Student loan grace period vs deferment vs forbearance

When you graduate from college or graduate school, it’s only a matter of time before your student loans enter the repayment stage. Know when you need to start repaying your student loans—and when you can temporarily stop making loan payments—before your first loan become due.

Student loans all into two categories: Loans that are backed by the federal government (these include Stafford and Perkins loans) and loans issued by private lenders. Federal student loans generally carry lower interest rates than private loans, but students can only borrow so much in federal loans each year, meaning many students turn to private loans to fill the gap.

Understanding what type of loans you have—and the differences in repayment requirements—can save you from missing payments, damaging your credit, and paying additional interest and fees.

When it comes to student loan repayment, federally backed loans and some private loans may come with a grace period of between six and twelve months. That means that you will not owe your first loan payment until six-twelve months after your graduation date. Some private loans, however, will not have a grace period, meaning you’ll need to make your first payment as soon as a month after you graduate.

Student loan grace periods are designed to give graduates time to find a job. If you get a job before the grace period ends, you may wish to start making loan payments anyway to get into the habit of making the payments and to avoid additional accrued interest.

Even if you don’t start paying your loans early, it’s a good idea to determine what your loan payment will be and start setting that money aside. Use it to first pay down any credit card debt you may have and next to begin to save an emergency fund.

You may be able to defer student loan payments when you go to graduate school or face a hardship such as unemployment or disability.

Forbearance is another way to temporarily pause making student loan payments if you’re having difficulty making payments but do not meet the criteria for deferment. During forbearance, interest continues to accrue. If you go more than a few months without making student loan payment, this additional interest can add a significant amount to your loan balance.

For federal student loans, a forbearance may be issued for up to 12 months at a time. General forbearance is issued by your loan servicer on a case-by-case basis, but may be granted for:

• Financial difficulties
• Medical expenses
• Change in employment

A mandatory forbearance will be issued for reasons including:

• National guard service
• Medical or dental residency
• AmeriCorps service
• If the total monthly amount you owe on all federal student loans is 20 percent or more of your monthly gross income

Pros and cons of putting off payments

Make sure you understand both the advantages and disadvantages to student loan grace periods, deferment, and forbearance. With a few exceptions, interest continues to accrue during these periods. So while these programs let you get through your education without worrying about making loan payments, you do pay a price for the convenience.

Often, you can elect to make small interest-only payments on deferred loans. You won’t make progress on the principal, but the new interest will not capitalize over time.

If you’re out of school and working in certain high-need, low-paying fields, you may be eligible for a number of student loan forgiveness programs. Unlike deferment or forbearance which simply postpone your loan payments, forgiveness programs will actually cancel some or all of your loan.

Summary

The prospect of paying back your student loans can be daunting—but that doesn’t mean it has to be overwhelming. Being aware of your options and responsibilities as a borrower can go a long way toward making the unpleasant process of repaying your loans a lot less stressful.