payments on your student loans. You must request a forbearance from your lender, and you typically need to complete a forbearance request form. You may also need to submit supporting documentation, depending on the nature of your request.
Generally, your lender can grant a forbearance for up to a year at a time. Unlike unemployment or economic hardship deferments, there is no three-year cumulative limit on discretionary forbearance periods granted due to financial hardship.
Interest Charges on Student Loans in Forbearance
Interest does not stop accruing while you’re in forbearance. When your student loans are in forbearance, you’ll continue to be charged interest on those student loans, whether they’re subsidized or unsubsidized.
Any unpaid interest that accrues will be added to your principal loan balance for you to repay once you go back into repayment.
Some forbearance arrangements may have you making interest-only payments, so no interest gets added to your principal. If the forbearance you arrange with your lender allows you to temporarily stop making payments altogether, you can always choose to make interest payments in order to avoid having any accrued interest added to your principal loan balance.
Important Points to Keep in Mind
Deferments and discretionary forbearances are not automatic. If you’re having trouble making your student loan payments and you’d like to request a deferment or forbearance to either reduce or postpone your payments, you need to contact your lender. You may be required to complete a deferment or forbearance request form and to submit supporting documentation.
Never assume that your deferment or forbearance has been automatically granted. You’ll receive something in writing from your lender regarding whether your request for a deferment or forbearance has been approved. If you don’t receive a written confirmation from your lender, you need to contact your lender to see if your deferment or forbearance request has been approved and to get that approval in writing.
Remember that deferment and forbearance periods are only temporary. At the end of your approved deferment or forbearance period, you’ll go back into repayment and be required to make monthly payments on your student loans. If you’re still having trouble making your payments at the end of your approved deferment or forbearance period, you may be able to request another deferment or forbearance—you’ll need to contact your lender.
Making small payments is better than making no payments at all. Even if your deferment or forbearance allows you to postpone your payments, interest doesn’t stop accruing just because you’re not making payments. If you have the room in your budget, consider making interest-only payments or paying as much of the interest as you can.
You’re responsible for the interest on any student loans you have in forbearance and on any unsubsidized loans you have in deferment (the government will pay interest on deferred subsidized loans). Any interest that accrues during deferment or forbearance that you don’t pay will be added to your principal loan balance for you to repay once repayment resumes.
When interest is added to your principal loan balance, it’s capitalized, meaning it becomes part of the principal and subject to interest itself. In other words, you’ll end up paying interest on interest. Even if you can’t make a full interest-only payment, any little bit you pay is that much less interest that will get capitalized.
NextStudent believes that getting an education is the best investment you can make, and we’re dedicated to helping you pursue your education dreams by making college funding simple. Learn more about Student Loans, Private Student Loans and Student Loan Consolidation.
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