If I Go To Grad School, Can I Defer My Loans?

Yes, you probably can. Getting your master’s, DSW, or doctorate from med school or law school requires money and time to concentrate. Attending graduate school while worrying about your undergraduate student loans can detract from your studies. Deferring your loan will help you concentrate on graduate school and make the most of your grad school experience. In this article, we’ll help you understand how deferring your undergraduate school loans can help you to successfully manage your student loan debt while you attend grad school. 

Can I Defer Undergraduate Student Loans While In Graduate School?

If you have a public student loan, you can defer your student loan while you’re in school if you’re enrolled at least half-time. Often, but not always, this deferment period is automatic because schools report enrollments. You should receive a notice that your loan is deferred. If not, you’ll need to call your loan servicer to complete the deferment process. 

If you have a Direct Plus loan, you’ll have a six-month grace period after you leave grad school before you’ll need to begin making repayments. It’s important to know that you only receive one grace period. If you have trouble making payments after the grace period, look at income-based repayment plans, deferment, or forbearance options. There is no grace period for undergraduate Direct Plus loans, only grad school Direct Plus loans. 

If you stop attending grad school but then return to grad school at least half-time during the grace period, your loan will be deferred again. When you stop attending grad school the next time, you’ll get a fresh six-month grace period. 

When Student Loans Accrue Interest

The accrued interest charged on your deferred student loan will depend on the type of student loan you’ve received. Subsidized federal student loans, which are income-based, do not accrue interest while the borrower is in grad school. Unsubsidized federal student loans will accrue interest while the borrower is enrolled in school. Your loan servicer can tell you if your private student loans defer interest but chances are that they won’t. 

If your loan does accrue interest, your total student loan payments can be reduced if you pay the interest while you’re enrolled in school. If you don’t pay the interest, interest will be charged on top of the interest you don’t pay. Interest payments are a small fraction of a standard student loan payment and may be more manageable.

Capitalization And Unpaid Interest

Except for subsidized loans, interest is still being charged when a loan is deferred. When it’s time to pay your loan, all the unpaid interest charged while your loan was in deferment is added up and turns into a total sum amount. That total of unpaid interest is added to your principal balance. (The amount you originally borrowed.) Your new principal balance will be more than what you originally borrowed. Interest will then be charged on that new (higher) principal balance. This is called "interest capitalization."

Interest capitalization makes your loan balance higher because you will be charged interest based on the new, higher principal balance. If you pay just the interest while attending school, deferred interest won’t be added to your principal balance. You won’t end up paying interest on the deferred interest. 

You don’t have to pay the interest while your loan is being deferred, but it will improve your long-term financial health if you do. 

What Are My Student Loan Repayment Options? 

Several options exist to help you repay your loans. There are qualifications to these options, and your eligibility will depend on the type of student loan you’re dealing with, your financial situation, your payment history, and loan terms. If you have a private student loan, you can talk to your loan servicer to see what payment plans are available under your loan terms. 

Here’s a list of some student loan repayment options for public loans:

• Income-Driven Repayment Plan (IDR): Based on income. Payments could be $0.00. 

• Standard Repayment Plan: A fixed amount pays off your loan in ten years. Not recommended for students planning on Public Service Loan Forgiveness (PSLF).

• Graduated Repayment Plan: Lower payments for the first couple of years, then payments gradually increase. Not an option for Public Service Loan Forgiveness repayment plan participants.

• Extended Repayment Plan: You must have $30,000 or more in student debt for this plan and be a Direct Loan borrower. Payments can be fixed or graduated. Doesn’t qualify for PSLF repayment plan.

• Revised Pay as You Earn (REPAYE): Payments are 10% of your discretionary income. Recommended for those seeking Public Service Loan Forgiveness.

• Pay as You Earn (PYE): You must have received your Direct Loan on or after Oct. 1, 2011. You must have also qualified as a new borrower on or after October 1, 2007 and have a high debt to income ratio. Tax consequences. Recommended for students seeking Public Service Loan Forgiveness.

• Income-Based Repayment Plan (IBR): High debt to income ratio required. Payment will be 10%-15% of your discretionary income. The amount you can’t pay in 20 years is forgiven, but you must pay taxes on the forgiven amount. Acceptable for the PSLF program.

• Income-Contingent Repayment Plan (ICR): This plan looks at your discretionary income and compares it to the amount you would pay with a 12-year fixed payment. Your payment will be the option that turns out to be the lesser amount. Qualifies for PSLF program.

• Income-Sensitive Repayment Plan: This is limited to Federal Family Education Loan (FFEL) borrowers. Doesn’t qualify for the PSLF program. Payments based on income. Loan term 15 years. 

• Loan Consolidation: You can group all your student loans into one loan and have a single monthly payment. You may get a lower interest rate or a fixed rate instead of a variable rate. 

If these options to repay your loan don’t work for you, look at deferment and forbearance options. 

Financial Hardship

When financial hardship hits, it’s important to contact your lender and advise them of your situation. Your public loan lender may be able to help you with deferment or forbearance options or help you clarify which income-based plan fits your situation. If you qualify for the IDR plan mentioned above, your payments could be $0.00. 

If you have a public loan and receive help from public assistance programs (TANF, SNAP, etc.) or you’re working and earn less than 150% of the poverty guidelines for your state and family size, you could qualify for an Economic Hardship Deferment and postpone your payments for three years. If you’re in the Peace Corps, you’re also eligible to qualify for this program. 

There’s also a federal student loan deferment program for borrowers in vocational, drug abuse, mental health, or alcohol abuse rehabilitation treatment programs. This is called the Rehabilitation Training Deferment. If you’re unemployed, whether or not you’re in rehab, you can qualify for a federal student loan deferment for up to three years. There are also separate deferment options for Parent Plus borrowers. 

A student loan forbearance lets you postpone payments. This is available for public loans, but usually not for private loans. During 2021, federal student loan payments will remain in administrative forbearance under the CARES Act due to the coronavirus pandemic. Interest rates have been lowered to zero percent. This is temporary until September 2021. Review the official Covid-related announcements from the Federal Student Aid government office to stay updated on changes. 

There are general and mandatory forbearance plans for federal student loans. You can postpone your payments for a year, and you can postpone your loans more than once, but you’ll still be charged interest and that interest will be added to the principal once you start paying on your student loan. Postponing your loan payments can help in an emergency, but it makes financial sense to try other payment options first. 

Student Loan Forgiveness

Student loan forgiveness is an option that can save you lots of money in the future. When a student loan or a portion of a student loan is forgiven, the borrower is no longer required to pay the forgiven amount. There are usually tax consequences associated with this option. 

The government offers a Public Service Loan Forgiveness Program and a Teacher Loan Forgiveness Program. There are several eligibility requirements for each of these programs. For the Teacher Loan Forgiveness Program, you must be a qualified teacher at a low-income school for five consecutive complete years. For the Public Service Loan Forgiveness Program (PSLF) you must work in public service full-time for certain categories of government or non-profit employers. You’re also required to have made 120 payments on your Direct Loans under qualifying plans (noted above). There are other eligibility requirements and exceptions, and you can check the Federal Student Aid website for the latest information. 

There are also federal forgiveness programs for disabilities, death, bankruptcy, closed schools, and other situations. Contact your loan servicer provider or the Federal Student Aid office to learn more. 

Let’s Summarize...

Undergraduate student loans can be deferred while you attend graduate school at least half-time. The process is often automatic. If you need payment options, the government has plans for deferment, income-based payments, and forbearance. If you start an income-based or deferment plan, pay the interest so you can have more money after you graduate! If you have private loans from your undergraduate education, call the loan service provider to find out your options. 

Graduate school is tough. Graduate students shouldn’t have to worry about their undergraduate student loan payments while they are focusing on their studies. Do some research and find the best payment options for you so that you can focus your energy on the here and now.