Welcome back to Day 4 of the CommonBond Student Loan Boot Camp. Yesterday we learned about how student loan interest is capitalized. Today we will go deeper into the situations you may face that would cause your student loan interest to capitalize.
Here's What You'll Learn Through the CommonBond Student Loan Boot Camp
Day 1: Average Student Loan Debt and Student Loan Refinancing
Day 2: Principal Versus Interest
Day 3 What Is Capitalized Interest?
Day 4: What Are Grace Period, Deferment and Forbearance?
Day 5: Student Loan Refinancing Versus Student Loan Consolidation
Day 6: Why Should You Refinance Private Student Loans?
Day 7: What Is Public Service Loan Forgiveness?
Day 8: How to Reduce Student Loan Payments
Day 9: How to Use a Student Loan Payoff Calculator
Day 10: Should You Pay Off Your Student Loans Early?
Day 4: Grace Period and Deferment and Forbearance
Interest capitalizes following:
- A six-month grace period that begins on graduation day
- A deferment period for a student loan
- A forbearance period for a student loan
So what are the grace period, deferment and forbearance? And what exactly do they mean for your student loans? Let's examine each situation:
What is the grace period? For student loans, the grace period typically refers to the six months following graduation during which you do not need to make any payments on your student loans. At the end of this grace period, you will begin making regular monthly payments on your loans.
What happens during grace period? For many loans, interest is still accruing during your grace period, but you are not required to make any payments at all. This means that when the six months of the grace period are over, six months worth of interest will capitalize, and your monthly payments will reflect this larger loan balance. Many lenders allow you to make payments during your grace period to reduce the added cost of capitalized interest.
If you want to lower your interest rate through refinancing while in your grace period, many lenders require that you begin making payments even if the six months are not over. A handful of lenders, including CommonBond, honor your grace period so that you can refinance to a better rate and still wait to begin repayment.
What should I do if my grace period is ending? First, gather the basic information on all your student loans, including how many student loans will enter repayment and when, your account numbers, your current monthly payment schedule, and your loan servicer's contact information. You can generally find all of that information by looking at your student loan monthly statements or by logging into your student loan servicer portal. Then, evaluate whether your loans are really the best fit for your personal situation. If you might benefit from lower interest rates, a different loan term or more flexible monthly payments, student loan refinancing may be right for you.
What is deferment? A deferment is a period during which you do not make payments on your student loans. There are typically two types of deferment: in-school deferment and deferment for six months after graduation which, as mentioned earlier, is referred to as your grace period.
What happens during in-school deferment? In-school deferment happens when you borrow money to pay for school, but you do not make any monthly payments on this loan until you graduate. For most loans, interest will continue to accrue during in-school deferment and then capitalize, adding to the loan balance you must begin repaying six months after graduation. Only special federal student loans, such as the Perkins Loan allow for in-school deferment with no accruing interest.
What happens during deferment after I graduate? Because deferment is a form of borrower protection that lenders offer at their discretion, your deferment options will be different with each lender, so contact your loan servicer to learn about your eligibility for deferment options. At CommonBond, deferment after graduation comes in two forms: a six-month grace period directly following graduation and a deferment period because you've gone back to earn a graduate degree. You do not need to make loan payments in either of these cases, though interest will continue to accrue.
What is forbearance? Like deferment, forbearance is a period of time during which you do not need to make payments on your student loans. Unlike deferment, borrowers must apply to their lenders to enter forbearance and often do so in the case of economic hardship.
What happens during forbearance? Forbearance is a type of borrower protection, a feature that each lender defines differently for their specific loans. Therefore, forbearance could involve temporarily reducing payments or simply postponing them, depending on the loan. Your lender will also specify for how long you can be in forbearance and the timing around when you need to apply for forbearance. Interest continues to accrue on most loans during forbearance and will capitalize at the end of the period, adding to the loan balance you'll need to repay.
How is forbearance different from deferment? The main difference between deferment and forbearance is that you're automatically granted a deferment, but you must apply for forbearance.
What should I do if I think I need forbearance? First, contact your loan servicer as soon as you think you'll have trouble making payments. They can explain all your options and how forbearance will affect your loan. Acting early is important because you'll have to apply for forbearance. Since you can't enter forbearance without approval from your lender, seeking advice as early as possible will ensure you're not forced to miss a payment. In fact, a few lenders, like CommonBond, may offer you additional assistance during forbearance, such as helping you find a job if you're out of work. At CommonBond, we call this program, which includes forbearance, CommonBridge.
The CommonBridge program offers you the option to postpone your monthly payments, in 3-month increments, for up to 12 consecutive months, and you can be in forbearance for 24 total months throughout the life of your loan. Like deferment, forbearance won't hurt your credit score. Forbearance is designed to prevent you from missing a payment, which would hurt your score—but interest will continue accruing during forbearance.
Now that you know the basics about student loans, you're more prepared to find the best loan option for your financial situation. Tomorrow we'll discuss the tradeoffs between student loan refinancing and student loan consolidation.