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How to Use Your Student Loan Deferment Grace Period Wisely

[some things in this entry were edited for better clarity, thanks to some sharp-eyed first commentators.]

One “nice” thing about student loans is that you can get them deferred. That may mean that you don’t have to pay them at all and they’re not earning interest (this is for subsidized…see below)** or that they’re earning interest (unsubsidized) but you don’t have to start paying it off yet. [paragraph edited for clarity]

Micah’s are completely deferred because he’s still technically in school, writing his dissertation. Clever Dude’s aren’t earning interest right now that he’s back at school in a Master’s program though he still is choosing to pay the minimum. Unlike Micah, he took a break in between.

It’s a handy place to be. Here are my thoughts on managing your debt-repayment while your loans are deferred.

1. Pay down other debts.

This is what we’re doing. Since we’ve only got the car to worry about and it charges interest, we’re working entirely on that. If we had minimum payments for the student loan, then we’d just treat this as a 0% interest debt in our debt snowball.

2. Save up an emergency fund.

If you’re going to attack debt, it helps to have an emergency fund of some sort to take care of Murphy. Maybe you want 3-6 months living expenses, maybe you feel like at this point you can only afford some kind of $1000-3000 cushion.

3. Save up repayment money.

If you don’t have to pay, you might as well let the interest work for you. I’m talking finding a comparatively high-interest savings account and paying into it. If you have the time, a CD might work too, if it lets you lock in good rates.

Most likely, your deferment won’t be long-term. So don’t put the money in the stock market or anything. You’re not out to chase profits here, just to store up money and earn a little interest. You’d feel pretty sucky if it turned bearish like this year.

Once you get to the end of the deferment, look into making one big payment to start you off. That way there is less money that they can charge you interest on once it starts accruing. As mentioned below, don’t forget to check out the rules on this.

Before taking any of these steps, make sure you know:

a) What your deferment means. Does it mean that you don’t have to pay them anything right now? Or does it mean that you have to make minimum payments but it’s essentially a 0% debt?

b) When you have to start making full payments. Last thing you want to do is miss a payment. Well, it’s not really the end of the world, but it’s definitely not ideal for your credit record.

c) Check how your creditor treats extra payments. Find out how to put all the extra money directly towards the debt, not the interest. You may need to write “Apply to principal” on the checks or there may be another process (especially if you pay online). You can’t assume that they’ll use your payments efficiently.

**Edit: I want to note that this goes for subsidized loans, which means that the government is paying the interest right now. If they’re unsubsidized, then the interest is accruing but you’re not required to start paying them off. A head start in this case might not be a bad idea, but look into what you’re required to do if you start paying them off now. If you may not be able to afford to start formal payments now (since you’re a student), make sure that you won’t have to keep making monthly payments.

If your loans are unsubsidized and you’ve got a job, then you’d most likely want to start paying them off ASAP.

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sjean April 1, 2008 at 1:24 pm

I am excited to get back to my MS degree for this very reason–my loans are subsidized! I doubt clever dude is required to make minimum payment, that isn’t really how deferment works (to my knowledge).

Your first paragraph isn’t quite accurate. Deferment, by definition, means you don’t have to make payments. If you have unsubsidized loans, they will still accrue interest.

Sorry to nitpick, I’m (unfortunately) a bit of a student loan expert. 🙂

Becca April 1, 2008 at 1:24 pm

Not all deferments stop interest accrual, either. From the AES website on their page about deferrals and forbearances:

Your interest keeps accruing.
Even if your monthly payments are suspended, you are responsible for repaying accrued interest on all federal and private loans. The only exception to this is for subsidized Stafford and Consolidation loans on deferment.

mrsmicah April 1, 2008 at 1:31 pm

Yep, just after it posted I remembered that I was assuming people had subsidized loans… so I edited it to add the subsidized vs. unsubsidized distinction.

Thanks, both! 🙂

Fabulously Broke April 1, 2008 at 2:36 pm

I wish I had read this article when I was at the tender young age of 19

Maybe I would’ve been MORE frugal and not in such a deep debt hole that I’m in now

Laura April 1, 2008 at 5:36 pm

My repayment is creeping up slowly (July) and I’m trying to finish off my car loan, so I’ll only have one debt to keep an eye on.

evan April 1, 2008 at 7:02 pm

great post.
thanks for sharing.

Ken Clark, CFP April 2, 2008 at 12:45 am

Great article!


Ken Clark, CFP

Ashley April 5, 2008 at 12:47 pm

I’m still in school but looking forward to a lengthy deferment when I get out. The head of financial aid at the school has told us that during deferment we can start paying on the loans (and if we send the money to the school, they’ll make sure it gets applied correctly) to get the interest paid off before it capitalizes at the end of deferment. That way when we do go into repayment, we’re not paying interest on the interest that accrued when we were in school.

Journey July 15, 2009 at 12:45 am

I am doing this right now. I have not saved up as much as I would like though.

Journey’s last blog post: Bank of America-Outrageous Hold Times

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