Federal Student Loan Deferment for Economic Hardship

Professor talking with studentA college graduate in student loan repayment may experience an economic hardship due to a host of different life circumstances. The most common reasons for an economic hardship include:

The federal government is a helpful and understanding student loan lender. Although the media may sensationalize student loan default rates, the federal government has put many safeguards in place to keep borrowers on track with their student loan repayments. Borrowers who are facing an economic hardship are best advised to work directly with their loan service provider to learn about all available options, such as an economic deferment.

As Federal Student Aid explains, a deferment allows an eligible borrower to temporarily postpone making payments, or to reduce the monthly amount due. The deferment covers both the principal and the interest. In the case of Federal Direct Subsidized Loans, Federal Subsidized Stafford Loans, and Perkins Loans, the federal government may pay the interest that accrues during the deferment period.

It is important to note that the government does not pay the interest on unsubsidized loans (Direct Loans and Stafford Loans included). Unsubsidized loan borrowers in deferment will have the option to pay the interest only (and defer payments on the principal) while the loan is deferred. For those borrowers who cannot or choose not to pay the interest, the unsubsidized loans will become more expensive in the long run because the interest accrues and gets added onto the principal balance. This process is known as capitalization and compounding interest, and it means, in effect, that borrowers end up paying interest on the interest.

Provided that a borrower meets any of the conditions for a deferment (described above), the loan service provider can process the request. In the case of Perkins Loans, borrowers will need to contact their school directly (either the school administers the loan or will advise the borrower of the contact information for the third-party loan service provider).

Borrowers who are experiencing a financial hardship, whatever the reason, are advised to contact their loan service provider as soon as possible to explore deferment options. Failing to make student loan payments can negatively affect a borrower’s credit report, and in cases where the loan has lapsed for too long a period, the borrower may lose the deferment option. While default is a reality for some borrowers, it is more than likely that some graduates who have defaulted did so without even exhausting their deferment (and other) options.

Borrowers who are committed to managing their student loans will find that they have many options in addition to deferment, such as forbearance. In addition, several different payment plans can lower the monthly payment amount due. For instance, some low-income borrowers in the Income-Based Repayment Plan may qualify for a zero monthly payment. Whatever a borrower’s circumstances, the key is to remain current on student loans, either through making a required payment, being in a deferment, being in forbearance, or being in a repayment plan with manageable payments (which, again, can be as low as zero per month).


Types of Student Loans