Student Loans—When to Delay Payment

We’ve talked about the importance of critical thinking when it comes to student loans. Education debt is a $1 trillion problem in the U.S., overwhelming younger generations before their careers begin. If you are a new grad who is struggling, adopting a positive borrowing perspective may be too-little-too-late. What happens when you can’t afford to pay your loans? What’s the next step? Should you rely on credit cards or risk the consequences of default? The answer to this question is “neither.” Read on to learn more about managing your loans safely while you create a better plan of action.

Option 1: Deferment

Deferment is a temporary delay of student loan principal and interest payments. Deferment terms and conditions depend on the type of loan and its holder. For example, while Mark’s private loan will accrue interest during deferment, the government will cover the interest on Alexis’s federal loan during the deferment period. Loan holders must apply for deferment and meet certain requirements, which may include:

  • Enrollment at least half-time in school
  • Recent unemployed disability
  • Financial hardship
  • Volunteering with the Peace Corps
  • Active military service

Option 2: Forbearance

If you don’t qualify for deferment, your lender may allow you to place your loans into forbearance, reducing your monthly payment amount for 12 months or up to 3 years. Unpaid principal and interest will continue to accrue during a forbearance period. While private lenders use their own rules regarding forbearance, federal loan forbearances are broken into two categories:

Discretionary. Based on financial hardship or illness, you may be granted forbearance, however, it is not guaranteed.

Mandatory. The government must grant you a forbearance if:

  • You are enrolled in a healthcare internship or residency program
  • Your loan payments exceed 20 percent of your gross monthly income
  • You are enrolled in a teaching program that qualifies for federal loan forgiveness
  • You are enrolled in the U.S. Department of Defense Student Loan Repayment Program
  • You are an active National Guard member who does not qualify formilitary deferment

When should I use these options?

Like any other debt, delaying payment is a last resort. Never consider forbearance or deferment unless you’re out of options. Examples include:

  • Recent unemployment and no savings
  • You can’t afford to make ends meet and other creditors refuse to delay payments
  • You’ve recently suffered a medical emergency and are only being paid a portion of your salary

Deferment or forbearance may seem like an easy fix, but it isn’t permanent. Save these options for desperate times only.

What happens if I don’t repay my loans?

Managing student debt is a stressful process, but it shouldn’t be ignored. Failing to repay your loans will lead to serious financial and legal trouble, including:

  • Credit damage
  • Collection or bankruptcy proceedings
  • Legal troubles, e.g., lawsuits, wage garnishments, etc.

Deferment and forbearance are options—failure to pay is not.

Where can I find help?

You aren’t the first person to struggle with student loans. Talk to your lender about available options and discuss your financial future with a qualified professional. Allow yourself time to make a wise and deliberate decision. The bottom line: Don’t allow college debt to follow you into retirement. Make an effort to manage your loans aggressively.