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It’s possible to consolidate or refinance your student loans into one loan with a single monthly payment. The major difference between these two options is that consolidation is offered through the federal government for federal student loans only. Refinancing is done with a private lender and can include both federal and private student loans.

When you consolidate student loans with the federal government through the Direct Loan Consolidation program, the new interest rate is the weighted average of your prior rates, rounded up to the nearest one-eighth of a percent.

Another option is student loan refinancing, which can be completed with a private lender. If you refinance, the new interest rate on your loans is based on factors like current market rates, your credit profile, your employment history, and your debt-to-income ratio.

Understanding the differences between consolidation versus refinancing is critical before deciding to take the plunge — especially since private refinancing means you lose your federal student loan benefits.

What Is Federal Student Loan Consolidation?

You can combine your federal student loans into one by taking out a Direct Consolidation Loan from the government.

Consolidating your loans may help simplify your repayment process if you have multiple loan servicers. However, consolidating doesn’t typically result in any interest savings, as the rate is simply the weighted average of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent.

In some cases, consolidating your loans may also be necessary if you are interested in enrolling in an income-driven repayment plan. In order to use a Direct Consolidation Loan, you must have at least one Direct Loan or one Federal Family Education Loan (FFEL).

What Is Student Loan Refinancing?

When you refinance student loans, it means you are borrowing a new loan which is then used to pay off the existing student loans you have. You can refinance both federal and private student loans. The new loan will have a new interest rate and terms, which as mentioned, are based on personal factors such as an individual’s credit history, employment history, and debt-to-income ratio.

Refinancing is completed with a private lender and borrowers may have the choice between a fixed or variable interest rate. In some cases, borrowers who refinance to a lower interest rate may be able to spend less in interest over the life of the loan. To get an idea of what refinancing your student loans could look like, you can take a look at SoFi’s student loan refinancing calculator.

It’s important to note that when you refinance student loans with a private lender, you lose access to federal loan forgiveness programs and payment assistance programs, such as income-driven repayment plans and student loan deferment.

Recommended: How to Build Credit

Comparing Student Loan Refinancing and Consolidation

As previously mentioned, consolidation can be completed for federal student loans through a Direct Consolidation Loan. Refinancing is completed with private lenders and can be done with either federal and/or private loans. An important distinction is that Direct Loan Consolidation allows borrowers to retain the federal benefits and borrower protections that come with their federal loans, while refinancing does not.

Depending on how a borrower’s financial situation and credit profile has changed since they originally borrowed their student loans, refinancing could allow borrowers to secure a more competitive rate or preferable terms. The rate and term on a refinanced loan will be determined by the lender’s policies and the borrower’s financial situation and credit profile, including factors such as credit score, income, and whether there is a cosigner.

Private Student Loan Refinancing Rates

It may be possible for borrowers to qualify for a more competitive interest rate by refinancing their student loans with a private lender. As of June 2023, current student loan refinance rates with SoFi start at 4.99% APR with autopay for fixed rate loans and 5.99% APR with autopay for variable rate loans. As noted previously, the rate you get typically depends on your total financial picture, including your credit history, income, and employment history.

Borrowers may also consider applying for student loan refinancing with a cosigner, which could potentially help them qualify for a more competitive interest rate.

Why Interest Rates Aren’t the Only Thing to Consider

Interest rates aren’t the only thing to consider when deciding whether to consolidate or refinance. If you go with a Direct Consolidation Loan, keep in mind that you might pay more overall for your loans, since this usually lengthens your repayment term. You may also lose credit toward loan forgiveness for any payments made on an income-based repayment plan or the Public Service Loan Forgiveness program.

If you refinance with a private lender, you’ll no longer be eligible for federal loan protections, including deferment and forbearance. Some private lenders, however, do offer their own benefits, such as a temporary pause on payments if you lose your job through no fault of your own.

It’s important to think carefully before consolidating or refinancing your student loans. Consider things like whether or not you plan on using federal benefits, and if a prospective private lender offers any options for relief if you hit a rough patch.

Even if you get a lower interest rate, make sure you can afford the new monthly payments before committing. And remember that this information is just a starting point for your decision. Don’t be afraid of doing more research and trusting you’ll make the right decision for you.

The Takeaway

Consolidating federal student loans can be done through the federal government with a Direct Consolidation Loan. The interest rate on this type of loan is the weighted average of the interest rates on the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. When you consolidate, you keep your federal benefits and protections.

Refinancing student loans allows borrowers to combine both federal and private student loans into a single new loan with a new interest rate. The rate may be variable or fixed, and will be determined by the lender based on criteria like market rates and the borrower’s credit history. Again, refinancing will eliminate any federal loans from borrower protections, including income-driven repayment plans.

Depending on an individual’s personal circumstances, either consolidation or refinancing may make more sense than the other. If refinancing seems like an option for you, consider SoFi. SoFi offers an easy online application, competitive rates, and no origination fees.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

A Direct Consolidation Loan combines federal student loans into a single loan with one monthly payment. If you have multiple federal student loans, this could be one way to simplify the repayment process and more easily stay on top of student loan payments. With a Direct Consolidation Loan, you are also eligible for student loan forgiveness and income-driven repayment programs.

A Direct Consolidation Loan, however, doesn’t typically lower your interest rate. Instead, this type of loan is geared toward borrowers who want to streamline their monthly payments or qualify for loan forgiveness, as opposed to borrowers who want to save money on interest.

While consolidation of student loans can lower your monthly payment by extending your repayment timeline, you typically end up paying more overall due to the additional interest you pay when lengthening your loan term. Before you commit, make sure to run the numbers and consider the pros and cons of a Direct Consolidation Loan.

Is a Direct Consolidation Loan a Good Idea?

Deciding if student loan consolidation is right for you depends on whether your desire to simplify your payments outweighs the potential loss of some benefits.

Pros of Direct Consolidation Loans

Can simplify repayment: The first thing to consider is if you currently have multiple federal student loans with different servicers, meaning you have to log in to two or more separate accounts to pay your student loan bills each month. In this instance, consolidation can make life a little easier because the process will give you a single loan with a single bill each month.

Can lower your monthly payments: Consolidation can also lower your monthly payment amount by giving you up to 30 years to repay your loan or by giving you access to income-driven repayment plans. Keep in mind, though, that by extending your loan term and reducing your monthly payment, you will end up paying more in interest over the life of the loan.

Can allow you to switch from a variable to a fixed rate: If you have any variable-rate loans, consolidation will make it so you can switch to a fixed interest rate.

Can make loans eligible for forgiveness: If you consolidate loans other than Direct Loans, such as Perkins Loans (drawn before the program was discontinued), those loans may become eligible for Public Service Loan Forgiveness (PSLF) once consolidated.

Recommended: Fixed vs. Variable Rate Loans

Cons of Direct Consolidation Loans

Can lead you to make more payments and pay more in interest: When you consolidate your federal loans, your repayment period will be extended between 10 and 30 years. This means you will make more payments and pay more in interest, unless you switch to a different student loan repayment plan.

Can make you lose some benefits: Consolidation can also cost you some benefits that only non-consolidated loans are eligible for, such as access to some loan cancellation options. It’s a good idea to check in with your loan program before opting for a Direct Consolidation Loan.

Can cause you to lose credit for payments toward loan forgiveness: One of the most important things to consider before consolidating student loans is that if you are currently paying your loans using an income-driven repayment plan or have already made qualifying payments toward PSLF, consolidating your loans will result in the loss of credit for payments already made toward loan forgiveness. However, there is now a one-time income-driven repayment account adjustment that allows borrowers to not lose credit from past payments if they choose to consolidate their loans.

How to Apply for a Federal Direct Consolidation Loan

The Direct Consolidation Loan application process is available through StudentLoans.gov and comes with no fees. You simply fill out the online application or you can print out a paper version and mail it. The entire online application process takes less than 30 minutes, on average.

Almost all federal student loans are eligible for consolidation. If you have private education loans, you cannot consolidate them with your federal loans. Also note that you can’t consolidate your loans while in school and must graduate, leave school, or drop below half-time enrollment in order to pursue consolidation. Parent PLUS Loans cannot be consolidated with loans in the student’s name.

You can also select which loans you do and do not want to consolidate on your loan application. For instance, if you have a loan that will be paid off in a short amount of time, you might consider leaving it out of the consolidation.

Remember to keep making payments on your loans during the application process until you are notified that they have been paid off by your new Direct Consolidation Loan. Your first new payment will be due within 60 days of when your Direct Consolidation Loan is paid out.

Repayment Plans for Consolidation Loans

A Direct Consolidation Loan will have a fixed interest rate that is the weighted average of all of the interest rates for the loans you are consolidating, rounded up to the nearest one-eighth of a percent. This means that the interest rate on your largest loan will have the most impact on your consolidation interest rate, whether that interest rate is high or low.

When you apply for a Direct Consolidation Loan, you must also be prepared to select a repayment plan. Many repayment plans are available for Direct Consolidation Loans, including:

•   Standard Repayment Plan

•   Graduated Repayment Plan

•   Extended Repayment Plan

•   Revised Pay As You Earn Repayment Plan (REPAYE)

•   Pay As You Earn Repayment Plan (PAYE)

•   Income-Based Repayment Plan (IBR)

•   Income-Contingent Repayment Plan (ICR)

Recommended: What Student Loan Repayment Plan Should You Choose? Take the Quiz

Consolidation for Defaulted Student Loans

Consolidation can also help student loans that are currently in default. Student loans will go into default after 270 days without payment, which can result in consequences and loss of benefits, such as damaging your credit score or possible wage garnishment.

Since loans in default are accelerated and the entire unpaid balance becomes due when you enter default, consolidation is worth considering since it allows you to pay off one or more federal student loans with the new Direct Consolidation Loan.

Once your consolidated loan is out of default, you can repay the Direct Consolidation Loan under an income-driven repayment plan or make three consecutive payments. Direct Consolidation Loans are eligible for benefits such as student loan deferment, forbearance, and loan forgiveness.

Refinancing vs Consolidation for Student Loans

For those interested in a better interest rate or more favorable loan terms, you could consider refinancing your student loans instead of consolidating them. Unlike consolidation, refinancing can combine both federal student loans and private student loans into one new loan with one monthly payment.

Keep in mind that refinancing can result in the loss of federal benefits since you’re working with a private company and not the government. If you plan on using income-driven repayment plans or student loan forgiveness, for example, it is not recommended to refinance with a private lender. However, for someone looking for lower interest rates or lower monthly payments, refinancing is an option to consider.

The Takeaway

A Direct Consolidation Loan combines your federal loans into one new loan with one monthly payment. Pros may include lowering your monthly payments, allowing you to switch from a variable to a fixed interest rate, and making certain loans eligible for forgiveness. The major con of Direct Consolidation Loans is possibly paying more in interest over the life of the loan due to the extension of your loan term.

If the idea of consolidation appeals to you but the weighted consolidation interest rate won’t save you much over the life of your loan, you could consider applying for student loan refinancing with SoFi. SoFi offers an easy online application, competitive rates, and flexible terms. But remember, refinancing makes it so you’re no longer eligible for federal benefits.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

No, an employee’s student loan repayment benefit from their employer is not taxed as income now through the end of December. Thanks to the CARES Act, employees can take advantage of up to $5,250 in tax-free student loan payment contributions from their employer.

For employees lucky enough to work for a company that offers a student loan repayment program, the benefits of this perk are clear: Employees get “free money” from their employers to help pay down their student loans.

Employer Student Loan Repayment Benefit and Taxes

Under employer student loan repayment programs, employers help employees pay back their student loans in amounts that vary from company to company. This monetary assistance can be a great help to individuals struggling with student loan debt — and may even ultimately have an impact on the economy. However, prior to 2020, employer contributions were subject to both payroll and income tax, which means that for employees, the benefit wasn’t quite as big as it might first appear.

That changed in early 2020, when the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded on this financial assistance by making all employer-match contributions up to $5,250 tax-free, exempt from both payroll and income tax.

While the measure implemented in the CARES Act was due to expire in January 2021, the new stimulus bill signed by President Donald Trump in December 2020 has extended that tax-free benefit for another 5 years, with a new expiration of December 31, 2025.

Understanding Employer Match of Student Loan Repayment

What is an employer student loan repayment program? It’s a way for companies to help alleviate their employees’ student loan debt burden by offering them a match (up to $5,250, tax-free) on payments they make toward their student loans every year. Employers make a regular contribution to an employee’s student loan balance, say $100 a month for example, while the employee continues to make regular payments.

In this way, employees can pay down more of their student loan balance and/or interest. Prior to the CARES Act, an employer’s student loan contributions were considered taxable income, but now through the end of 2025, they will be tax-free and fall under the same maximum (up to $5,250), as tuition reimbursement benefits from an employer.

There are a number of services available to companies who are looking to manage this kind of benefit. Just like the companies designed to help HR departments manage other benefits like health care, financial institutions can help assist with student loan repayment plans.

Companies with Student Loan Repayment Benefits

Employer student loan repayment programs are still rather new — only about 17% of companies offer them. However, close to 50% of companies say they plan to offer student loan repayment assistance in the future. To get a sense of what kinds of programs different employers offer, here are several examples of companies who have this incentive in place:

•   In 2019, Chegg, the education technology company best known for online textbook rentals, began offering its employees $1,000 annually toward student loan debt, with an additional equity grant of up to $5,000 annually.

•   Estée Lauder, the cosmetics company, launched their student loan benefit program in 2018 by offering $100 monthly for payback, with a cap of $10,000 total.

•   In 2017, Fidelity, the brokerage firm, began offering up to $5,250 per year in student loan repayment for its employees.

•   Also in 2017, Live Nation, entertainment and events, began contributing $100 monthly to student loans, maxing out at $6,000 in repayment.

•   Penguin Random House, the book publisher, began in 2018 to reimburse up to $1,200 yearly (capped at $9,000) for student loans to full-time employees who have been with the company at least one year.

•   PwC, also in the financial services industry, offers $1,200 annually and up to $10,000 total for student loan payments.

•   SoFi offers one of the more unique employer student loan repayment programs on the market, offering $200 a month in reimbursement with no cap.

Implementing a student loan repayment program with a matching contribution will depend on a company’s size and resources.

But this kind of incentive can appeal to potential new employees. Most companies do not require employees who leave the organization to repay the benefit. Paid out monthly, it can help with the most burdensome student loan payments, which some employees might find more valuable than, say, a year-end bonus.

Save on Student Debt while Saving for Retirement

Helping employees pay down student loan debt, while also still saving for retirement, is a benefit that could really increase the appeal of an employer loan repayment program.

In 2018, the IRS cleared a path for employers to create a different kind of student loan payoff program that could help attract employees. The program was created by Abbott Laboratories, but companies of all sizes could use a similar approach.

The IRS allowed Abbott to help its employees save for retirement and pay down student debt with a new program that allows people who direct a certain amount of their paycheck to pay off student loans to also get a contribution from Abbott for their retirement accounts.

Abbott’s program might inspire more employers to implement similar programs, where the company can make a tax-free contribution to the employee’s 401(k) on the condition the employee makes student loan payments.

The Takeaway

With the recent extension of the rules set forth in the CARES Act, employer student loan repayment contributions up to $5,250 are payroll-tax and income-tax free until December 31, 2025. For individuals whose company offers such a benefit, this makes it more useful than ever before in paying down student loan debt.

Just like a 401(k) retirement match, a company that offers a student loan repayment program is basically offering you extra money. For many employees, even an extra $100 a month could be enough to help them get out of debt faster and feel more confident about their financial security.

To make the most of student loan repayment benefits and pay down loans in the most efficient way possible, it’s always a good idea to evaluate your current payment plan. For some individuals with federal student loans, switching to an income-driven repayment plan or consolidating your loans could make monthly loan payments more manageable.

For individuals with both private and federal student loans, it might make sense to consider refinancing your student loans through a private lender, such as SoFi.

Refinancing combines multiple student loans — federal or private — into a single loan with one monthly payment. It can potentially lower your interest rate or give you access to more favorable loan terms. That said, refinancing with a private lender means forfeiting access to federal loan benefits like income-driven repayment plans, deferment, and public service loan forgiveness. Nonetheless, if your credit score and earnings have improved since graduating from college, refinancing might be a way to pay less in interest with a lower interest rate and a shorter repayment term.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Life can get expensive. When you factor in things like rent or mortgage, groceries, child care expenses, transportation costs, and more, it adds up quickly. And for more than 43 million Americans, their monthly budget also includes student loan payments.

If you’re able to lower or eliminate student loan debt, you’ll have more money at your disposal. So what’s the fastest way to pay off student loans? There’s no one right answer, but these tips could help you hasten repayment so you can focus on other financial goals.

Six Tips to Accelerate Student Loan Repayment

1. Putting Extra Toward the Principal

One of the most effective ways to get ahead of student loan debt is to pay more than the monthly minimum. There are no prepayment penalties for federal or private student loans, so it might be one of the fastest ways to shrink your debt.

As a bonus, when you put extra money toward the principal loan balance, you’re also shaving off the total cost of interest you may otherwise pay over the life of the loan.

You might be surprised how much an additional monthly $50 payment can trim off your debt. If your monthly budgets are too tight to make an additional monthly contribution, you might consider increasing your payments every other month or quarterly.

To make the most of prepayments, the additional payments should be applied to the loan’s principal. Some loan servicers may apply a payment to the next month’s payment instead of deducting it from the loan balance. You may want to contact your loan servicer to make sure prepayments are applied to the principal.

2. Making a Lump Sum Payment

If making extra monthly payments to your student loans is out of the question, consider making a lump sum payment. That means making use of “found money.” Instead of treating a tax refund, financial gifts, bonuses, or a raise at work like “fun money,” you could use it to double down on your debt.

It may also be a good time to review your spending habits and see where you might be able to find some extra cash. Even minor adjustments like taking public transportation instead of a cab or finding street parking instead of paying at a garage could add up.

When you find areas in your spending to cut back, consider adding that money to an account dedicated to your student loan repayments.

3. Finding a Side Hustle

If you’re still searching for how to pay off student debt faster, you could try finding an additional source of income and putting that money toward debt.

What are your skills, hobbies, and interests? While it may take perseverance to find the right side hustle, it could wind up being one of the fastest ways to pay off student loans.

There are apps that offer flexible, part-time side hustles. If you’re crafty, you could try selling your creations at an online marketplace. If you’re a photographer, writer, or editor, you could try finding a freelance gig. Once you get your side hustle going, the additional income could be regularly put toward extra student loan payments.

Recommended: 15 Low-Cost Side Hustles

4. Getting Help Paying Off Your Loan

You could speed up loan repayment if you can find a way to have someone else contribute, such as:

Seeking an employer perk. Before the coronavirus pandemic, an estimated 8% of employers offered student loan repayment assistance as a benefit. The CARES Act of 2020 gave companies an incentive to offer the benefit, which was then extended through 2025.

Employers can contribute up to $5,250 per employee each year toward qualified education expenses, such as student loan assistance, without raising the worker’s gross taxable income.

Volunteering. Some volunteer opportunities might ease your student loan balance. For example, members of the Shared Harvest Fund can get a stipend applied to their student loans if they match up with a nonprofit organization that needs their talents.

You can choose the cause you like or filter by project. For instance, if you’re a lawyer, you can consult with a nonprofit organization looking to change its structure. A social media whiz can help set strategy for a therapy-pet agency.

Asking. Your family members and friends want you to succeed, so why not ask them to contribute to your student loan instead of buying something you don’t really need on your birthday? One site, GiftofCollege.com, lets you set up a profile, link to a student loan, and ask for contributions via social media.

5. Rolling Out the Debt Snowball Method

When it comes to finding the fastest way to pay off student loans, you could try using the debt snowball method. Here’s how that works.

First, take a look at your loans and focus on the balances. While you should be making at least the minimum monthly payment on all your loans, the debt snowball method has you put any additional money toward the loan with the smallest balance first.

Once that loan is paid off, you’d use the money you were paying on the old loan payment amount and roll it to the next smallest debt. The idea is to continue using this method until all of your loans are paid off. Each time you pay off a loan, it feels like a win that helps you see the progress you’re making.

6. Refinancing or Consolidating Loans

Refinancing your student loans with a private lender means taking out a new loan that pays off your existing loans and has a new interest rate, term, and monthly payment.

Depending on your credit score and income (among other factors), you may be able to secure a lower interest rate when you refinance your student loans with a private lender — which means the loan may accrue less interest over time (depending on the loan’s term). Lenders generally offer both fixed-rate and variable-rate loans, and often give you the option to extend or shorten your repayment term.

If you have exclusively federal student loans, you could consolidate them into a Direct Consolidation Loan, with one monthly payment. The new, fixed interest rate will be the weighted average of your existing interest rates rounded up to the nearest one-eighth of a percentage point.

Consolidation can lower your monthly payment by giving you up to 30 years to repay your loans, but a longer term means more payments and more interest.

Before refinancing federal student loans, it’s best to weigh the borrower protections of those loans against refinancing with a private lender, who can’t offer the same federal benefits. For example, if you are enrolled in an income-driven repayment plan or are applying for Public Service Loan Forgiveness, refinancing might not be your best option. When you consolidate your loans, you keep your access to federal benefits; when you refinance your loans, you lose this access.

The Takeaway

Wondering how to pay off student loans quickly? There are a few strategies to explore. One or more of these six suggestions could be the ticket to chipping away at the debt faster.

To see what refinancing student loans with SoFi could mean for your finances, you may want to look at estimates with this student loan refinancing calculator and then check your rate.

SoFi offers competitive fixed or variable rates, no application or origination fees, and an easy online application.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

Undergraduate and graduate students in school at least half-time can put off making federal student loan payments, and possibly private student loan payments, with in-school deferment. The catch? Interest usually accrues.

Loans are a fact of life for many students. In fact, a majority of them graduate with student loan debt.

While some students choose to start paying off their loans while they’re still in college, many take advantage of in-school deferment.

What Is In-School Deferment?

In-school deferment allows an undergraduate or graduate student, or parent borrower, to postpone making payments on:

•   Direct Loans, which include PLUS loans for graduate and professional students, or parents of dependent undergrads; subsidized and unsubsidized loans; and consolidation loans

•   Perkins Loans

•   Federal Family Education Loan (FFEL) Program loans

Parents with PLUS loans may qualify for deferment if their student is enrolled at least half-time at an eligible college or career school.

What about private student loans? Many lenders allow students to defer payments while they’re in school and for six months after graduation. Sallie Mae lets you defer payments for up to 48 months as long as you are enrolled at least half-time.

But each private lender has its own rules.

Recommended: How Does Student Loan Deferment in Grad School Work?

How In-School Deferment Works

Federal student loan borrowers in school at least half-time are to be automatically placed into in-school deferment. You should receive a notice from your loan servicer.

If your loans don’t go into automatic in-school deferment or you don’t receive a notice, get in touch with the financial aid office at your school. You may need to fill out an In-School Deferment Request, which is available at studentaid.gov.

If you have private student loans, it’s a good idea to reach out to your loan servicer to request in-school deferment. If you’re seeking a new private student loan, you can review the lender’s school deferment rules.

Most federal student loans also have a six-month grace period after a student graduates, drops below half-time enrollment, or leaves school before payments must begin. This applies to graduate students with PLUS loans as well.

Parent borrowers who took out a PLUS loan can request a six-month deferment after their student graduates, leaves school, or drops below half-time enrollment.

Requirements for In-School Deferment

Students with federal student loans must be enrolled at least half-time in an eligible school, defined by the Federal Student Aid office as one that has been approved by the Department of Education to participate in federal student aid programs, even if the school does not participate in those programs.

That includes most accredited American colleges and universities and some institutions outside the United States.

In-school deferment is primarily for students with existing loans or those who are returning to school after time away.

The definition of “half-time” can be tricky. Make sure you understand the definition your school uses for school deferment, as not all schools define half-time status the same way. It’s usually based on a certain number of hours and/or credits.

Do I Need to Pay Interest During In-School Deferment?

For most federal student loans and many private student loans, no.

However, if you have a federal Direct Unsubsidized Loan, interest will accrue during the deferment and be added to the principal loan balance.

If you have a Direct Subsidized Loan or a Perkins Loan, the government pays the interest while you’re in school and during grace periods. That’s also true of the subsidized portion of a Direct Consolidation Loan.

Interest will almost always accrue on deferred private student loans.

Although postponement of payments takes the pressure off, the interest that you’re responsible for that accrues on any loan is currently capitalized, or added to your balance, after deferments and grace periods. (This capitalization will no longer occur in certain situations as of July 2023, thanks to new regulations from the Department of Education that are set to take effect.) You’ll then be charged interest on the increased principal balance. Capitalization of the unpaid interest may also increase your monthly payment, depending on your repayment plan.

If you’re able to pay the interest before it capitalizes, that can help keep your total loan cost down.

Alternatives to In-School Deferment

There are different types of deferment aside from in-school deferment.

•   Economic Hardship Deferment. You may receive an economic hardship deferment for up to three years if you receive a means-tested benefit, such as welfare, you are serving in the Peace Corps, or you work full time but your earnings are below 150% of the poverty guideline for your state and family size.

•   Graduate Fellowship Deferment. If you are in an approved graduate fellowship program, you could be eligible for this deferment.

•   Military Service and Post-Active Duty Student Deferment. You could qualify for this deferment if you are on active duty military service in connection with a military operation, war, or a national emergency, or you have completed active duty service and any applicable grace period. The deferment will end once you are enrolled in school at least half-time, or 13 months after completion of active duty service and any grace period, whichever comes first.

•   Rehabilitation Training Deferment. This deferment is for students who are in an approved program that offers drug or alcohol, vocational, or mental health rehabilitation.

•   Unemployment Deferment. You can receive this deferment for up to three years if you receive unemployment benefits or you’re unable to find full-time employment.

For most deferments, you’ll need to provide your student loan servicer with documentation to show that you’re eligible.

Then there’s federal student loan forbearance, which temporarily suspends or reduces your principal monthly payments, but interest always continues to accrue.

Some private student loan lenders offer forbearance as well.

If your federal student loan type does not charge interest during deferment, that’s probably the way to go. If you’ve reached the maximum time for a deferment or your situation doesn’t fit the eligibility criteria, applying for forbearance is an option.

If your ability to afford your federal student loan payments is unlikely to change any time soon, you may want to consider an income-based repayment plan.

Another option to explore is student loan refinancing. The goal of refinancing with a private lender is to change your rate or term. If you qualify, all loans can be refinanced into one new private loan.

Playing with the numbers can be helpful when you’re considering refinancing. Using a student loan refinance calculator can help you figure out how much you might save.

Should you refinance your student loans? If it could save you money, refinancing may be worth it for you. Just know that if you refinance federal student loans, they will no longer be eligible for federal deferment or forbearance, loan forgiveness programs, or income-driven repayment. Make sure you won’t need access to these programs.

As you’re weighing the pros and cons, this student loan refinancing guide can be a valuable resource to help you decide if refinancing makes sense for you.

The Takeaway

What is in-school deferment? It allows undergraduates and graduate students to buy time before student loan payments begin, but interest usually accrues and is added to the balance.

If you’d like to lower your student loan rates, look into refinancing with SoFi. Students are eligible to refinance a parent’s PLUS loan along with their own student loans. And there are no fees.

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SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.