Graduating college and beginning your new career can be exciting, but it can also be overwhelming, especially once you have to begin repaying your student loans. This can eat into your earnings and may leave you struggling to cover your living expenses.
Federal student loans and some private student loans enable you to defer -- or temporarily stop -- your payments in select circumstances, like economic hardship, active military service, or serious illness or disability. If you don’t qualify for deferment, you may qualify for forbearance, which is similar to deferment, but often easier to get. You may be able to get a forbearance even if you don’t meet any of the above criteria, but you should think carefully before doing so. Deferments and forbearances could make your life more difficult in the long run. Here are three times you shouldn’t defer your student loans.
1. You have an unsubsidized federal or private student loan and you can’t afford the interest payments
Student loans may either be offered by the federal government or a private financial institution. Federal student loans are available in two types: subsidized and unsubsidized. The government pays the interest on subsidized federal student loans during deferment periods, but not during a forbearance. You are responsible for paying the interest that accrues on unsubsidized federal student loans and private student loans during deferment and forbearance. If you don’t, your lender will roll any accrued interest into your principal balance once the deferment period ends, resulting in a larger balance that’s more difficult to pay off.
Whenever possible, you should make at least the interest payments on unsubsidized federal and private student loans during the deferment period to prevent your balance from ballooning. If you don’t, you could end up worse off after the deferment period than you were before it began.
2. You can pay something, but not your full monthly payment
If you have a federal student loan, you can request a deferment of six months, extendable up to three years, if you’re struggling to find full-time employment. This is defined as 30 or more hours of work per week. This type of deferment may make sense if you have no money coming in, but if you have a part-time job and you can afford to spare a little cash for your student loans, it’s better to pay what you can.
If you’re on the federal student loan standard repayment plan, you’ll pay a fixed monthly amount for 10 years. But some have trouble keeping up with these payments, especially in the early years of their career. In that case, check to see if your lender offers income-based or alternative repayment plans that fit better into your budget. This is your best move if you can afford it because you can continue paying down your debt instead of pushing it further down the road, possibly risking a larger balance due to accrued interest.
3. You don’t envision your financial situation improving
You can claim a deferment for economic hardship for up to three years if you are working full time and your monthly income is below 150% of the poverty guideline for your state and family size. But this is only meant to be a temporary measure until you get back on your feet. If you don’t envision your financial situation improving, you’re better off negotiating a different payment plan with your lender.
Once you’ve exceeded the three-year maximum for the economic hardship deferment, you won’t be able to claim it again, even if your financial situation takes a turn for the worse. It’s best to only use this as a last resort when you cannot afford to make any payments.
Alternatives to deferment and forbearance
When you’re struggling to pay back your student loans, your first step should be to look for areas where you can cut spending to free up more cash for your loan payments. Perhaps you can dine out less or spend less money on clothing each month.
If that isn’t enough, talk to your lender about an alternative repayment plan. Private lenders will have their own repayment options, but federal student loans offer several choices, including:
- Graduated Repayment: You pay back your loan over 10 years, but your payments start low and increase every two years.
- Extended Repayment: You make a fixed or graduated payment over 25 years. You must have at least $30,000 in outstanding federal student loans to qualify for this option.
- Income-Based Repayment (IBR): Your monthly payments are 10% or 15% of your discretionary income -- the difference between your income and 150% of the poverty guidelines for your state and family size. The government recalculates your payments every year based on your newest income information.
- Income-Contingent Repayment (ICR): You pay the lesser of 20% of your discretionary income or the amount you’d pay on a 12-year fixed-rate repayment plan. Payments are recalculated each year.
- Income-Sensitive Repayment: Your payments are based on your income, but you must pay back the full balance within 15 years.
One of these options may reduce the amount you owe each month, enabling you to keep up with your payments and avoid deferment or default. This is always your best option if you can afford it. If you have no choice but to defer your loans, make sure you understand the consequences of this action and do your best to pay at least the interest during the deferment period if you have an unsubsidized federal or private student loan.