Deferment of Student Loans

Deferred student loansThe average college senior in 2011 left school with $26,600 in debt, according to a report provided by the Institute for College Access and Success Project on Student Debt. It’s a significant amount of money, particularly for students who enter a tough job market that offers few lucrative jobs with high pay scales. And, this figure doesn’t account for all of the students who are still in school, just trying to graduate, while they’re attempting to pay the loans they’ve accumulated from previous years in the education system.

Some people are able to scrimp and save, subsisting on noodles and tea while they bunk with friends and family members, and these sacrifices allow them to pay back their loans right on schedule. But there are times when paying back a loan on time is difficult or even impossible. A deferring a student loan or loans might be a good option when times are tough and you have financially legitimate reasons to put off your repayment.

A Common Definition

Loans that are deferred aren’t gone; the money borrowed is still owed, and the debt has to be repaid. Instead, what a deferred loan can do is provide a student or graduated borrower with a little breathing room before payments begin. That little delay could allow a student to:

  • Complete an education
  • Get a job
  • Pull together savings
  • Sell assets

It’s a popular choice among people who can’t pay their debts, but who don’t want to default on their loans. With deferring a student loan, borrowers are given some space and time, during which they can work to improve their financial outlook without shorting the bank in the process.

Long Rules

Anyone who has borrowed money has likely wished for a payback extension. When the first bill comes due, it’s all too easy to think of other ways to spend the money in question. Not everyone can qualify for a deferred loan, and those who do might need to provide proof that they meet the requirements the lender has outlined.

These requirements can vary dramatically from institution to institution, but it’s common for lenders to offer deferment of student loans in the face of a temporary lifestyle adjustment, such as:

Deferment of student loans might also apply when people choose to give back by enrolling in the Peace Corps, the National Guard or the armed forces.

The list of eligible people isn’t long, and sometimes, there are limits on the amount of time a loan might be deferred. People who are unemployed might see a deferment for only three years, for example, even though their struggle to find a job might last for a longer period of time.

The U.S. Department of Education has a helpful website that lists all of the requirements an individual must meet in order to defer a federal student loan. Private student loans are somewhat more complicated to defer, as different loan servicers have different requirements and sets of policies surrounding deferment. If you’re interested in deferring a private student loan, you should contact your loan servicer directly to determine exactly what you have to do to defer your loan(s).

It’s important to note that deferment isn’t an option for students who are behind on their loan payments. Banks often move into an aggressive stance when payments are missed, and they’re not willing to provide a student with a deferment that would allow for further delays. That’s why it’s vital for students to investigate their options before they default. Once a borrower misses a payment or two, students will have less solutions available to them.

Drawbacks of Loan Deferment

Lower your monthly payment by refinancingNot everyone who qualifies for deferment will want to take advantage of the option, as there are a few drawbacks to consider. For example, student loans provided through a private organization with no federal subsidy might continue to accrue interest while the loan is in deferment. This might mean that a student racks up thousands of dollars in charges while waiting for the right time to pay the loan back. For some, the price of delay is just too high.

Per TransUnion, more than half of all student loans currently in existence were deferred in the beginning of 2013. The numbers speak for themselves: a lot of students view deferment as a good way to manage their debt. However, some students who happen to qualify for deferment may wish to be aggressive with their loan repayment, and would rather work towards being debt-free as opposed to deferring.

It’s worth repeating that deferred loans aren’t forgiven loans. The debt isn’t going away, and when the deferment period ends, the borrower will be required to make the agreed-upon payments. This can put pressure on some people, making them worried about how they’ll pay the loans back in the future.

The Benefits of Deferring Student Loans

For those people still enrolled in school, a student loan deferment could be a godsend, as it allows them to focus on their studies while not being immediately concerned with making payments. A study featured in Forbes suggests that only 49% of students who enroll in college will graduate on time, and the authors suggest that worries about money can push some people into taking jobs. The tension and pressure to begin making payments might force students to take fewer classes each term while also working part-time. Delaying graduation and staying in school longer can pretty easily make a student’s college experience more expensive: more semesters equals more tuition, which, in turn, can mean more debt. This can make for an unpleasant cocktail of accruing debt that becomes increasingly difficult to manage. Deferring loans can remit some of this pressure, and that might allow students to take on a full course load without constant worries about issues of payment and loss.

Similarly, deferring a student loan could allow an unemployed person to really focus on the job search, networking with the right people and seeking out quality job opportunities, as opposed to taking lower-quality part-time jobs for which they’re overqualified. This kind of targeted search could result in a more profitable job, where those students who simply must pay their loans back now might be forced to take the first job they can find, no matter how menial the work might be. Deferment just expands the options available, and it reduces the pressure a recent graduate might face.

Those dealing with some sort of life hardship might also take comfort in the fact that a deferred student loan has no impact on a person’s credit score. From a lender’s perspective, a person in deferment is still paying the loan back appropriately, and there is no default or loss involved. The bank and the student just have a new agreement that they’re both interested in following. Students who don’t pay their loans when they should, however, can go into default, and this can be catastrophic.

Defaulting on a loan can ruin a student’s credit rating, making it more difficult and more expensive to make home purchases, car purchases and other big investments. Some employers even check applicants’ credit ratings during the hiring process, so a default could even make getting a job difficult. Even if a deferred student loan comes with interest payments, this might be preferable to ruining credit with a default.

Sorting the Options

deferment optionsDeferring student loans can be great for some, but they’re not the only option available for people struggling to pay back what they owe. Combining old debts with new is sometimes a better choice, while student loan forbearance might be a better option for others. In general, however, those who can’t pay their loans and who see a crisis looming on the horizon really do need to take action now, so they can make a choice that’s right for their future. Contacting the loan servicer is a good place to start, and searching for other loan options might be a reasonable second step if the option to defer isn’t available.

If you’re considering deferring your student loans, be sure to calculate how much the deferment might cost you in potential interest accrued, and take the time to create a repayment plan for when your deferment period ends.