The Definitive Guide to Student Loans

The costs of deferring your student loans may make you think twice about your options

Student Loan debt
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Of the more than 44 million student loan borrowers in the United States, some may have their debts cleared due to an epic clerical error. The rest, however, aren't so lucky.

Paying back loans can be a challenge for many Americans, especially when those loans total $1.4 trillion. That's why 30 percent of direct loans are in deferment, New America reports.

How do you know whether deferment could be right for you? Here's an overview of the pros and cons.

Students protesting budget cuts at UC Berkeley. (File photo).
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Students protesting budget cuts at UC Berkeley. (File photo).

Drawbacks to deferment

When a borrower defers a loan — or temporarily suspends repayment because of unemployment, financial hardship, enrolling in active military duty or another reason — interest will still accrue if the loans are unsubsidized. If no payments are made during the deferment, that interest will capitalize, or be added to the total amount of the loan.

For direct unsubsidized loans, interest accrues as soon as the loan is approved.

Interest rates will rise for 2017 to 2018. Undergrads will pay 4.45 percent on loans distributed from July 1, 2017, to June 30, 2018. That's up from 3.76 last year.

Graduate students will pay six percent on direct unsubsidized loans, up from 5.31 percent this year.

An undergrad who borrows $37,000 — and that's less than the national average for 2016 graduates — and has an interest rate of 4.45 percent will pay $8,908 in interest over 10 years, according to NerdWallet's student loan calculator. Graduate students, who average $58,539 for a Master of Arts degree, will pay nearly $20,000 in interest over the same time span.

There are limited time frames for how long a loan can be deferred. Deferring a loan could also eliminate eligibility for certain public forgiveness programs.

Students protest the rising costs of student loans in Los Angeles.
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Students protest the rising costs of student loans in Los Angeles.

Benefits to deferment

Still, there are benefits to deferment, Shannon McNay of Student Loan Hero tells CNBC Make It. It can give you a much needed break.

And at least deferment does not affect your credit. "After all, if your lender approves it — and, in some cases, they have to — then you're mutually agreeing to temporarily suspend your payments," she says.

Other options

There are also alternatives to deferment.

"Utilize benefits such as income-driven repayment plans to help you until you get on your feet," McNay says. "If you're on an income-driven repayment plan and follow your plan's instructions to the 'T,' you could be eligible for forgiveness after a certain amount of qualifying payments have been made. The only catch is that the forgiven amount could be considered taxable income, which means you should be ready for a tax bill just in case."

Or, "refinance your student loans," she says. "Talk to your lender the minute you think you might be having trouble to see what options they have to help."

If you're enrolled in an eligible college or graduate school, loans may be automatically deferred, and some employers will offer loan assistance to their employees.

There is also the option of forbearance, which temporarily suspends loan payments. However, while deferment is more easily granted, forbearance is typically at the loan holder's discretion. Specific qualifications are detailed on the government's Federal Student Aid page.

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Federal vs. private loans

There are some key differences between federal and private loans.

Federal loan payments, through companies like FedLoan, typically will not start until after graduation. Private loan payments, through companies like Navient, may begin during school. Federal loans come with fixed interest rates, whereas private loan interest can be variable: Some reach rates up to 18 percent.

Private loans may also have stricter requirements on deferment and forbearance.

"Generally speaking, paying off student loans is a marathon," says McNay. "Although it's nice to think about knocking them out in a few years, that's not always possible. But that's OK."

Plenty of celebrities, including former President Barack Obama, former First Lady Michelle Obama and bestselling author Cheryl Strayed, didn't pay off their loans until their 40s.

"You took on debt to gain more opportunity," McNay says. "Focus on that."

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