How Do I Defer My Student Loans?

College students on the football field are carrying their text books with one college kid smiling.

The COVID-19 crisis and resulting financial hardships it has caused are affecting many who have outstanding student loans. The CARES Act and subsequent extensions have automatically suspended payments for federally guaranteed student loans through September 30, 2021. However, private student loans may still require that you make payments.

If you are having a hard time making your student loan payments, loan deferment may be an option. Lenders may defer your loan in response to COVID-19 or for reasons such as financial hardship, unemployment or school enrollment. Deferment allows you to temporarily stop making payments on your loans, but interest may still continue to accrue.

As of the third quarter (Q3) of 2020, student loan borrowers on average held $38,792 in student loan debt, according to Experian data. Altogether, student loan debt hit an all-time high of more than $1.57 trillion last year—and 72% of those loans were in forbearance or deferral, Experian found. If you think deferment may be necessary for you to stay current on your payments, here's how to do it.

What Is the Difference Between Deferment and Forbearance?

Student loan forbearance and deferment are both ways to reduce the burden of student loan payments, but have some important differences:

Student Loan Forbearance

Forbearance temporarily suspends or reduces your loan payments. However, interest on the loan continues to accrue and must be paid even during the forbearance period. The U.S. Department of Education pays the interest on subsidized loans; if your loan is unsubsidized, however, you'll be responsible for paying the interest while the loan is in forbearance.

Student Loan Deferment

Deferment can also suspend your loan payments, but interest won't accrue if you're deferring a subsidized federal loan or subsidized consolidation loan. The U.S. Department of Education continues to pay the interest during that time.

If you have an unsubsidized direct loan, Stafford loan, consolidation loan or PLUS loan, interest continues to accrue while the loan is in deferment, and you are responsible for paying that interest. Depending on the type of loan you have, you may have a choice to either pay the growing interest during the deferment or have it capitalized (added to your principal balance) at the end of the deferment.

Keep in mind that once the accrued interest becomes part of your principal balance, you're essentially accruing interest on the interest that built up during the deferment. This can significantly increase the lifetime cost of your loan. If you can possibly do so, paying the interest during deferment is a good way to keep your long-term costs down.

Who Qualifies for Student Loan Deferment?

You may be eligible for deferment if you are enrolled in school, on active-duty military service, unemployed or undergoing financial hardship. To qualify for student loan deferment, you generally need to work with your loan servicer or lender and fill out an application.

Federal Student Loan Deferment

You may qualify for a federal student loan deferment if you are:

  1. Attending school at least half time
  2. Attending an approved graduate fellowship program
  3. Unemployed
  4. Suffering an economic hardship
  5. Going through rehabilitation
  6. On active military duty or attending school after active duty
  7. A parent with a Parent PLUS loan

Even if you meet one of the above seven reasons, most federal student loans require applications for deferment. Deferment for those still in school is generally automatic if you are currently enrolled in school at least half time, but you should check with your school to make sure they've reported your enrollment status to your lender.

Private Student Loan Deferment

If you have private student loans, your options for student loan deferment will be limited. However, you may qualify for a deferment if you're enrolled in school, deployed by the military, unemployed or can prove economic hardship. Contact your lender directly to ask if it offers student loan deferment, whether you qualify and how to apply.

What Student Loans Can I Defer?

All types of federal student loans are eligible for deferment. You can defer payments on direct subsidized loans, Perkins loans and subsidized consolidation loans without accruing additional interest during the deferment period. You can also defer payments on direct unsubsidized loans, unsubsidized Stafford loans, direct PLUS loans, FFEL PLUS loans and unsubsidized consolidation loans, but you will accrue interest on the loan during the deferment period.

If you're required to pay the interest on your student loans during deferment, you can either pay the interest as it accrues or have it added to your loan balance when deferment ends.

Refer to the chart below to see how interest is typically handled during deferment of different types of loans.

Interest Payment During Deferment
You are generally NOT responsible for paying the interest that accrues on:You ARE responsible for paying the interest that accrues on:
Direct subsidized loansDirect unsubsidized loans
Subsidized federal Stafford loansUnsubsidized federal Stafford loans
Federal Perkins loansDirect PLUS loans
The subsidized portion of direct consolidation loansFederal family education loan (FFEL) PLUS loans
The subsidized portion of FFEL consolidation loansThe unsubsidized portion of direct consolidation loans
The unsubsidized portion of FFEL consolidation loans

Source: Department of Education

How Long Can You Defer Student Loans?

The length of your student loan deferment will depend on the type of deferment for which you're approved. For example, deferment based on financial hardship or unemployment can last up to three years. Deferment based on attending school or military service may last as long as you continue to meet the qualifications. Keep in mind that if you have unsubsidized or PLUS loans, you're still required to pay the interest that accrues during the deferment period, no matter how long deferment lasts.

Deferring your student loan also means it will take longer to pay them off. Having student loan debt increases your debt-to-income ratio and may make it more difficult to get approved for other types of loans, such as a mortgage or car loan, in the future. If your student loans accrue interest during deferment that you have to pay, it could add significantly to the total amount you owe—especially if the interest is capitalized.

Alternatives to Deferment and Forbearance

Student loan deferment and forbearance can be useful options when you have a temporary setback that makes it hard to make your payments, such as losing your job. Missing a student loan payment has consequences, including potential damage to your credit score, and deferment can help you avoid them. However, you're essentially "kicking the can down the road," and will eventually have to make payments again—potentially larger ones if unpaid interest accrues during the deferment.

Deferment can be a solution for temporary financial issues that make it difficult to pay your student loans. If you have federal student loans and your financial issues are longer-lasting—for example, you've entered a low-paying career field—an income-based repayment (IBR) plan may be a better alternative.

IBR is one of four income-driven repayment plans the federal government offers for borrowers whose federal student loan payments are high relative to their incomes. An IBR plan permanently reduces your monthly payments, gives you 20 to 25 years to repay your loan, and may even forgive the loan if it's not paid off in that time.

Income-based repayment works like this: If you have federal student loans for undergraduate studies, PLUS loans for graduate education or consolidated federal loans that don't include a parent PLUS loan, complete the online application through the Department of Education or contact your loan servicer. Once you're approved, your new monthly payment will be calculated based on your income and family size.

If you qualify, you'll have either 20 or 25 years to pay off your student loan, and your monthly payment will be capped at either 10% or 15% of your discretionary income, which is the amount of your adjusted gross income that exceeds 150% of federal poverty guidelines, based on your state and the number of people in your family.

To maintain your eligibility for the IBR plan, you must "recertify" your income information each year; if your income changes, your loan payment amount may change too. However, your payment will never be higher than it would have been under a standard 10-year student loan repayment plan.

The downside of IBR is that you'll be in debt for much longer than you would have been under a 10-year student loan repayment plan. Carrying this debt can make it harder to qualify for other loans, and if you miss a payment, it can negatively affect your credit. The upside, though, is that if you still haven't paid off your loan after 20 or 25 years of making your payments on time, you'll be eligible for student loan forgiveness, which cancels out any remaining balance.

Is Student Loan Deferment Right for You?

If you're struggling to make your student loan payments because of short-term financial problems, student loan deferment can offer an opportunity to get your finances in order and help you maintain a good credit score. Depending on the type of loan you have and your situation, you may also want to consider student loan forbearance or income based repayment.

Before applying for a student loan deferment, make sure you know whether you'll be responsible for paying any interest that accrues during deferment and how deferment will affect your overall loan balance. Talking to your student loan servicer will help you understand the options available so you can make an educated decision.