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    Grace Period And Deferment: What Is The Difference?

    Grace Period And Deferment

    A grace period and deferment are two available options to help you delay your student loan repayments. Both of these options work in different ways but serve more or less the same purpose. In this blog, we’ll help you understand how each option works and how you can use them.

    What Is A Grace Period?

    When it comes to the repayment of student loans, all federal loans and some private loans offer grace periods of six to twelve months. A grace period is a span of time during which the borrower of the student loan doesn’t have to make any repayments. During this period, the lender isn’t allowed to charge any penalties on the outstanding loan amount. 

    Unlike other options, grace periods are included within the student loan terms and do not require any additional application or approval process. If you have a federal student loan, you’re eligible for a six-month grace period after completing your education. Interest doesn’t accrue during the grace period on subsidized federal student loans, but if you have an unsubsidized loan, you’ll have to pay the accrued interest. In the case of private student loans, a grace period depends entirely on the lender’s discretion.

    Even if you make a late payment during this period, it won’t result in a default or incur extra charges. However, if you have a stable income, you may want to keep making regular payments in full to clear off the debt quickly. 

    What Is A Deferment?

    Deferment is another option that helps you delay the loan payment for a certain duration. However, this isn’t included in the loan terms. You’ll need to file an application alongside legitimate proof of financial hardship to request approval for deferring loan payments. Usually, deferments are offered in six-month intervals for a total period of 36 months. 

    In the case of some federal student loans, the deferment period starts automatically when you enroll in a college or university at least part-time. Other student loans require you to submit valid documents proving your financial stability and the approval depends on the lender. Bear in mind that if you’ve already missed payments, you won’t be eligible for deferment. 

    During the deferment period, interest on the loan accrues. If you have a subsidized student loan, the Federal Government will take care of the interest, but for all other loans, you’re liable to pay the accrued interest every month. If you miss payments or make delayed payments, it’ll be reflected on your credit report and lower your credit score. 

    The Difference

    Although both deferment and grace periods are options designed to delay student loan repayment, there are quite a few notable differences between them.

    • A grace period is a part of the loan terms and comes into effect automatically once the borrowers complete their education. However, borrowers will need to apply for deferments alongside substantial proof of economic hardship.
    • The maximum time allotted for a grace period is six months. In some cases, it can be as long as one year. Deferments are allotted in six-month intervals for a total of three years.
    • Borrowers don’t necessarily need to make payments during the grace period. In the case of deferments, interest accrues on loans and borrowers are liable to make timely payments. The interest is paid by the Federal Government for subsidized loans, but for unsubsidized loans, it needs to be paid by the borrower.
    • A grace period doesn’t reflect in the borrower’s credit history nor does it impact the credit score. But deferments are reflected in the credit history and can hurt the credit score if the borrower fails to make timely payments.

    Forbearance is another option to delay student loan repayments and is the next best choice if you’re not eligible for a deferment. Interest accrues during the forbearance period and you’re liable to make timely payments. It usually is for a length of twelve months at a time and there is no maximum limit. You can request forbearance as many times as you want.

    Read More: Deferment vs forbearance

    The Pros And Cons Of Putting Off Payments

    Pros:

    • It helps to delay repayments for a short period of time.
    • You can use the money to cater to other important financial needs.
    • In some cases, you need to make interest-only payments, thus allowing you to better manage your finances.

    Cons:

    • Interest accrues during this period. If you miss payments, it will hurt your credit score.
    • If you stop making payments, the capitalized interest will increase the total outstanding balance. This will make it difficult for you to clear off the loan within the agreed terms.
    • Putting off payments temporarily are just short-term solutions and pose huge threats if you can’t manage your finances correctly.

    Bottom Line

    The prospect of paying off your student loan debt can be exhausting, especially if you’re fresh out of college. It is important to plan your payments and use these options sparingly. You must be aware of the benefits and disadvantages of these options and their impact on your credit health before you choose them.