Understanding Student Loan Deferment: A Comprehensive Guide

Navigating the world of student loans can be complex. Terms like deferment, forbearance, and cancellation are frequently encountered, but their meanings and implications are not always clear. This article provides a detailed explanation of student loan deferment, its various types, eligibility requirements, and its relationship to other options like forbearance and cancellation.

Deferment, Forbearance, and Cancellation: Defining the Terms

Deferment, forbearance, and cancellation represent different ways borrowers can manage their student loan obligations. Deferment and forbearance both offer temporary relief from repayment, while cancellation can lead to a reduction or elimination of the loan balance.

Deferment and forbearance define certain rights borrowers have under their loan agreement with their lender that allow them to postpone making payment on a student loan. The third term, cancellation, refers to ways that a student loan can be reduced or 'cancelled', in part or in whole. These three words however lead to a variety of possibilities.

What is Student Loan Deferment?

A deferment is a temporary pause to your student loan payments for specific situations. Within almost every student loan agreement are terms allowing a borrower to defer loan payments or pay at a later date. It allows borrowers to postpone making payments on their student loans for a specific period due to certain circumstances.

Students and graduates typically defer their student loan payments for two reasons. The basic student loan deferment definition is it’s a temporary period of time when you don’t need to make student loan payments. Students may choose to defer their payments for a variety of situations including attending graduate school, internships, fellowships, residencies, and more.

Interest Accrual During Deferment

If you qualify for federal student loan deferment, you should pay attention to what type of loan you have. You don’t have to pay interest on the loan during deferment if you have a subsidized loan. If you have an unsubsidized loan, you’re still responsible for the interest during deferment. If you don’t pay the interest as it accumulates, it will be added to your loan balance, which will increase the overall amount you have to pay.

One of the key aspects of deferment is how interest accrues. For subsidized federal student loans, the government pays the interest that accrues during the deferment period. However, for unsubsidized federal student loans and private student loans, interest continues to accrue, and is typically added to the principal balance of the loan once the deferment period ends. This capitalization of interest means that the borrower will pay interest on a higher principal amount, increasing the overall cost of the loan.

Types of Deferment

The Department of Education has published a list of reasons that qualify you for a deferment. There are several types of deferments available to borrowers, each with its own eligibility criteria.

Student Deferment

The most commonly used deferment is the Student Deferment. The Student Deferment allows borrowers who have returned to a federally-designated institution of higher learning (a school assigned a Federal OPE Code ) to defer their loans for the time period they are enrolled at least half-time. In most cases, students cannot withdraw before the end of the term or the deferment will be reversed.

One of the most common reasons to defer student loans is starting school again. Most students qualify for graduate school deferment so long as they are enrolled at least half-time. However, most loans will continue to accrue interest, so you may end up paying more on the loan by deferring for several years for school.

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Economic Hardship Deferment

Borrowers are entitled to an economic hardship deferment for periods of up to one year at a time, not to exceed three years cumulatively, having provided the school with satisfactory documentation showing they fall into any of the following categories:

Has been granted an economic hardship deferment for either a Stafford or PLUS Loan for the same period of time for which the Perkins Loan deferment has been requested
Receives federal or state public assistance, such as Temporary Assistance to Needy Families (formerly, Aid to Families with Dependent Children ), Supplemental Security Income, food stamps, or state general public assistance
Works full time and earns a total monthly gross income that does not exceed 150% of the poverty line for the borrower's family size
Serves as a volunteer in the Peace Corps

Financial difficulty deferment can give you the time you need to get back on your feet and get control of your finances. You may need to provide documentation and sufficient evidence of financial hardship to qualify.

Unemployment Deferment

A borrower may defer repayment on a Perkins Loan for up to three years, regardless of disbursement date and contrary provisions on the promissory note, if seeking and unable to find full-time employment. The school may determine the documents a borrower must provide when applying for this type of deferment.

Fellowship Deferment

Borrowers may defer repayment if enrolled and in attendance as a regular student in a course of study that is part of a graduate fellowship program approved by the Department of Education, including graduate or postgraduate fellowship-supported study (such as a Fulbright Grant ) outside the United States.

If you’re doing an internship, fellowship, clerkship, or residency, you could qualify for student loan deferment. Once you’re accepted into the program, you’ll want to reach out to your loan servicer to determine if you’re eligible. You may need to verify that you have a Bachelor’s degree or that your program will go toward a degree or certificate. If you qualify, you don’t need to make loan payments while you’re in the program.

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Pre-Cancellation Services Deferment

A borrower must file a pre-cancellation deferment at the beginning of each qualified year of service if wishing to apply for employment cancellation benefits at the end of every year of qualified service. This ensures the borrower is not billed during the year and not expected to make payments during that time. Such borrowers will subsequently qualify to cancel a portion of their loan due to employment services. (also see Cancellation below)

Other Deferment Options

Many lenders provide deferment for people who volunteer in the Peace Corps or are active duty in the military. As an example, College Ave offers deferment for members of the Armed Forces and National Guard who are called into active duty for more than 30 days. The Peace Corps can work similarly. For each of these services, you will need to provide verification of membership in the organization and potentially of active duty.

Deferment for Private Student Loans

Private student loans may or may not have a deferment option, and the rules vary among lenders. Contact your loan servicer as early as possible if you want to explore this option. The terms and fees associated with postponing private student loan payments are based upon your contract and applicable laws.

How to Apply for Deferment

To defer your student loans, you’ll need to contact your student loan servicers. Depending on your loan type (federal or private), you may have multiple servicers, and you’ll need to contact each one individually. You may also need to provide all the documentation necessary to prove to your lender that you qualify.

The terms of your loan specify how to qualify for the deferments. Speak to your lender if you think you may be eligible for a deferment based on the terms of your student loan.

REMEMBER - not all student loans have the same terms, and chances are that you may have received loans from more than one lender. Make sure to discuss deferment availability and how to qualify with the actual lender of the loan (or that lender's billing servicer).

Deferment vs. Forbearance

Both deferment and forbearance involve a temporary stop to or reduction in loan payments. While these terms could have distinct meanings for student loans, when it comes to personal loans and mortgages lenders may use the terms interchangeably. In general, deferment is a pause in loan payments. Forbearance can include a payment pause or a reduction in payments or interest rates.

Forbearance may also be an option if you’re unable to pay your federal student loans.

TIP: Student loan “forbearance” is essentially the same thing as deferring your student loans, but is generally more specific to pausing private student loan payments related to financial hardships.

Key Differences

The crucial difference between forbearance and an economic hardship deferment or unemployment deferment (which in the case of the latter two are also granted in financial hardship situations) is that although forbearance can be obtained more readily than the two deferments mentioned, interest continues to accrue during the forbearance period, even on subsidized student loans. In addition, the forbearance period is counted into the maximum repayment period. This means if you were given ten years to repay your student loan at a consistent defined amount, and you were then granted forbearance, the ten-year repayment period would not be extended as the time in forbearance would be counted as part of the ten years. In turn, this could trigger either an increase in your future regular payment amount or raise the amount of your final payment at the close of the ten-year repayment term.

Interest accrual: Some loans don't accrue interest in deferment. During forbearance, interest will typically still accrue.

Long-term impact on loan repayment: Deferment may allow you to avoid adding interest to your total debt.

Depending on your loan and circumstances, you may not have the option to choose between deferment and forbearance.

Deferment vs. Cancellation

Cancellation is another option available to student loan borrowers, but it differs significantly from deferment. There are several types of loan cancellations available to student loan borrowers depending on the type of loans they have.

Deferment is a temporary suspension of payments, while cancellation can result in a portion or the entirety of the loan being forgiven.

Teacher Cancellation

You qualify for cancellation (discharge) of up to 100% of a Federal Perkins Loan if you have served full time in a public or nonprofit elementary or secondary school system as a:

teacher in a school serving students from low-income families; OR
special-education teacher, including teachers of infants, toddlers, children, or youth with disabilities; OR
teacher in the fields of mathematics, science, foreign languages, or bilingual education or any other field of expertise determined by a state education agency to have a shortage of qualified teachers in that state

Child or Family Services Loan Cancellation

For those who work full time for a public or nonprofit child- or family-services agency providing services to high-risk children and their families from low-income communities

If you qualify for these or any of the other types of employment cancellations, your loan balance will be partially reduced, year-by-year, according to a pre-established cancellation schedule. It is especially important to know to what employment cancellations you are entitled, so that you do not lose out on the benefit. For example, if you consolidate a Perkins Loan, you will lose your Perkins Loan cancellation privileges under the terms of the consolidation, as the consolidation loan money will pay off the Perkins Loan. Likewise, if you make payments to a loan and later found out that you were working in a field that allowed you cancellation rights, the payments you already made will not be refunded. Contact the lender of the loan (or its billing servicer) for more details on qualifying for and obtaining a cancellation.

Other Options Besides Deferment

Student Loan Deferment can be helpful for many, but it may not be available for every borrower. Some potential alternatives to a student loan deferment can include income-driven repayment which allows students to pay a monthly payment that makes sense for them based on their income.

Another alternative to a student loan deferment is to refinance your student loans. Refinancing allows creditworthy borrowers to potentially get a lower interest rate that could save them a significant amount of money every month and over the life of the loan. One of the downsides of refinancing is that it does strip the borrower of federal loan benefits.

If you have a mortgage or unsecured debt, like a personal loan or credit card debt, it may help to look into refinancing options.

Impact on Credit Score

Deferring repayment on one of your loans should not directly hurt your credit score. Loans in deferment will be reported as currently deferred, and other lenders can see that if you apply for more credit. But it's not considered in credit scoring calculations.

During and after a deferment period, monitor your credit to make sure it gets reported accurately and that you don't experience undue damage to your credit score.

Is Deferment Right for You?

There are many situations when it may make sense to defer your student loans. For example, if you go back to school and aren’t working, you may not be able to make payments. If you have temporary difficulties making ends meet, you could qualify for student loan deferment. If you experiencing employment difficulties or large medical expenses, you may also be eligible for deferment.

Loan deferment can provide you with the breathing room you need to get your financial situation in order. But in most cases, it only provides temporary relief.

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