In-School Deferment: Eligibility, Process, and Alternatives

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in-school deferment

Deferment allows borrowers to stop repayment for several months. Not repaying debt for some period sounds attractive. However, this option brings its risks, too. During deferment, whether in-school or another type, interest payment might accrue. As a result, borrowers can end up with higher loan balances than before. This guide focuses on in-school deferment and discusses the overall process. Besides, we present you with two alternatives in case you do not qualify for deferment.

What is In-School Deferment?

Deferment allows borrowers to delay the payments. During the deferment period, borrowers do not need to make payments for student loans. It is possible to get a suspension for various reasons, such as economic challenges, cancer treatment, graduate fellowship, etc. One of the most common types of deferment is due to being enrolled, which is called in-school deferment. 

Such deferment happens when a debtor is enrolled in an eligible college or career school at least half-time. Deferment does not cover only the period till graduation. In addition, if you are a graduate or professional student with Direct PLUS Loan, you will have an additional six-month deferment after graduation. You start repayment only after these six months. Keep in mind that postponement also stops if your study falls below half-time. 

How In-School Deferment Works?

Generally, borrowers do not need to apply for in-school deferment. They are automatically given this status once they enroll at university at least half-time. In that case, the loan servicer notifies the borrower that he/she is in-school deferment period and there is no need to repay the student loans. 

If you did not get automatic notification from the loan servicer, you could contact the school’s financial aid officer. The officer will contact the officials and ensure you get deferment status. However, in some cases, you can also fill a deferment application form to request non-repayment.

Please, continue your payments as usual until you are notified that deferment is effective. Otherwise, you can miss payments and face serious consequences.

Eligibility

in-school deferment

One of the essential requirements for in-school deferment is being enrolled at least half-time. If your studies fall below this threshold, postponement stops, and you are required to repay the debt. 

Besides, keep in mind that deferment covers Direct, FFEL, and Perkins loans. Private loans are not covered by federal in-school deferment. However, there exist some private lenders who provide deferment options for students. We will discuss private school deferment in the following sections.

If you have Perkins loans, another deferment option will be available to you. When borrowers apply for Perkins loan cancellation, they get deferment during the progress period. Additionally, Perkins loan borrowers can receive a six-month additional grace period for repayment after graduation (or once the borrower becomes ineligible for in-school deferment). 

The Danger with In-School Deferment

Some people would agree to anything to delay the repayment process. However, such a benefit does not come without its risks. Unfortunately, during the school deferment period, the interest payments can still accrue. 

The accrual of interest depends on what type of loan you have. Direct Subsidized, Subsidized Stafford, Perkins, subsidized parts of Direct Consolidation, and FFEL consolidation loan borrowers will not face accruing interests. The others should be worried about interest payments accumulating. Such debtors have:

  • Direct Unsubsidized Loans
  • Unsubsidized Stafford Loans
  • Direct PLUS Loans
  • FFEL PLUS Loans
  • Unsubsidized part of Direct Consolidation
  • Unsubsidized part of FFEL Consolidation. 

What Happens When Interest Accrues?

When borrowers get the loans mentioned above, their interest payments will accrue during the in-school deferment process. Such borrowers can choose to pay interest during this period. However, if they do not, the loan interest accrues. The accrued interest becomes capitalized at the end of the deferment period. 

Capitalization means interest payments are added to the original debt balance. Hence, the debtor gets more considerable original debt than before. As interest is the percentage of the original balance, the monthly payment amounts increase after capitalization. In the long run, borrowers end up paying a higher amount than originally owed.

If you have Perkins loans, interest is never capitalized. Yet, if you have Direct Loans or FFEL loans, make sure you check the above list and determine if interest is capitalized.

Other Types of Determent

You can request deferment under several conditions. First, we discussed in-school deferment, which allows borrowers to avoid payments when enrolled in schools for at least half time. However, you can still request postponement even if you do not study anymore. 

1. Deferment Due to Economic Challenges

If you work, but your income is substantially low, you can stop payment with this deferment option. The eligibility requirement is having full-time work but earning less than 150% of the poverty guideline. Additionally, if you serve in the Peace Corps or receive means-tested benefits like welfare, you can qualify for this deferment program. As a result, you will be able to stop payments for a maximum of three years. 

2. Unemployment Deferment

If you are unemployed, it is highly likely that you will not be able to afford repayment. In this case, you can ask for a deferment. As a result, you will not be required to repay debt for a maximum of three years. The eligibility requirement also involves the borrower getting unemployment benefits and seeking a job although he/she is unable to find one.

3. Cancer Treatment

in-school deferment

Going through cancer treatment is hard enough. Such borrowers should not be worried about their debt payments. Hence, the government allows deferment due to cancer treatment. Debtors can avoid payments for as long as treatment takes. Additionally, six months after the treatment ends, you will not need to repay student loans.

4. Rehabilitation

Similar to Cancer Treatment, you can stop payments if you are undergoing rehabilitation training. This process can be due to drug abuse, mental health issues, alcohol abuse, etc.

5. Graduate Fellowship

Graduate students can enroll in a fellowship program for additional financial support. Most of these programs are available to doctoral students. However, it is possible to find programs for master’s degree students. The borrowers applying for graduate fellowship deferment can stop repayment as long as the program continues.

6. Military Service and Post-Duty Non-Repayment

Military members provide hazardous service under extreme conditions. Hence, during this period, it would be unfair to require them to repay student loans. Therefore, you can get your payments deferred if you are on active duty due to war, military operation, or emergency. Besides, even after your assignment, you will receive an additional grace period. 

This deferment usually ends when the borrower resumes enrollment or 13 months pass after the completion date. The earlier one is applied. 

7. PLUS Loan Deferment

If you are a parent and took loans for a child who studies at least half-time, you can request a deferment. This deferment even applies to 6 months after graduation or after becoming ineligible. Parents can request this deferment by filling deferment requests for Parent PLUS loans. However, it is also possible to ask for postponement during applying for a Direct PLUS loan. 

Private Loan Deferment

In-school deferment can also be accessible to private student loan borrowers. However, the availability depends on your lender. Some lenders allow deferring payments during the school period, unemployment, or active duty. Others allow stopping payments when facing financial challenges. 

Yet, similar to federal loan deferment, interest will continue to accrue. Hence, after forbearance, the interest will capitalize on the loan amount. Therefore, if you do not want capitalization, you need to pay only interest during the deferment period. 

If you are not sure whether deferment is allowed for your private loan, you can contact the lender or read loan terms. 

Deferment and Forgiveness Program

During the school deferment period, you are not required to make payments. But what happens to forgiveness programs that require repayment? Unfortunately, you do not progress for this forgiveness if you are on deferment. 

For example, Public Service Loan Forgiveness requires 120 payments before your debt is canceled. Hence, it takes a minimum of 10 years of repayment. If you get a postponement for a year, you do not repay the debt and do not progress for PSLF. As a result, it takes more than ten years for PSLF.

What is an Alternative to Deferment?

Non-repayment might sound attractive. However, in-school deferment comes with its disadvantages. Besides, not everyone will qualify for deferment. In such a case, you can apply for alternatives. Generally, there exist two options:

  • Student Loan Forbearance
  • Income-Driven Student Loan Repayment

Forbearance vs. Deferment

If you have federal loans, forbearance and in-school deferment are highly similar—both suspended payment for some period. However, with forbearance, interest accrues in almost all cases. With the postponement, accrual happens with certain loan types, which we discussed above.

In addition, both programs will be barriers to borrowers for progressing toward forgiveness programs. Borrowers also get automatically qualified for forbearance, similar to deferment. 

General and Mandatory Forbearance

As deferment has several types in addition to in-school deferment, forbearance also has different categories. 

General Forbearance

It is an option for loan servicers to grant general forbearance. Hence, this option is also called a discretionary forbearance. For example, you can request non-repayment with this program if you face financial challenges, medical expenses, or employment change. There can also be other reasons, but you need to convince the loan servicer to allow you to stop payments. 

General forbearance usually covers payments during a year, but you can request another once forbearance ends. There is a limit of three for applying general forbearance.

Mandatory Forbearance

As its name suggests, this alternative to in-school deferment is not optional. Loan servicers are required to stop collecting payments under several conditions for mandatory forbearance. 

  • If you serve in AmeriCorps, or
  • If you qualify for Defense Department Student Loan Repayment, or
  • If you enroll in a medical or dental internship or residency, or
  • If you are on National Guard duty, or
  • If your student debt is 20% or more of your income, or
  • If you progress for Teacher Loan Forgiveness.

Also, keep in mind that only Direct and FFEL loans are eligible for this option. You can request forbearance for a 12-month duration and renew your request when the period is completed. 

Forbearance due to COVID-19

As discussed above, during forbearance, the interest accrues. However, there exists an exception. When the COVID-19 pandemic hit the borrowers, they became unable to afford loan payments. Hence, the government granted loan forbearance or temporary non-repayment to borrowers. Under this plan, the borrowers do not make payments, and interest does not accrue. Besides, each month in forbearance is counted for forgiveness programs. However, this benefit is expected to end in January 2022. 

Income-Driven Repayment Plan

in-school deferment

Deferment is not a long-term option. It only covers several months. Besides, interest might accrue, which can increase borrowers’ total debt. Hence, in-school deferment is not the best option if you cannot afford payments. 

If your income is significantly low and there is no expected date for improvement, postponement is not advisable. Instead, enrolling in an Income-driven repayment plan can be more effective.

Income-driven repayment plans are accessible to federal loan borrowers. This repayment is based on earning level and family size. As payment is the percentage of discretionary income, your payments become affordable. Therefore, if you earn less, you pay less for student loans. It is even possible to have $0 payments in case of extremely low earning levels. 

Besides making your payments affordable, Income-driven repayment grants forgiveness after the repayment period. For example, once you repay the debt for 20 years, the remaining amount is canceled. Hence, Income-driven repayment is a better option than deferment if you qualify for it. 

Types of Income-Driven Repayment Plans

Income-driven repayment also has different types. Therefore, it provides high flexibility to borrowers. You can choose the plan that is most suitable for your finances and payout debt effectively. 

Pay As You Earn 

The Pay as You Earn repayment plan was created to provide the most affordable repayment for borrowers. Hence, it requires 10% of discretionary income. Your discretionary income is what is left after deducting taxes and other necessary expenses from your earnings. As a result, repayment becomes a child’s game for the borrower. 

Under this plan, it takes 20 years to get out of debt. After 20 years of repayment, the remaining amount is forgiven. Therefore, Income-driven plans are better than in-school deferment as there is no forgiveness option with postponement. 

Revised Pay as You Earn

Another program created to help financially struggling borrowers is Revised Pay as You Earn. It also requires only 10% of discretionary income. However, unlike the Pay, as You Earn plan, you can repay debt either in 20 or 25 years. The payback period is shorter for undergraduate students and longer for graduate/professional students. 

Income-Based Repayment

The Income-Based repayment plan has different requirements depending on whether you are a new borrower. New borrowers are those receiving the first disbursement after July 2014. If you are a new borrower, the repayment rate is 10%, and the payback period is 20 years. Others are required to pay 15% of discretionary income for 25 years. 

Income-Contingent Repayment

An Income-contingent plan requires 20% of discretionary income or a fixed amount over 12 years payment period. Moreover, it takes 25 years to repay debt. This repayment is the only plan available for Parent PLUS debtors. 

To Sum Up…

Deferment happens when borrowers are not required to repay student loans for several months. Federal loan deferment can occur under different conditions, such as cancer treatment, rehabilitation, military activity, in-school period, etc. We focused on in-school deferment in this guide, allowing borrowers to avoid payments while enrolled at least half-time. 

However, no matter which suspension you choose, your interest payments can continue accruing. Then, accrued payments can be capitalized to your original debt balance. As a result, your debt amount and repayment amount will increase in the long run. Yet, your payments might not accrue if you have loans like Direct Subsidized, Perkins, etc. 

Forbearance and Income-driven repayment plans can be alternatives to deferment. Unfortunately, forbearance can be as problematic as deferment. However, Income-driven repayment is a better option than deferment as it provides a long-term solution. 

Get an Expert Help

If you are unsure which debt resolution strategy is the best, contact our debt specialists. Debt experts have years of experience in cases like in-school deferment, loan forgiveness, and forbearance, and they have helped thousands of borrowers similar to you. They can analyze your finances and find the most suitable option quickly. Contact us now as we provide FREE consultation for borrowers in need.