Can You Pay Down Student Loans While in Deferment?

You can pay down student loans while in deferment. In fact, it is advisable.

Deferment is one of the options that allow for financial relief when it becomes difficult to make payments on your student loans, often due to financial hardships. Deferment is a short-term option that suspends or reduces your student loan payments temporarily.

If your student loan payments are deferred, it is important to know whether interest will continue to accrue (for unsubsidized loans) and whether you will be responsible for the interest payments. 

If you are responsible for the interest that accrues while your student loan is in deferment, it is to your advantage to make payments toward your loan. For example, if you borrow $37,000 at an interest rate of 4.45% for 10 years, you will pay $8,908 in interest. If the length of the loan is extended through deferment, it will continue accruing interest that will increase the total cost of the loan. If you continue to make payments, by the end of the duration of your loan, the total cost over the life of the loan will be decreased.

If you do not have to make payments and are not responsible for the accrued interest, it is still beneficial to continue making student loan payments if and when you can while in deferment, because those payments will lower your overall balance.

Many individuals are concerned about the negative impacts on their credit score while in deferment, but the good news is that being in deferment will not hurt your credit score, although it will be visible to prospective lenders.

How to Defer Your Student Loans

You can defer your federal student loans by requesting a deferment. In most cases, deferments are not automatic, and you have to submit a request to your student loan servicer – likely with a form that you will need to fill out – proving that you meet the eligibility requirements for deferment. If you are approved, you may be able to have your federal student loans deferred for up to three years.

Seven circumstances can qualify you for deferment on your federal student loans.

• Economic hardship: This deferment can be for up to three years, but to qualify, you need to serve in the Peace Corps, work full time with earnings below 150% of the poverty guideline for your family size and state of residence, or receive a means-tested benefit, such as welfare.
• Graduate fellowship: This is available for master’s degree and doctoral students who are enrolled in an approved graduate fellowship program.
• In-school deferment: This deferment can happen automatically based on information provided by your school if you are enrolled at least half time at an eligible career school or college; those with a Direct PLUS Loan qualify for an additional six months of deferment.
• Military service and post-active duty: Deferment is available for those who have completed qualifying active duty service and any grace period, or those on active duty military service in connection with a war, military operation, or national emergency.
• Parent PLUS borrower deferment: If you’re a parent who received a Direct PLUS Loan to pay for your child’s education, and that student is enrolled at least half time at an eligible college or career school, you may also be eligible for an additional six months of deferment.
• Rehabilitation training deferment: If you’re enrolled in an approved rehabilitation program for drug abuse, mental health, vocational, or alcohol abuse treatment, you may be eligible for deferment.
• Unemployment deferment: If you are seeking and unable to find full-time employment, or receive unemployment benefits, you can qualify for deferment for up to three years. 

If you are eligible for an income-driven repayment plan, any payments made – even if they are $0 or close to it – will count toward debt forgiveness programs where, after 20 or 25 years of repaying your loans, your remaining debt is forgiven.

If your loan is deferred, then that time will not be counted toward the 20 to 25 years necessary for debt forgiveness, and the life of your loan will be extended for the amount of time that you deferred your loan. For example, if your payments are deferred for three years, then the year that you previously would have qualified for debt forgiveness is pushed back three years. If you would have previously qualified in 2030, but deferred for three years, then your loans would qualify in 2033.

Eligible Loan Types and Interest

Deferment is available for the following federal loan types:

• Direct Loan
• Federal Family Education Loan (FFEL) Program Loan
• Perkins Loan

With Direct subsidized loans, the government will pay the interest that accumulates on your loans while you are in deferment; with unsubsidized loans, interest continues to accumulate when the loan is in deferment and will be capitalized (added to the principal balance) at the end of the deferment period. 

Loan types that you are responsible for accrued interest during deferment include:

• Direct Unsubsidized Loans
• Direct PLUS Loans
• Unsubsidized Stafford Loans
• FFEL PLUS Loans
• Unsubsidized portion of FFEL Consolidation Loans
• Unsubsidized portion of Direct Consolidation Loans

Loan types where you generally are not responsible for paying the interest that accrues during deferment:

• Direct Subsidized Loans
• Subsidized Stafford Loans
• Perkins Loans
• Subsidized portion of FFEL Loans
• Subsidized portion of Direct Consolidation Loans

For private student loans, it is necessary to contact your lender if you would like to defer your loan for a period. Keep in mind that the options for deferment of private student loans are more limited than with federal student loans.

Before Exploring Deferment

Before you get to the point where you need your student loans to be deferred, it is advisable to explore the eight federal loan repayment plans to help you pay your student loan payments on time.

1. Standard Repayment Plan: Payments are fixed and ensure your loans are paid off within 10 years.
2. Graduated Repayment Plan: Payments are initially lower, then increase every two years, ensuring your loans are paid off within 10 years.
3. Extended Repayment Plan: Payments can either be fixed or graduated, ensuring that your loans are paid off within 25 years.
4. Revised Pay As You Earn Repayment Plan (REPAYE): Monthly payments are capped at 10% of your discretionary income.
5. Pay As You Earn Repayment Plan (PAYE): Monthly payments are capped at 10% of your discretionary income, not to exceed what you would pay with the 10-year Standard Repayment Plan.
6. Income-Based Repayment Plan (IBR): Monthly payments are capped at either 10% to 15% of your discretionary income, not to exceed what you would pay with the 10-year Standard Repayment Plan.
7. Income-Contingent Repayment Plan (ICR): Your monthly payment is either 20% of your discretionary income or what you would pay if your plan had a fixed payment for 12 years that is adjusted for your income, whichever is less.
8. Income-Sensitive Repayment Plan: Your loan will be paid in full within 15 years with a payment based on your annual income.

Each loan repayment plan has different eligibility requirements, terms, and conditions, with some even offering debt forgiveness after 20 to 25 years. It is important to ask questions and read the fine print, so you are aware and knowledgeable when making any decisions.

While there are circumstances where you do not have to pay down your student loans while they are in deferment, the benefits of continuing to make monthly payments will keep you on track. Before you seek deferment, though, visit College Finance for helpful resources on your repayment options. We’re dedicated to helping you make an informed decision with up-to-date student loan information, so you can make the most of your college investment.