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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