The COVID-19 pandemic has left many Americans looking for ways to reduce the size of their monthly bills. One bright spot for those who carry student loan debt is that, as part of the CARES Act, borrowers with federally backed student loans could defer their payments — including interest — until September 30, 2020. In August, this provision was extended until December 31, 2020.
If you think it’s likely that you’ll still need relief from student loan payments after the end-of-year deadline, then deferment is an option. Here’s what to know before deferring your student loans.
DETERMINE YOUR ELIGIBILITY
The U.S. Department of Education lists several grounds for granting a deferment on federal student loans: economic hardship, unemployment, cancer treatment, enrollment in an eligible graduate fellowship program, half-time enrollment in an approved college or career school, and military service.
But whether or not you can defer private loans depends on the individual lender.
“Historically, private lenders have been very reluctant to allow any kind of deferments, although I have noticed in our pandemic experience a number of private lenders working to be more flexible in their application of deferment,” says Heather Jarvis, an attorney who specializes in student loans.
Private borrowers can check with their lender to see what options may be on the table during the pandemic and beyond.
ASSESS THE BENEFITS
You can typically defer federal student loans for a maximum of three years. Especially for borrowers who are up against unemployment or have experienced a pay cut, deferment may have one or more of these benefits:
You’ll free up money. The most obvious perk of deferring your student loans is that you won’t have to make your monthly payment. That’s no small thing considering that the average borrower shells out between $200 to $299 per month on student loan payments, according to the Federal Reserve. If you’re rebuilding your financial health, temporarily deferring your loans could enable you to pay off high-interest debt or establish a solid emergency fund while you get back on your feet.
Interest doesn’t accrue. If you have subsidized federal student loans, interest generally does not accrue during the deferment period. The same goes for Federal Perkins Loans, along with subsidized portions of certain types of consolidation loans. (Unsubsidized loans, on the other hand, are another story. More on this in a bit.)
It can help prevent you from defaulting. If you’re struggling to keep up with payments and default on your loan, the account could get sent to a collection agency, which can negatively impact your credit score. What’s more, the entire balance — including interest — becomes due immediately. Deferment could be the lifeline you need to keep your student loan in good standing.
You can restore your borrowing power. If you have student loans that are in delinquent status, Jarvis says you can’t borrow additional loans for educational programs. This could spell trouble for those hoping to go back to school. Deferment temporarily safeguards your loan from default to help keep your borrowing power intact.
UNDERSTAND THE DOWNSIDE
Just because you’re eligible to defer your student loans doesn’t mean you necessarily should. In some cases, doing so can cause more harm than good.
Deferment doesn’t make the amount you owe go away and, more often than not, interest on private loans or unsubsidized federal loans continues to accrue during the deferment period. If you don’t make the interest-only payments, these charges will add up and could be tacked on to your principal balance once deferment ends. That might leave you paying much more over the life of the loan.
CONSIDER AN INCOME-DRIVEN REPAYMENT PLAN
If you’ve experienced a pay cut, Jarvis says opting for an income-driven repayment plan may serve you better than temporarily deferring your loans. This involves re-certifying your income with your student loan servicer so they can recalculate your monthly payment, which could bring it down to a more manageable number. While this does stretch out your repayment timeline — which means ultimately paying more over the long haul — you can always readjust it when your income stabilizes again.
Another key benefit of an income-driven repayment plan is that under the various versions of these plans offered by the government, any remaining loan balance is forgiven if your federal student loans aren't fully repaid at the end of the repayment period. Borrowers who make income-driven repayments for either 20 or 25 years will have their remaining balances fully forgiven. However, deferment will bring this momentum to a halt.
“You would not be credited for that period of deferment toward forgiveness, whereas you would if you were in an income-driven repayment plan, even if your payment amount was very low,” Jarvis says.
Deferment could also slow down the progress you’re making toward other loan forgiveness programs. For example, full-time employees working in a public-service role can have their student loan balance forgiven after making 120 qualified monthly payments. When you defer your loans, you pause your payments and delay your loan forgiveness timeline.
Any deferment has consequences so you should make sure you consider all your options to determine if doing so will provide the relief you may need during difficult times.