Each week, we will answer a real question from readers on education costs and how to pay for college. If you have a question, feel free to send it to firstname.lastname@example.org.
Q: "I just got out of college and I can only find part-time work. Will this affect whether or not I can defer payments on my student loans? Or would I be in a better situation by not taking the part-time job so I can keep deferring and wait for a full-time gig instead?" - Martin, Ala.
A: The eligibility criteria for the economic hardship deferment are complicated, but generally if you are earning less than 150% of the poverty line you will qualify. You can check whether you will qualify by using the Economic Hardship Deferment Calculator on the FinAid site.
Using a deferment or forbearance, however, will dig your debt into a deeper hole, making it more difficult to repay. During a deferment the government pays the interest on subsidized loans, but the interest on unsubsidized loans is capitalized, thereby adding it to the loan balance.
During a forbearance the interest on both subsidized and unsubsidized loans is capitalized if its unpaid by the borrower. Just a few years of nonpayment will cause the loan balance to explode, as demonstrated by a chart on the third page of the Quick Reference Guide on Repaying Student Loans. Four years of non-payment, for example, would double the cost of the loan.
Deferment and forbearance options are also limited. There’s a three-year cap on deferments and a five-year cap on forbearances, and you must reapply every year. So with all this in mind, it is best to save deferments and forbearances for true emergencies, such as medical or maternity leave or complete unemployment.
A better approach would be to use an alternate repayment plan to reduce your monthly payments to affordable levels. The income-based repayment plan bases the monthly payments on a percentage of your discretionary income, as opposed to the amount you owe.