Principal Deferment Options: What You Need to Know
As a responsible borrower, you may find yourself in situations where making principal payments on your loans becomes challenging. Whether you’re facing financial hardship or unexpected circumstances, it’s essential to be aware of the options available to defer your loan principal temporarily. In this article, we will explore different principal deferment options and provide insights into their benefits and considerations.
1. Loan Deferment vs. Forbearance
When it comes to delaying principal payments on your loan, two common options are loan deferment and forbearance. While both can help borrowers temporarily suspend paying off the principal, they differ in terms of eligibility requirements and interest accrual.
Loan deferment is typically granted for specific situations such as unemployment, economic hardship, or returning to school at least half-time. During the deferment period, no interest accrues on subsidized federal student loans. However, unsubsidized federal student loans and private loans continue accruing interest.
On the other hand, forbearance is usually offered when borrowers don’t qualify for deferment but still need temporary relief from making monthly payments due to financial difficulties or medical issues. Unlike deferment for subsidized federal student loans, all other types of loans (including unsubsidized federal student loans) continue accruing interest during forbearance.
2. Federal Student Loan Deferments
If you have federal student loans and meet certain criteria like being enrolled at least half-time in an eligible program or experiencing economic hardship (unemployment or low income), you may be eligible for various types of deferments:
a) In-school Deferment: If you return to school at least half-time while having a Direct Subsidized Loan or Stafford Loan that entered repayment before enrollment, you might qualify for an in-school deferment.
b) Economic Hardship Deferment: This option is available if you’re experiencing financial difficulties such as unemployment benefits, receiving public assistance, or having a low income. Economic hardship deferment can provide temporary relief for up to three years.
c) Unemployment Deferment: If you’re actively seeking employment and unable to find full-time work, you may be eligible for unemployment deferment. This option allows borrowers to suspend principal payments for up to 36 months.
d) Temporary Total Disability Deferment: Individuals who are temporarily unable to work due to physical or mental impairment can apply for this deferment. The maximum duration is three years.
3. Private Student Loan Deferments
Private student loan lenders have different policies regarding principal deferments. Some may offer similar options as federal loans, while others might not provide any specific programs at all. It’s crucial to reach out directly to your private lender and inquire about their deferment options if you’re struggling with making principal payments on your private student loans.
4. Mortgage Principal Deferments
If you’re facing financial difficulties that make it challenging to meet mortgage obligations, there are a few potential ways to temporarily postpone paying the principal:
a) Loan Modification: You can contact your mortgage servicer and explore loan modification options that could include reducing the interest rate, extending the term of the loan, or deferring a portion of the outstanding principal.
b) Forbearance Agreement: In certain circumstances such as natural disasters or other emergencies, your mortgage servicer may offer forbearance agreements that allow temporary suspension of both principal and interest payments until you regain stability.
5. Auto Loan Principal Deferments
If you find yourself in a situation where making auto loan principal payments becomes difficult due to financial hardships or unexpected circumstances like job loss or medical bills, here are some possible solutions:
a) Refinancing: One way to potentially reduce monthly auto loan payments is by refinancing your auto loan with extended terms and lower interest rates. However, keep in mind that refinancing doesn’t actually defer the principal; it simply adjusts the loan terms to make payments more manageable.
b) Loan Extension: Some auto lenders may offer loan extension options, allowing borrowers to extend the term of their loan and temporarily lower monthly payments. This can provide temporary relief without affecting your credit negatively.
c) Payment Deferral: Depending on your lender’s policies, you may be able to negotiate a payment deferral where you skip one or more monthly payments but still accrue interest during that period.
In conclusion, when faced with financial difficulties or unexpected circumstances that hinder your ability to pay off loan principal, there are various deferment options available across different types of loans. Whether it’s federal student loans, private student loans, mortgages, or auto loans, understanding these options and reaching out to your lenders is crucial in finding temporary relief while keeping long-term financial goals intact. Remember to consider the potential implications such as interest accrual and extended repayment periods before choosing a deferment option.