Forgo Deferment & Forbearance on Your Student Loans

June 11, 2018

It’s tough to cover a mortgage, wedding, new baby, or medical expense on top of your student loan payments. As such, it can be tempting to request deferment and forbearance on your student loans. Before you apply for these options, be sure to understand the hidden costs that can lead to a much higher, much longer repayment down the road.

Both federal and private student loan programs offer deferment and forbearance options. These options provide you with temporary relief from your burdensome monthly payments and may seem like a good option to avoid a delinquency or default. Think again. Not making payments during your deferment and forbearance periods results in the capitalization of the interest you owe, meaning your loan principal will subsequently increase. Voila! Not only have your monthly payments ballooned when you inevitably start making payments again, but you now owe way more than you did when you first took out the student loans!

Deferment

Deferment is pushing back payments due to a temporary situation and your loan provider has a list of qualifications. The most common types are In-School Deferment, Graduate Deferment, and Military Service Deferment. For Parent PLUS Borrower loans, it is only available to parents who received Direct PLUS Loans or FFEL PLUS Loans. The deferments listed below are available to Direct Loan, FFEL Program loan, and Perkins Loan recipients only as per the Federal Student Aid government website. Types of deferments available differ based on your education loan lender, but there are commonalities between all private student loan debts. According to US News, private lenders can offer deferment relief for up to 6 months, or in extreme cases 12 months.

Federal Student Loan Deferment Types

In-School Deferment Request
Parent PLUS Borrower Deferment Request
Graduate Fellowship Deferment Request
Rehabilitation Training Program Deferment Request
Unemployment Deferment Request
Economic Hardship Deferment Request
Military Service and Post-Active Duty Student Deferment Request

It sounds like a great deal, but remember – you’re increasing the principal balance of the loan and prolonging the inevitable. Let’s say that you chose to defer your loans. As per MarketWatch, the average undergraduate student comes out with $37,000 in student loan debt. Think the cost of an undergrad degree is a lot? The average cost for a law school student that graduated from a private college is $122,158 according to Forbes. Even more unbelievable is the average Medical School Debt at $189,165 as per Modern Healthcare. Check out our chart below to see the hidden costs associated with deferring your student loan payments. Calculations as per those listed in College Reviews.

Undergraduate Deferment Loan Costs

Total Loan Cost	Interest Rate	Deferment Period	Loan Length	Total Debt After Deferment	Total Increase in Debt
$37,172	8.25%	12 months	10 years	$40,238	$3,066
$37,172	8.25%	24 months	10 years	$43,305	$6,133

Graduate Deferment Loan Costs

Total Loan Cost	Interest Rate	Deferment Period	Loan Length	Total Debt After Deferment	Total Increase in Debt
$140,616	9.50%	12 months	10 years	$153,974	$13,358
$140,616	9.50%	24 months	10 years	$167,333	$26,717
$161,722	9.50%	12 months	10 years	$177,085	$15,363
$192,449	9.50%	24 months	10 years	$167,333	$30,727

Forbearance

Financial responsibility starts with taking charge of your financial obligations and developing a sound monthly budget. However, what happens if you unexpectedly lose your job or are unable to work due to medical reasons? You suddenly find yourself in financial hardship and may turn to your student loan provider to seek forbearance options.

Similar to deferment, each loan provider and loan type has a unique set of guidelines to qualify for forbearance. Unlike deferment, forbearance could potentially affect your credit. The guidelines for qualifying for forbearance are different for the federal and private student loan programs, so check with your loan servicers and lenders to determine what forbearance options are available. According to the Federal Student Aid site, there are two types of Forbearance for Federal Student Loans- General and Mandatory.

General Forbearance

According to the government Federal Student Aid site, General Forbearances are used when you cannot make a monthly payment. Direct Loans, FFEL Program loans, and Perkins Loan borrowers qualify for this type of forbearance. Types of General Forbearance as per the Federal Student Aid site.

Financial difficulties
Medical expenses
Change in employment
Other reasons acceptable to your loan servicer

Mandatory Forbearance

If you meet the requirements for this type of loan, your loan servicer is required to grant you forbearance. Mandatory forbearance is only provided for 12 months. If you still qualify at the end of the 12-month period, you must resubmit your information. As per the Federal Student Aid site, here are the types of Mandatory Forbearance:

Medical or Dental Internship/Residency, National Guard Duty, or Department of Defense Student Loan Repayment Program – (Direct Loans and FFEL Program loans only)
Student Loan Debt Burden (Direct Loans, FFEL Program loans, and Perkins Loans)
AmeriCorps Forbearance (Direct Loans and FFEL Program loans only)
Teacher Loan Forgiveness Forbearance Request) (Direct Loans and FFEL Program loans only)

Once you qualify for forbearance, there may be a time period in which you may need to reapply in order to continue receiving benefits, as well as a maximum time they’re available. Keep making your monthly payments until forbearance is granted by your lender, as a delinquency on your monthly payments can result in a negative hit to your credit score. Just like deferment, most student loans in forbearance will accrue interest which gets capitalized and added to the principal amount of your loan. Therefore, this seemingly attractive option to postpone your monthly payments during an unexpected financial hardship ultimately further enslaves you to your student loans.

Although deferment or forbearance may seem like a tempting option, it isn’t always the best path forward. Making even a partial monthly payment is better than making no payment at all. Watch your budget closely and get creative with the steps you can take to avoid deferment or forbearance.

Refinancing your student loans is another great option to consider, just be sure to find a reputable lender like Education Loan Finance. By consolidating private and federal student loans into one monthly payment, you may be able to reduce your student loan payments enough to help you afford that wedding or down payment on a home.

Our Simplest Guide to Student Loan Refinancing

Department of Education Proposes That New Entity Handle Student Loan Debt

On Tuesday of this week, the Trump administration and Department of Education (DOE) Secretary Betsy DeVos proposed that a new, independent entity manage the federal student loan portfolio, rather than the Department of Education’s Office of Federal Student Aid. Devos proposed the move at a conference this week, calling for a “stand-alone government corporation, run by a professional, expert and apolitical board of governors.”

When asked why they believe the federal student loan portfolio should be managed outside of the DOE, Devos claimed that the DOE was never set up by Congress to be a bank, but claims that’s effectively what they are.

In order to make this happen, laws would have to be passed that would separate the Office of Federal Student Aid from the DOE in order for it to be a stand-alone entity.

Source: Yahoo News

Lawmakers Call for Investigation of Federal Loan Discharge Program for Disabled Borrowers

With plenty of heat surrounding allegations against the U.S. government’s Public Service Loan Forgiveness Program for not making the qualification requirements clear, a new federal program is under fire from lawmakers this week – this one meant to forgive student loans of borrowers with “significant, permanent disabilities.” An NPR report recently revealed that the program wasn’t helping a large portion of borrowers who were eligible.

This loan discharge program is specifically meant to help individuals who have the most severe type of disability: Medical Improvement Not Expected (MINE). The Education Department finds eligible borrowers by comparing federal student loan records with the Social Security Administration records, then sends a letter to these disabled individuals and requires them to apply in order to have their loans discharged. The controversy lies in that that many of these borrowers are unable to apply or may not be aware of the notice they received. The NPR report revealed that only 36% of eligible borrowers have had their student loans discharged.

Source: NPR

Trump Calls on Aides for Plan to Tackle Student Debt

With Democrats such as Elizabeth Warren making bold claims for tackling student debt in the US, President Trump has called on his administration to put together a “blueprint” for how they will manage the student debt crisis. The Washington Post claims that Trump is calling for this plan as a method to combat “anxieties that Democrats such as Warren will tap into populist impulses that propelled his 2016 victory,” and that “he will need policies beyond his signature areas of immigration and trade to counter them.”

Source: The Washington Post

Rand Paul Wants You to Use Your 401k to Pay Off Student Loans

Senator Rand Paul (R-KY) recently proposed a legislative act that would allow individuals to use pre-tax money from their 401k to pay off student loans, or even pay for college. The HELPER Act (Higher Education Loan Payment and Enhanced Retirement), is an initiative by Paul to “reshape the way people save for higher education, driven through tax and savings incentives,” says Forbes writer Zack Friedman.

Key takeaways from the act would include the ability to withdraw $5,250 from your 401(k) or IRA annually to pay off debt or pay for college, the ability to pay tuition and expenses for a dependent or spouse, tax-free employer-sponsored student loan and tuition plans, and a removal of the cap on student loan interest reduction.

Source: Forbes

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2019-12-05

Student Loan Interest vs. Other Interest Types

By Caroline Farhat

If you have student loans, you’ve probably been told at one point that it’s “good” debt. But what does that really mean? Is any debt actually good or is it all bad? Is the interest you pay on your student loans better than the interest you pay on your auto loan?

As you accumulate more assets, you’ll encounter many different types of interest. It’s helpful to know how each type of interest differs so that you know exactly what you’re getting into when you borrow money.

What is Student Loan Interest?

Student loan interest is essentially the cost you pay for borrowing the money. When you pay interest, you will be paying back the amount of money you borrowed plus the cost to borrow the money (the interest). The higher the interest rate, the more money you will have to pay in addition to the amount you borrowed. The amount you borrow is called the principal and the cost to borrow the money is called the interest. Interest is charged on both federal student loans and private student loans until the loan is paid in full. When you make a payment on a loan the interest is paid first, any amount of the payment over the interest is applied to the principal and lowers the balance of the loan. The types of rates and how interest is calculated are based on the type of student loan.

Federal Student Loans: The Difference Between Subsidized and Unsubsidized

Federal student loans have fixed interest rates that are set by the government. They remain the same throughout the life of the loan. Also, federal student loan interest rates may be lower than auto loans or personal loans. Federal student loans have two different types of interest: subsidized interest and unsubsidized interest. A subsidized interest loan means the government pays the interest on the loan while you are in school or during deferment (a grace period from federal student loan payments granted for certain situations), which means the balance of the loan does not increase. Once you are out of school or the deferment period ends, you will be responsible for paying the interest on the loan. An unsubsidized federal student loan means the interest starts accruing from the day the loan is first disbursed. Although you may not be required to make payments on the loan while you are in school, you will end up with a loan balance higher than you initially borrowed. The interest on a federal student loan is calculated using the simple interest formula. Here is how to calculate the simple interest formula:

The principal (the amount of money you borrowed) X the interest rate = The amount of interest you will pay each year for the loan

Private Student Loans: The 411 on Fixed and Variable Interest Rates

Private student loans can have a variable interest rate or a fixed interest rate. A variable interest rate is based on the current market and economy and can change over the life of the loan. A fixed interest rate remains the same throughout the life of the loan. It’s important to note that rates can vary widely based on the student loan lender, which is why it is so important to do your research and only sign with a reputable company. The interest rate you receive on a private student loan is also based on certain financial factors, including your credit score.

For example, ELFI customers who refinanced student loans report saving an average of $309 every month¹. If you currently have private student loans, you can check out our student loan refinance calculator to get an estimated rate and monthly payment for both fixed and variable options.² Whether you’ve taken out federal student loans or private student loans throughout your college journey, consolidating and refinancing could score you some significant savings.

Interest On Other Common Loans

If you’re in full adulting mode, odds are you have or are considering getting an auto loan or mortgage. Just like your student loans, these financial products come with interest as well.

Interest rates on car loans can be variable or fixed rates and the rate you receive is based on factors such as your credit score and financial health. There are two ways interest is calculated on car loans: simple or precomputed. For simple interest, the interest is calculated based on the balance of the loan. If you pay extra on your car loan, the principal will be reduced and in the long run, you will be saving money in interest (woohoo). If you have a precomputed interest loan on a car, it will be calculated on the total amount of the loan in advance. This means that even if you make extra payments, you will not save any money on the interest over time. One big difference to note between student loan interest and auto loan interest is how it can affect your taxes. With student loans, the interest you pay may be a tax deduction you can take depending on your income and the amount of interest you have paid. With an auto loan, there is no such benefit.

Interest on a house loan, otherwise known as a mortgage, is calculated similar to a simple interest car loan. An interest rate on a mortgage may be variable or fixed depending on which type of loan you choose. There are two major types of mortgage loans:

Principal and interest loans - You pay back the interest and the principal (the amount of money you borrowed) at the same time. This is the most common type of mortgage.
Interest-only loans - This is when, for a certain period of time, payments towards the loan only go towards paying off the interest on the loan.

Mortgage loans are amortized, like some student loans, which means your payment goes towards more interest upfront. Then as the balance decreases, you pay less interest and the payment goes towards paying down the principal. Also, just as with some student loans, some of the interest you pay on your mortgage may be tax-deductible.

Understanding Interest Can Pay Off

It’s important to understand the different types of interests and loans when determining which debt to focus on paying off first. Being strategic about how and when you pay off your debt can save you hundreds and even thousands of dollars. A good rule of thumb is to pay off the debt with the highest interest rate and then focus on your interest rate debt. Of course, if you have the option to refinance, explore that first and then develop your debt reduction plan.

¹Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

²Subject to credit approval. Terms and conditions apply. Variable rates may increase after closing.

2019-12-04

Tips for Starting Your Student Loan Repayment Journey

Once you graduate from college, leave college, or drop below half-time enrollment, it’s time to start thinking about when your student loan repayment period kicks in. Understanding the repayment process for your student loans is very important for a number of reasons – for one, if you don’t pay, your interest will accrue. Second, if you don’t pay, it will affect your credit score, which can hinder your ability to buy a home, buy a car, qualify for credit cards, take out a personal loan, or refinance your student loans. If you graduated this past spring, your student loan repayment period will likely start around this time of year (if they haven’t kicked in already). Follow these tips to master student loan repayment and get yourself to a strong financial start after college.

Know How to Access Your Loan Information

A good first step is to acquire your loan information. This can typically be accessed via an online login. Monitoring your loan information will be essential during the course of repayment. If you took out Federal Student Loans, you can likely access your info at https://myfedloan.org/. If you took out private student loans, check with your lender for how to access your information. Tracking your loans will give you a gage on the status of each loan, the balance you owe, as well as interest rates for each loan. By understanding the status of your loans, you can make more informed decisions about how you want to prioritize repayment, what type of repayment plan you want to choose, or even whether you want to consolidate or refinance your student loans.

Know When Your Payments Start

Immediately following graduation, you’ll likely have a grace period, or a period of time before your first payment is due. This can vary depending on the type of loan you have, and they can be different for each loan. Subsidized and Unsubsidized Federal loans have a six-month grace period. Perkins loans have a nine-month grace period. There is no grace period for PLUS loans; however, if you are a graduate or professional student PLUS borrower, you do not have to make any payments while you are enrolled at least half time and (for Direct PLUS loans first disbursed on or after July 1, 2008) for an additional 6 months after you graduate or drop below half-time enrollment. Private student loans will have differing grace periods so contact your loan servicer for more details. Knowing when your loan will be due is imperative to starting off on the right foot when it comes to your student loans.

Weigh Repayment Options

When you take out federal student loans and your grace period is complete, you will automatically enter the Standard Repayment Plan. This plan allows you to pay off your debt within 10 years, with the monthly payment remaining the same over the life of the loan. If standard repayment doesn’t work for your budget, you may want to consider some other options, or perhaps even refinance your student loans. The federal student loan program offers the following Income-Based Repayment plans:

Graduated Repayment Plan – Gives you a smaller payment amount in the beginning and gradually increases the payment amount every two years.
Extended Repayment Plan – Allows you to pay the least possible amount per month for 10 to 25 years.
Revised Pay As You Earn Repayment Plan or REPAYE Plan – Bases the monthly payment on you (and spouse’s) adjusted gross income, family size, and state of residence.
Pay As You Earn or PAYE – Monthly payments are based on your adjusted gross income and family size. You must be experiencing a financial hardship to qualify. You must also be considered a “new borrower” as of 10/1/2007 or after, or be someone who received an eligible Direct Loan disbursement on 10/1/2011 or after.
Income-Based Repayment or IBR – Monthly payments based on your adjusted gross income and family size. Must be experiencing a financial hardship to qualify.
Income-Contingent Repayment or ICR – Based on your monthly adjusted gross income and family size. Typically chosen if an individual can’t qualify for the Pay As You Earn Plan or Income-Based Repayment.Any changes to your income or your spouse’s income will affect your student loan payment. For example, if your salary increases, your student loan payment will as well. If you are married, both your income and your partner’s income are combined. Two combined incomes will increase your total income, likely increasing your monthly payment.

Keep in mind that each repayment option will have positives, negatives, as well as eligibility requirements. Research each option before making a decision, and consider contacting your loan servicer if you have questions or need more information.

Automate Your Payments (If you can)

Setting up automatic payments will make student loan repayment less of a hassle, will avoid late payments, and may even score you an interest rate reduction. Just be sure you have enough money in your account month-to-month to endure the payments without overdrawing.

Make Extra Payments

When you make your monthly payment, it will first apply to any late fees you have, then it will apply to interest. After these items are covered, the remaining payment will go toward your principal loan balance (the amount you actually borrowed). By paying down the principal, you reduce the amount of interest that you pay over the life of the loan. Applying extra income by making larger payments or double payments will reduce the total amount you’ll end up paying.

Reach Out for Help if Necessary

If you’re having trouble making your monthly payments, particularly on your federal student loans, contact your loan servicer. They will work with you to find a repayment plan you can manage or help determine your eligibility for deferment or forbearance. If you stop making payments without getting a deferment or forbearance, you risk your loan going into default, which can have serious consequences to your credit.

Weigh Refinancing & Consolidation Options

If you have multiple student loans that are all accruing interest at different rates, you may want to consider student loan refinancing or consolidation to make repayment more manageable. The federal student loan program offers student loan consolidation, in which they combine your loans into one loan with a weighted average interest rate, rounded up to the nearest 1/8th percent. You can also consolidate your federal and/or private student loan with a private lender through the process of refinancing. Refinancing your student loans is much like consolidation, however it offers the opportunity to start new repayment terms and possibly lower your interest rate. Keep in mind that refinancing with a private lender may cause you to lose access to certain federal student loan repayment options that are listed above.

Look Into Loan Forgiveness

If you work in a public service position or for a non-profit, you may want to consider the Public Service Loan Forgiveness program or another loan forgiveness program offered by the federal government. Other options exist for volunteers, military recruits, medical personnel, etc. Some state, school, and private programs also offer loan forgiveness. Check with your school or loan servicer to see if you may qualify for student loan forgiveness.

Earn Your Tax Benefits

If you are paying your student loans, you may be able to deduct the interest you pay on your student loans when filing your taxes. Deductions reduce your tax liability, saving you money and serving as a nice tradeoff for having to pay interest on your student loans. Repayment of student loans can be a long, difficult journey – but by taking advantage of your resources and staying determined to pay off your debt, it is manageable. If you need more information on paying back your student loans or the options that are available to you, contact your loan servicer.