After securing an education loan for her B.Tech degree, Shweta felt relieved knowing her tuition fees were covered. Grateful for the financial support, she was committed to repaying the loan diligently after graduation. With a stable job in hand, she began her repayment journey with discipline and commitment. However, after a year in the workforce, she recognized the value of further education and the opportunities it could unlock. When she proposed the idea to her family, they were against it. “But what about the student loan? Not paying it back will hamper your credit score! Do you fully grasp the gravity of the situation?”, said her father anxiously. Shweta felt torn between, whether to put aside her aspirations and continue working or risk financial instability to chase her dreams? Just as panic began to set in, her sister calmly intervened, “Shweta, don’t worry! You can apply for a student loan deferment. It allows you to temporarily suspend your repayments while you focus on further studies. I want you to pursue all your dreams.” Her sister’s words struck a chord. A sense of relief washed over Shweta as she realized that she didn’t have to choose between her education and financial responsibility, she could have both.
Understanding student loan deferment
What if students could press a pause on their education loan repayments without damaging their credit score? Well, student loan deferment makes that possible! With this, scholars can get a temporary postponement of repaying the loan for a set period of time. But, a student loan deferment will be obtainable only under specific circumstances. The duration and conditions of deferment can vary depending on the type of loan.
- Government Education Loans: In India, certain conditions may permit payment postponement for education loans provided by government backed organisations. Some banks may offer a moratorium period during deferral, usually following the course’s conclusion, during which borrowers are exempt from making payments. However, depending on the sort of loan, interest can keep accruing during this time.
- Private Education Loans: In India, private loan deferments are less frequent and are dependent upon the policy of the specific lender. Even though some private lenders could allow you to postpone payments in specific situations (such as going back to school or experiencing financial difficulties), interest usually keeps accruing during that time, raising the overall loan amount.
Types of Deferment Options
Understanding the different types of deferment options available is crucial for borrowers to make informed decisions and manage their repayment effectively. Below are some of the common deferment options available for student loans.
1. In-school deferment: In- school deferment is a temporary suspension of the education loan if the student enrolled in at least half time at a recognised institution. In simple words, if someone wants to continue their education after their student loan repayment has already begun, in-school deferment allows them to temporarily pause loan payments while they are enrolled in a new recognised program. This is valid for six months after graduation.
- For federal student loans there is no need to apply for deferment as the school usually reports enrolment status to the loan provider. However, the responsible individual is advised to cross check the validity of their deferment.
- For private loans, the policies of deferment vary according to the lender. In most cases, individuals have to apply for the deferment themselves.
2. Parent PLUS borrower deferment: Similarly to the in-school deferment, parent PLUS borrower deferment is applicable to parents who have taken out a loan in order to help their children. As long as their child is enrolled in a recognised institution for at least half time, there will be a temporary suspension of loan repayment.
- The deferment is not automatic, borrowers must request it through their loan servicer.
- Interest still accrues during deferment because parent PLUS borrower loans are unsubsidized. Borrowers can choose to pay interest during deferment to prevent it from being added to the loan principal.
3. Economic hardship deferment: This deferment is applicable only under a federal student loan program. It was created for students experiencing financial hardships, so that they can postpone their repayment. Like every deferment, the government pays the interest on subsidized student loans but not unsubsidized loans during the deferment. In order to qualify for this, the individual must meet at least one of the following conditions.
- Receiving Means Tested Benefits – You are receiving government assistance such as Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI) and state general public assistance programs.
- Earning Below 150% of the Federal Poverty Guideline – Your income is at or below 150% of the poverty line for your family size and state.
- Serving in the Peace Corps – Volunteers qualify for economic hardship deferment for up to three years.
4. Military Service deferment: One qualifies for this deferment if they are on active duty or performing qualified national guard duty during a war, military operation or national emergency. As a result, not all active duty military personnel are eligible for this deferment.
- The deferment lasts for the entire period of active duty service and extends for 13 months after service ends.
- You must apply through your loan servicer and provide documentation of active-duty service.
5. Cancer Treatment Deferment: This policy applies to students diagnosed with life-threatening conditions such as cancer and are actively undergoing treatment. These students are usually exempt from loan repayments for the duration of their one-year treatment period, followed by an additional six-month deferment after treatment, based on certification from their physician. But, the exact length of the deferment can vary depending on the student’s individual situation.
- The student typically needs to submit a formal request to the educational institution, which may include medical documentation confirming the diagnosis and treatment plan.
- During the deferment period, the education loan interest may continue to accrue, depending on the terms set by the financial institution.
Pros and Cons of Student Loan Deferment
While student loan deferment can provide valuable relief in times of need, it also comes with its own set of drawbacks. Borrowers should thoroughly understand the potential implications before deciding to opt for deferment.
|
Pros |
Cons |
| Student loan deferment does not hamper the overall credit score. | During the deferment period, interest continues to accrue, particularly on unsubsidized loans, potentially increasing the overall loan balance. |
| Deferment allows for the temporary suspension of loan payments, providing immediate financial relief. | With a larger loan balance, the repayment timeline could be stretched, leading to longer-term debt. |
| Deferment is only available for a limited period, encouraging borrowers to plan ahead and prepare for the resumption of regular payments. | Since deferment is available for a fixed duration only, regular payments must resume after that. This can cause disruptions if borrowers haven’t planned for that transition. |
| Deferment options are reserved for those truly in need. This ensures that the support is directed to individuals who are experiencing significant challenges. | Deferment is not universally available, borrowers must meet specific eligibility criteria to qualify. |
Alternatives to Deferment
If deferment isn’t the right option or if other solutions are being sought, consider these alternatives:
- Forbearance: The concept of forbearance is very similar to deferment, as there is temporary postponement of student loan payments. The only difference is that interest accrues on all loan types, even on subsidized loans. It is usually granted when one does not qualify for deferment.
- Income driven repayment plans: Income driven repayment plans are a helpful alternative for those who find it difficult to keep up with standard loan payments. These plans base monthly payments on the borrower’s income and family size, often reducing the monthly payment to an affordable level.
- Extended repayment plans: If standard repayment terms are difficult to meet, an extended repayment plan may be a viable alternative. Under this plan, the loan term is extended, often up to 25 years, which reduces the monthly payment. While this can make monthly payments more affordable, it can also increase the total amount of interest paid over the life of the loan.
- Graduated repayment plans: A graduated repayment plan allows for lower monthly payments at the beginning of the loan term, with the payments gradually increasing over time. This can be beneficial for borrowers who anticipate their income will rise in the future. Like extended plans, this may lead to paying more in interest over the loan’s lifetime.
FAQs
Can I apply for deferment on both government and private loans?
Deferment options are more commonly available for government-backed loans. While some private lenders may offer deferment, it largely depends on the lender’s policies. Government loans typically have more flexible deferment conditions.
Does student loan deferment affect my credit score?
No, student loan deferment does not directly impact your credit score as long as the loan is in good standing and the deferment conditions are met.
Is interest accrued during deferment?
Yes, interest continues to accrue on unsubsidized loans during deferment, potentially increasing the loan balance. However, on subsidized loans, the government may pay the interest for some types of deferment, such as during in-school or military deferment.
Do I need to apply for deferment or is it automatic?
For federal loans, in-school deferment is typically automatic as schools report enrollment status directly to the loan servicer. However, for other types of deferment (such as economic hardship or military service), you must apply through your loan servicer and provide supporting documentation.
Can I continue making payments during deferment?
Yes, borrowers can continue making payments during deferment if they choose. This can help reduce the amount of interest that accrues, particularly on unsubsidized loans.