What is Student Loan Deferment?
A common question in the financial aid world is, "What is student loan deferment?" Rasmussen College Student Economics Business Analyst Angel Patel explains deferment and provides and example in this brief educational video.
Learn more about repaying your student loans.
Loans assumed to be unsubsidized loan issued from the federal Direct Loan program. Loan amount is $10,000, with a 6.8% interest rate and a 10 year loan term upon entering repayment.
- Standard repayment: Total interest paid is $3,809.64. Monthly payment on amortized 10-year schedule is $115.08
- Repayment after 1-year deferment: One year deferment adds $680 of accrued interest capitalized on original principal amount. Deferment deemed to begin upon entering repayment for 12 consecutive months. Repayment based on capitalized amount of $10,680 over a 10-year term at 6.8% interest. Total interest paid is $4,068.70. Including the capitalized cost of $680 for the deferment to arrive at a total loan cost of $14,749 over the 11 years from entering repayment. Monthly payment is $122.91.
- Paying during deferment: Paying $40 each month during the 12 month deferment totals $480. The total interest accrued is $680 less $480 = $200. Repayment based on capitalized amount of $10,200 over a 10-year term at 6.8% interest. Total interest paid is $3,885.83. Including the capitalized cost of $680 for the deferment to arrive at a total loan cost of $14,566 over the 11 years from entering repayment. Monthly payment is $117.38.
These calculations are based on estimates from the following online calculators:
One question we hear a lot around here is, "What is deferment?" I want to go over an example showing pretty much a person who decides to go into deferment or stay into a standard payment plan.
Now, here we have Jill. She's taken out $10,000 in unsubsidized loans. She's been having a hard time finding a job, but she decides to make a couple sacrifices and make her $115 monthly payments. So, after 10 years, she'll have ended up spending about $14,000 in repaying her loans, and that's about $10,000 for the actual loan and the rest in interest expense.
Now, let's say Jill decides she needs to enter into deferment. So she's not going to make any payments for a year, but when she enters repayment one year later, she's actually going to now owe $10,700 due to the amount of interest that she has accrued over that time. She will still have her 10 years to repay her loan. She'll have ended up spending about $15,000 in repayment.
Now, let's say she still decides to go into a deferment but says, "You know what, I can afford to make $40 monthly payments." So when she enters back into repayment one year later, she's actually going to owe now $10,200. She'll still have her 10 years to repay her loans, except for now she's going to end up spending about $14,500 while she's in repayment.
So, when you're answering the question, "What is deferment," it's always important to remember the impact that deferment will have to the total cost of your loan.