A student loan deferral by itself does not affect your credit score, however, in certain situations, your credit score would be better off if you avoided it. Learn how student loan deferrals work and how they can affect your credit score.
- A student loan deferral doesn't directly impact your credit score since it occurs with the lender's approval.
- Student loan deferrals can increase the age and the size of unpaid debt, which can hurt a credit score.
- Not getting a deferral until an account is delinquent or in default can also hurt a credit score.
- Alternatives to deferrals include refinancing or, in some cases, income-driven repayment plans.
How Does Deferring Student Loans Affect My Credit?
A student loan deferral or deferment lets you postpone making payments on your debt—the principal, the interest, or both—for a period of time. Your lender may approve your deferral request under a number of circumstances.
Usually, these circumstances involve your inability to work: temporary total disability, rehabilitation training program, parental leave (e.g., pregnancy or caring for a newly adopted or newborn child), or unemployment. Or, they might reflect additional study: medical-school residency, full-time graduate fellowship, or at least half-time enrollment at an eligible school. Deferrals are also allowed for certain types of jobs: public service (e.g., joining the Peace Corps or the Armed Forces), or teaching in a designated area or school system that has a shortage of teachers.
Borrowers being treated for cancer can defer their loan payments during their regimens and for up to six months after the treatment is complete.
Your credit score reflects whether you are meeting your obligations to your creditors. Usually, non-payment is a prime example of not meeting obligations. But student loan deferments are a different case. You're not just opting out on your own: Your lender has approved the request to suspend your repayments. So, you are holding up your end of the agreement with your lender. Hence, the deferral will not directly hurt your credit score.
Drawbacks of Student Loan Deferrals
There are a couple of ways that deferral can indirectly hurt your credit score, however.
Waiting Too Long
Don't wait until you've fallen behind on payments to request a deferral. As soon as you're 30 days overdue, your lender can report your payment as "late" to the credit bureaus, which can lower your credit score.
When your loan payment is 90 days overdue, it is officially "delinquent." When your payment is 270 days late, it is officially “in default.” Both delinquencies and defaults have significant negative consequences on your score. Deferrals won't directly affect your credit score.
Not paying down your loan balance during the deferral period could cause your credit score to sink slightly lower over time.
The total amount you owe compared with the amount you originally borrowed affects your credit score, and the less you owe, the better. In this case, your debt is not growing, but it is getting older, and sometimes its age weighs more heavily on the score.
Maximum number of years you can usually defer student loan payments
In addition, if you have a private loan or a federal unsubsidized loan, interest will continue to accrue during the deferral period, and this increase in your loan balance, which could drag on your credit score. If you don’t pay the interest on your loan and allow it to accrue, the total amount you repay over the life of your loan may be higher.
On the positive side, if your credit score is lower than it otherwise might be because you owe such a large balance on your student loans, it should start increasing once you start repayments again.
What Are the Disadvantages of Deferring Student Loans?
Deferring your student loan has several disadvantages to consider. When you defer your student loan, you may potentially delay a student loan forgiveness program you could qualify for. You could face mounting expenses in unpaid interest and it could take you longer to pay off your debt.
When Should You Defer Student Loans?
There are a number of scenarios when you should defer student loans. If you are a part-time or full-time student, delaying student loans may be appropriate. If you lost your job and cannot afford the monthly payments, deferring a student loan would be a better financial option than failing to make your payments.
What Is the Difference Between Forbearance and Deferral?
When you have a loan deferral, your loan interest does not accrue. Essentially, your loan is paused. When you are in forbearance, interest continues to accrue on what you owe.
How Many Times Can You Request Forbearance for a Student Loan?
If you are struggling financially, you can request a forbearance of a federal student loan for up to 12 months at a time. Once the time period expires, you can request another forbearance for a total of up to three years.
The Bottom Line
A student loan deferral doesn't directly hurt your credit score. However, it doesn't help it, either. Depending on your situation, a loan deferral might not be the optimal strategy for dealing with your student debt. Before you commit to this course, consider alternative options such as refinancing or income-driven repayment plans.