Student Loan Deferment: Live to Pay Another Day
Let's travel in time back to August 338 B.C., when the fabled Athenian orator and statesman Demosthenes was a foot soldier at Chaeronea, the scene of one of the most famous battles in history between the Athenians and the Macedonians. The Macedonians carried the day, and 3,000 Athenians died. Demosthenes retreated early in the fight and was severely reprimanded for fleeing the battlefield. Defending himself against critics, Demosthenes retorted: "The man who runs away may fight again." Over the centuries this line has been translated to finally read "He who fights and runs away will live to fight another day."
As it turns out, this old saying is a good moral for struggling student loan borrowers who need more time to pay off their debt. Many of these borrowers are on the ropes financially, making the prospect of going into delinquency only too real. Read on to find out how a loan deferment could save the day in a student's fight against mounting debt. (To learn more about avoiding delinquent accounts, see What You Need To Know About Bankruptcy and A Lifeline For Those Drowning In Debt.)
Loan Snapshot: How Much Debt Graduates Accumulate
According to the College Board's study, Trends In College Pricing 2007, from "1997-98 to 2007-08, published tuition and fees for full-time in-state students at public four-year colleges and universities rose 54% in inflation-adjusted dollars - an average of 4.4% per year. This increase compares to 49% for the preceding decade and 21% from 1977-78 to 1987-88."
The Association of Credit and Collection Professionals reports that in 2008, collection agencies recovered $759 million in delinquent debt for the Department of Education. Among students who earned bachelor's degrees at public four-year colleges and universities in 2007-08, 6% graduated with more than $40,000 in debt. Among those who earned their bachelor's degrees at for-profit institutions, 24% had borrowed $40,000 or more.
Many students barely make more than they owe in their first year out of school - and that's before taxes and not including all the living expenses they will incur. So, what are they to do? One good option is getting a student loan deferment. A deferment is simply an extension of your principal repayment deadline. It can help students buy themselves the time they need to get their financial houses back in order.
With a deferment, interest on the loan may or may not accrue, depending on the type of loan incurred. With Perkins Loans or Stafford Loans, no interest accrues during the deferment period because the federal government pays the interest. For unsubsidized loans or private loans, interest continues to accrue throughout the deferment period. (To learn more on loans, see Getting A Loan Without Your Parents.)
Steps Students Can Take
Here are some steps students can take to get the deferment they need to "fight another day".
- Contact the lending institution and ask for the appropriate application for a deferment. State the case clearly and explain why you should qualify for a deferment. It's fine to do so over the phone but a letter may have more impact (and there's less of an opportunity to forget some important criteria, as with a verbal discussion).
- Students may be able to put a brake on interest payments on any type of loan during a deferment by "capitalizing" the loan. This means adding the existing interest onto the loan principal and rolling it into one big ball of financial obligations for the unlucky graduate. However, paying interest on interest is costly, and no way to go through life.
- Another word of warning on deferments: Don't assume that if you apply for a deferment you will get one. Students should try to continue making payments - as much as they can, anyway - while their applications are being reviewed and processed. It's a short trip from assumed deferment to default, so take nothing for granted.
Students should make sure to follow up after their request for paperwork and file the request with the name of the primary contact they'll be dealing with. That person may hold the most influence over the deferment situation.Also remember that deferment situations usually apply to individuals who are least able to afford paying their loans, including:
- Students still in undergraduate or graduate school (and likely not making much money)
- Sick or disabled students who are in recovery or who are undergoing a rehabilitation or disease treatment program
- Those who have suffered a job loss
- Those suffering from economic woes
- Parents with young children (in limited situations)
A deferment may be the hero waiting in the shadows to save these students' financial standings, and they need only ask to be saved.
The Bottom Line
While paying off student loans as quickly as possible is the best financial advice, when adverse financial situations make this option impossible, a deferment may be a reasonable alternative to provide borrowers with temporary relief from their debt.