How Federal Student Loan Deferment Works

Federal student loan deferment is a vastly better alternative to default as it buys the borrower some time to get their personal finances back under control. Defaulting on a student loan not only damages your FICO credit score, it could mean that certain career choices are no longer a possibility. Account delinquency will also disqualify the borrower from being eligible to defer student loans. According to the U.S. Secretary of Education, 225,300 of 3.3 million accounts (6.7%) are currently in default. This figure was just 5.2% in 2006. Given the state of the global economy, these figures appear set to deteriorate further.

Federal Student Loan Deferment

Graduates choose to defer student loans due to a change of personal circumstances. The most common reasons for student loan deferral are unemployment, poor health and economic hardship. Each of these scenarios can make it almost possible to keep-up with monthly repayments. Although not a long term solution, a payment break is an ideal way to get some temporary respite.

Defer Student Loans

Federal student loan deferment affects subsidized and unsubsidized loans in different ways. Subsidized Stafford and Perkins loans will not accrue any further interest during the period of deferment. However, unsubsidized Stafford loans will accrue interest. Those taken out before July 1 2006 will be charged a variable rate and those after this date will pay a fixed rate. Individuals who have a private loan should talk directly to the lender.

Deferring Student Loan Payments

Unable to find work - 3 years.
Economic hardship - 3 years.

* It is important to note that deferring payment will not reduce the amount of time that you have left to clear the money you owe.

Student Loan Forbearance

As long as a borrower hasn't defaulted on their loan agreement, forbearance remains possible even if deferral hasn't been granted. Although interest continues to accrue, payment can be delayed for a maximum period of 3 years. However, approval will need to be granted every 12 months.

Federal student loan deferment is not a long term solution to student loan debt, but it does provide a borrower with time to resolve their financial difficulties, recover from ill health or find work. Don't just default on your loan as the normal debt solutions are not available. Get in-touch with your school or lender should money problems become an issue.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.

Updated: 30 April 2011