Pros And Cons Of Student Loan Deferment

Q: For current college graduates who are still unemployed and facing upcoming student loan payments, what are some of the pros and cons of student loan deferment?

A: Let’s face it—graduating college and stepping into unemployment while your student loan payments loom over you isn’t anyone’s dream scenario. But don’t panic! If making payments right now isn’t in the cards, deferment could be a lifeline. Before you skip a payment or lose sleep, let’s break down the ins and outs of deferment so you can make the best decision for your financial health.

What is Student Loan Deferment?

Deferment is like hitting the pause button on your federal student loans. It’s a temporary postponement of payments granted under specific circumstances such as:

• Unemployment: If you’re actively looking for work but haven’t landed a job yet.
• Economic Hardship: If your income doesn’t meet basic living expenses.
• Active Military Duty: If you’re serving in the military during times of conflict or national emergency.

While deferment can be a helpful option, it’s not automatic. You’ll need to apply and demonstrate that you meet the eligibility criteria. Let’s weigh the good and the not-so-good about using this option.

Pros of Student Loan Deferment

“Deferment isn’t about giving up—it’s about giving yourself breathing room to get back on your feet.”

Here’s how deferment can help when you’re navigating tough times:

• Avoid Default: Missing payments can lead to loan default, which wrecks your credit score and triggers aggressive collection efforts. Deferment helps you stay in good standing with your lender.
• Subsidized Loan Benefits: If you have subsidized federal loans, the government covers the interest during your deferment period. This means your loan balance won’t grow while you’re pausing payments.
• Time to Regroup: Whether you’re hunting for a job, improving your financial situation, or dealing with life’s curveballs, deferment can give you the time you need to catch your breath and plan your next steps.

Pro Tip: If you’re eligible for deferment, apply as soon as possible to avoid missing payments while your application is processed.

Cons of Student Loan Deferment

“Deferment can help now, but it’s not a magic wand—it won’t make the debt disappear.”

Deferment isn’t without its drawbacks. Be aware of the following cons:

• Interest Accumulation: If you have unsubsidized loans (or private loans), interest continues to accrue during deferment. When the deferment period ends, the unpaid interest is added to your principal balance—making the loan more expensive over time.
• Eligibility Limitations: Not everyone qualifies for deferment. Borrowers with private loans often have fewer options, and some lenders may not offer deferment at all.
• Temporary Solution: Deferment is just a short-term fix. If your financial struggles persist, you may need to explore other options like income-driven repayment plans or refinancing.

Pro Tip: Before choosing deferment, calculate how much additional interest you’ll owe by the end of the deferment period. If it’s too steep, explore other repayment options.

Private Loans and Deferment

When it comes to private student loans, deferment rules vary widely by lender. While some private lenders may offer deferment or forbearance options, they typically require you to continue paying interest during the deferment period. This means your total loan balance could grow quickly, even if your payments are temporarily paused.

“With private loans, deferment is less common and often less forgiving. Check your loan agreement or talk to your lender for specifics.”

Alternatives to Deferment

If deferment isn’t the right fit, there are other ways to manage your student loans while unemployed:

• Income-Driven Repayment Plans (IDR): For federal loans, these plans adjust your payment to a percentage of your income (as low as $0/month in some cases).
• Forbearance: Similar to deferment, forbearance allows you to pause payments, but interest accrues on all loan types.
• Part-Time Work: Picking up a temporary or gig job can help you make payments, even if it’s not your ideal role.

Pro Tip: Contact your loan servicer immediately if you’re struggling. Many lenders offer hardship options, but they can’t help you if you don’t reach out.

Deferment can be a valuable tool for navigating tough financial times, but it’s not a one-size-fits-all solution. Carefully weigh the pros and cons, and don’t hesitate to explore other repayment strategies if deferment isn’t the right choice for you. The most important thing is to stay proactive. Missing payments or ignoring your loans will only create bigger problems down the line.

Remember, student loans are a marathon, not a sprint. Take it one step at a time, keep communication open with your lender, and you’ll find a solution that works for your situation.