Comparing Interest-Only Student Loan Deferment and Principal Student Loan Deferment

Student loan deferment allows you to reduce, or make no payments, on a debt while you are in school. Deferment is also an option once you have graduated if you have a gap in income. Most students will use a deferment option at some point during the life of a private student loan. They type of deferment you choose, however, will affect how expensive your loan is and how your credit holds up during the process. Opting for interest-only deferment is better than deferring all payments if possible for a number of reasons.

Compounding Interest

When you have an interest-only deferment, you are still required to make the payments on the loan. You are only paying the interest that was charged in a given period, though, and you are not paying down any of the balance. This can stop the interest from compounding over time, which is beneficial to the total expense of the loan. If you take a $10,000 loan, you may be assessed $100 in interest each term. If you pay the interest down, your loan balance stays at $10,000, and interest is only charged on this sum the next month. If you do not pay the interest, then future interest will be charged on the new $10,100 balance, and so on, eventually creating a much higher interest charge.

Accumulating Debt

Aside from paying interest on interest, you are also allowing the principal balance of your debt to continue to grow. By the time you are finished with school, you may have a debt worth $15,000 to $20,000, instead of just $10,000, depending on your interest rate and other factors. You should aim to be in as little debt as possible when you graduate. This allows you more flexibility in your job search as well as making you a better candidate for other loans.

Higher Monthly Payments

The higher your debt when you graduate, the higher your monthly payments will have to be. Keeping only the small $10,000 balance means you may be able to make very low payments on a 10-year loan. You will have more flexibility for your living expenses. Some students who would like to pursue a career in social service, go on to receive a graduate degree or even take time off to travel will not have the option if they have very high monthly student loan payments. Paying at least the interest of the loan during school will make your payments lower once you graduate.

Longer Payment Terms

If you defer all payments on your loan, you may have no choice but to take a longer period of time to pay the loan off once you graduate. This can create problems for you if you want to take an auto loan or a home loan and still have no paid off student debt. For example, this debt will be counted in your debt to income ratio when you seek your first mortgage. The higher your debt, the lower the limits you will be able to achieve on that mortgage.

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