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Students face mounting pressure to find a job that not only keeps them happy but pays enough to cover their student debt. Unfortunately, the student loan industry is plagued with concerning statistics which adds unnecessary stress. For example, data from the Federal Reserve Bank of New York shows 10.8% of student loan holders can’t keep up with the monthly payments.
Data from the Department of Education shows that only 56% of all federal student loan debt is in the process of being repaid. The other 44% is either on hold or even worse, in default. For the many people who fall in this category, taking solace in knowing they aren’t alone is the first step towards relief.
What Is Student Loan Deferment?
Student loan deferment gives holders of student debt the option to pause payments on their loan or to lower the amount paid for a period of up to three years. During the hiatus period, students holding subsidized government student loans don’t have to worry about interest payments as the government will cover that portion. On the other hand, students will need to pay interest on unsubsidized federal student loans.
Students need to satisfy certain criteria for loan deferment to be a realistic option. Some of the more common criteria include being a recent graduate within the past six months, unable to find full-time employment, or experiencing economic hardship.
Students can defer payments for longer periods of time under more stringent scenarios, typically involving medical and health-related difficulties.
When To Defer A Loan
Anyone who is in a position where they can’t afford to pay anything should consider deferring their payments for as long as possible. Failure to do so could result in student loans becoming delinquent.
The first day after an individual doesn’t make a student loan payment, their loan will become past due. After 90 days, the loan provider could declare the loan as being in default and pass along this status to the major credit bureaus. The simple process of filing for a loan deferment will eliminate this scenario from happening.
Consolidating Loans
Student loan consolidation, as the name implies, consists of combining two or more separate loans into one bundle. It makes paying more simple, as there is only one monthly payment and one set of terms.
A federal student loan consolidation will group together at least two federal loans into one loan facilitated through the Department of Education. In this case, a student won’t benefit from a lower interest rate, rather they will pay smaller amounts of money on a consistent basis, but over a longer time period.
A private consolidation, commonly referred to as student loan refinancing, consists of a student packaging private and/or federal loans into one new loan. In this case, the student can potentially benefit from lower interest rates.
When To Consolidate A Loan
Students who pay multiple loans throughout the month may find it more advantageous to combine all of their loans into one. The immediate benefit is easier to manage monthly budget, especially if one loan requires payment at the start of the month, another in the middle, and another at the end.
Instead, one simple payment could eliminate worries of not having enough cash left to cover one of the loans or other recurring expenses. Consolidating all payments into one helps a student organize their monthly finances and maintain better control over their life.
Another benefit of loan consolidation is the potential to lock in a fixed rate for interest payments. Locking in a fixed rate implies the dollar amount a student pays in the first month will not change over the years. A variable-rate implies a student could face the burden of paying more in the future if interest rates move higher.
Differences Between The Two
The main difference between deferring and consolidation relates to the time horizon. A deferment is usually an option for short to medium-term payment relief.
On the other hand, student loan consolidation offers zero time relief as the bill will need to be paid immediately, as it has in the past. Students who prefer tackling their debt load as quickly as possible may prefer to consolidate all their loans into one in the hopes of saving money on interest expenses.
Similarities Between the Two
The common theme between loan deferment and consolidation is it eases some of the financial pressure. Either option gives the student some sort of financial breathing room to better cope with the nature of their financial responsibilities.
Either scenario will provide valuable life lessons on proper budgeting and spending. This should prepare a student for what could come down the road: even greater financial responsibilities such as homeownership, opening a business, raising children.
Deferment Versus Forbearance
Student loan forbearance gives a holder of debt an opportunity to pause their payments, typically for up to one year. Interest will accrue and needs to be paid on a monthly basis, unlike the deferment options.
One would consider forbearance if the student loan debt is delinquent and is dangerously close to going into default. Some of the more common reasons why a student would consider forbearance is financial or medical difficulties or a change in employment status.
Forbearance comes in two forms. The first is called “discretionary forbearance” and the ultimate approval rests with the loan provider. In other words, there is no guarantee of relief and it would be wise to consider other options while their request is pending.
By contrast, a “mandatory forbearance” requires a loan servicer to grant a forbearance if certain criteria are met. Some of the examples include payments on federal student loans exceeding 20% of the total monthly gross income or serving in a medical or dental internship or residency program.
Pitfalls Of Deferring Loans
Students who defer their unsubsidized loans will be hit with penalties as interest will accrue immediately. If regular payments to cover the interest are not met, the interest will capitalize and will be transferred to the total amount of the loan.
Another main disadvantage of loan deferment is the fact that doing so will erase future eligibility for several public forgiveness programs.
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The Bottom Line
One of the more difficult life lessons that come out of student loan repayment is handling financial obligations like a champion. As is always the case in life, paying bills as quickly as possible is always the best option.
For the millions of students and graduates who simply can’t pay their bills for whatever reason, there are options to ease the burden. Perhaps the worst course of action would be to ignore a debt problem and hope it magically fixes itself. It never does. This fairy-tale thinking will merely create additional problems through higher fees, potential penalties, and a damaged credit score that can take years to repair.
- Filing for bankruptcy shall not exempt from the obligation to repay the loan.
- You may be eligible to specific educational loan benefits from your educational institution or may be qualified for Federal student financial assistance you may receive additional information with your institution of higher education or at the website of the U.S. Department of Education.
Article Topics
Student Loans
Jessica Cotzin is a writer and the Lendstart authority on small businesses and personal loans. She has been writing about personal finance and the loans industry for a number of years, and holds a bachelor’s degree in journalism from Florida Atlantic University.
