Financial Implications of Deferring Loans
When you defer payments on your student loan, it may seem like you’re making no mistakes. But there are two important outcomes you should consider when thinking about deferment:
Interest may accrue during the deferment period. Generally, interest will accrue during the deferment period on unsubsidized loans, such as direct unsubsidized loans, unsubsidized consolidation loans, direct PLUS loans, federal unsubsidized Stafford loans, federal PLUS loans, and portions of some federal consolidation loans. However, generally, there will be no interest accrued during the deferment period on subsidized loans, such as direct subsidized loans, subsidized consolidation loans, federal subsidized Stafford loans, federal Perkins loans, or portions of some federal consolidation loans. The financing costs will result in paying a larger amount over the life of the loan. The deferment period may not count towards the requirements for eligibility for forgiveness. This means you will need to resume repayment on the loan to proceed in the loan forgiveness process.
How Loan Deferment Works During Unemployment
Even if you are between jobs, you cannot simply stop paying your student loan; you risk your loan being classified as delinquent, which could lead to default. To start loan deferment during unemployment (and stop repayments), you will need to officially qualify and apply for deferment through your student loan servicer – it is not automatic. Furthermore, you will generally need to provide documentation that proves your eligibility for deferment.
How “unemployment” is defined: You do not have to be strictly unemployed to qualify for deferment. “Unemployment” is activated either by receiving unemployment benefits or actively seeking but being unable to find full-time work, defined as working at least 30 hours a week in a job that is expected to last at least three consecutive months. Types of loans: Federal student loans, which are generally the most borrower-friendly, offer the best opportunity for unemployment deferment. Some private lenders may also allow for deferment, but the rules may vary. Contact your loan servicer for full details. Applying for unemployment deferment: To make it official, submit a deferment request with your student loan servicer (the company you send monthly payments to) based on reasons of unemployment. You will need to fill out an unemployment deferment request form on the U.S. Department of Education’s website to request that your loans go into deferment. Qualifying for deferment: You will need to document your situation to qualify. There are two ways to claim that you qualify: claiming that you qualify for state unemployment benefits or that you are actively looking for work. Once approved: Stop payment as soon as you receive the official word from your student loan servicer. However, you will need to stay in touch with your loan servicer.
Note: Stopping payments abruptly on a student loan during unemployment is not the same as receiving unemployment deferment from the lender. While the latter is a legitimate approach to stopping payments, the former is not and could lead to default on the loan.
Interest Payments on Student Loans
If you have subsidized loans, the interest is paid for you. However, in the case of unsubsidized loans, you will either need to pay the interest costs each month or add those costs to your loan balance (known as interest capitalization).
Capitalizing on interest costs may seem attractive, as you can deal with them later, but this approach can be costly. Your monthly payment will actually increase. As a result, you will have to repay the amount you borrowed plus the interest that has accrued during the deferment period (plus you will pay interest on the interest that is added to your loan).
For this
The reason you may prefer to pay interest as it accrues. During the unemployment deferment period, you typically have the option to pay the interest costs each month. This payment will be less than the scheduled payment, and you are likely to prevent your debt from increasing.
For example, let’s assume you have an unsubsidized borrower loan of $30,000 at 6% interest and received a deferment for 12 months starting when the loan enters repayment. If you pay the interest as it accrues, your monthly payment would be $333 over 120 payments. Conversely, if the interest accrues, the new loan balance will reflect $1,800 in accumulated interest. Your monthly payment would be higher by $353 per month for 120 months.
Timeframe for Unemployment Deferment
Generally, if you are a borrower from the Direct Loan Program or FFEL Program, your deferment will end earlier than your maximum deferment eligibility, six months from the date of the start of the deferment, or the date you are no longer eligible for deferment for another reason.
If you have a Perkins loan, your deferment ends earlier than your maximum deferment eligibility, 12 months from the date of the start of the deferment, or the date you are no longer eligible for deferment for another reason.
When the deferment period ends, you need to reapply to remain in deferment – this is not automatic. This means you will have to sign documents again and claim that you are still actively seeking work or receiving state unemployment benefits. If the original loans were issued before July 1, 1993, the deferment period can last for up to two years; otherwise, it can continue until the
Source: https://www.thebalancemoney.com/unemployment-deferment-315583
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