Finding a way to pause your student loan payment can be a lifesaver when your financial life goes sideways. And trust me, this can happen to anyone at any time.
For me, the financial roller coaster ride started in June 2010. I was expecting our first child when my husband accepted a job in another state. I’d had to quit my teaching job when we moved, and I knew I was not going to be bringing in a paycheck for at least a year.
On top of this reduction in income, we bought a house in our new city, but it took nearly a year to sell our old house. We were stuck paying two mortgages for 11 months.
Between the two of us, my husband and I also had about $35,000 in outstanding federal student loan debt. To help get a better handle on our monthly budget, we decided to explore the option of deferment until our financial situation became more stable.
What is deferment?
Deferment allows you to pause the monthly payments on your federal student loans for a set period of time. For subsidized loans (these include Federal Perkins loans, Direct Subsidized loans, and Subsidized Federal Stafford loans), interest will not accrue on your loans while they are deferred. Unsubsidized loans, on the other hand, do accrue interest during the deferment period. If you have an unsubsidized loan that you plan to defer, you are allowed to pay the interest to keep it from being capitalized and added to your principal, but it is not a requirement for your deferment.
Deferment can make a huge difference in your bottom line, but it is not necessarily a cure-all to your financial problems. Here is what you need to know about deferring your student loans.
1. You might not be eligible for deferment
When we applied for a deferment of our student loan payments, our first big surprise was the discovery that we were not eligible. Borrowers are eligible for, and have the right to take, deferment in the following circumstances:
- During at least half-time enrollment in postsecondary school;
- During full-time enrollment in an approved graduate program;
- During enrollment in an approved rehabilitation training program if you are disabled;
- During a period of unemployment (limited to three years);
- During active duty with the military, or within 13 months of when your active duty occurred;
- During periods of economic hardship, as defined by federal regulations (also limited to three years).
My husband and I had assumed that going from two family members to three, from two paychecks to one, and from one mortgage to two, was sufficient enough to meet the economic hardship requirements. But federal regulations only allow for economic hardship deferment if you are either on public assistance, or the salary from your full-time employment is no more than 150 percent of the federal poverty guideline for your family size and state. His salary was too high to qualify.
Instead of deferment, we had to apply for a discretionary forbearance, which is the option available to borrowers who aren’t eligible for a deferment.
What’s the difference between deferment and forbearance?
The biggest difference between the two processes is that interest will accrue on your loans if they go into forbearance, even…