Now that we have a basic understanding of the types of Student Loans, let’s break down the terminology that relates to your loan.
Student loan deferments allow you to postpone paying back your loans in certain circumstances. This is an extremely important strategy, particularly since interest does not accrue for subsidized loans during deferment periods. Interest does accrue on unsubsidized loans. If you can afford it, you should consider paying the interest while you are in a deferment period.
You are eligible for student loan deferments only if you have not yet defaulted on your loans.
Deferment options for federal loans vary depending on the type of loan and date the loan was incurred. You can get the following deferments for most loans:
- In-school deferments for at least half-time study;
- Graduate fellowship deferments;
- Rehabilitation training program deferment;
- Unemployment deferment not to exceed three years;
- Economic hardship deferment, granted one year at a time for a maximum of three years; and
- Military deferment.
There are a number of other deferments available in the Perkins program only, including:
- Full-time service for law enforcement and correction officers, and
- Volunteer service such as the Peace Corps.
You can request a deferment form from your loan servicer. You should contact your guaranty agency or school if you have a different type of loan. You should continue paying while your application is pending.
The deferment options above are for federal government loans. Many private lenders also offer deferments. These vary by program. Read your loan agreement carefully or ask your lender about options that may be available for your private loan.
Economic Hardship Deferment
The economic hardship deferment is granted one year at a time for a maximum of three years.
The first three qualification categories are “automatic” as long as you can provide supporting documentation. These three categories are:
- Previous qualification for economic hardship deferment under another federal loan program.
- Receipt of federal or state public assistance benefits. This includes payments under a federal or state public assistance program such as TANF, SSI, Food Stamps, or state general public assistance.
- You qualify if you are serving as a Peace Corps volunteer.
You can also qualify based on your income you are working full-time and your monthly income does not exceed the larger of A) The federal minimum wage rate or B) 150% of the poverty line income for your family size and state. (In 2014, the poverty line for a family of two living in the 48 contiguous states was $15,730).
There are two ways to qualify for an unemployment deferment. The simpler way is to provide proof of eligibility to receive unemployment benefits. The other way is to show that you are diligently searching for full-time employment (defined as employment of at least thirty hours per week and expected to last at least three months). This second category requires you to certify that you are diligently seeking but unable to find full-time employment and in most cases that you are registered with a public or private employment agency. You may qualify under this second category whether or not you have been previously employed.
If you apply under the seeking full-time employment category, the initial deferment can be granted for a period that begins up to six months before the loan holder receives your request and can be granted for up to six months after that date. If you get the deferment based on your search for full-time employment and you want to extend it beyond the initial period, you must certify that you have made at least six diligent attempts during the preceding six month period to secure full-time employment.
Each unemployment deferment may last for up to six months. You must reapply to extend the deferment. If you are applying under the seeking full-time employment category, you must certify that you have made at least six diligent attempts to obtain full-time employment in the last six months. This deferment cannot be granted for a total of more than three years.
Military Service Deferment
This deferment is available in all three loan programs, FFEL, Direct and Perkins. It is available to military service members on active duty during a war, other military operation or national emergency, members of the National Guard called to active duty during a war, military operation or national emergency and reserve or retired members of the Armed Forces called to active duty during a war, military operation or national emergency.
This deferment may be granted based on a request from the borrower or the borrower’s representative.
There is no time limit on the military deferment. The eligibility period ends 180 days after the borrower is demobilized from active duty service.
Some borrowers called to active duty will not be eligible for military deferments. To help cover this gap, there is a mandatory forbearance available to National Guard members who qualify for the post-active duty deferment (see below), but do not qualify for a military or other deferment.
Active Duty Student Deferment
This deferment should really be called “Post-Active Duty Deferment” because it is for borrowers who are enrolled in school when they are called to active duty and plan to re-enroll after they have completed their service.
This deferment is available in all three loan programs, FFEL, Direct and Perkins. Eligible borrowers include members of the National Guard and reserve or retired members of the Armed Forces called to active duty at the time, or within six months prior to the time, that they were enrolled in school. These borrowers may receive deferments for up to 13 months following completion of active duty military service and any applicable grace period. The period expires at the earlier of a borrower’s re-enrollment in school or the end of the 13 month period.
Similar to the military service deferment the borrower must be on active duty to qualify for this deferment. Unlike the military service deferment, activation during a war or other military operation or national emergency is not required.
You usually do not have to start repaying your loans right away. This “waiting period” after graduation and before repayment begins is known as a “grace period.”
Grace periods can be extended for up to three years (in addition to the standard six months) if a borrower is serving on active duty in the Armed Forces. Repayment begins after the grace period is over. You can only use the grace period once per loan, so if you go back to school after your grace period ends, that loan will not be eligible for a second grace period upon graduation from the subsequent program. New loans will be eligible for a grace period. Be advised that you lose any remaining grace period if you consolidate your loans. Also be advised that there is not a second grace period if you already used up your original one. For example, if you have an in-school deferment on a loan that entered repayment at an earlier date (before you returned to school) and you graduate, drop below half-time enrollment or withdraw, you will be required to begin making payments right away on the loan because the original six month grace period was already used up.
You have six months to begin repayment on Stafford loans after graduation, or after you leave school or drop below half-time enrollment. Older Stafford Loans may have a longer grace period. You can also request a shorter grace period if you want to start repaying sooner, and avoid unnecessary interest capitalization. “Capitalization” is when interest that accrued during the grace period or other deferment is added to the loan principal when repayment begins.
Interest will not accrue while you are in school, and during the grace period for subsidized Stafford loans. The government pays the interest on these loans. This is not the case for unsubsidized loans. If you have unsubsidized loans, you may either pay the interest during the in-school deferment and grace periods, or the interest will be capitalized when repayment begins. For loans made for periods of enrollment beginning on or after July 1, 2012, graduate and professional students will no longer be eligible to receive subsidized loans. Loans made prior to this date are not affected by this change.
There is no grace period for PLUS loans. Repayment on PLUS Loans generally must begin within sixty days after the final loan disbursement for the period of enrollment for which the loan was borrowed. However, deferments are available for PLUS loans disbursed on or after July 1, 2008. These graduate and professional student PLUS borrowers may defer repayment during the six months after they leave school. The additional six months will automatically be applied when the graduate PLUS borrower requests an in-school deferment.
A parent borrower with loans disbursed on or after July 1, 2008 may defer repayment while the student on whose behalf the loan was taken out is in school. Parent PLUS borrowers may also defer repayment for six months after the student on whose behalf the loan was borrowed is no longer in school or if the parent is also a student, six months after the day that the parent is no longer in school. Parent PLUS borrowers must apply for this deferment.
Because PLUS loans are unsubsidized, interest will accrue during the deferment period.
The grace period for Perkins loans is nine months. Perkins loan borrowers attending less than half-time should check with their financial aid administrators to determine their grace periods. Perkins borrowers should not be charged interest during the grace period.
Private loans may also have grace periods. These are sometimes called “interim periods”. You should read your loan agreement carefully and ask your lender about when repayment begins. Interest will generally accrue while you are in the grace period. Once you enter repayment, the accrued interest will usually be capitalized, meaning that it will be added to your principal balance. You can also choose to pay the interest during the grace period and avoid capitalization.
Forbearance is one of two main ways to delay repayments on a student loan, the other being deferment. The main practical difference is that interest continues accruing during the delay period with forbearance, which isn’t always the case with deferment. Usually forbearance is at the discretion of the lender, while deferment is automatically based on specific criteria. Generally, forbearance is an option available when the person is in poor health, is unlikely to be able to afford to pay the loan back in full by the scheduled completion date, or has such a low income that the scheduled monthly payments are 20 percent or more of his monthly income.
In contrast, a person who is temporarily disabled, on military service, in education or working in some other public jobs may be able to defer the loans.
People in some other public jobs may be able to cancel loans. If a person dies, or is permanently disabled and unable to work, the loan can automatically be cancelled.
In most circumstances, forbearance is not guaranteed. The borrower must apply for forbearance and the lender will assess whether or not to grant it.
In contrast, most of the eligibility requirements for deferment or cancellation are automatic, meaning that anyone who qualifies is guaranteed to receive such treatment if she applies for it.
The key principle of forbearance is that the loan continues to accrue interest during the forbearance period. The borrower has the option of paying the specific interest that accrues during this time. If he does not do so, the interest will be added to the total outstanding loan amount, thus having a compound effect.
In contrast, no interest accrues during a deferment period for a specific type of loan known as a subsidized Stafford loan: the federal government pays the lender an amount equivalent to the interest for the deferment period. With other types of loans, interest does accrue for the borrower during deferment.
Forbearance is granted for a one-year period, after which the borrower must reapply. It will again be up to the lender to decide whether to continue the forbearance.
In contrast, with a deferred loan the borrower will usually be guaranteed a successful renewal application if he still meets the conditions. However, deferment for a specific reason may have a total time limit, after which it cannot be renewed.
Student loans default and delinquency policies and practices vary depending on the type of loan. You also need to know the important difference between being delinquent and being in default. The government collection powers and your options to deal with student loan problems depend on whether you are delinquent with your payments or whether you are in default. The government’s extraordinary collection powers kick in only after you default.
You are in default on most federal student loans if you fail to make payments for nine months. The entire loan balance becomes due once you default. A delinquency period begins on the first day after you miss a payment. Your loan holder has certain responsibilities once you are delinquent. During the first 15 days, they must send at least one written notice or collection letter.
The notices and other tactics intensify the longer you are delinquent. If the delinquency goes on for nine months, your loan holder will declare you in default. If you are having trouble making payments, contact your lender sooner rather than later. If you are starting to have problems, you should work with your loan holder to postpone payments or figure out another way to get temporary relief. It is your responsibility to notify your loan holder if you move to a new address.
I know a few people who became delinquent on their payments and it’s tough now for them to get a line of credit or even go back to school. It’s so important to understand how much your monthly payment will be for student loans so that you can incorporate that into your monthly cash flow chart.